Undertaking-level deduction, DTAA royalty limits and non-discrimination bar non-resident disallowance; incidental income stays eligible.

Eligible software technology park unit deductions under section 10A are computed at the undertaking level before general aggregation and set-off provisions apply, so losses of one eligible unit cannot be offset against income from other units at that stage. Payments for international private leased circuits were not royalty for the relevant years because retrospective domestic amendments could not enlarge the DTAA definition, so section 40(a)(i) disallowance did not apply. The India-USA DTAA non-discrimination clause barred a disallowance mechanism operating only against non-resident payments. Interest on staff loans and scrap-sale income retained the necessary business nexus for section 10A/10B deduction. Interest under section 234D was sustained on excess refund.

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Issues: (i) Whether losses of eligible software technology park units could be set off against income from other units while computing total income; (ii) whether payments made to Sprint USA for international private leased circuits were royalty and therefore liable to disallowance for non-deduction of tax at source; (iii) whether the non-discrimination clause in the India-USA DTAA prevented disallowance under section 40(a)(i); (iv) whether miscellaneous income from interest on staff loans and sale of scrap qualified for deduction under section 10A/10B; and (v) whether interest was chargeable under section 234D.

Issue (i): Whether losses of eligible software technology park units could be set off against income from other units while computing total income.

Analysis: The deduction under section 10A is to be worked out at the stage of the eligible undertaking itself, and the Court applied the Supreme Court's interpretation that the eligible unit must be computed independently before the general aggregation and set-off provisions operate. The earlier contrary view could not govern the assessment years in question.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether payments made to Sprint USA for international private leased circuits were royalty and therefore liable to disallowance for non-deduction of tax at source.

Analysis: The Court held that the later explanations inserted in section 9(1)(vi) by the Finance Act, 2012 could not be applied retrospectively to fasten royalty liability for the relevant assessment years. The definition of royalty under the applicable DTAA controlled the matter, and on that basis the payment for IPLC did not amount to royalty so as to attract section 40(a)(i).

Conclusion: The issue was decided in favour of the assessee.

Issue (iii): Whether the non-discrimination clause in the India-USA DTAA prevented disallowance under section 40(a)(i).

Analysis: The Court held that Article 26(3) requires deductible payments to a resident of the other Contracting State to be allowed under the same conditions as if paid to a resident. Since the domestic disallowance operated only in the case of non-resident payments for the relevant years, the provision was discriminatory and could not be invoked to sustain the disallowance.

Conclusion: The issue was decided in favour of the assessee.

Issue (iv): Whether miscellaneous income from interest on staff loans and sale of scrap qualified for deduction under section 10A/10B.

Analysis: The Court applied the principle that incidental income arising in the ordinary course of the export-oriented business and integrally connected with the undertaking forms part of the eligible profits. Interest on staff loans and scrap sale were treated as having the requisite nexus with the undertaking's business.

Conclusion: The issue was decided in favour of the assessee.

Issue (v): Whether interest was chargeable under section 234D.

Analysis: In view of the retrospective amendment to the provision and the dates of assessment, the levy of interest on excess refund was held to be legally sustainable.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The appeals were allowed in respect of the set-off loss issue, the IPLC royalty and withholding-tax issues, and the miscellaneous income deduction issue, while the levy of interest under section 234D was sustained.

Ratio Decidendi: For the relevant assessment years, the scope of royalty under a DTAA cannot be enlarged by retrospective domestic amendments, eligible undertaking deductions under section 10A/10B are computed at the undertaking level, and the non-discrimination article bars a disallowance mechanism that applies only to non-resident payments on less favourable terms.

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