2021 (12) TMI 518 - SC - Income Tax

Challenges to Tax Law Interpretation on STP/SEZ Setoff, Software Payments, and Exemption Eligibility

The case addressed various issues including setoff of losses of STP/SEZ units, nature of payment for software purchase, disallowance of depreciation, ... Deduction u./s 10A - Set-off of losses of STP/SEZ units against other income - Whether losses of 10A units cannot be set off against income of non-10A units? 0 principles of red-judicata - Whether High Court has erred in holding that deemed export, reimbursement of expenses, expenses incurred in foreign currency, delayed export proceeds and VAT/GST will form part of export turnover for the purpose of computation of deduction U/s. 10A - HELD THAT:- This Special Leave Petition challenges the judgment and final order [2020 (12) TMI 1300 - KARNATAKA HIGH COURT] which was disposed of in terms of the judgment passed [2020 (12) TMI 687 - KARNATAKA HIGH COURT] which in turn was disposed of in terms of the judgment passed [2020 (12) TMI 678 - KARNATAKA HIGH COURT] issues covered by decisions of this Court in M/s. WIPRO Ltd. [2015 (10) TMI 826 - KARNATAKA HIGH COURT] and Commissioner of Income Tax & Another v. TATA Elxsi Ltd.,[2016 (3) TMI 460 - KARNATAKA HIGH COURT]are pending adjudication at the instance of the revenue before the Supreme Court. In view of the aforesaid submission needless to state that the Assessing Officer shall decide the issues in accordance with the decision which may be rendered by the Supreme Court. As held no interference is called for with the order passed by the tribunal. The Supreme Court in Radhasoami Satsang [1991 (11) TMI 2 - SUPREME COURT] has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenge the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For this reason also, in the facts of the case, a different view cannot be taken. In the instant case, the tribunal has answered all the substantial questions of law in favour of the assessee In view of the observations made by the High Court, we dispose of the instant petition by reiterating the observations and clarifying that as and when the decisions with respect to the Questions No.(i), (ii) and (viii) are rendered by this Court, the matters shall be governed in terms of directions issued by the High Court. Expenses of corporate office are to be allocated on ad hoc percentage of 20% and not based on turnover of various undertakings/business for the purpose of deductions U/s. 10A, 80-IB and 80-IC - Whether High Court has erred in holding that deemed export, reimbursement of expenses, expenses incurred in foreign currency, delayed export proceeds and VAT/GST will form part of export turnover for the purpose of computation of deduction U/s. 10A? - HELD THAT:- Matter was disposed of in terms of the judgment passed by the High Court in [2020 (12) TMI 678 - KARNATAKA HIGH COURT] stating all the remaining issues covered by decisions of this Court in WIPRO Ltd. [2015 (10) TMI 826 - KARNATAKA HIGH COURT] and Commissioner of Income Tax & Another v. TATA Elxsi Ltd.,[2016 (3) TMI 460 - KARNATAKA HIGH COURT] are pending adjudication at the instance of the revenue before the Supreme Court. In view of the aforesaid submission needless to state that the Assessing Officer shall decide the issues in accordance with the decision which may be rendered by the Supreme Court. Issues involved:1. Setoff of losses of STP/SEZ units against other income2. Nature of payment for purchase of software in terms of 'royalty'3. Disallowance of depreciation under Section 40(a)4. Allocation of expenses of corporate office for deductions under various sections5. Inclusion of profits of software development facilities located outside India in eligible income for deduction under Section 10A6. Eligibility of various incomes for exemption under Section 10A7. Determination of export turnover for computation of deduction under Section 10ADetailed Analysis:1. The primary issue in this case was whether the High Court erred in allowing the assessee's claim towards setoff of losses of STP/SEZ units against other income, despite the Supreme Court's precedent that losses of 10A units cannot be set off against income of non-10A units. The Additional Solicitor General accepted that certain questions were concluded by authoritative pronouncements, leaving only specific questions for consideration.2. Another issue raised was whether the payment for the purchase of software constituted 'royalty' under Section 9(1)(vi) of the Income Tax Act. The High Court's decision on this matter was questioned, highlighting the need for clarity on the nature of such payments.3. The judgment also addressed the issue of disallowance of depreciation under Section 40(a), with reference to relevant legal precedents such as the Munjal Sales Corp. case. The High Court's decision to remit back this issue was challenged, emphasizing the applicability of established legal principles.4. The allocation of expenses of the corporate office for deductions under various sections, including Sections 10A, 80-IB, and 80-IC of the Act, was disputed. The High Court's method of using an ad hoc percentage of 20% for such allocations was questioned, indicating the need for a more precise approach based on turnover.5. A question arose regarding the inclusion of profits from software development facilities located outside India in eligible income for computing deductions under Section 10A. The High Court's stance on this matter was challenged, seeking clarity on the treatment of such profits.6. The eligibility of various incomes, such as interest, dividend, insurance claim, etc., for exemption under Section 10A was also debated. The High Court's decision on the eligibility of these incomes for exemption was brought into question, necessitating a review of the criteria for exemption.7. Lastly, the determination of export turnover for the computation of deductions under Section 10A was a point of contention. Issues such as deemed export, reimbursement of expenses, and delayed export proceeds were raised, emphasizing the need for a comprehensive understanding of what constitutes export turnover for tax purposes.In conclusion, the judgment delved into multiple complex issues related to income tax assessments and deductions, highlighting the importance of clarity and consistency in interpreting and applying tax laws.