Section 10A loss set-off and overseas technical service payments: binding circulars and TDS exclusion principles apply.

A beneficial CBDT circular on section 10A computation was treated as binding, and losses of an STPI/eligible unit could be aggregated under sections 70 and 71 before applying the deduction scheme; the resultant loss could be carried forward under section 72, so set-off against non-STPI profits was permitted. The article also notes that where a Japan branch carried on business outside India as a permanent establishment and the technical service payment was incurred for that overseas business, section 9(1)(vii)(b) excluded deemed accrual in India; no income being chargeable in India, no TDS obligation arose and disallowance under section 40(a)(i) could not be made.

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Issues: (i) Whether the loss of the STPI unit eligible for section 10A treatment could be set off against the profits of the non-STPI unit. (ii) Whether the payment made by the Japan branch to HCL Japan Ltd. attracted disallowance under section 40(a)(i) for failure to deduct tax at source.

Issue (i): Whether the loss of the STPI unit eligible for section 10A treatment could be set off against the profits of the non-STPI unit.

Analysis: The relief under section 10A, as explained by the CBDT circular on computation and set-off of losses, was treated as permitting aggregation under sections 70 and 71 before applying the deduction framework. The circular clarified that if the resultant figure from an eligible unit is a loss, it can be carried forward and set off under section 72, and that losses of eligible and ineligible units are to be dealt with in the ordinary computation scheme. The circular was held to be binding on the departmental authorities and beneficial to the assessee.

Conclusion: The set-off of the STPI unit loss against the profits of the non-STPI unit was allowed, in favour of the assessee.

Issue (ii): Whether the payment made by the Japan branch to HCL Japan Ltd. attracted disallowance under section 40(a)(i) for failure to deduct tax at source.

Analysis: The Japan branch was accepted as carrying on business outside India as a permanent establishment, and the payment for technical services was incurred and borne in connection with that overseas business. On those facts, the payment fell within the exclusion in section 9(1)(vii)(b), so no income was deemed to accrue or arise in India in the hands of the recipient. If no income was chargeable in India, no obligation to deduct tax at source arose, and the corresponding disallowance could not survive.

Conclusion: The disallowance under section 40(a)(i) was rightly deleted, in favour of the assessee.

Final Conclusion: The cross appeals were resolved by granting the assessee relief on the set-off issue and by sustaining deletion of the TDS disallowance, leaving the Revenue without success on both challenged additions.

Ratio Decidendi: A beneficial CBDT circular on computation of section 10A losses is binding on the Department, and payments for technical services incurred for an overseas business fall outside section 9(1)(vii) where no income is deemed to accrue or arise in India, so no TDS disallowance can be made.

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