2011 (1) TMI 1480 - AT - Income Tax

Summary

Issues Involved:
1. Exclusion of telecommunication and travel expenses from export turnover for deduction under section 10A.
2. Setting off of domestic unit losses against income from 10A unit.
3. Setting off of unabsorbed losses and depreciation before computing deduction under section 10A.
4. Treatment of interest on fixed deposits and other income for deduction under section 10A.
5. Depreciation on intellectual property rights.
6. Treatment of lease rental income for deduction under section 10A.

Issue-wise Detailed Analysis:

1. Exclusion of Telecommunication and Travel Expenses from Export Turnover for Deduction under Section 10A:
The assessee argued that telecommunication and travel expenses should not be excluded from export turnover as they were not incurred specifically for the delivery of software outside India. The Tribunal, however, held that telecommunication and insurance charges are indirectly included in the export turnover and must be reduced for the purpose of computing deduction under section 10A. The Tribunal also upheld that these charges should be reduced from the total turnover to accurately compute the deduction, following the Special Bench decision in Sak Soft Ltd.

2. Setting off of Domestic Unit Losses Against Income from 10A Unit:
The assessee contended that losses from its domestic business should not be set off against the profits of the 10A unit before allowing the deduction. The Tribunal agreed with the assessee, citing several decisions, including Tata Consultancy Service Ltd. and Khoday India Ltd., which established that the deduction under section 10A is undertaking-specific and should not be affected by losses from other units.

3. Setting off of Unabsorbed Losses and Depreciation Before Computing Deduction under Section 10A:
The Tribunal noted that the issue of setting off unabsorbed losses and depreciation before allowing the deduction under section 10A was not clear from the assessment order. It remanded the issue back to the AO to verify if the losses pertain to the STP unit and to set off the losses accordingly if they relate to the assessment years in which the assessee is eligible for exemption under section 10A.

4. Treatment of Interest on Fixed Deposits and Other Income for Deduction under Section 10A:
The Tribunal held that interest earned on fixed deposits and other income such as insurance claims should be treated as business income and included in the profits for the purpose of deduction under section 10A. This decision was based on the precedents set by the Karnataka High Court in M/s. Green Agro Pack (P) Ltd. and the Delhi High Court in CIT vs. Sportking India Ltd.

5. Depreciation on Intellectual Property Rights:
The Tribunal followed its previous decision in the assessee's own case for earlier years, allowing depreciation on intellectual property rights (IPRs). It directed the AO to determine the written down value (WDV) of the IPRs and allow depreciation accordingly, considering the provisions of section 43A regarding assets acquired from outside India.

6. Treatment of Lease Rental Income for Deduction under Section 10A:
The Tribunal upheld the AO's decision to exclude lease rental income from the profits eligible for deduction under section 10A, following the Tribunal's decision in the assessee's own case for earlier years. It was held that the rental income from sub-leased premises does not have a direct nexus with the export of computer software and should be treated as 'income from other sources.'

Conclusion:
The appeals by both the revenue and the assessee resulted in partial relief for the assessee. The Tribunal provided detailed reasoning for each issue, ensuring that the legal principles and precedents were thoroughly applied and upheld. The decisions made reflect a careful consideration of the specific provisions of the Income-tax Act, 1961, particularly section 10A, and relevant judicial interpretations.