2024 (8) TMI 282 - AT - Income Tax

Exemption claimed u/s.10A - denial of claim as export turnover brought into India does not amount to 75 percent of the total turnover of the STP unit - as submitted by the assessee that, it treated export credits of the bank account maintained by it in the USA as export proceeds and that, this a/c was operated with the approval of the RBI - whether sales from STP units exceeded 75% of the total turnover during the relevant period as per the law applicable for relevant Assessment Year? HELD THAT - Expenditure incurred in foreign exchange are to be excluded from total turnover and what is excluded from total turnover is also excluded from export turnover . Thus, the export turnover, in the numerator must have the same meaning as the export turnover, which is a constituent element of the total turnover in the denominator. We note that the revenue in the present facts of the case, computed export turnover based on the definition of export turnover as appearing in section 80HHE in peacemeal, without considering the other related provisions. Even otherwise section 10A(2)(ia) compares the export proceeds with total sales. It is not in dispute that, section 10A is a beneficial section like section 80HHE. Section 10A is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that is provided by section 80HHE, by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act. In any event, the EXIM policy explained hereinabove is clear on this aspect. Hon'ble Supreme Court in the case of K.P. Varghes 1981 (9) TMI 1 - SUPREME COURT held that, a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly Hon'ble Supreme Court in the case of Bajaj Tempo Ltd 1992 (4) TMI 4 - SUPREME COURT with respect to relief for new industrial undertaking under section 15C of the Income-tax Act, 1922, held that, such provisions should be construed liberally. A literal Construction which defeats the very purpose of enacting the provision should be avoided. Thus The definition of the export turnover , in sec. 10A excludes from its ambit any expenses incurred in foreign exchange in providing technical services outside India for the year under consideration. We therefore direct the Ld.AO to compute the 75% of total sales on gross receipt u/s. 10A(2)(ia) of the Act. Appeal filed by the assessee stands allowed.

Summary

Issues Involved:

1. Denial of exemption under Section 10A due to non-fulfillment of the 75% export turnover requirement.
2. Interpretation of "export turnover" and its computation for the relevant assessment year.
3. Applicability of definitions and provisions from Section 80HHE to Section 10A.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10A:

The assessee company, engaged in the export of software solutions, filed a return declaring a loss for AY 2000-01. The Assessing Officer (AO) denied the exemption claimed under Section 10A, arguing that the export turnover brought into India did not meet the 75% threshold of the total turnover of the STP unit. The AO considered net inward remittances, excluding onsite expenses and sub-contractor payments, as "export turnover," which resulted in a figure below the required 75%.

2. Interpretation of "Export Turnover":

The CIT(A) and the Tribunal initially ruled in favor of the assessee, stating that the services rendered by sub-contractors outside India do not affect the exemption claim under Section 10A. The Tribunal held that the engagement of sub-contractors paid from the assessee's foreign bank account does not negate the fact that the assessee exported computer software. The High Court later remanded the issue back to the Tribunal to verify whether the export proceeds should be considered on a gross or net basis.

3. Applicability of Definitions and Provisions from Section 80HHE:

The AO imported the definition of "export turnover" from Section 80HHE, which was not applicable for AY 2000-01 under Section 10A. The Tribunal noted that Section 10A did not define "export turnover" for AY 2000-01, and the definition was introduced only from AY 2001-02. The Tribunal emphasized that the entire sales credited in the overseas bank account, maintained with RBI approval, should be considered as export turnover without deducting expenses incurred in foreign exchange.

Detailed Analysis:

1. Denial of Exemption under Section 10A:

The assessee argued that 100% of the revenue from STP units constituted export turnover. The AO's computation of only 56% as export turnover was challenged. The Tribunal observed that for AY 2000-01, Section 10A did not contain a definition of "export turnover." The Tribunal concluded that the entire sales credited in the overseas bank account should be treated as export turnover, satisfying the 75% requirement under Section 10A(2)(ia).

2. Interpretation of "Export Turnover":

The Tribunal analyzed the legislative intent and the EXIM policy, which allowed STP units to sell 25% of their produce domestically while availing tax exemption. The Tribunal noted that the amendment to Section 10A aimed to ensure substantial exports, requiring 75% of total sales to be exports. The Tribunal further clarified that the term "total sales" should be interpreted in value terms, not quantity.

3. Applicability of Definitions and Provisions from Section 80HHE:

The Tribunal highlighted that the AO's reliance on the definition of "export turnover" from Section 80HHE was misplaced. The Tribunal pointed out that the definition of "export turnover" under Section 80HHE excluded certain expenses, which should also apply to the total turnover. The Tribunal referred to Explanation 1 to Section 80HHE, which deemed export proceeds credited to a foreign bank account approved by RBI as received in India. The Tribunal concluded that the AO's computation was incorrect and directed the AO to compute 75% of total sales on a gross receipt basis under Section 10A(2)(ia).

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the AO to compute the 75% export turnover requirement based on gross receipts, not net remittances. The Tribunal emphasized a liberal interpretation of Section 10A, aligning with the legislative intent to promote exports and provide tax incentives. The order was pronounced on 31st July 2024.