2015 (9) TMI 219 - AT - Income Tax

Eligibility for exemption U/s.10A - brought forward losses and unabsorbed depreciation of earlier years whether cannot be set-off against profit and gains of the undertaking while computing the eligible exemption U/s.10A? - Held that - Since the Ld. CIT (A) has held that unabsorbed losses and depreciation of the earlier years cannot be set off against the profits from the eligible unit for computing the eligible deduction U/s. 10A of the Act following the decision of the Tribunal in the case Scientific Atlanta India Technology Pvt Ltd. Vs. ACIT 2010 (2) TMI 658 - ITAT, CHENNAI we do not have any hesitation to confirm the order of the Ld. CIT (A) on this issue. - Decided in favour of the assessee. Expenditure incurred in foreign exchange towards telecommunication charges deducted from export turnover should also be deducted from total turnover for arriving at the eligible deduction U/s.10A - Held that - Explanation 2(iv) to Section 10A of the Act stipulates that export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses if any, incurred in foreign exchange in providing the technical services outside India. The arithmetic consequential implication of such exclusion of the above stated expenditures from export turnover would be, to iron out the element of those expenditures, while computing the eligible deduction U/s. 10A of the Act. In the given case before us, the relevant expenditure that has to be excluded from the export turnover is telecommunication charges . Thus on giving effect to Explanation 2(iv) to Section 10A of the Act, the telecommunication charges should be excluded not only from export turnover , but it has also to be reduced from the debit side of profit and loss account . Moreover, once the telecommunication charge is reduced from the export turnover , it will stand reduced to that extend in total turnover because export turnover is a part and parcel of total turnover while drawing the profit and loss account . Further, needless to mention that total turnover is a credit side item in the profit and loss account . Thus, the overall effect in the profit and loss account would be that, the profit will remain the same, since telecommunication charge is excluded from both debit side and credit side of the profit and loss account , however the export turnover and the total turnover will stand reduced to the extent of telecommunication charges so excluded.- Decided in favour of the assessee.

Issues Involved:
1. Set-off of brought forward losses and unabsorbed depreciation against profits of the undertaking while computing eligible exemption under Section 10A of the Income Tax Act.
2. Deduction of telecommunication charges incurred in foreign exchange from both export turnover and total turnover for computing deduction under Section 10A.

Detailed Analysis:

Issue 1: Set-off of Brought Forward Losses and Unabsorbed Depreciation
The Revenue contended that the brought forward losses and unabsorbed depreciation of earlier years should be set off against the profits of the undertaking while computing the eligible exemption under Section 10A of the Income Tax Act. The Assessing Officer had set off these losses and depreciation from the current year's profit of the eligible 10A unit and then granted the deduction for the remaining profit.

The CIT(A) allowed the appeal of the assessee, relying on the decision of the Chennai Benches of the Tribunal in the case of Scientific Atlanta India Technology Pvt Ltd. vs. ACIT. The key points from this decision are:
- Section 10A falls under Chapter III, which deals with "Incomes which do not form part of total income."
- The income from Chapter IV cannot be clubbed with those from Chapter III to determine the total taxable income.
- The brought forward business losses and unabsorbed depreciation of a non-10A unit cannot be set off against the profits of the undertaking eligible for deduction under Section 10A.

The CIT(A) concluded that the brought forward losses and unabsorbed depreciation of earlier years cannot be set off against the profits and gains of the undertaking claiming exemption under Section 10A. The losses and depreciation allowed to be carried forward from the assessment years 2003-04 and 2004-05 are to be set off against normal business profits only, not against the profits of the unit eligible for deduction under Section 10A.

The Tribunal confirmed the CIT(A)'s order, stating that the unabsorbed losses and depreciation of the earlier years cannot be set off against the profits from the eligible unit for computing the eligible deduction under Section 10A. Thus, this ground raised by the Revenue was decided in favor of the assessee.

Issue 2: Deduction of Telecommunication Charges from Both Export Turnover and Total Turnover
The Revenue argued that the expenditure incurred in foreign exchange towards telecommunication charges should be deducted only from the export turnover and not from the total turnover while computing the eligible deduction under Section 10A.

The CIT(A) allowed the appeal of the assessee, following various judicial decisions, including:
- DCIT vs. M/s. Honeywell International India Circle (P) Ltd.
- Dell International Services India Private Ltd.
- Tata Elxisi Ltd.
- Patni Telecom (P) Ltd vs. ITO.

These decisions held that if any expenditure is required to be deducted from the export turnover in the numerator, the same should also be deducted from the total turnover in the denominator for arriving at the eligible deduction under Section 10A.

The Tribunal confirmed the CIT(A)'s order, stating that the telecommunication charges should be excluded from both export turnover and total turnover. This is based on the decision in the case of ITO vs. Sak Soft Ltd., which held that for the purpose of applying the formula under Section 10A, the expenses incurred in foreign exchange should be excluded from both export turnover and total turnover.

Thus, this issue was also decided in favor of the assessee.

Conclusion
The appeal of the Revenue was dismissed, with both issues decided in favor of the assessee. The Tribunal upheld the CIT(A)'s decision that:
1. Brought forward losses and unabsorbed depreciation of earlier years cannot be set off against the profits of the undertaking while computing the eligible exemption under Section 10A.
2. Telecommunication charges incurred in foreign exchange should be deducted from both export turnover and total turnover for computing the eligible deduction under Section 10A.

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