2007 (6) TMI 313 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility of various types of income for exemption under Section 10A.
2. Eligibility of reimbursement from Exim Bank for exemption under Section 10A.
3. Eligibility of corporate charges and charges for use of workstations for exemption under Section 10A.
4. Eligibility of income from domestic software services for exemption under Section 10A.
5. Disallowance of lease rent payment to Noida Authorities as capital expenditure.

Issue-wise Detailed Analysis:

1. Eligibility of Various Types of Income for Exemption under Section 10A:
The assessee-company claimed exemption under Section 10A for various types of income, including interest on EEFC, rupee deposits, ICDs, corporate charges, Exim Bank ISO reimbursement, domestic software services, and recovery of charges for use of workstations. The Assessing Officer disallowed these claims, and the CIT(A) affirmed the disallowance. The primary contention was whether these incomes could be considered as "profits and gains derived by an assessee from an industrial undertaking" under the unamended Section 10A. The Tribunal referred to several judicial precedents, including the Supreme Court's interpretation in Cambay Electric Supply Industrial Co. Ltd. v. CIT and Pandian Chemicals Ltd. v. CIT, which emphasized a direct nexus between the income and the industrial undertaking. The Tribunal concluded that interest on EEFC, rupee deposits, and ICDs did not have a direct nexus with the industrial undertaking and were not eligible for exemption under Section 10A.

2. Eligibility of Reimbursement from Exim Bank for Exemption under Section 10A:
The assessee received a grant from Exim Bank for obtaining ISO quality certification. The Tribunal noted that the total expenses for ISO certification were more than the grant received. Applying the principles laid down in Lalsons Enterprises v. Dy. CIT and approved by the Delhi High Court in CIT v. Shri Ram Honda Power Equipment, the Tribunal held that only the net amount should be excluded. Since the expenses exceeded the grant, the net effect was zero, and the amount did not need to be excluded while computing profits derived from the industrial undertaking. Thus, the reimbursement from Exim Bank was allowed as exempt under Section 10A.

3. Eligibility of Corporate Charges and Charges for Use of Workstations for Exemption under Section 10A:
The assessee received corporate charges and charges for the use of workstations from HCL Technologies Ltd. The Tribunal observed that these amounts were reimbursements for expenses incurred by the assessee on behalf of HCL Technologies Ltd. Since the expenses were already debited to the profit and loss account, the reimbursement should reduce the expenses and not the profits of the business. Therefore, the Tribunal directed that these amounts should not be reduced from the profits of the business of the eligible industrial undertaking. Consequently, the corporate charges and charges for the use of workstations were allowed as exempt under Section 10A.

4. Eligibility of Income from Domestic Software Services for Exemption under Section 10A:
The assessee earned income from domestic software services, which was included in the total software services income shown in the profit and loss account. The Tribunal noted that the income from domestic software services was less than 1% of the total services rendered by the eligible undertaking and was derived from the same undertaking. Therefore, the entire profit of the eligible undertaking, including income from domestic software services, was eligible for exemption under Section 10A.

5. Disallowance of Lease Rent Payment to Noida Authorities as Capital Expenditure:
The assessee paid lease rent and late registration fees to Noida Authorities for leasehold properties. The Assessing Officer treated this payment as capital expenditure, which was upheld by the CIT(A). The Tribunal, however, held that the lease rent payment was for continuing to enjoy leasehold rights and did not result in acquiring a new capital asset. Therefore, the expenditure was revenue in nature and allowable as such.

Conclusion:
The Tribunal allowed the appeal partly, granting exemptions under Section 10A for reimbursement from Exim Bank, corporate charges, charges for the use of workstations, and income from domestic software services. However, it disallowed exemptions for interest on EEFC, rupee deposits, and ICDs. The lease rent payment to Noida Authorities was also allowed as revenue expenditure.