PER Dr.O.K.NARAYANAN, VICE PRESIDENT There are three appeals. Two appeals are filed for the assessment year 2005-06, one by the assessee in ITA No.114(Mds)/2011 and the other by the Revenue in ITA No.90(Mds)/2011. The third appeal in ITA No.2100(Mds)/2011 is filed by the assessee for the assessment year 2007-08.

2. First we will consider the appeal filed by the assessee for the assessment year 2005-06 in ITA No.114(Mds)/2011.

2.1. The first issue raised by the assessee in its appeal for the assessment year 2005-06 is that foreign currency expenditure should not be excluded from the export turnover in computing the deduction under section 10A of the Income-tax Act, 1961. The Income-tax Appellate Tribunal, Hyderabad Bench in the case of Patni Telecom P. Ltd. vs. ITO, 308 ITR (AT) 414 (Hyderabad), has held that expenses incurred in foreign exchange, as part of the export carried out by the assessee, cannot be excluded from the export turnover. In that case the assessee had incurred expenditure for the purpose of - - ITA 114, 90 & 2100/2011 3 export turnover by way of expenses incurred in foreign exchange. The Tribunal held that providing technical services outside India was not in connection with providing technical services. The assessee did not render any independent technical service. It developed software on contract basis according to the agreement and handed over the same to the customer. The expenditure incurred was for development of software according to the software development agreement entered into between the client and the assessee and therefore the expenses incurred in that connection in foreign currency cannot be excluded from the export turnover. The facts of the present case are also exactly similar. Therefore, we direct the Assessing Officer to include the foreign currency expenditure as well to form part of export turnover of the assessee in computing the deduction under section 10A of the Act. This issue is decided in favour of the assessee.

2.2. The second issue raised is that the telecommunication expenditure incurred in Indian currency should not be excluded from the export turnover in computing the deduction under section 10A. Following the very same - - ITA 114, 90 & 2100/2011 4 judgment of the Income-tax Appellate Tribunal, Hyderabad Bench in the case of Patni Telecom P. Ltd. vs ITO, 308 ITR (AT) 414, we direct the Assessing Officer to treat the telecommunication expenditure as part of the export turnover. This issue is again decided in favour of the assessee.

2.3. The next issue, which is raised in ground No.5, is that the losses of eligible units not allowed to be set off against other taxable profits. In the present case the Assessing Officer adjusted the brought forward losses of the assessment year 2004-05 of the eligible units against the current years profits of the eligible units before computing the deduction under section 10A. The very same issue was considered by the Income-tax Appellate Tribunal, B-Bench, Chennai, in the case of RR Donnelley India Outsource Pvt. Ltd. vs DCIT, in ITA Nos.1489 & 1490(Mds)/2010. Through their order dated 26-7-2012 the Tribunal, following the decisions of the Honble Karnataka High Court in the case of CIT & Anr. Vs. Yokogawa India Ltd. and Others, 246 CTR (Kar) 226 and in the case of CIT & Anr. Vs. Tata Elxsi Ltd. & Others, 247 CTR 334, has held that the current years profit of the eligible units should not be reduced by setting - - ITA 114, 90 & 2100/2011 5 off of the brought forward losses of earlier years even though relating to eligible units. The Assessing Officer has to give deduction under section 10A on eligible profits of the current assessment year. This issue is decided in favour of the assessee.

2.4. The last issue raised by the assessee for the present assessment year is on the question of section 14A disallowance. The Assessing Officer has disallowed 2% of exempt income treating the same as expenditure incurred in connection with earning the exempt income in the nature of dividend income from mutual funds. It is the case of the assessee that it has not incurred any expenditure towards earning such exempt income. We find that the disallowance of 2% made by the assessing authority is reasonable. At the same time, we accept the alternate contention of the assessee that the profit for the purpose of section 10A will be enhanced to the extent of the above disallowance. Therefore proportionate enhancement will be made in the amount of deduction available under section 10A. This issue is partly decided in favour of the assessee. - - ITA 114, 90 & 2100/2011 6

3. The assessee is partly successful in its appeal filed for the assessment year 2005-06.

4. Next we will consider the appeal filed by the Revenue for the very same assessment year 2005-06.

4.1. The first issue raised by the Revenue is that the foreign currency expenditure reduced from the export turnover should have been reduced from the total turnover by the Commissioner of Income-tax(Appeals). This ground is rejected in view of the decision of the Income-tax Appellate Tribunal, Hyderabad Bench delivered in the case of Patni Telecom P. Ltd. vs. ITO, 308 ITR (AT) 414. In assessees own case for the earlier assessment year 2002-03, this issue was decided in favour of the assessee. This issue is decided against the Revenue.

4.2. The second issue raised by the Revenue is that telecom expenditure incurred in Indian rupee reduced from the export turnover should not have been reduced from the total turnover. For the reasons already stated above, this ground is also rejected. - - ITA 114, 90 & 2100/2011 7

4.3. The next ground of the Revenue is that the provision made by the assessee for liabilities of expenditure was in the nature of provision and should not have been allowed by the Commissioner of Income-tax(Appeals) as an expenditure in computing the income. The assessee is providing provision for expenditure incurred in the previous year itself. The amount was not paid by the end of the year and in certain cases bills were not received by the end of the year and in such cases the assessee is making a provision for such expenditure already incurred during the relevant previous year. In the course of the next previous year the assessee is making the payment and the differential amount, if any, is adjusted in its profit and loss account. This is a consistent practice followed by the assessee. The provision for unpaid expenses is not in the nature of contingent expenditure. It is a provision made against actual expenditure. Therefore, the decision of the Honble supreme Court rendered in the case of Bharat Earth Movers vs. CIT, 245 ITR 428 , squarely applies here. The ground of the Revenue is dismissed. - - ITA 114, 90 & 2100/2011 8

4.4. The last issue raised by the Revenue is in the context of disallowance under section 14A. We have already decided the issue in the course of deciding the appeal filed by the assessee. No separate treatment is called for in the light of the ground raised by the Revenue. This ground is accordingly rejected.

5. The appeal filed by the Revenue for the assessment year 2005-06 is liable to be dismissed.

6. Next we will go to the appeal filed by the assessee for the assessment year 2007-08.

6.1. The first ground is that the lower authorities have erred in excluding the net exchange gain on Exchange Earners Foreign Currency (EEFC) account from profits eligible for deduction under section 10A of the Act. The issue is that the assessee is permitted by RBI to keep a part of its foreign exchange earnings in foreign currency account abroad so that it can be used by the assessee for purchasing raw materials and availing other services and if not required can remit back the money to India alongwith interest. Interest is accrued as part of export turnover. It has nexus only with the export turnover and - - ITA 114, 90 & 2100/2011 9 therefore it is also in the nature of export profits. This issue has been decided by the Honble Delhi High Court in favour of the assessee in the case of CIT vs. Indian Toners and Developers Ltd., 326 ITR 435 . This issue is decided in favour of the assessee by a series of Tribunal orders in the case of M/s.Rishabh International vs. JCIT, Mumbai in ITA No.2788 & 2789 of 2004; in the case of Discover India Tours(P) Ltd. vs. Assessing Officer, 9 SOT 665 (Del); in the case of CIT vs. Syntel Ltd. in ITA Nos.1974, 1976 & 1978 of 2009; in the case of Rajesh Exports Ltd. vs. ACIT in ITA No.51 of 2008, etc. Accordingly, we direct the Assessing Officer to include the gain from EEFC account as part of the profits eligible for deduction under section 10A of the Act. This issue is decided in favour of the assessee.

6.2. The second issue raised by the assessee is that the foreign currency expenditure should not be excluded from the export turnover in computing the deduction under section 10A of the Act. As decided for the earlier assessment year 2005-06 and in the light of the decision of the Hyderabad Bench of the Tribunal in the case of Patni Telecom(P) Ltd. vs. ITO, 308 ITR - - ITA 114, 90 & 2100/2011 10 414, we accept the contention of the assessee and direct the Assessing Officer not to exclude the foreign currency expenditure as part of the export turnover of the assessee in computing the deduction under section 10A of the Act.

6.3. The third issue raised by the assessee is that the foreign currency expenditure reduced from the export turnover should also be reduced from the total turnover. For the reasons already stated for the earlier assessment year, we hold that the foreign currency expenditure should not be reduced from the export turnover, as the expenditure was incurred in connection with the export itself. Therefore, the foreign currency expenditure need not be reduced from the export turnover. This issue is decided in favour of the assessee.

6.4. The fourth issue raised by the assessee is that the telecommunication expenditure incurred in Indian currency should not be excluded from the export turnover in computing the deduction under section 10A. Likewise, it is also the issue raised by the assessee that telecom expenditure incurred in Indian currency reduced from the export turnover should also be reduced from the total turnover. In both these cases, exclusion - - ITA 114, 90 & 2100/2011 11 of telecommunication and telecom expenditure incurred in Indian currency from the export turnover is not justified. Those expenditure were incurred for effecting the export. Therefore, the question of excluding them from the export turnover does not arise. In view of this, we hold that the contention of the assessee has to be accepted and accordingly we direct the Assessing Officer to include the telecommunication as well as the telecom expenses incurred in Indian currency as part of the export turnover of the assessee. The quantum of deduction available under section 10A will be modified accordingly. These two issues are decided in favour of the assessee.

6.5. The next issue raised by the assessee is that the disallowance of provision for liabilities by holding them to be contingent in nature is not justified. In view of our finding for the earlier assessment year and in the light of the decision of the Honble Supreme Court in the case of Bharat Earth Movers vs CIT, 245 ITR 428 , we hold that the provision is not in the nature of contingent expenditure. Therefore, the Assessing Officer is directed to deduct the provision while computing the income of the assessee. - - ITA 114, 90 & 2100/2011 12

6.6. The next issue raised by the assessee is regarding the losses of eligible units not allowed to be set off against other taxable profits. In the present case, the Assessing Officer has ignored the current years loss of eligible units and has not allowed set off of such loss against the balance taxable profit of the assessee. The Assessing Officer has held that the losses of eligible units shall necessarily to be carried forward in the light of the provisions of sections 10A(6) and 10AA(6) of the Income-tax Act, 1961 and the losses carried forward will be eligible for set off in the subsequent years only when the assessee has filed a declaration under section 10A(8). This view of the Assessing Officer is not sustainable in law in view of the decisions of the Honble Bombay High Court in the case of CIT vs. Galaxy Surfactants Ltd. (ITA No.3465 of 2010) and in the case of Hindustan Unilever Ltd. vs. DCIT, 325 ITR 102 . It is also against the decision of the Income-tax Appellate Tribunal, Chennai Bench in the case of Scientific Atlanta India Technology(P) Ltd. vs ACIT, 129 TTJ 273. If we accept the finding of the Assessing Officer, it will be running against the ratio of the judgment rendered by the Honble Karnataka High Court in the case of - - ITA 114, 90 & 2100/2011 13 Yokogawa India Ltd., 341 ITR 385 . Accordingly we hold that the losses of eligible units shall be set off against other taxable profits. This issue is decided in favour of the assessee.

6.7. The next issue raised by the assessee is that the disallowance of expenditure incurred by SEZ units that have not commenced operations is not sustainable in law. The Assessing Officer has treated the expenditure incurred by SEZ units which have not commenced operations as losses of such units eligible for deduction under section 10AA and given the same treatment to it as in the case of losses of eligible units not having been set off against other taxable profits. For the reasons already stated for the above stated issue, we hold that the Assessing Officer is not justified in disallowing the expenditure incurred by SEZ units that have not commenced operations. The disallowance is accordingly deleted. This issue is decided in favour of the assessee.

6.8. The next issue raised by the assessee is regarding the disallowance made under section 14A of the Act. The Assessing Officer has invoked Rule 8D and we confirm the - - ITA 114, 90 & 2100/2011 14 disallowance made by him. This issue is decided against the assessee.

6.9. But, we accept the alternate contention of the assessee that the disallowance shall go to enhance the profit eligible for deduction under section 10A. Accordingly, we direct the Assessing Officer to enhance the disallowance made under section 14A as part of the eligible profit for the purpose of section 10A.

6.10. The next issue raised by the assessee is against the addition made by the Transfer Pricing Officer on the ground of reimbursement of expenses. The Transfer Pricing Officer has made a mark up of 5 per cent on certain travel cost incurred by the assessee and reimbursed by its associate enterprise and treated as additional income to be taxed as part of transfer pricing adjustment. But the fact is that the reimbursement was made on cost to cost basis and there is no rendering of any service and it does not involve service element. What is incurred is reimbursed. So, therefore, there is no profit element in the reimbursement. In such situation there is no justification in - - ITA 114, 90 & 2100/2011 15 making a mark up of 5 per cent. This addition is accordingly deleted. This issue is decided in favour of the assessee.

6.11. The next issue raised by the assessee is that the disallowance of recruitment expenditure and mark up on the same are not justified. A mark up of 8% has been levied on the reimbursement cost , even though, according to the assessee, the expenses have been included by the assessee in computing its margin under TNMM method and the same has been approved by the TPO. We do not find any reason to make such a mark up of 8 per cent. The expenses were incurred in Indian currency. It is not part of any transaction with associate enterprise outside. Strictly, it does not come under TP regime. Even if it is part of domestic transaction, there is no reason stated by the Assessing Officer to make a mark up of 8 per cent on reimbursement cost. We find no reason to sustain this addition and accordingly it is deleted. This issue is decided in favour of the assessee.

6.12. The last issue raised by the assessee is that the disallowance made by the assessing authority under section 40(a)(i) on payments made to non residents for examination fees - - ITA 114, 90 & 2100/2011 16 is not justified. The payments were made by the assessee to non residents for examination fees. Examinations are conducted by foreign bodies. The foreign bodies who conduct the examination do not earn any income in India by this process. It is in the interests of the Indian candidates that they are applying for the examination and they are admitted to appear for the examination for which payment of fees is necessary. The examination being conducted by foreign body, the examination fees have to be paid in foreign currency. It is the fees collected by the foreign body abroad. The only thing is that it is sent from India. There is no element of income at all. Therefore, there is no question of deducting any tax at source at the time of payment. The disallowance made by the Assessing Officer under section 40(a)(i) is accordingly deleted.

7. The appeal filed by the assessee for the assessment year 2007-08 is partly allowed.

8. In result, the two appeals filed by the assessee for the assessment years 2005-06 and 2007-08 are partly allowed and the appeal filed by the Revenue for the assessment year 2005-06 is dismissed. - - ITA 114, 90 & 2100/2011 17 Orders pronounced on Wednesday, the 23 rd of January, 2013 at Chennai. Sd/- Sd/- (S.S.Godara) (Dr. O.K.Narayanan) Judicial Member Vice-President Chennai, Dated, the 23 rd January, 2013. V.A.P. Copy to: 1. Assessee

2. Department

3. CIT

4. CIT(A)

5. DR

6. GF.