DTAA credit and software sale taxation: treaty relief limited to income taxed in India, while STP sale profits qualified for exemption.

Section 80HHE deduction was computed by following the assessee's earlier-year method on reduction of foreign currency expenditure from export and total turnover, and the relief was allowed. Article 23 DTAA relief was confined to income actually taxed in India, so the Canadian tax credit could not be claimed on the entire royalty receipt; the computation method was upheld with figure revision. DTAA credit was not to be deducted before calculating surcharge. Profit on sale of Eagle Software was treated as business income from the eligible STP unit, not capital gains, and qualified for exemption under section 10A.

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Issues: (i) whether the deduction under section 80HHE was to be computed after reducing foreign currency expenditure from export turnover and total turnover; (ii) whether relief under article 23 of the India-Canada DTAA was to be computed on the entire royalty receipt or only on the portion of income actually subjected to tax in India; (iii) whether surcharge had to be calculated after granting credit for DTAA relief; and (iv) whether the profit on sale of Eagle Software was taxable as capital gains or was eligible for exemption under section 10A.

Issue (i): Whether the deduction under section 80HHE was to be computed after reducing foreign currency expenditure from export turnover and total turnover.

Analysis: The deduction was to be worked out in the same manner as had been directed in the assessee's own earlier years. The matter turned on the formula for section 80HHE and the treatment of foreign currency expenses in the computation of export turnover and total turnover. The Tribunal followed its earlier decision in the assessee's case on identical grounds.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether relief under article 23 of the India-Canada DTAA was to be computed on the entire royalty receipt or only on the portion of income actually subjected to tax in India.

Analysis: The Tribunal held that double taxation relief is available only to the extent the same income has suffered tax in both countries. It accepted the Revenue's contention that the Canadian tax credit could not be allowed on receipts which were not taxed in India in the same manner, and approved the AO's method subject to revision of figures in accordance with the Tribunal's order. The Tribunal also held that the gross receipt taxed in Canada was not necessarily the same income charged in India after deductions under section 80HHE.

Conclusion: The issue was decided against the assessee insofar as the assessee's method was rejected, and in favour of the Revenue on the manner of computation.

Issue (iii): Whether surcharge had to be calculated after granting credit for DTAA relief.

Analysis: The Tribunal held that credit under the DTAA was not to be first reduced while computing surcharge, though the tax on doubly taxed income would include surcharge as part of the Indian tax burden.

Conclusion: The issue was decided against the assessee.

Issue (iv): Whether the profit on sale of Eagle Software was taxable as capital gains or was eligible for exemption under section 10A.

Analysis: The software was developed in the course of the assessee's software business and was treated as a trading receipt, not a capital asset. The sale was found to have been effected through the eligible STP unit, so the profit formed part of the profits of that unit and qualified for exemption under section 10A.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the section 80HHE computation and the treatment of Eagle Software, but failed on the DTAA credit methodology and surcharge issue. The Revenue's appeal and the cross-objection were not sustained.

Ratio Decidendi: Double taxation relief under an ordinary credit treaty applies only to the same income actually taxed in both jurisdictions, and software sale proceeds arising from an eligible export unit retain business character and may qualify for section 10A exemption when sold through that unit.

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