2020 (10) TMI 564 - HC - Income Tax

High Court grants deduction under Section 10A for 'deemed export'

The High Court allowed the appeal, granting the assessee the deduction under Section 10A for the 'deemed export' of Rs. 1,23,66,641/-. The court held that ... Benefit of deduction u/s 10A on the ‘deemed export’ made to another STP unit - the receipt was routed through the banking channel by convertible foreign exchange - whether a transaction is an ‘export’ or a ‘deemed export’ and not on the quantum of deduction, which the assessee is entitled to? - HELD THAT:- A proper reading of Section 27 of the SEZ Act would mean that the benefit, which will accrue to the assessee will be subject to the modification specified in the Second Schedule and it would mean fulfillment of certain conditions for being entitled to the benefit of the special provision namely Section 10AA of the Act. The provisions of the SEZ Act cannot be ignored because of the fact that the terms ‘developer’, ‘entrepreneur’ and ‘authorized operations’ are not defined under the Income Tax Act, but they are defined under the SEZ Act, which, being a special Statute, will have to be applied to consider as to whether the transaction is an ‘export’ or a ‘deemed export’. This is amply made clear by the provisions of Section 53 of the SEZ Act, which states that ‘a Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations’. CBEC issued a clarification vide Circular No. 1001/8/2015-CX.8 dated 28.4.2015 with regard to rebate of duty on goods cleared from DTA to SEZ, which clearly explains the concept of a ‘deemed export’ and also states that the provisions of the SEZ Act shall have overriding effect of the provisions of the Income Tax Act in case of any inconsistency. In the instant case, there was no inconsistency. Rather, the provisions of the Income Tax Act resorts to the provisions of the SEZ Act while considering as to whether the assessee would be entitled for the benefit under Section 10A or 10B of the Act. The receipt was routed through the banking channel by convertible foreign exchange - Decided in favour of assessee. Allowance of expenditure incurred towards telecommunication u/s 10A - whether it has inextricable nexus to the export made by the appellant ? - HELD THAT:- This second substantial question of law admitted is, in effect, a question of fact and that the Tribunal affirmed the order passed by the Commissioner of Income Tax (Appeals)-3, Chennai-34 [hereinafter called the CIT(A)], who remanded the matter to the Assessing Officer for a fresh consideration. Issues Involved:1. Denial of deduction under Section 10A of the Income Tax Act, 1961 on the 'deemed export' of Rs. 1,23,66,641/- made to another STP unit.2. Remittance back to the Commissioner of Income Tax (Appeals) on the issue of allowance of expenditure incurred towards telecommunication amounting to Rs. 17,09,510/- under Section 10A of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Denial of Deduction under Section 10A on 'Deemed Export'Background:The assessee, engaged in software development in a Special Economic Zone (SEZ) in Chennai, claimed a deduction under Section 10A for the assessment year 2009-10, including a sum of Rs. 1,23,66,641/- as export receipt. This amount was considered a 'deemed export' towards software development to another Software Technology Park (STP) Unit. The Assessing Officer (AO) disallowed this deduction, stating that the receipt was in Indian rupees and did not fall under 'export' as per the Income Tax Act.Tribunal's Decision:The Tribunal affirmed the CIT(A)'s order, which remanded the matter to the AO for fresh consideration. However, the Tribunal did not render any specific finding against the assessee.High Court's Analysis:1. Reference to Karnataka High Court Decisions:- Tata Elxsi Ltd. Case: The Karnataka High Court held that supplies made from one STP to another STP should be treated as 'deemed export' under the EXIM Policy. The court emphasized that the export should yield foreign exchange, which should be brought into the country, fulfilling the conditions for Section 10A benefits.- International Stones India (P) Ltd. Case: The court reiterated that 'deemed export' should be considered within the ambit of 'export turnover' for Section 10A, emphasizing that the purpose of the provision is to encourage exports and fetch foreign currency.2. Arguments by Assessee:- The assessee argued that the AO failed to recognize the nature of the transaction and the payment was received in foreign currency.- The concept of 'deemed export' was explained through agreements and invoices, showing the transaction was for onsite software development for a US company.3. Arguments by Revenue:- The Revenue relied on the Kerala High Court decision in Electronic Controls and Discharge Systems (P) Limited, which held that the concept of 'deemed export' under the SEZ Act is not incorporated in Section 10A of the Income Tax Act.- The Revenue also referenced Section 27 of the SEZ Act, arguing that the Income Tax Act provisions prevail over the SEZ Act.4. Court's Conclusion:- The High Court found that the Karnataka High Court's decisions in Tata Elxsi Ltd. and International Stones India (P) Ltd. were applicable, as they harmoniously read the provisions of the SEZ Act and the Income Tax Act.- The court held that the provisions of the SEZ Act, including the concept of 'deemed export,' should be considered while applying Section 10A.- The decision in Electronic Controls and Discharge Systems (P) Limited was distinguished as it did not consider the SEZ Act's provisions and the receipt was in Indian currency.Judgment:The High Court allowed the appeal, holding that the assessee was entitled to the deduction under Section 10A for the 'deemed export' of Rs. 1,23,66,641/-. The first substantial question of law was answered in favor of the assessee.Issue 2: Remittance Back on Telecommunication ExpenditureBackground:The Tribunal remitted the issue of allowance of expenditure incurred towards telecommunication amounting to Rs. 17,09,510/- under Section 10A back to the CIT(A) for fresh consideration.High Court's Analysis:The High Court noted that this issue was factual and the Tribunal affirmed the remand order by the CIT(A). No substantial question of law arose for consideration in this regard.Judgment:The High Court left the question open for the AO to decide on merits after affording an opportunity to the assessee. No costs were awarded.Conclusion:The High Court allowed the appeal regarding the deduction under Section 10A for 'deemed export,' ruling in favor of the assessee based on the Karnataka High Court's interpretation. The issue of telecommunication expenditure was remanded for fresh consideration by the AO.