2014 (8) TMI 595 - HC - Income Tax

High Court clarifies deduction rules under Section 10A, remands matter for detailed assessment

THE COMMISSIONER OF INCOME TAX And THE INCOME TAX OFFICER Versus M/s RELQ SOFTWARE PVT LTD

The High Court of Karnataka addressed issues regarding the computation of deduction u/s.10A of the Act. The court clarified the interpretation of set off ... Deduction u/s 10A – Amount paid to engineers for technical services and communication charges - Whether the Tribunal was correct in holding that the amount paid to engineers on site for technical services should be added to the export turnover when computing deduction u/s.10A of the Act – Held that:- The technical services rendered in post-sale services would stand on a different footing when compared to pre-sale services - If any technical service is rendered in the course of export of computer software then the expenditure incurred in that regard cannot be excluded - What has to be excluded is only technical services rendered which is independent of export of computer software - the matter was remitted back to the Assessing Authority to decide whether the technical services rendered was in connection with the computer software business, export of computer software or it is the case of exclusively rendering technical services – Decided in favour of Revenue. Issues:1. Interpretation of set off against income for computation of deduction u/s.10A of the Act.2. Inclusion of payments made for technical services in export turnover for deduction u/s.10A of the Act.3. Inclusion of communication charges for technical services in export turnover for deduction u/s.10A of the Act.Analysis:Issue 1:The first substantial question of law revolved around whether the Tribunal correctly held that carried forward business loss and unabsorbed depreciation of non STPI units cannot be set off against income of the STRI unit for the purpose of computing deduction u/s.10A of the Act. The court referred to a previous case and stated that the judgment favored the assessee against the Revenue. However, it was noted that the judgment was under appeal before the Apex Court. The court decided to answer the substantial question of law accordingly.Issue 2:Regarding the second and third substantial questions of law, the Tribunal had based its decision on a previous case involving INFOSYS TECHNOLOGIES LTD. The court highlighted that when expenditure is related to payments made on site development, it cannot be excluded from the export turnover as technical services. The court emphasized that if technical services are rendered in the course of export of computer software, the expenditure incurred in that regard cannot be excluded. The matter was remanded to the Assessing Authority to determine whether the technical services were connected to the export of computer software or exclusively technical services. The court set aside the findings of the Tribunal, First Appellate Authority, and Assessing Authority, remitting the matter back to the Assessing Authority for fresh consideration on these issues.In conclusion, the High Court of Karnataka addressed various substantial questions of law related to the computation of deduction u/s.10A of the Act. The judgment provided clarity on the interpretation of set off against income, inclusion of payments for technical services in export turnover, and communication charges for technical services. The court emphasized the need for a detailed examination by the Assessing Authority to determine the eligibility of the assessee for exclusion of expenditure towards technical services, ultimately allowing the appeal in part and remitting the matter for fresh consideration.