HSBC ELECTRONIC DATA PROCESSING INDIA PRIVATE LIMITED, ,HYDERABAD vs. ADDL. COMMISSIONER OF INCOME TAX , RANGE-2, HYDERABAD

The next issue i.e. issue No.4, raised by the assessee is relating to finding of fact and law, which is not the subject of rectification of the appeal u/s 254(2) of the Act and hence, the same is dismissed,

In the result, the Miscellaneous Application filed by the assessee is partly Allowed. The Registry is directed to fix the matter in due course for adjudication of ground Nos. 6(b) and 6(c), after issue the notice to both the parties”.

Thus, this Tribunal while deciding the M.A has recalled the earlier order dated 5/8/2024 for adjudication of Ground No.6(b) and 6(c) and consequently, the appeal of the assessee has been listed for hearing and adjudication of Ground Nos. 6(b) and 6(c) which reads as under:

As regards Ground No.6(b), the learned AR of the assessee has submitted that the Assessing Officer while computing the deduction u/s 10A of the Act has excluded foreign exchange gain from the export turnover, however, the same has not been excluded from the total turnover. The learned AR has referred and relied upon the judgment of the Hon'ble Supreme Court in assessee’s own case along with a group of civil appeals including in case of Pr. CIT vs. HCL Technologies Ltd reported in 404 ITR 719 and submitted that the Hon'ble Supreme Court has decided this issue in favour of the assessee by holding that while computing the relief u/s 10A of the Act, what is excluded from the export total turnover must be excluded from the total turnover since one of the component of total turnover is export turnover. The learned AR has further submitted that by following the judgment of the Hon'ble Supreme Court in the case of Pr. CIT vs. HCL Technologies Ltd (Supra), the Bangalore Benches of the Tribunal in the case of Safran Engineering Services India (P) Ltd vs. ACIT reported in (2021) 191 ITD 293 has also decided this issue in favour of the assessee by holding that the foreign exchange gain, if excluded from export turnover should also be excluded from the total turnover while computing the deduction u/s 10A of the Act. Thus, the learned AR has submitted that the Assessing Officer may be directed to re-compute the deduction u/s 10A by excluding foreign exchange gain both from the export turnover as well as total turnover.

On the other hand, the learned DR has relied upon the orders of the authorities below.

Having considered the rival submission as well as relevant material available on record, we find that the issue involved in Ground No.6(b) of assessee’s appeal is now covered by the judgment of the Hon'ble Supreme Court in assessee’s own case as well as in the case of CIT vs. HCL Technologies Ltd (Supra) wherein the Hon'ble Apex Court has held in Para 15 to 21 are as under: “15. A Statute is the intention of the legislature who enacts it after having regard to various facts and circumstances. It is a cardinal principle of law that the interpretation by the Court shall be done in such a way that the intention of the legislature shall prevail and no injustice occurred with the parties. The rule of harmonious construction is the thumb rule to interpretation of any statute. An interpretation which makes the enactment a consistent whole, should be the aim of the Courts and a construction which avoids inconsistency or repugnancy between the various sections or parts of the statue should be adopted.

In CIT v. J.H. Gotla [1985] 23 Taxman 14J/156 ITR 323 (SC) this Court has held as under:

The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxmann.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.

Accordingly, the formula for computation of the deduction under Section 10A of the Act would be as follows:

In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total

Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.

On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.”

Accordingly, the Assessing Officer is directed to compute the deduction u/s 10A by excluding the amount of foreign exchange gain already excluded from the export turnover from the total turnover also subject to the final amount of foreign exchange gain arrived as per the outcome of the Ground No.6(c) is taken up hereunder.

As regards Ground No.6(c), the learned AR of the assessee has submitted that the Assessing Officer has reduced the gross amount of foreign exchange gain instead of the net amount after reducing the foreign exchange losses on the hedging transactions. The learned AR has referred to the computation of deduction u/s 10A placed at Page No.848 of the paper book as well as at page 13 of the paper book. She has further referred to the details of the net foreign exchange gain as calculated at page

We have considered the rival submission as well as relevant material available on record. At the outset, we note that this claim was not made by the assessee before the Assessing Officer, but the same was made before the learned CIT (A). The learned CIT (A) in para 12.1 to 12.2 has held as under: “12.1 I have considered the arguments of the assessee and find that the Hon'ble ITAT special bench in the case of Sri. Prakash L Shah (115 ITD 167) held that the foreign exchange gain emanating from export is integral part of export proceeds. However, the facts in the present case are different. The gains realized are not derived from export of ITES but are either hedging gains or marked to market notional gains as per the accounting standards. These gains, as observed by the Assessing Officer, are not related to the realization of export proceeds but are out of a separate activity of hedging. There is a thin line separating the gains derived out of fluctuation in foreign exchange due to late realization of export proceeds and gains arising out of hedging in foreign exchange. It is not disputed that hedging is an insurance to the assessee against fluctuations in foreign exchange but the resultant gains cannot be treated as ITA No 1613 of 2017 HSBC Electronic Data Processing India P Ltd Page 8 of 10

2 As the exchange gain in the present case is also from forward contracts or marked to market difference, the gain in basically in the form of speculation/notional gain and hence is not eligible for deduction u/s. 10A. Coming to the other argument of the assessee that the Assessing Officer ignored the net result of foreign exchange gain by not reducing the losses incurred it is seen that the other gain/losses are not hedging losses but are related to foreign exchange realization loss/gain, arising out of export proceeds as against the hedging gains/MTM gains considered by the Assessing Officer. In short, the assessee had loss in realization of export proceeds due to foreign exchange fluctuation whereas it had gains due to hedging. These two items stand on different footing. The exchange loss/gain in realization of export proceeds becomes part of export proceeds whereas the hedging/marked to market gains would not part of export turnover. Therefore, I am of the considered opinion that the Assessing Officer has correctly reduced the hedging gains from the purview of 1OA deduction and hence there is no need to interfere with the decision of Assessing Officer on this aspect. In the result ground No. 8 is dismissed. “

The assessee has claimed that the loss due to foreign exchange fluctuation in respect of derivative transaction entered into by the assessee to hedge the loss due to foreign exchange