2015 (7) TMI 1319 - AT - Income Tax

Deduction u/s 10A - compensation received by the assessee on account of termination of contract - whether it would be part of profit of the business for the purpose of computing deduction u/s 10A ? - HELD THAT - In the case in hand the assessee is 100% export oriented unit (EOU) and particularly the export of software. The contract in question was for supply/export of software and on cancellation of that contract for supply of software the assessee received the compensation which is nothing but income derived from the said undertaking from the main business activity of the supply/export of software. Therefore following the decision of the Delhi Bench in the case Sony India Pvt. 2008 (9) TMI 420 - ITAT DELHI-H we are of the view that the amount received by the assessee as compensation on account of cancellation of the contract in relation to export of software would constitute as its business income and will be part of profits of business of the undertaking and therefore eligible for deduction u/s 10A. Exclusion of the expenses both from export turnover as well as from the total turnover for the purpose of computing deduction u/s 10A. - This issue of exclusion of the expenses incurred in foreign exchange from the export turnover as well as from the total turnover is settled by the judgment of Hon ble Jurisdictional High Court in the case of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein held that here should be uniformity in the ingredients of both the numerator and the denominator of the formula Section 10-A is a beneficial section. Setting off of brought forward losses - HELD THAT - The issue on the setting off of brought forward losses after allowing the deduction u/s 10A is now covered by the judgment of Hon ble Jurisdictional High Court in the case of CIT(A) Vs. Yokogowa 2011 (8) TMI 845 - KARNATAKA HIGH COURT wherein Hon ble High Court has held that the deduction u/s 10A is allowable on the relevant years profits of the eligible unit without brought forward losses and unabsorbed depreciation being set off. Re-imbursement of travelling expenses to be included in the profit of the business while computing deduction u/s 10A of the Act. - AR has pointed that this issue has not been adjudicated by the CIT(A) - HELD THAT - . Since this issue has not been adjudicated by the CIT(A) therefore we remit this issue to the record of the CIT(A) for adjudication of the same on merit after giving an opportunity of being heard to the assessee. Disallowance of deduction u/s 10A in respect of deemed export on account of sale to another STP unit - HELD THAT - As far as the allowability of deduction u/s 10A in respect of the sale to another STP unit in convertible foreign exchange this issue is now covered by the above decision of Hon ble jurisdictional High Court. However this issue has not been examined by the CIT(A) therefore only for the limited purpose of giving a finding that the sale in question is to the another STP unit the issue is remitted to the record of the AO for verification and then allowing the claim of the assessee if sale in question is to the another STP unit.

Summary

Issues Involved:
1. Nature of compensation received on contract termination.
2. Exclusion of expenses from export turnover and total turnover for Section 10A deduction.
3. Setting off brought forward losses.
4. Inclusion of reimbursement of travel expenses in business profit for Section 10A deduction.
5. Inclusion of deemed exports in export turnover for Section 10A deduction.

Detailed Analysis:

1. Nature of Compensation Received on Contract Termination:
The Revenue challenged the CIT(A)'s decision that the compensation amount of Rs. 1.32 crores received by the assessee on account of contract termination is capital in nature and hence not taxable. The assessee, in cross-objections, argued that even if treated as revenue income, it should be included in the profits of the business for computing deduction under Section 10A. The Tribunal noted that the contract was for the export of software and thus part of the business activity. Citing the Delhi Tribunal's decision in Sony India Pvt. Ltd., it was held that the compensation received on contract termination is business income and eligible for deduction under Section 10A. Consequently, the appeal of the Revenue on this ground failed, and the assessee's cross-objection was allowed.

2. Exclusion of Expenses from Export Turnover and Total Turnover for Section 10A Deduction:
The Assessing Officer (AO) had reduced expenses towards travel and data communication services from the export turnover while computing the deduction under Section 10A. The CIT(A) directed the AO to exclude these expenses from the total turnover as well, following the Karnataka High Court's decision in Tata Elxsi. The Tribunal upheld the CIT(A)'s order, affirming that the expenses should be excluded from both export turnover and total turnover to maintain uniformity in the computation formula.

3. Setting Off Brought Forward Losses:
The AO disallowed the set-off of brought forward losses of prior years, but the CIT(A) directed the AO to allow it as per law. The Tribunal referenced the Karnataka High Court's decision in CIT vs. Yokogawa, which held that deduction under Section 10A should be allowed on the current year's profits of the eligible unit without setting off brought forward losses and unabsorbed depreciation. The Tribunal decided this issue in favor of the assessee for both assessment years.

4. Inclusion of Reimbursement of Travel Expenses in Business Profit for Section 10A Deduction:
The assessee contended that reimbursement of travel expenses amounting to Rs. 2,27,325 should be included in the profit of the business while computing deduction under Section 10A. The Tribunal noted that the CIT(A) had not adjudicated this issue and remitted it back to the CIT(A) for adjudication on merits after providing the assessee an opportunity to be heard.

5. Inclusion of Deemed Exports in Export Turnover for Section 10A Deduction:
The assessee claimed deduction under Section 10A by including Rs. 1,00,43,496 as deemed exports, which was disallowed by the AO. The Tribunal noted that this issue was covered by the Karnataka High Court's decision in Tata Elxsi, which held that supplies made to another STP unit should be treated as deemed exports. However, since the CIT(A) had not adjudicated this issue, the Tribunal remitted it to the AO for verification and allowing the claim if the sale was to another STP unit.

Conclusion:
The appeals filed by the Revenue were dismissed, and the cross-objections filed by the assessee were allowed in part. The Tribunal upheld the CIT(A)'s decisions favoring the assessee on the nature of compensation received and the exclusion of expenses from total turnover. It also directed the AO to verify and allow claims regarding reimbursement of travel expenses and deemed exports. The setting off of brought forward losses was decided in favor of the assessee based on precedent.