2020 (1) TMI 920 - AT - Income Tax

Deduction u/s.10A - Deduction granted to unit II treating it as a separate eligible unit by the Ld. CIT(Appeals). HELD THAT - It is absolutely clear that there were existence of two units i.e. Unit 1 is for creating products for higher education industry and Unit 2 is for creating products for banking and finance industry. Unit 1 and Unit 2 are basically two different and distinct units of the assessee. There is neither expansion nor splitting one unit into another. The Ld. DR was unable to bring on record any material/document in support of the Revenue substantiating that both units are one and the same. DR relied on the observation of the Assessing Officer that Master Service Agreement was not furnished but how that agreement could have helped the revenue additionally was not substantiated by the Ld. DR because of the fact that as on record in the order of the Ld. CIT(Appeals) at Para 5.3.2 and Para 5.3.3, it is mentioned by the First Appellate Authority that various documents/returns such as separate custom bonded warehouse licenses, separate annual reports filed with STPI, separate monthly reports submitted to Superintendent of Customs for Unit I and Unit II further confirm that Unit II is separate and independent from Unit I. These facts were not disputed by the Ld. DR before us. Thus we are of the considered view that Unit II of the assessee company is absolutely a new and separate unit and independent from Unit I. Therefore, the Ld. CIT(Appeals) was justified in holding that the assessee is eligible to claim of deduction u/s.10A of the Act on the profits of Unit II separate from deduction u/s.10A of the Act on profits of Unit I. Thus, we do not find any infirmity with the findings of the Ld. CIT(Appeals) and relief provided to the assessee by the Ld. CIT(Appeals) is hereby sustained. Computation of deduction u/s 10A - as per CIT-A exemption u/s.10A of the Act should be computed after excluding communication expenses, insurance and travel expenses from the total turnover - HELD THAT - As relying on HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT CIT(Appeals) was correct in directing the Assessing Officer to calculate deduction u/s.10A of the Act after reducing the expenses which are reduced from export turnover, from total turnover as well. Thus, relief provided to the assessee by the Ld. CIT(Appeals) is hereby sustained. Thus, ground No.2 raised in appeal by the Revenue is dismissed. Interest income eligible for deduction u/s.10A of the Act when the facts of the case are that interest was earned on bank deposits - HELD THAT - As decided in M/S MOTOROLA INDIA ELECTRONICS PVT LTD 2014 (1) TMI 1235 - KARNATAKA HIGH COURT while directing the Assessing Officer to allow deduction u/s.10A of the Act on interest income of ₹ 42,86,469/-. The Ld. DR could not bring any contrary decision of any Higher Forum in support of the Revenue nor could bring any relevant documents/materials opposing the already established facts in favour of the assessee. Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) which is thereby upheld. Thus, ground No.3 raised in appeal by the Revenue is dismissed. Foreign exchange gain as eligible for deduction u/s.10A - HELD THAT - Hon‟ble Madras High Court in the case of CIT Vs. Pentasoft Technologies Ltd. 2010 (7) TMI 75 - MADRAS HIGH COURT held that the exchange value based on upward or downward of the Rupee value is not in the hands of the assessee. In other words, 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 export 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 - Decided against revenue

Summary

Issues Involved:
1. Deduction under section 10A for Unit II as a separate eligible unit.
2. Computation of exemption under section 10A after excluding certain expenses from total turnover.
3. Eligibility of interest income for deduction under section 10A.
4. Eligibility of foreign exchange gain for deduction under section 10A.

Detailed Analysis:

1. Deduction under Section 10A for Unit II as a Separate Eligible Unit:
The Revenue contested the allowance of deduction under section 10A for Unit II, arguing that the stipulated conditions were not satisfied. The Assessing Officer (AO) found that the assessee had not claimed the deduction for Unit II in the previous year (A.Y. 2008-09), suggesting that the claim was an afterthought rather than an inadvertent mistake. The AO concluded that Unit II was not a new unit but rather an expansion or split of an existing unit, thus denying the deduction.

The CIT(Appeals), however, held that Unit II was a separate and independent unit based on various documents, including separate custom bonded warehouse licenses and separate reports submitted to government authorities. The CIT(Appeals) concluded that the assessee was eligible for deduction under section 10A for Unit II, separate from Unit I. The Tribunal upheld this decision, noting that the STPI had confirmed the separate existence of Unit II and that the AO's remand report supported this conclusion.

2. Computation of Exemption under Section 10A after Excluding Certain Expenses from Total Turnover:
The Revenue argued that the CIT(Appeals) erred in directing the exclusion of communication, insurance, and travel expenses from the total turnover while computing the exemption under section 10A. The AO had contended that the total turnover should be considered in its entirety without any exclusions.

The CIT(Appeals) directed the AO to compute the deduction after reducing these expenses from both the export turnover and the total turnover, relying on the decision of the Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. The Tribunal upheld this decision, referencing the Supreme Court's ruling in CIT vs. HCL Technologies Ltd., which supports the exclusion of such expenses from the total turnover to ensure the formula for computing the deduction is workable.

3. Eligibility of Interest Income for Deduction under Section 10A:
The AO treated the interest income earned on bank deposits as "income from other sources" and not as income derived from export business, thus denying the deduction under section 10A. The assessee argued that the interest income was earned on short-term deposits of surplus funds, which were closely linked to the business activity.

The CIT(Appeals) allowed the deduction, citing the Karnataka High Court's decision in CIT & Anrs. vs. Motorola India Electronics P. Ltd., which held that interest income on deposits related to export business qualifies for deduction under section 10A. The Tribunal upheld this decision, noting that the Revenue could not provide any contrary decision or material to oppose the established facts favoring the assessee.

4. Eligibility of Foreign Exchange Gain for Deduction under Section 10A:
The AO reduced the foreign exchange gain from the profit of the undertaking, arguing that it did not have a direct nexus with the profit derived from export business. The CIT(Appeals) allowed the deduction, relying on the Bombay High Court's decision in CIT vs. Gem Plus Jewellery India Ltd., which held that gains from foreign exchange fluctuations realized within the stipulated period form part of the sales proceeds and are directly related to export activities.

The Tribunal upheld this decision, further referencing the Madras High Court's ruling in CIT vs. Pentasoft Technologies Ltd., which supports the inclusion of foreign exchange gains in the computation of profits for deduction under section 10A.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(Appeals)'s decisions to allow deductions under section 10A for Unit II, to compute the exemption after excluding specific expenses from total turnover, and to include interest income and foreign exchange gains in the deduction computation.