2

referred the matter to the Addl. CIT (Transfer Pricing) for determination of ALP of the International Transaction. In pursuance to the transfer pricing adjustment made by the TPO, the Assessing Officer made a draft assessment order incorporating the transfer pricing adjustment made by the TPO as well as proposing some other disallowances. Against the draft assessment order, the assessee raised objections before the Dispute Resolution Panel (DRP). In compliance with the directions of the DRP, a final assessment order was passed u/s 143(3) read with section 92CA and 144C of the Act on 29-11- 2010 determining the total income at Rs.21,58,92,080 after allowing deduction u/s 10A of the Act. The CIT while examining the assessment records of the impugned assessment year of the assessee in exercise of powers u/s 263 of the Act was of the view that the assessment order passed is erroneous and prejudicial to the interests of revenue and accordingly proposed to revise the assessment order and issued a show cause notice to the assessee pointing out the following defects:-

i) Technical consultancy charges paid in foreign exchange to the concerned outside India was disallowed u/s 40a(ia) and added to the return of income as the assessee company did not deduct tax at source. However, for the purpose of deduction u/s 10A the technical consultancy charges to the tune of Rs.11,91,05,050/- in respect of STPI Unit-III and Rs.57,65,917/- in respect of STPI Unit situated in Bangalore were not reduced from the export turnover to arrive at the correct 'adjusted export turnover' of respective units in terms of clause (iv) below explanation-2 to section 10A of the Act.

3

ii) Computation of deduction u/s 10A in respect of STPI Unit-3 and STPI Unit situated in Bangalore that the disallowance of Rs.11,91,05,050/- and Rs.57,65,917/- respectively for non deduction of tax at source was added to the profits of the respective STPI Units which resulted in increase of the 'adjusted profits for the purpose of section 10A'. As the total disallowance of Rs.19,48,02,907/- was already considered for computing the overall taxable income before allowable deduction under Chapter III and Chapter VIA of the Act. Therefore the additions made in the above mentioned STPI Units have resulted in arriving at higher adjusted profits of the undertaking thereby resulting in excess deduction u/s 10A of the Act.

3. Though the assessee objected to the proposed action of the CIT in revising the assessment order in the context of the issues raised in the show cause notice, the CIT however rejected the contention of the assessee and held that the consultancy charges of Rs.12,48,79,067/- incurred in foreign currency relating to providing technical services outside India cannot be the part of export turnover as defined in clause(iv) of Explanation-2 of section 10A of the Act and accordingly directed the Assessing Officer to reduce the same from the export turnover while computing deduction u/s 10A of the Act. So far as second issue concerning excess allowance of deduction u/s 10A of the Act is concerned, the CIT held that the disallowance made u/s 40(a)(ia) of the Act amounting to Rs.19,48,02,907 cannot be considered for the purpose of computation of deduction u/s 10A of the Act. In other words, according to the CIT, the disallowance made u/s 40(a)(ia) cannot be considered as part of business profit of the assessee and accordingly directed the Assessing Officer to compute 10A deduction without including the aforesaid amount of

4

Rs.19,48,02,907/- to the turnover of the assessee. Being aggrieved of the order passed by the CIT, the assessee has preferred an appeal before us with the following revised grounds of appeal:-

"1.The order of the CIT-II, Hyderabad U/s. 263 dated 27.03.2013 is contrary to the law and facts of the case.

2.The learned ClT erred in holding that the amount of Rs. 12A8JO,967/-, the so called consultancy charges incurred in foreign currency, is to be reduced from the "Export Turnover, in terms of clause (iv) of Explanation 2 to section lOA, for the purpose of working out the relief under section lOA

i) He ought to have realized that the said amount of Rs.12A8JO,967/- represented actually the software development charges paid to the foreign subsidiaries of the appellant for the services rendered by them and not technical service charges.

ii) Having noticed that the said amount of Rs. 12A8,02,907/- constituted a part of 19A8,02,907/-which was held by the Assessing Officer to be the business profit of the non-residents arising out of their business connection with India in terms of section 9(1)(i) of the Income tax Act, he ought to have held that the said amount could not be reduced from the export turnover.

iii) He ought to have noticed that this amount of Rs.12A8,02,907/- was not charged to the clients of the appellant and, as such, was not included in the export turnover and so could not be reduced from the export turnover.

iv) What can be excluded in terms of clause (iv) of Explanation 2 to section lOA is only, inter alia, expenses incurred in foreign exchange in providing technical services outside India and not expenditure on technical services received from outside India. As the amount of Rs.12A8,02,907/- does not represent expenses incurred by the appellant in providing technical services, it cannot be reduced from export turnover.

3} The Id. CIT erred in holding that the amount of Rs. 19A8,02,907/- disallowed under section 40(a}(i) of the Income tax Act and such other amounts are to be excluded from business profits for the purpose of working out the deduction under section lOA of the Income tax Act.

i) He erred in relying solely on the decision of the Ahmedabad Bench of the Tribunal in the case of Sri Ramesh Bhai C Prajapati without even putting it to the Appellant and ignoring all the relevant arguments advanced by the Appellant and .thus, violating all the canons of natural justice.

ii) He ought to have noticed that the deduction under section lOA is to be given from the "total Income" which is defined in section 2(45) of the Income tax Act as income computed in the manner laid down in the Act and

5

so the disallowance made under section 40(a}(i) constituted an integral part of total income and, as such, there is no statutory warrant for reducing the amount of 19A8,02,907/- or such other amounts from the business profits of the Appellant.

iii) He ought to have realized that the stand taken by him goes contrary to the decision of the Hon'ble Bombay High Court in the case of CIT vs. M/S. Gem plus Jewellery India Ltd [3301TR 175] and the ratio of the decision of the High Court in the case of CIT Vs. Allied Industries [229 CTR 462 (HP)] and of the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited vs ITO, Ward-1(1}, Hyderabad [143 ITD 59].

4) The Id. ClT grossly erred in ignoring the established legal position that, when two views are possible, revisionary action under section 263 does not lie.

5) The Appellant craves leave to raise any other ground with the permission of the Bench. "

4. Ground No.1 is general in nature and needs no adjudication.

5. So far as ground No.2 is concerned, the learned authorised representative for the assessee specifically contended before us that the amount of Rs.12,48,70,967/- was not included in the export turnover by the assessee itself while computing the deduction u/s 10A of the Act. Hence, there is no question of reducing it from the export turnover when it has not at all been included in the export turnover by the assessee. The learned authorised representative for the assessee submitted that this fact can be verified by the Assessing Officer. In the alternative, the learned authorised representative for the assessee also contended that if at all it has to be excluded from the export turnover then for maintaining the principle of parity, it has to be excluded from the total turnover as well. In support of such contention, the learned authorised representative for the assessee relied on the decision of Hon'ble Bombay High Court in case of Gem Plus Jewellery India Limited (330 ITR 175) and

6

Income-tax Appellate Tribunal Chennai Bench in case of Sak Soft Ltd. (30 SOT 55).

6. The learned Departmental Representative on the other hand, submitted that the matter may be remitted to the file of the Assessing Officer for verifying whether the assessee has not included this amount in the export turnover.

7. We have considered rival submissions of the parties and perused the material on record. It is the specific contention of the learned authorised representative for the assessee that the aforesaid amount of Rs. 12,48,70,967/- being the technical consultancy charges were not at all included in the export turnover by the assessee itself while computing the deduction u/s 10A of the Act. If it is really a fact then there cannot be any reduction of the said amount from the export turnover when the assessee has not at all included it in the export turnover while computing deduction u/s 10A of the Act. We therefore direct the Assessing Officer to verify this fact and if on verification it is found that the assessee has not included the said amount while computing the deduction u/s 10A then there is no question of reducing it from export turnover for the purpose of computing deduction u/s 10A of the Act. Even otherwise also, the alternative contention of the assessee is not without substance. When any amount being in the nature of freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India are to be excluded from the export turnover, then the same is also required to be excluded from the total turnover for the purpose of computing deduction u/s 10A of the Act. This view of ours gets support from the decision of Hon'ble Bombay High Court in case of CIT Gem Plus Jewellery India Ltd. (330 ITR 175 and

7

Income-tax Appellate Tribunal Chennai Bench in case of Sak Soft Ltd. (30 SOT 55). Hence this ground is allowed for statistical purposes.

8. In ground No.3, the assessee has assailed the action of the CIT in holding that the amount of Rs.19,48,02,907/- disallowed u/s 40(a)(ia) of the Act cannot be considered for the purpose of deduction u/s 10A of the Act.

9. The learned authorised representative for the assessee submitted before us that the issue is squarely covered by the decision of Hon'ble Bombay High Court in case of CIT vs. Gem Plus Jewellery India Limited (330 ITR 175 and the decision of Income-tax Appellate Tribunal Hyderabad Bench in case of DCIT vs. M/s Seven Hills Business Solutions (ITA No.391/Hyd/12 dated 21-6-2012 which was approved by the jurisdictional High Court in ITTA No.119 2013 dated 27-6-2013.

10. The learned Departmental Representative, on the other hand, supported the order of the CIT on this issue.

11. We have considered rival submissions of the parties and perused the material on record. After perusing the facts and materials on record, we are of the view that the issue is squarely covered in favour of the assessee. The Hon'ble Bombay High Court while considering identical issue in case of CIT vs. Gem Plus Jewellery India Ltd. (supra) held that the additions made to the income of the assessee by virtue of disallowance made u/s 43B of the Act, amounts to increase in the business profit of the assessee and therefore assessee is entitled to claim exemption u/s 10A with regard to the addition made on account of statutory disallowance. Following aforesaid decision of the Hon'ble Bombay High Court, the co-ordinate bench of this Tribunal in case of DCIT

8

vs. Seven Hills Business (supra) held that the disallowance made u/s 40(a)(ia) for non deduction of TDS would result in increase in business profit of the assessee, hence the assessee would be entitled to claim deduction u/s 10A with reference to such addition made on account of disallowance u/s 40(a)(ia). Respectfully following the ratio laid down as above by the Hon'ble Bombay High Court and co-ordinate bench of the Tribunal, we hold that the assessee would be entitled to claim exemption u/s 10A of the Act on the addition made on account of disallowance u/s 40 (a)(ia) of the Act which would be considered as part of business profit of the assessee for the impugned assessment year. In these circumstances, we set aside the order of the CIT on this issue and direct the Assessing Officer to compute exemption u/s 10A keeping in view our direction given hereinbefore.

12. In the result, the appeal is allowed in part. Order pronounced in the court on 13-9-2013. Sd/-

( CHANDRA POOJARI)

ACCOUNTANT MEMBER

Sd/-

(SAKTIJIT DEY)

JUDICIAL MEMBER

Hyderabad,

Dated the 13^thSept. 2013 Copy to:-

1) Infotech Enterprises Limited, 4^thFl;oor, A- Wing, Plot No.11, Software Units Layout, Infocity, Madhapur, Hyderabad.

2) Addl. CIT, Range-2, 8^thFloor, IT Towers, Masab Tank, Hyderabad.

3) CIT Hyderabad. 4)DRP, 4A, IT Towers, AC Guards, Hyderabad. 5.The Departmental Representative, I.T.A.T., Hyderabad. Jmr*

9

*