2018 (6) TMI 1394 - HC - Income Tax

Deduction u/s 10A computation - eligibility criteria - Held that - To be eligible for exemption from payment of income tax, export should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured / software developed by it outside the country. It may export out of India by itself or export out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. The finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. For computation of deduction if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. See M/s. Tata Elxsi Ltd., vs. Asst. Commissioner of Income Tax 2015 (10) TMI 634 - KARNATAKA HIGH COURT and Commissioner of Income-tax, Central III vs. HCL Technologies Ltd.(2018 (5) TMI 357 - SUPREME COURT)

Summary

Issues:
Interpretation of Section 10A for income tax exemption on profits derived from export; Treatment of supplies made from one STP to another STP as 'deemed export'; Exclusion of communication expenses from total turnover under Section 10A.

Analysis:
1. Interpretation of Section 10A for income tax exemption on export profits:
The judgment refers to the conditions an assessee must fulfill to claim benefits under Section 10A. It highlights that for income tax exemption, the export of articles or software must yield foreign exchange brought into the country. The court emphasizes that the assessee need not personally export goods but can do so through another STP unit, as long as foreign exchange is attributable to such export. The judgment cites the case of M/s. Tata Elxsi Ltd. to support this interpretation, where the court held that supplies from one STP to another STP should be treated as 'deemed export' for the purpose of Section 10A.

2. Treatment of supplies from one STP to another STP as 'deemed export':
The judgment discusses the relevance of Clause 6.11 of the Exim Policy, stating that supplies from the DTA to STP units are considered 'deemed export'. It explains that even though such supplies may not meet the export requirements under the Customs Act, they are treated as 'deemed export' under the Exim Policy. The court clarifies that to be eligible for income tax exemption under Section 10A, the export should result in foreign exchange earnings, whether done by the assessee or through another STP unit. The judgment concludes that supplies from one STP to another should be treated as 'deemed export' to qualify for the tax benefit.

3. Exclusion of communication expenses from total turnover under Section 10A:
The judgment also references the case of HCL Technologies Ltd., where the issue of excluding communication expenses from total turnover for relief under Section 10A was discussed. The court held that if deductions on expenses like freight, telecommunication, and insurance related to the delivery of software under Section 10A are allowed only in export turnover and not from total turnover, it would lead to illogical and unjust results. The court reasoned that expenses excluded from export turnover must also be excluded from total turnover to align with the legislative intent. It emphasized that such deductions should be allowed from the total turnover in the same proportion to prevent absurd outcomes.

In conclusion, the judgment clarifies the interpretation of Section 10A for income tax exemption on export profits, establishes the treatment of supplies from one STP to another as 'deemed export', and emphasizes the exclusion of certain expenses from total turnover under Section 10A to ensure a fair and logical application of the law. The appeal filed by the Revenue was disposed of in line with the decisions discussed in the judgment.