2019 (4) TMI 1168 - HC - Income Tax

Appeals Dismissed: Tribunal Upholds Decisions on Section 10A Interpretations

The appeals were dismissed at the stage of admission as no substantial questions of law arose for consideration. The Tribunal's decisions on all four ... Deduction under section 10A - export turnover versus total turnover - exclusion of expenses incurred in foreign exchange - set off of brought forward losses under section 10A - compensation on termination of export/service contract as business income - deemed export through STP unit - harmonious construction of statuteExclusion of expenses incurred in foreign exchange - export turnover versus total turnover - deduction under section 10A - harmonious construction of statute - Whether expenses incurred in foreign exchange that are excluded from 'export turnover' must also be excluded from 'total turnover' for computing deduction under section 10A. - HELD THAT: - The Tribunal's confirmation of the appellate authority was upheld. The court followed the reasoning in the Supreme Court decision cited (HCL Technologies Ltd.), which accepted the Karnataka High Court's view in Tata Elxsi that where a term is not separately defined, its meaning must be ascertained in context and by harmonious construction. Since export turnover is a component of total turnover, items excluded from export turnover (such as freight, telecommunication, insurance and expenses in foreign exchange for technical services) must also be excluded from total turnover; otherwise the statutory formula for computing export profits under section 10A would become unworkable and yield absurd results. The deduction therefore must be computed by excluding such expenses from total turnover in the same proportion as from export turnover. [Paras 6]Revenue's challenge rejected; expenses excluded from export turnover are to be excluded from total turnover for section 10A computation.Set off of brought forward losses under section 10A - deduction under section 10A - Whether brought forward losses can be set off against profits/deductions under section 10A as allowed by the Tribunal. - HELD THAT: - The Tribunal's view allowing set off of brought forward losses in favour of the assessee was sustained by reference to the Supreme Court's analysis in Yokogawa India Ltd., which interpreted the amended section 10A as providing for deductions (not merely exemptions) and treated the benefit as flowing to the eligible undertaking on its own. The Supreme Court's reasoning, including the distinction between exemption and deduction and the treatment of adjustment of losses and unabsorbed depreciation under the statutory scheme, negates the Revenue's substantial question of law on this point. [Paras 7]Revenue's challenge rejected; set off of brought forward losses as applied by the Tribunal stands.Compensation on termination of export/service contract as business income - deduction under section 10A - Whether compensation received on termination of an export/service contract constitutes income derived from export business and is eligible for deduction under section 10A. - HELD THAT: - The court accepted the Tribunal's finding that the compensation received on termination of the export/service contract has a direct nexus with the assessee's export business. The assessee, being a 100% export-oriented unit, had entered an export agreement which was terminated by the other party; but but for termination the supply/export would have occurred. The compensation received for that termination is therefore in the course of and derived from the export business and forms part of the profits of the undertaking. The court also relied on the Full Bench decision in Hewlett Packard Global Soft Ltd., which treated incidental receipts integral to the export business (e.g., interest on deposits) as qualifying for section 10A relief; by parity, the termination compensation is similarly to be treated as business income eligible for deduction. [Paras 9, 10, 11]Revenue's challenge rejected; the compensation on termination is business income arising from export and qualifies for section 10A treatment.Deemed export through STP unit - deduction under section 10A - Whether software supply to another STP unit (deemed export) that yields foreign exchange brought into India can be included in export turnover for section 10A purposes. - HELD THAT: - The Tribunal's reliance on Tata Elxsi was endorsed. Section 10A applies where (i) the undertaking exports articles or computer software, (ii) the export may be effected directly or through another exporter after fulfilling conditions, and (iii) such export yields foreign exchange brought into India. If these conditions are satisfied, the export through an STP unit constitutes export for the purposes of section 10A and the relevant turnover may be included. Consequently, the Tribunal's direction to include amounts relating to software supplied to another STP unit as part of export turnover (subject to the statutory conditions) was sustained. [Paras 12]Revenue's challenge rejected; deemed exports via STP unit producing foreign exchange fall within section 10A criteria and may be included in export turnover.Final Conclusion: The appeals by the Revenue were dismissed at the admission stage; the Tribunal's confirmations (allowing exclusion of foreign exchange expenses from total turnover, permitting set off of brought forward losses, treating termination compensation as business income eligible under section 10A, and treating deemed exports through an STP unit as export turnover where conditions are met) stand. Issues Involved:1. Exclusion of expenses incurred in foreign currency from both export turnover and total turnover for computation of deduction under section 10A.2. Allowing setting off of brought forward losses.3. Treatment of compensation received on termination of export/service contract as business income.4. Deduction under section 10A for deemed export on account of sale to another STP unit.Detailed Analysis:1. Exclusion of Expenses Incurred in Foreign Currency:The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) to exclude expenses incurred in foreign currency from both export turnover and total turnover for the purpose of computation of deduction under section 10A. This decision was based on the precedent set by the Karnataka High Court in CIT v. Tata Elxsi Ltd., which was further upheld by the Supreme Court in CIT v. HCL Technologies Ltd. The Supreme Court clarified that 'what is excluded from the export turnover must also be excluded from total turnover,' ensuring that the formula for computing deductions under section 10A remains consistent and logical. Therefore, the court concluded that the question of law regarding this issue would not survive for consideration.2. Allowing Setting Off of Brought Forward Losses:The Tribunal's decision to allow setting off of brought forward losses was based on the Supreme Court's ruling in CIT v. Yokogawa India Ltd. The Supreme Court explained that section 10A, as amended, provides for deductions rather than exemptions, and these deductions are to be computed independently for each eligible undertaking without reference to other units of the assessee. This interpretation aligns with the legislative intent to provide additional benefits to eligible units under section 10A. Consequently, the court determined that this question of law would no longer arise for consideration.3. Treatment of Compensation Received on Termination of Export/Service Contract:The Tribunal held that the compensation received by the assessee on termination of an export/service contract should be treated as business income derived from export activities. The court noted that the compensation was directly linked to the business activities of the assessee, as the contract was terminated without any fault on the part of the assessee. This interpretation was supported by a Full Bench decision in CIT v. Hewlett Packard Global Soft Ltd., which held that incidental income, such as interest on bank deposits, earned by an export-oriented unit is entitled to 100% exemption under section 10A. Therefore, the court concluded that the compensation received qualifies for deduction under section 10A.4. Deduction under Section 10A for Deemed Export:The Tribunal ruled in favor of the assessee regarding the deduction under section 10A for deemed export on account of sale to another STP unit. The court referred to its decision in Tata Elxsi Ltd. v. Asst. CIT, which clarified that section 10A benefits apply if the sale proceeds are received in convertible foreign exchange, regardless of whether the export is direct or through another exporter. The court emphasized that the legislative intent behind section 10A is to promote exports and earn foreign exchange. As the conditions for deemed export were met, the court held that the assessee was entitled to the deduction under section 10A.Conclusion:The appeals were dismissed at the stage of admission as no substantial questions of law arose for consideration. The Tribunal's decisions on all four issues were upheld, affirming the interpretations and applications of section 10A as consistent with legislative intent and judicial precedents.