2019 (4) TMI 1168 - HC - Income Tax

Computation of deduction under section 10A - exclusion of expenses incurred in foreign currency, both from the export turnover and total turnover - HELD THAT - What is excluded from the export turnover must also be excluded from total turnover, since one of the components of total turnover is export turnover. See TATA ELXSI LTD. case 2011 (8) TMI 782 - KARNATAKA HIGH COURT Setting off of brought forward losses - HELD THAT - While considering this aspect, the Tribunal relied upon the decision in Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT and held in favour of the assessee Compensation amount received by the assessee on account of termination of export/service contract - whether that income could be treated as business income arising out of export item? - HELD THAT - This court in M/S. HEWLETT PACKARD GLOBAL SOFT LTD. 2017 (11) TMI 205 - KARNATAKA HIGH COURT has held that the interest income derived by the assessee would be eligible for deduction under section 10A of the Act. Likewise, in the case on hand, the compensation/damages received by the assessee on termination of export contract would be in the course of his export business and is to be treated as income derived from out of the business, which qualifies for deduction under section 10A of the Act. Deduction of amount from the export turnover which relates to software supplied to another STP unit - HELD THAT - The Tribunal while answering the said question held that it is a deemed export, as the export is done through STP unit and foreign exchange is earned. This court in Tata Elxsi Ltd. v. Asst. CIT 2015 (10) TMI 634 - KARNATAKA HIGH COURT it is clear that if an assessee wants to claim the benefit of section 10A, firstly he must export articles or things or computer software. Secondly, the export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting section 10A is fulfilled, and the assessee would be entitled to the benefit of exemption from payment of Income-tax on the profits and gains derived by the undertaking from the export .

Issues Involved:
1. Exclusion of expenses incurred in foreign currency from both export turnover and total turnover for computation of deduction under section 10A.
2. Allowing setting off of brought forward losses.
3. Treatment of compensation received on termination of export/service contract as business income.
4. Deduction under section 10A for deemed export on account of sale to another STP unit.

Detailed Analysis:

1. Exclusion of Expenses Incurred in Foreign Currency:
The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) to exclude expenses incurred in foreign currency from both export turnover and total turnover for the purpose of computation of deduction under section 10A. This decision was based on the precedent set by the Karnataka High Court in CIT v. Tata Elxsi Ltd., which was further upheld by the Supreme Court in CIT v. HCL Technologies Ltd. The Supreme Court clarified that "what is excluded from the export turnover must also be excluded from total turnover," ensuring that the formula for computing deductions under section 10A remains consistent and logical. Therefore, the court concluded that the question of law regarding this issue would not survive for consideration.

2. Allowing Setting Off of Brought Forward Losses:
The Tribunal's decision to allow setting off of brought forward losses was based on the Supreme Court's ruling in CIT v. Yokogawa India Ltd. The Supreme Court explained that section 10A, as amended, provides for deductions rather than exemptions, and these deductions are to be computed independently for each eligible undertaking without reference to other units of the assessee. This interpretation aligns with the legislative intent to provide additional benefits to eligible units under section 10A. Consequently, the court determined that this question of law would no longer arise for consideration.

3. Treatment of Compensation Received on Termination of Export/Service Contract:
The Tribunal held that the compensation received by the assessee on termination of an export/service contract should be treated as business income derived from export activities. The court noted that the compensation was directly linked to the business activities of the assessee, as the contract was terminated without any fault on the part of the assessee. This interpretation was supported by a Full Bench decision in CIT v. Hewlett Packard Global Soft Ltd., which held that incidental income, such as interest on bank deposits, earned by an export-oriented unit is entitled to 100% exemption under section 10A. Therefore, the court concluded that the compensation received qualifies for deduction under section 10A.

4. Deduction under Section 10A for Deemed Export:
The Tribunal ruled in favor of the assessee regarding the deduction under section 10A for deemed export on account of sale to another STP unit. The court referred to its decision in Tata Elxsi Ltd. v. Asst. CIT, which clarified that section 10A benefits apply if the sale proceeds are received in convertible foreign exchange, regardless of whether the export is direct or through another exporter. The court emphasized that the legislative intent behind section 10A is to promote exports and earn foreign exchange. As the conditions for deemed export were met, the court held that the assessee was entitled to the deduction under section 10A.

Conclusion:
The appeals were dismissed at the stage of admission as no substantial questions of law arose for consideration. The Tribunal's decisions on all four issues were upheld, affirming the interpretations and applications of section 10A as consistent with legislative intent and judicial precedents.

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