2021 (1) TMI 168 - HC - Income Tax

Deduction u/s 10A in respect of provisions written back towards link charges and annual day expenses and the said claim was not derived by an undertaking from the export of article or thing or computer software - HELD THAT - This issue is covered by the decision of this Court in M/s. California Software Co. Ltd . 2020 (2) TMI 1234 - MADRAS HIGH COURT wherein took a view that the income brought to tax under Section 41 of the Act by reversal of the entry with regard to the stock option given to the employees is also in the nature of 'export income' and therefore, the Assessee is entitled to exemption / deduction under Section 10-A / 10-B of the Act and the view taken by the learned Tribunal is not sustainable. Foreign Exchange Fluctuation Gain - HELD THAT - This issue is covered by the decision in CIT v. M/s. Pentasoft Technologies Ltd. 2010 (7) TMI 75 - MADRAS HIGH COURT the assessee does not determine the exchange value of the Indian Rupee. It has to be remembered but for the fact that the assessee is an expot house, there was no question of earning any foreign exchange. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher Rupee value was earned by virtue of such exports carried out by the assessee, there is no reason why the benefit of Section 10(A) should not be allowed to the assessee. Foreign Currency Expenditure and Communication Charges - HELD THAT - The same are covered by a decision of this Court in CIT v. M/s. Zylog Systems Limited 2020 (3) TMI 181 - MADRAS HIGH COURT wherein, it was held that such expenditure incurred by the Assessee in foreign currency will also be includible in the definition of 'export turnover' for the purpose of computing deduction under Section 10B of the Act. Set off of brought forward losses before allowing tax holiday deduction is covered by the decision in CIT v. M/s. Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT - From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. Though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Revenue appeal dismissed.

Summary

Issues:
1. Tax holiday on provisions no longer required written back.
2. Denial of tax holiday u/s 10A / 10B in respect of Foreign exchange fluctuation gain.
3. Exclusion of Foreign currency expenditure and telecommunication expenditure from export turnover for computing tax holiday deduction.
4. Set off of brought forward losses before allowing tax holiday deduction.

Issue 1: Tax holiday on provisions no longer required written back:
The judgment covers the issue of whether deductions under Section 10A for provisions written back should be allowed. The court referred to previous decisions and held in favor of the Assessee based on the case of M/s. California Software Co. Ltd. The court emphasized that such provisions are eligible for deduction if derived from the export of articles or software.

Issue 2: Denial of tax holiday for Foreign exchange fluctuation gain:
The court addressed whether gains from foreign exchange fluctuations should be eligible for deduction under Section 10A. Citing the case of M/s. Pentasoft Technologies Ltd., the court ruled in favor of the Assessee, stating that such gains related to export business should qualify for the deduction.

Issue 3: Exclusion of Foreign currency and telecommunication expenditure from export turnover:
The judgment analyzed whether foreign currency and telecommunication expenses should be excluded from export turnover for tax holiday computation. Referring to the case of M/s. Zylog Systems Limited, the court held that such expenditures in foreign currency are part of export turnover for deduction under Section 10B.

Issue 4: Set off of brought forward losses before tax holiday deduction:
The court examined whether brought forward losses should be set off before allowing tax holiday deductions. Relying on the decision in the case of M/s. Yokogawa India Ltd., the court ruled in favor of the Assessee, stating that deductions under Section 10A should be calculated independently for the eligible undertaking before considering other aspects of total income computation.

The judgment provided detailed analysis and references to previous decisions to resolve the issues raised in the Tax Case Appeals concerning deductions under Section 10A and 10B of the Income Tax Act. The court's rulings favored the Assessee in each issue, emphasizing the eligibility of certain expenses and gains for tax holiday deductions based on specific criteria and previous legal interpretations.