Section 10A deductions, set-off of losses, and computer-rate depreciation were partly allowed; several claims needed factual verification.

Section 10A deduction was confined to the eligible undertaking as a matter of binding precedent, so separate treatment of the STPI units was rejected. Foreign currency expenses and link charges had to be reduced consistently from both export turnover and total turnover, while losses of eligible STPI units were allowed to be set off against other taxable income. Depreciation on networking equipment and computer peripherals was allowed at the higher computer rate, and Rule 8D disallowance under section 14A was deleted as prospective. Foreign branch profits, foreign tax credit, ESOP expense, software licence fee, forward-cover loss, sundry creditors written back, DDT relief, and surplus-fund income were either allowed in principle or remanded for verification, depending on factual nexus and supporting evidence.

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Issues: (i) Whether each STPI unit could be treated as a separate undertaking for deduction under section 10A; (ii) whether foreign currency expenses and link charges were to be reduced from export turnover without a corresponding reduction from total turnover; (iii) whether losses of STPI units eligible under section 10A could be set off against other taxable income; (iv) whether depreciation on networking equipment and computer peripherals was allowable at the higher computer rate; (v) whether disallowance under section 14A read with Rule 8D could survive for the year under consideration; (vi) whether profits of foreign branches of the erstwhile DSL unit and foreign tax credit claims were allowable subject to verification; (vii) whether ESOP expenditure, software licence fee, loss on premature cancellation of forward covers, sundry creditors written back, DDT relief, and deduction on income from temporary parking of surplus funds were allowable or required verification.

Issue (i): Whether each STPI unit could be treated as a separate undertaking for deduction under section 10A.

Analysis: The claim was tested against the earlier findings in the assessee's own case and the concurrent view that, on the material then available, the 31 units could not be treated as separate undertakings. The later Delhi High Court decision was treated as binding on the factual question for the year under appeal, and no new material was shown to disturb that position.

Conclusion: The claim was rejected and the restriction of deduction under section 10A was upheld, against the assessee.

Issue (ii): Whether foreign currency expenses and link charges were to be reduced from export turnover without a corresponding reduction from total turnover.

Analysis: The Tribunal followed its earlier orders in the assessee's case, along with the settled legal position that the same exclusions must apply consistently in the computation formula to avoid distortion of deduction under section 10A.

Conclusion: The adjustment was held to be unsustainable and relief was granted to the assessee.

Issue (iii): Whether losses of STPI units eligible under section 10A could be set off against other taxable income.

Analysis: In view of the post-amendment nature of section 10A as a deduction provision, and the authorities recognizing aggregation under the business head for eligible units, the losses of eligible undertakings were held capable of set-off against non-eligible income.

Conclusion: The set-off of losses was allowed in favour of the assessee.

Issue (iv): Whether depreciation on networking equipment and computer peripherals was allowable at the higher computer rate.

Analysis: The Tribunal applied the settled principle that peripherals and integral components forming part of the computer system are entitled to depreciation as computers rather than as plant and machinery.

Conclusion: Higher depreciation was allowed in favour of the assessee.

Issue (v): Whether disallowance under section 14A read with Rule 8D could survive for the year under consideration.

Analysis: Rule 8D was held to be prospective and not applicable to the assessment year in question; the assessee's own computation was therefore not liable to be mechanically replaced by Rule 8D.

Conclusion: The disallowance was deleted in favour of the assessee.

Issue (vi): Whether profits of foreign branches of the erstwhile DSL unit and foreign tax credit claims were allowable.

Analysis: The claim for foreign branches depended on verification whether the overseas offices functioned merely as conduits for on-site software services or as independent marketing branches, so the matter required factual examination. For foreign tax credit, the Tribunal held that taxes paid abroad were, in principle, creditable even where the underlying income was claimed under section 10A, but the exact linkage and documentary support had to be verified by the Assessing Officer.

Conclusion: The foreign branch issue was restored for verification; foreign tax credit was allowed in principle subject to verification and supporting evidence.

Issue (vii): Whether ESOP expenditure, software licence fee, loss on premature cancellation of forward covers, sundry creditors written back, DDT relief, and deduction on income from temporary parking of surplus funds were allowable or required verification.

Analysis: ESOP expenditure was held to be an ascertained business liability allowable on accrual, and the incremental adjustment on exercise was also permitted subject to verification. Software licence fee was remanded because the factual nature of the expenditure and the enduring-benefit issue required fresh examination. Loss on premature cancellation of forward covers was treated as a hedging loss falling within the exclusion from speculation, and was allowed. Sundry creditors written back were remanded for verification of whether liabilities had been paid or already offered to tax in later years. DDT relief under the treaty rate was allowed following the later binding view. Income from temporary parking of surplus funds was held eligible for section 10A deduction in principle, subject to verification that the funds belonged to the eligible undertaking and the income formed part of its business profits.

Conclusion: Relief was granted on ESOP expenditure, forward-cover loss, DDT and temporary surplus-fund income in principle, while software licence fee and sundry-creditor addition were remanded for verification.

Final Conclusion: The appeals were decided on a mixed basis: some additions were deleted, some claims were allowed subject to verification, and certain matters were restored to the Assessing Officer, but the core denial of separate-undertaking treatment under section 10A remained against the assessee.

Ratio Decidendi: For section 10A computations, the post-amendment provision operates as a deduction linked to the business profits of the eligible undertaking, and where the governing formula or binding precedent applies, allied items such as eligible business losses, integral computer peripherals, hedging losses, and certain incidental business incomes cannot be excluded merely by their form; however, factual eligibility must still be verified where the nexus is disputed.

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