2015 (10) TMI 634 - HC - Income Tax

Sales of Software Between STP Units Qualify as Deemed Exports Under Section 10A for Tax Benefits

The HC held that sales of computer software by an STP unit to another STP unit qualify as deemed exports under Section 10A, provided the goods are ... Entitlement to the benefit of Section 10A - sales effected to other STP - whether it does not amount to a deemed export - ITAT denied the benefit - whether the computer software sales to M/s. Texas Instruments India Ltd. do not fall under the expression ‘export turnover’ for the purpose of deduction under Section 10A? - Held that:- If a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled and the assess ee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export. Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU/EHTP/STP/BTP units will be regarded as ‘deemed export’, besides being eligible for relevant entitlements under paragraph 6.12 of the Policy. They will also be eligible for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purpose of Exim Policy, it is treated as ‘deemed export’. Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as ‘deemed export’ because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU/EHTP/STP/BTP unit may export goods manufactured /software developed by it through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/SEZ/BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured / software developed by it outside the country. It m ay export out of India by itself or export out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits an d gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software - Decided in favour of assessee. Issues Involved: Eligibility for Section 10A benefits under the Income Tax Act for sales made to another Software Technology Park (STP) unit and whether such sales qualify as 'deemed export.'Issue-wise Detailed Analysis:1. Eligibility for Section 10A Benefits:The core issue is whether the assessee, having made sales to another STP unit, is entitled to the benefits under Section 10A of the Income Tax Act, which provides tax exemptions for profits derived from the export of computer software. The assessee argued that the sales to Texas Instruments India Pvt. Ltd. (TIIPL), another STP unit, should be considered as part of the export turnover because the software was ultimately exported out of India by TIIPL, and the consideration was received in convertible foreign exchange.2. Definition and Interpretation of Export:The Tribunal and lower authorities held that the sales to TIIPL did not qualify as exports under Section 10A because the software was not directly exported outside India by the assessee. The Tribunal referenced the Exim Policy and concluded that the benefits under Section 10A should align with the provisions specified therein, which do not explicitly include 'deemed export' under the Act.3. Legislative Intent and Exim Policy:The court examined the legislative intent behind Section 10A, which aims to encourage export-oriented industries by providing tax exemptions for profits derived from exports. The Exim Policy allows for exports through other exporters or STP units under certain conditions, indicating that the policy supports indirect exports as long as foreign exchange is earned and brought into India.4. Interpretation of 'Export Turnover':Section 10A(3) specifies that the sale proceeds of exported articles or things or computer software must be received in convertible foreign exchange. Explanation 2(iv) to Section 10A defines 'export turnover' as the consideration received in convertible foreign exchange, excluding certain expenses. The court emphasized that the objective is to earn foreign exchange, regardless of whether the export is direct or through another STP unit.5. Applicability of Deemed Export Concept:The court noted that the Exim Policy treats supplies from one STP to another as 'deemed export' for policy purposes. Therefore, for the purposes of Section 10A, the supplies made from one STP to another should also be treated as 'deemed export,' provided the foreign exchange is earned and brought into India. This interpretation aligns with the legislative intent to promote export-oriented industries.Conclusion:The court concluded that the assessee is entitled to the benefits under Section 10A for the sales made to TIIPL. The supplies to another STP unit, which were ultimately exported, should be considered as part of the export turnover. The substantial question of law was answered in favor of the assessee, and the appeal was allowed, setting aside the impugned orders. The assessee is entitled to the deduction of profits and gains derived from the export of computer software.