2013 (1) TMI 110 - AT - Income Tax

Deduction under section 10A in respect of Bangalore unit (STPI unit) - assessee company had two units, one in Bangalore STPI unit and another in Mumbai (Non STPI Unit) - brought forward losses of STPI unit without setting off the carry forward losses as well as the loss of the current year pertaining to Non-STPI unit OR after setting off the unabsorbed loss of the same unit and the current year s loss of the non-STPI unit - Held that - As decided in CIT Versus Yokogawa India Ltd. 2011 (8) TMI 845 - KARNATAKA HIGH COURT deduction u/s 10A/10B is allowable without setting off the non-STPI unit - As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 72. Exclusion of telecommunication expenses and travelling expenses incurred in foreign currency from the export turnover & not from the total turnover while calculating deduction u/s 10A - Held that - As decided in CIT v M/s Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. When the statute prescribed a formula and in the said formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same - Thus CIT(A) was justified in directing the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while computing deduction under section 10A - in favour of assessee.

Summary

Issues Involved:
1. Whether deduction under section 10A should be allowed without setting off brought forward losses and current year's loss of non-STPI units.
2. Whether the assessee had filed a declaration under section 10A(8) to opt out of the benefit of section 10A for certain assessment years.
3. Whether telecommunication and travel expenses incurred in foreign currency should be excluded from both export turnover and total turnover while calculating deduction under section 10A.

Detailed Analysis:

Issue 1: Deduction under Section 10A without Setting Off Brought Forward Losses and Current Year's Loss of Non-STPI Units
The assessee, engaged in software development, claimed deduction under section 10A for its Bangalore unit (STPI unit) without setting off the losses of its Mumbai unit (Non-STPI unit) and brought forward losses of the STPI unit. The Assessing Officer (AO) set off these losses before calculating the deduction under section 10A. The CIT(A) partly allowed the appeal, directing that the loss of the non-STPI unit should not be set off but upheld the set-off of unabsorbed depreciation and carry forward losses of the same unit. The assessee appealed, citing the jurisdictional High Court's judgment in CIT v Yokogawa India Ltd., which held that deduction under section 10A is undertaking-specific and should be allowed without setting off brought forward and current year losses of other units. The Tribunal, following this precedent, held that the deduction under section 10A should be calculated without setting off the carried forward business loss of earlier years, thus allowing the assessee's appeal on this ground.

Issue 2: Declaration under Section 10A(8)
The assessee contended that it had filed a declaration under section 10A(8) to opt out of the 10A scheme for the assessment years 2003-04 and 2004-05. The AO rejected this claim, noting that the declarations did not bear the seal of the AO's office. The CIT(A) upheld the AO's rejection. The Tribunal, however, did not consider this issue further, as it had already adjudicated the main issue in favor of the assessee, rendering this ground infructuous.

Issue 3: Exclusion of Telecommunication and Travel Expenses from Export Turnover and Total Turnover
The AO excluded telecommunication and travel expenses incurred in foreign currency from the export turnover but not from the total turnover while calculating the deduction under section 10A, reducing the deduction amount. The CIT(A) directed the AO to exclude these expenses from both export turnover and total turnover, following the Tribunal's orders and the Special Bench decision in ITO v M/s Sak Soft Ltd. The Tribunal upheld this decision, citing the Karnataka High Court's judgment in CIT v M/s Tata Elxsi Ltd. and the Mumbai High Court's judgment in CIT v Gem Plus Jewellery India Ltd., which established that expenses excluded from export turnover should also be excluded from total turnover to maintain parity.

Conclusion:
The Tribunal allowed the assessee's appeal on the main issue of setting off losses and upheld the CIT(A)'s decision on excluding specific expenses from both export and total turnover. The revenue's appeal was dismissed, affirming that the deduction under section 10A should be calculated without setting off losses of non-STPI units and brought forward losses of the same unit, and that specific expenses should be excluded from both export and total turnover.