AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 1499
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....income earned by the Appellant from short-term deposits is not eligible for deduction under section 10AA of the Income Tax Act, 1961 (`the Act'). 3. The learned CIT (A) has erred on facts and in circumstances of the case and in law by confirming the order of the learned Assessing Officer who has reduced the MAT credit to the extent of Rs 1,55,08,015 consequent to disallowance of deduction under section 10AA of the Act for interest income earned by the Appellant. 4. That the learned CIT (A) has erred in the facts and circumstances of the case by - passing the impugned Order without following the judicial Precedence on this matter. 2. The brief facts of the case are that the assessee filed return of income on 29.11.2018 declaring income at Rs. 21,72,88,740/-. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. The assessee has entered into an Advance Pricing Agreement with the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Govt. of India on 27.7.2020 and the agreement covers the period of F.Y. 2016-17 to F.Y. 2020-21. In pursuance to the Advance Pricing Agreement, the assessee has f....
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....Further in the case of CIT Vs Motorola India Electronics Pvt. Ltd. [2014] Taxman 11 (Karnataka), High Court of Karnataka held that "the profit of the business of the undertaking includes the profit and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking". It also held that "there is a direct nexus between interest income and the income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles". In the case of CIT Vs Hewlett Packard Global Soft Ltd. [2018] 403 ITR 453(Karnataka) (FB), full bench of Karnataka High Court held that "the incidental activity of parking of surplus funds with the banks by special category of assessee covered under Section 10A or 10B was integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest earned incidentally could not be de-linked from its profit and gains derived by the undertaking engaged in the export of articles as envisaged under section 10B an....
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.... business income as defined in section 10AA of the Act. He strongly relied on the judgement of jurisdictional High Court Full Bench decision in the case of CIT Vs. Hewlett Packard Global Soft Ltd. in ITA No. 812 of 2007 dated 30.10.2017 reported in 87 taxmann.com 182 (Kar.) and submitted that the issue involved in the case of the assessee is similar that of the judgement rendered by the Full Bench of the jurisdictional High Court. Further, he relied on the following decisions of jurisdictional High Court of Karnataka and coordinate benches of this Tribunal: a) In the case of CIT Vs. Motorola India Electronics (P) Ltd. (2014) 46 taxmann.com 167 (Karnataka) b) In the case of Principal CIT Vs. Infosys Ltd. (2023) 147 taxmann.com 520 (Karn.) c) Decision of ITAT Bangalore in the case of Affiliated Computer Services of India (P) Ltd. Vs. Deputy Commissioner of Income tax, Central Circle-1(1), Bangalore (2020) 114 taxmann.com 178 (Bang. Trib) d) Decision of Mumbai bench of Tribunal in the case of Rialto Exim Vs. ITO reported in (2023) 146 tamann.com 359 (Mumbai Trib) 3. The ld. D.R. relied on the order of the lower authorities and submitted that....
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....7) 87 taxmann.com 182 in which it has been held as under: Dr. Vineet Kothari J. - The following Questions have been referred on 10/04/2017 by the Division Bench of this Court for answer by Full Bench. "(i) Whether in the facts and in the circumstances of the case, Tribunal was justified in holding that interest from Fixed Deposits, accrued interest on Fixed Deposits, interest received from Citibank, Hong kong and interest on staff loans should be treated as business income of the assessee even though the assessee is not carrying any banking/financial activity? (ii) Whether the Assessing Officer was correct in holding that the interest income cannot be held to be derived from eligible business of the assessee (software development) for the purpose of claiming deduction under Section 10A of the Income Tax Act, 1961?" 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 d....
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..... 812/2007 and relying upon certain Supreme Court decisions referred therein, held that the Undertaking/Assessee could have more sources of income other than the profits and gains as are derived by them from the export of 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 Underta....
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.... Economic Zones (SEZs)" and Section 10-B deals with "Special provisions in respect of newly established 100% Export Oriented Units (100% E.O.Us)". 12. Before coming to the crux of the controversy, let us have a look 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 U....
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....-B in Chapter III of the Act, submitted that the interest income derived by the Respondent assessee cannot be said to be "Profits and Gains" as derived by an Undertaking from the export of articles and therefore such interest income earned from 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 appe....
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....me (DEPB), Duty drawback incentives dealing with deduction under 80-IB of the Act held that the profit derived on sale of such DEPB and Duty draw back Entitlements by the assessee could not be said to be Profits and Gains "derived from" which are "ancillary" as compared with 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....
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....ative Societies engaged in specified types of activities did not include the interest earned by it by investing Surplus Funds in Short Term Deposits and Government Securities which would be taxable under Section 56 of the Act as "Income from other Sources". The relevant extract of the Supreme Court 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" whi....
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.... articles or things or computer software during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case 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 prof....
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...., in respect of interest received by an assessee on Fixed Deposit Receipts (FDRs.) which were under lien with Bank for facilitating Letter of Credit and Bank Guarantee facilities held that such interest received on FDRs would qualify for deduction under Section 10-B of the Act. The relevant paragraphs 9 and 15 of the said decision are 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....
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....rnataka High Court has been cited with approval by this Court in Hritnik Exports (supra) and Universal Precision Screws (supra). In Hritnik Exports (supra) the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the 'profits 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 ....
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....e profits of the business for the purpose of arriving at deduction available under Section 80HHC. But an identical provision is not there. Therefore, that provision cannot be imported by implication. The submission that the amount earned from interest was not intended to be taken into account for the purpose of giving benefit under subsection (1) of Section 10B may be correct. But the amount of deduction 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....
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.... 20. In relation to this, we also find support in the judgment of this Court in the case of Black and Veatch Consulting Pvt. Ltd. This Court has observed and held as under: "Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court, while construing the provisions of Section 10B, in Hindustan Unilever Ltd. v. Deputy 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....
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.... cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income "derived from" such Undertakings doing such special business activity. 35. 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% Ded....
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....schief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in any other business. No objection could have been taken to such reading but when the result of reading in such plain and simple manner is analysed then it appears that literal construction would not be proper. ..." [II] In R.K. Garg v. Union of India [1982] 133 ITR 239/[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 t....
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....nds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act. 38. We therefore affirm and agree with the view expressed by the first Division Bench of this Court in the case of Motorola India Electronics (P.) Ltd. (supra) and we do not agree with the view taken by the subsequent Division Bench on 10/04/2014 in the present case. 39. Both the questions thus framed above are answered in favour of the Respondent Assessee and against the Revenue in the terms indicated above and the matter is sent back to the Division Bench for deciding this Appeal in accordance with the aforesaid opinion. 4.1 On going through the above judgement, the judgement relied by the AO has been considered and it is a full bench judgement rend....