2010 (11) TMI 593 - AT - Income Tax

Deduction u/s 10A - The assessee-company is carrying on the business of development and export of software, manpower training, and consultancy services - There is dispute with regard to the quantum of deduction - the assessee is accepting that the interest received from bank deposits and other income has to be treated as income from other sources and, accordingly, they shall not be included in the business profits - The learned Departmental Representative did not object to the submissions of the assessee It was held that the interest received from bank deposits and other income should be assessed under the head Income from other sources and accordingly they shall not form part Profit from business for the purpose of computation of deduction under section 10A of the Act The next question is whether the deduction under section 10A is assessee specific or undertaking specific - after the amendment made by the Finance Act, 2001, the total turnover shall comprise of the total turnover of the business carried on by the Undertaking only - The amended section is applicable for the years under consideration The claim of the assessee is that if the communication expenses incurred by it are to be reduced from the export turnover; it should also be reduced from the total turnover also - learned CIT(A), in the assessment year 2005-06, has accepted this claim of the assessee on the basis of the decisions of Bangalore Bench of ITAT and also by placing reliance on the decision of Hyderabad Bench of ITAT in the case of ITO v. D.E. Block India Software Ltd. IT Appeal Nos. 893 and 894 (Hyd.) of 2006 , wherein a similar view was expressed In the result, all the three appeals of the assessee and the appeal of the revenue for the assessment year 2005-06 are treated as partly allowed for statistical purposes- The appeal of the revenue for the assessment year 2004-05 is allowed

Issues Involved:
1. Manner of computation of deduction under section 10A of the Act.
2. Inclusion of interest received from bank deposits and other income in "Profits of Business."
3. Definition and scope of "Total Turnover."
4. Definition and scope of "Export Turnover."

Detailed Analysis:

1. Manner of Computation of Deduction Under Section 10A:
The primary issue in these appeals is the manner of computation of deduction under section 10A of the Act for the assessment years 2003-04 to 2005-06. The formula for deduction under section 10A is:
\[ \text{Deduction under section 10A} = \frac{\text{Profits of Business} \times \text{Export Turnover}}{\text{Total Turnover}} \]
The disagreement arises over the components of "Profits of Business," "Export Turnover," and "Total Turnover."

2. Inclusion of Interest Received from Bank Deposits and Other Income in "Profits of Business":
The dispute on the inclusion of interest received from bank deposits and other income in "Profits of Business" was resolved with the assessee conceding that such receipts should be treated as "Income from other sources" and not included in "Profits of Business." Consequently, these receipts will not form part of the business profits for the purpose of computation under section 10A.

3. Definition and Scope of "Total Turnover":
Several sub-issues were addressed under this main issue:
- Interest from Bank Deposits and Other Income: It was concluded that since these receipts are assessable under "Income from other sources," they should not be included in the total turnover.
- Assessee Specific vs. Undertaking Specific: The deduction under section 10A is determined to be undertaking specific, meaning the total turnover should include only the turnover of the software export division, not the entire business turnover of the assessee.
- Turnover from Other Divisions: The turnover from other divisions (Manpower Training and Consultancy Services) should not be included in the "Total Turnover" for the purpose of section 10A deduction. The software export division at Bhogapuram is considered a separate "Undertaking."

4. Definition and Scope of "Export Turnover":
The term "Export Turnover" is defined in clause (iv) of Explanation 2 to section 10A and includes the consideration for export received in convertible foreign exchange, excluding freight, telecommunication charges, or insurance attributable to delivery outside India or expenses incurred in foreign exchange for technical services outside India.
- Telecommunication Charges: The telecommunication charges paid to MCI World Com for IPCL leased lines were disputed. It was concluded that these charges should be deducted from both the export turnover and the total turnover to maintain consistency in the formula.
- Attribution to Delivery of Software: The issue of whether telecommunication charges are fully attributable to the delivery of software was not adjudicated as deducting these charges from both export turnover and total turnover nullifies any reduction in the eligible deduction under section 10A.

Conclusion:
The deduction under section 10A needs to be recalculated based on the principles discussed, and the issue is remanded to the Assessing Officer for re-computation. The appeals of the assessee and revenue for the assessment years 2003-04 and 2005-06 are partly allowed for statistical purposes, and the appeal of the revenue for the assessment year 2004-05 is allowed.

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