2013 (1) TMI 110 - AT - Income Tax

Appeal success: Deduction calculation clarified, expenses excluded.

The Tribunal allowed the assessee's appeal, holding that the deduction under section 10A should be calculated without setting off losses of non-STPI units ... Deduction under section 10A/10B to be computed without setting off brought forward or current business losses - Unit specific exclusion of undertaking profits for section 10A computation - Parity between numerator and denominator - exclude specified export related expenses from both export turnover and total turnoverDeduction under section 10A/10B to be computed without setting off brought forward or current business losses - Unit specific exclusion of undertaking profits for section 10A computation - Whether carried forward business losses and unabsorbed depreciation of earlier years are to be set off before computing deduction under section 10A/10B. - HELD THAT: - Following the decision of the jurisdictional High Court in CIT v. Yokogawa India Ltd., the Tribunal held that profits of an undertaking eligible for deduction under section 10A/10B are to be excluded at source for the purpose of computing the assessee's income of that undertaking. The Court explained that the phrase 'total income' in the context of section 10A must be read with the scheme of Chapter III and sub section (4) which apportions export profit to the undertaking; consequently the profits eligible for deduction do not enter into the assessee's total income and therefore the question of setting off brought forward business losses or unabsorbed depreciation against such profits does not arise. The Tribunal respectfully followed Yokogawa and allowed the assessee's alternative ground, declining to decide the question of filing of a declaration under section 10A(8) as unnecessary. [Paras 3]Carried forward business losses and unabsorbed depreciation of earlier years shall not be set off against the profits of the undertaking for computing deduction under section 10A/10B.Deduction under section 10A/10B to be computed without setting off brought forward or current business losses - Unit specific exclusion of undertaking profits for section 10A computation - Whether current year loss of a non STPI (non 10A) unit can be set off against the profits of an STPI (10A) unit for computing deduction under section 10A. - HELD THAT: - Applying the same reasoning in Yokogawa India Ltd., the Tribunal held that the income of the 10A unit is excluded at source and does not form part of the assessee's total income for the purposes of section 10A computation. As the profits of the 10A undertaking are not included in the assessee's income, losses of a non 10A unit (current year) cannot be set off against those profits under section 72. Respectfully following the High Court, the Tribunal rejected the Revenue's contention and directed that the non STPI unit loss not be set off while calculating the 10A deduction. [Paras 5]The current year loss of the non STPI unit cannot be set off against the profits of the STPI unit for the purpose of computing deduction under section 10A.Parity between numerator and denominator - exclude specified export related expenses from both export turnover and total turnover - Whether telecommunication and travelling expenses incurred in foreign currency, excluded from the definition of export turnover, must also be excluded from total turnover when applying the section 10A formula. - HELD THAT: - Relying on the High Court decisions (including Tata Elxsi and Gem Plus) and the Special Bench in Sak Soft Ltd., the Tribunal held that where the statute defines 'export turnover' to exclude certain items (freight, telecommunication, insurance, expenses in foreign exchange), the same exclusions must be applied to the component of total turnover that comprises export turnover so that numerator and denominator are construed consistently. Uniformity in the ingredients of export turnover in both numerator and denominator is necessary to avoid an absurd result and to give effect to the legislative intent to incentivise exports. Consequently the Assessing Officer was directed to exclude the specified expenses from both export turnover and total turnover while computing section 10A deduction. [Paras 6]Telecommunication and travelling expenses in foreign currency excluded from export turnover must also be excluded from total turnover for computing deduction under section 10A.Final Conclusion: The assessee's appeal is partly allowed: deduction under section 10A/10B must be computed without setting off carried forward business losses or non STPI current year loss against undertaking profits, and specified export related expenses excluded from export turnover must also be excluded from total turnover; the question of the assessee's filing of a section 10A(8) declaration was not adjudicated as unnecessary in view of the above decision. 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 UnitsThe 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 TurnoverThe 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.