Section 10A turnover parity and DTAA withholding rules shaped the tax treatment of business receipts, recoveries and share purchase payments.

Business receipts treated as income of the eligible undertaking, including interest on fixed deposits, corporate deposits and employee loans, foreign exchange gain, customer discount and computer-peripheral depreciation, were held includible for deduction under sections 10A and 10AA. Cost recoveries from sister concerns on a cost-to-cost basis were allowed to be apportioned, with 95% set off against eligible-unit expenses. Receipts excluded from export turnover were required to be excluded from total turnover to preserve parity in the section 10A formula. Payments for purchase of shares from Mauritius entities did not attract withholding tax under the India-Mauritius DTAA, so disallowance under section 40(a)(i) was not sustainable.

---

---

Issues: (i) Whether interest on fixed deposits, corporate deposits and employee loans, foreign exchange gain, customer discount, and depreciation on computer peripherals were to be excluded from deduction under sections 10A and 10AA; (ii) whether cost recoveries from sister concerns could be partially set off against expenses of eligible units; (iii) whether receipts excluded from export turnover were also required to be excluded from total turnover; and (iv) whether disallowance under section 40(a)(i) could be sustained for payments made for purchase of shares from Mauritius entities without deduction of tax at source.

Issue (i): Whether interest on fixed deposits, corporate deposits and employee loans, foreign exchange gain, customer discount, and depreciation on computer peripherals were to be excluded from deduction under sections 10A and 10AA.

Analysis: The Tribunal followed the coordinate bench decisions in the assessee's own earlier year and held that the receipts treated as business income formed part of the profits of the eligible undertaking for purposes of section 10A and section 10AA. The foreign exchange gain had already been offered to tax, so no contrary addition could survive. The customer discount was held to be a scientifically computed and crystallised liability representing a lesser realisation of sale price. Printers, routers and similar peripherals were treated as part of an integrated computer system eligible for the higher rate of depreciation applicable to computers.

Conclusion: The Revenue's challenge failed on these items, and the relief granted by the first appellate authority was sustained in favour of the assessee.

Issue (ii): Whether 95% of cost recoveries from sister concerns could be set off against the expenses of eligible units.

Analysis: The Tribunal held that the recoveries were on a cost-to-cost basis and that, where details were furnished, the approach of allocating only 5% to the non-eligible unit and allowing the balance against the eligible unit's expenses was consistent with the earlier year's decision in the assessee's own case.

Conclusion: The disallowance was not disturbed and the Revenue's objection was rejected.

Issue (iii): Whether receipts excluded from export turnover were also required to be excluded from total turnover while computing deduction under section 10A.

Analysis: The Tribunal applied the settled principle that the formula for deduction under section 10A requires parity between export turnover in the numerator and total turnover in the denominator. Accordingly, items reduced from export turnover cannot be retained in total turnover for computation purposes.

Conclusion: The assessee succeeded on this issue and the corresponding turnover adjustment was directed to be made in its favour.

Issue (iv): Whether disallowance under section 40(a)(i) could be sustained for payments made for purchase of shares from Mauritius entities without deduction of tax at source.

Analysis: The Tribunal held that the impugned payment was for acquisition of shares and, in view of Article 13(4) of the India-Mauritius DTAA, the capital gains of Mauritius residents were not taxable in India. In that view, the obligation to withhold tax under section 195 did not arise, and section 40(a)(i) could not be invoked.

Conclusion: The Revenue's disallowance was rejected and the assessee's relief was upheld.

Final Conclusion: The cross appeals were disposed of by sustaining the Revenue's failure on all substantive additions and granting the assessee relief on the turnover-computation issue, resulting in only a partial success for the assessee overall.

Ratio Decidendi: For deduction under section 10A, the computation must maintain parity between export turnover and total turnover, and business receipts forming part of the eligible undertaking's profits are not to be excluded merely because of their character as interest, reimbursement or similar ancillary income when treated as part of business income.

---