2025 (6) TMI 1312 - AT - Income Tax

Assessee wins on deductions under sections 10A and 10AA but loses on dividend distribution tax refund

DCIT, Circle 10 (1), New Delhi. Versus M/s. Genpact India, (now merged with Genpact India Private Ltd.) And (Vice-Versa)

ITAT Delhi ruled in favor of the assessee on multiple issues. Interest on fixed deposits was held eligible for deduction under sections 10A and 10AA as ... Interest on fixed deposits as eligible for deduction u/s 10A & 10AA - HELD THAT:- We observed that the identical issue was decided by the ITAT against the Revenue [2024 (5) TMI 215 - ITAT DELHI] AO himself had treated the said mentioned receipts as only ‘business income’ and not ‘income from other sources’, which is evident from the computation of total income, enclosed in page 20 of the assessment order. Once it is treated as ‘business income’, the assessee would be automatically eligible for deduction u/s 10A & 10AA of the Act. Even otherwise, the provisions of Section 10A(4) are very clear to state that the entire ‘profits of the business of the undertaking’ in proportion of export turnover to total turnover would be eligible for deduction u/s 10A of the Act. Hence, subject mentioned receipts constitute business receipts would fall within the ambit of Section 10A(4) of the Act, thereby making the assessee eligible for deduction thereon. Similar is the provision in Section 10AA(7) of the Act with the same words. Hence, in view of the explicit provisions of Section 10A(4) and 10AA(7) of the Act, the arguments advanced by the ld. CIT(DR) deserve to be dismissed. Deduction claimed u/s 10AA - foreign exchange gain - Identical issue was decided by the ITAT against the Revenue in AY 2011-12 [2024 (5) TMI 215 - ITAT DELHI] Gains arising out of foreign exchange fluctuations are having direct nexus over the export sales of the assessee and would be eligible for deduction u/s 10A of the Act. Reduction of freight & Telecommunication charges and recovery of expenses in respect of migration/ on-the-job training services from ‘total turnover’ while computing deduction u/s 10A and 10AA - Items that are subject matter of reduction from export turnover in the numerator need to be reduced in the denominator from the ambit of total turnover also as admittedly total turnover is nothing but the sum total of export turnover and domestic turnover. Hence, the export turnover reflected in the numerator cannot be different from the export turnover figure reflected in the denominator. Hence, for the purpose of computing the deduction u/s 10A/10AA/10B/80HHC/80HHE etc. all items that were sought to be excluded from export turnover need to be excluded from total turnover also in order to bring parity. Disallowing depreciation on computer peripherals - As identical issue was decided by the ITAT against the Revenue in AY 2011-12 [2024 (5) TMI 215 - ITAT DELHI] assets like printers, routers along with other accessories/ peripherals form one integrated system and would be of no use independently of each other. Therefore, all such facilities from part of computers and hence eligible for depreciation at the rate applicable for computers. This issue is duly covered by the decision of the Hon’ble Jurisdictional High Court in the case of BSES Yamuna Powers [2010 (8) TMI 58 - DELHI HIGH COURT] Disallowance u/s 14A - HELD THAT:- Undisputedly, there is no exempt income earned by the assessee during the year under consideration and, therefore, section 14A is not applicable. In this regard, decision of PCIT vs Era Infrastructure India Ltd. [2022 (7) TMI 1093 - DELHI HIGH COURT] as held that if there is no exempt income earned by the assessee, then section 14A is not applicable. Allow credit for TDS as per law after due verification. Refund of excess DDT paid - as submitted that the assessee paid dividend distribution tax at the rate of 16.2225% u/s 115-O whereas applicable tax rate on such distributions as per the DTAA between India and Mauritius is 5% - HELD THAT:- We find that the issue raised in the additional ground has been decided by the ITAT, Special Bench decision in case of Total Oil India (P) Ltd. [2023 (4) TMI 988 - ITAT MUMBAI (SB)] wherein very same issue has been decided against the assessee. Accordingly, the additional ground raised by the assessee is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this matter are as follows:(a) Whether income from interest on fixed deposits, inter-corporate deposits, and employee loans qualifies for deduction under sections 10A and 10AA of the Income-tax Act, 1961, as part of the profits of the eligible business undertaking.(b) Whether income from foreign exchange gain and forward contract gain related to hedging activities is eligible for deduction under sections 10A and 10AA of the Act.(c) Whether freight and telecommunication charges should be excluded from total turnover for the purpose of computing deduction under sections 10A and 10AA.(d) Whether expenses related to migration and on-the-job training should be excluded from total turnover for such deduction computations.(e) Whether disallowance on account of excess depreciation on computer peripherals is justified.(f) Whether disallowance under section 14A of the Act is warranted in absence of exempt income.(g) Whether the assessee is entitled to credit for Tax Deducted at Source (TDS) amounting to Rs. 6,04,276/-.(h) Whether the Dividend Distribution Tax (DDT) paid in excess of the rate prescribed under the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius is refundable.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Eligibility of Interest Income for Deduction under Sections 10A and 10AALegal Framework and Precedents: Sections 10A and 10AA provide deductions for profits and gains derived from export undertakings engaged in specified businesses, including IT and IT-enabled services. The provisions stipulate that the entire profits of the business of the undertaking, in proportion to export turnover to total turnover, are eligible for deduction.Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer (AO) initially treated the interest income as 'income from other sources' and disallowed deduction under section 10AA. However, subsequently, the AO treated the interest income as 'Other Business Income.' The Tribunal relied on coordinate Bench decisions for AY 2011-12 and subsequent years, which held that interest income earned on fixed deposits and inter-corporate deposits, arising from temporary surplus funds generated by the export business, is incidental and inextricably linked to the business of the eligible undertaking and thus eligible for deduction under section 10AA.Key Evidence and Findings: The assessee placed surplus funds generated from export business in fixed deposits and inter-corporate deposits. Interest on employee loans was also considered part of business income as employees were integral to the business.Application of Law to Facts: The Tribunal applied the explicit provisions of sections 10A(4) and 10AA(7) which cover 'profits of the business of the undertaking' and held that the interest income qualifies as business income eligible for deduction.Treatment of Competing Arguments: The Revenue argued that such interest income is not derived from the specified business activity. The Tribunal rejected this, relying on the AO's own treatment of the income as business income and judicial precedents.Conclusion: Grounds 1 to 3 raised by the Revenue were dismissed, affirming the eligibility of interest income for deduction under sections 10A and 10AA.Issue (b): Eligibility of Foreign Exchange Gain and Forward Contract Gain for Deduction under Section 10AALegal Framework and Precedents: Section 10AA allows deduction on profits and gains derived from eligible undertakings. The question was whether foreign exchange gains arising from hedging activities qualify as business profits eligible for deduction.Court's Interpretation and Reasoning: The Tribunal observed that the assessee entered into forward contracts to hedge foreign exchange risks on export receivables, which is a normal business practice to protect profit margins. The Tribunal emphasized that the gain arises due to differences between exchange rates at invoice booking and receipt/payment dates, which directly relate to export sales.Key Evidence and Findings: The assessee furnished detailed explanations and documentary evidence on the nature of foreign exchange and forward contract gains. The Tribunal relied on judicial precedents from the Madras and Bombay High Courts holding that such gains have a direct nexus to export sales and are eligible for deduction under section 10A.Application of Law to Facts: The Tribunal applied these precedents and accepted the assessee's claim that the foreign exchange gains are part of the profits of the eligible business.Treatment of Competing Arguments: The Revenue contended that such gains arise from hedging and are not derived from the specified business. The Tribunal rejected this, relying on the detailed explanation and judicial authority.Conclusion: Ground No. 4 raised by the Revenue was dismissed.Issue (c) and (d): Treatment of Freight, Telecommunication Charges, and Migration/On-the-Job Training Expenses in Computing Export Turnover and Total TurnoverLegal Framework and Precedents: Explanation 1(i) to section 10AA defines 'export turnover' and excludes freight, telecommunication charges, insurance, and expenses incurred in foreign exchange in rendering services outside India, but only if these are included in the consideration received in convertible foreign exchange.Court's Interpretation and Reasoning: The Tribunal noted that the assessee did not invoice telecommunication expenses or migration/on-the-job training expenses to overseas customers; these were reimbursed and netted off against expenses. Therefore, these amounts were not part of export turnover and should not be excluded from it. Furthermore, the Tribunal relied on the Supreme Court decision in CIT vs. HCL Technologies Ltd., which mandates that any item excluded from export turnover in the numerator must also be excluded from total turnover in the denominator to maintain parity in deduction computations.Key Evidence and Findings: The assessee's billing methodology and reimbursement practices were examined. The Tribunal found that telecommunication expenses were not charged to customers and reimbursements for migration/on-the-job training were netted off.Application of Law to Facts: Applying the definition of export turnover and the principle of parity in turnover computation, the Tribunal held that the AO erred in excluding these expenses from export turnover but not from total turnover.Treatment of Competing Arguments: The Revenue sought to reduce the export turnover by these expenses without corresponding reduction in total turnover, which was rejected by the Tribunal.Conclusion: Grounds Nos. 5 and 6 of the Revenue's appeal were dismissed; Grounds Nos. 1 and 2 of the assessee's appeal were allowed.Issue (e): Disallowance of Excess Depreciation on Computer PeripheralsLegal Framework and Precedents: Depreciation rates applicable to computers and peripherals are governed by the Income-tax Rules. Jurisprudence has held that peripherals forming an integrated system with computers qualify for the same rate of depreciation as computers.Court's Interpretation and Reasoning: The Tribunal observed that assets like printers, routers, and other peripherals form an integrated system and are not independently useful. It relied on decisions of the jurisdictional High Court and coordinate Bench rulings holding that such assets are eligible for depreciation at the computer rate.Application of Law to Facts: The Tribunal applied the principle that peripherals are part of computers and eligible for depreciation accordingly.Treatment of Competing Arguments: The Revenue's disallowance was rejected based on binding precedents.Conclusion: Ground No. 7 raised by the Revenue was dismissed.Issue (f): Disallowance under Section 14ALegal Framework and Precedents: Section 14A read with Rule 8D provides for disallowance of expenditure incurred to earn exempt income. If no exempt income is earned, section 14A is not applicable.Court's Interpretation and Reasoning: The Tribunal noted that the assessee had no exempt income during the year under consideration. It relied on the decision of the jurisdictional High Court in PCIT vs. Era Infrastructure India Ltd., which held that in absence of exempt income, section 14A disallowance is not warranted.Application of Law to Facts: Since no exempt income was earned, the Tribunal upheld the deletion of disallowance under section 14A.Treatment of Competing Arguments: The Revenue's reliance on section 14A was rejected.Conclusion: Ground No. 8 raised by the Revenue was dismissed.Issue (g): Credit for Tax Deducted at Source (TDS)Court's Interpretation and Reasoning: The Tribunal directed the AO to allow credit for TDS of Rs. 6,04,276/- after due verification, as per law.Conclusion: The assessee's ground regarding TDS credit was allowed.Issue (h): Refund of Excess Dividend Distribution Tax (DDT) Paid under Section 115-OLegal Framework and Precedents: Section 115-O mandates payment of DDT on dividends declared. The rate applicable under the India-Mauritius DTAA is 5%, whereas the assessee paid DDT at 16.2225%. The question was whether excess DDT paid is refundable.Court's Interpretation and Reasoning: The Tribunal admitted the additional ground raised by the assessee challenging excess DDT. However, it noted that the issue has been decided against the assessee by the ITAT Special Bench in the case of Total Oil India (P) Ltd., which held that the higher DDT rate under domestic law is applicable notwithstanding the DTAA rate. The assessee reserved the right to challenge the Special Bench decision before the High Court.Treatment of Competing Arguments: The Revenue relied on the Special Bench decision to reject the refund claim.Conclusion: The additional ground raised by the assessee was dismissed.3. SIGNIFICANT HOLDINGS'Once it is treated as 'business income', the assessee would be automatically eligible for deduction u/s 10A & 10AA of the Act. Even otherwise, the provisions of Section 10A(4) are very clear to state that the entire 'profits of the business of the undertaking' in proportion of export turnover to total turnover would be eligible for deduction u/s 10A of the Act.''Forward foreign exchange contracts are taken to protect profit margins when receiving or making a foreign currency payment at some point in the future, usually as a result of foreign sales or purchases... gains arising out of foreign exchange fluctuations are having direct nexus over the export sales of the assessee and would be eligible for deduction u/s 10A of the Act.''The items that are subject matter of reduction from export turnover in the numerator need to be reduced in the denominator from the ambit of total turnover also as admittedly total turnover is nothing but the sum total of export turnover and domestic turnover.''The assets like printers, routers along with other accessories/ peripherals form one integrated system and would be of no use independently of each other. Therefore, all such facilities form part of computers and hence eligible for depreciation at the rate applicable for computers.''If there is no exempt income earned by the assessee, then section 14A is not applicable.''The issue regarding excess Dividend Distribution Tax paid under section 115-O vis-`a-vis the DTAA rate is settled against the assessee by the ITAT Special Bench decision.'The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeal, granting relief on computation of export turnover and total turnover, TDS credit, and rejecting disallowances under sections 10A/10AA and 14A, while dismissing the claim for refund of excess DDT.