TaxTMI 
TaxTMI 
2018 (12) TMI 1211
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.... assessee claimed deduction under section 10 A of the income tax act in the return of income With respect to 9 different units of the assessee aggregating to INR 13 28 795 619/-. The claim of the assessee was examined by the assessing officer, wherein, he held that the disallowance of deduction under section 10 A, is required to be made on other income and miscellaneous income of the assessee. Accordingly, he held that INR 24 4340 5880/- is other income, though it can be assessed as the business income of the assessee. However same cannot be said to be the income derived from export-oriented undertaking. Therefore, he excluded the above sum while working the deduction under section 10 A of the income tax act. The learned assessing officer further held that on the interest income also the deduction cannot be allowed. There was certain transfer pricing adjustment also during the course of assessment proceedings. Consequently, the returned income of the assessee of INR 30 170 320720/- was assessed at INR 70 21138145/- wide order under section 143 (3) of the income tax act wide order dated 28/3/2013. 4. The order of the learned AO was challenged before the learned CIT - A. He passed....
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....rred to paragraph number 4.2.2 of the learned CIT - A, and stated that the interest income cannot be allowed as deduction is eligible income while calculating the deduction under section 10 A of the income tax act. 7. We have carefully considered the rival contentions and perused the orders of the lower authorities. The above issue is squarely covered in favour of the assessee by the decision of the full bench of the honourable Karnataka High Court in case of 2017] 87 taxmann.com 182 (Karnataka) (FB)/[2018] 403 ITR 453 (Karnataka) (FB)/[2017] 299 CTR 118 (Karnataka) (FB) Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd. As under :- 2. The conflict of opinion of the Two Division Benches has resulted in the aforesaid Reference to the Full Bench. The earlier view was taken in favour of the assessee by the first Division Bench in CIT v. Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167/225 Taxman 11 (Kar.) (Mag.). The subsequent Division Bench taking a different view on 10/04/2014 in the present I.T.A.No.812/2007 referred the aforesaid Questions of Law for consideration by the Full Bench. 3. The first Division Bench in its decision dated 1....
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....f articles or things or Computer Software and such Undertakings contemplated under Section 10-A(1) of the Act are entitled to seek benefit of deduction only in respect of the profit derived from export of articles or things or Computer Software. 6. The subsequent Division Bench further held that the expression "Total Turnover of the business carried on by the Undertaking" would mean only the turnover of the export business of the Undertaking and not any other activity from the Undertaking which earns profit, which could be a part of total income of the assessee. The Division Bench, therefore, proceeded to take a view that the Respondent assessee/Undertaking, M/s. Hewlett Packard Globalsoft (P.) Ltd. which invested its surplus funds in Banks and received interest thereon and also interest on the staff loans, such interest earned by the Undertaking/assessee had no direct nexus with the business of the Undertaking and in other words the business of the Undertaking as contemplated under Section 10- A of the Act is only the export of articles or things or Computer Software and interest on surplus amount in Bank deposit or loans to staff could not have any nexus with the busines....
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....ook at the brief factual background of the Respondent assessee for the Assessment Year 2001-02 in question. 13. The Respondent assessee during the relevant year operated four Units set up under the Scheme formulated by the Government in the name of Software Technology Parks of India (STPI) for 100% Export of the Computer Software Units. The Government of India to promote the fast growing Industry of Software and Software Technology in our country, made a special provision for providing incentive in the form of Tax Exemption by inserting Section 10-A in Chapter III of the Act which provision is quoted herein below and the same provided for a 100% deduction of Profits and Gains derived by an Undertaking from the export of articles or things or Computer Software for a period of ten consecutive Assessment Years from the beginning of its setting up, if such Undertaking begins to manufacture or produce such Articles or things or Computer Software in its Export Undertaking. The said provision was substituted by Finance Act, 2000, with effect from 01/04/2001 in place of the earlier Section 10-A, which was inserted by Finance Act, 1981. 14. Section 10-B of the Act was also....
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.... Banks and staff loans has to be taxed under Section 56 of the Act as "Income from other Sources" and 100% deduction treating them as "profits and gains of business" is not allowable under 80-A of the Act. 18. The relevant extracts of the judgments mainly relied upon by the learned counsel for the Revenue are quoted below for ready reference. 19. In Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC), the Hon'ble Supreme Court dealing with a controversy with regard to interest on deposits with Electricity Board held that the same could not be treated as 'Profits and Gains derived from Industrial Undertaking" for the purposes of Section 80-HH of the Act. The relevant paragraphs 4 and 6 of the judgment are quoted below for ready reference. '4. Section 80HH of Income Tax Act grants deduction in respect of profits and gains "derived from" an industrial undertaking. The contention of the appellant before us is that interest earned on the deposit made with the Electricity Board (assessee) for the supply of electricity to the appellants industrial undertaking should be treated as income derived from the industrial undertaking within the meaning ....
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....the words "attributable to" and therefore such profits on sale of DEPB/Duty drawback Entitlements was not deductible under Section 80-IB of the Act. The relevant discussion as found in paragraph 16 of the judgment is quoted below for ready reference. "16. DEPB is an incentive. It is given under Duty Exemption/Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/duty drawback are incentives which flow from the Schemes framed by Central Government or from s. 75 of the Customs Act, 196....
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....rt judgment is quoted below for ready reference. 'To say that the source of income is not relevant for deciding the applicability of s. 80P would not be correct because weightage has to be given to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in s. 80P(2)(a). An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. In this particular case, the evidence shows that the assessee-society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, such interest income falls in the category of "other income" which has been rightly taxed by the Department under s. 56. The Totgars Co-operative Sale Society Ltd. v. ITO (2010) 228 CTR (Kar.) 526 affirmed. Assessee, a co-operative society, being engaged in providing credit facilities to its members and marketing the agricultural produce of the members, ....
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....se may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. . . . . . 10A. (4) For the purposes of [sub-section (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking." 25. The learned counsel for the Respondent assessee, Mr. T. Suryanarayana submitted that the ....
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....quoted below. "9. The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for consideration before the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar). The said appeal before the Karnataka High Court was by the Revenue challenging an order passed by the ITAT which held that the interest payable on FDRs was part of the profits of the business of the undertaking and therefore includible in the income eligible for deduction Sections 10A and 10B of the Act. There the Assessee had earned interest on the deposits lying in the EEFC account as well as interest earned on inter-corporate loans given to sister concerns out of the funds of the undertaking. There was a restriction on the Assessee in that case from making pre-payment of its external commercial borrowings ('ECB'). It could repay only to the extent of 10% of the outstanding loan in a year. This made the Assessee temporarily park the balance funds as deposits or with various sister concerns as inter corporate deposits until the date of repayment. The Assessee contended that the interest deriv....
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....its of the business' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act." 30. The said judgment, in our opinion, rightly distinguishes the judgments on the interpretation of Section 80-HH, 80-IA etc. under Chapter VI-A of the Act in view of Section 80-A (4) of the Act which, with a non-obstante clause which starts with "Notwithstanding anything to the contrary contained in Section 10-A or Section 10-AA or Section 10-B or Section 10-BA or in any provisions of this Chapter" proceeds to enumerate the various deductions under Chapter VI-A of the Act. 31. Similarly the Division Bench of the Calcutta High Court in CIT v. Hindustan Gum & Chemicals Ltd. [2016] 72 taxmann.com. 90/241 Taxman 401 again held that interest earned on Surplus Business Funds deposited with Banks for short periods will be part of profits of business for the purposes of Section 10-B of the Act. The relevant portion of the judgment in para.3 relied upon in the decision of the Division Bench of this....
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....duction available to a 100% export oriented undertaking is necessarily dependent upon the formula provided in subsection (4). There is, as such, no scope for any controversy that part of the money was earned from interest and not from export. This question came up before the Karnataka High Court and was answered in the case of CIT v. Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167/225 Taxman 11 (Kar.)(Mag.) as follows: In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlements is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the charact....
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....ty Commissioner of Income Tax MANU/MH/0417/2010: [2010] 325 ITR 102 (Bom.) at paragraph 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VIA "gross total income" to mean the total income computed in accordance with the provisions of the Act, before ....
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....The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income'....
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....[1981] 7 Taxman 53, the Hon'ble Apex Court has held as under:- '8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self....