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Facts
An earlier appeal of the assessee was disposed of, following which a Miscellaneous Application was filed for rectification. This led to the recall of the previous order for adjudication of Ground Nos. 6(b) and 6(c). Ground 6(b) pertains to the exclusion of foreign exchange gain from total turnover for Section 10A deduction, while Ground 6(c) relates to the consideration of net vs. gross foreign exchange gain (from hedging transactions) for the same deduction.
Held
The Tribunal held that for Ground 6(b), foreign exchange gain, if excluded from export turnover for Section 10A computation, must also be excluded from total turnover, relying on Supreme Court judgments. For Ground 6(c), concerning hedging gains, the issue was remanded to the Assessing Officer for verification to determine if these were genuine hedging transactions against export proceeds or speculative in nature, and only then consider the net profit or loss for Section 10A.
Key Issues
1. Whether foreign exchange gain, excluded from export turnover, should also be excluded from total turnover for Section 10A deduction. 2. Whether net or gross foreign exchange gain/loss from hedging transactions should be considered for Section 10A deduction.
Sections Cited
10A, 254(2), 28
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Income Tax Appellate Tribunal, Hyderabad ‘ DB-B ‘ Bench, Hyderabad
Before: Shri Vijay Pal Rao, Vice-Shri Manjunatha, G.
Per Vijay Pal Rao, Vice President
This appeal by the assessee is directed against the order dated, 30/05/2017 of the learned CIT (A)-9, Hyderabad for the A.Y.2010-11. Earlier, the appeal of the assessee was disposed of by this Tribunal vide order dated 5/8/2024 and thereafter, the assessee filed a Miscellaneous Application in MA No.43/Hyd/ 2024 for rectification of mistake in the said order of the Tribunal.
Page 1 of 10 The M.A of the assessee was disposed of vide order dated 13/02/2025 in Para 9 to 11 as under:
“9. We have heard the rival contentions and also gone through the record in the light of the submissions made on either side. Admittedly, this matter was heard on 6/6/2024 and it appears that the alternate ground Nos.6(b) and 6(c) raised by the assessee were not addressed in the impugned order. In the interest of justice, the order dated 6/6/2024 of the Tribunal is partially recalled to the limited extent of adjudicating the ground Nos.6(b) and 6(c). Accordingly, this contention of the assessee is allowed.
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, 11. 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:
“6(b) Without prejudice to the above, erred in not excluding the foreign exchange gain from the total turnover for the purpose of computation of deduction u/s 10A of the Act. 6(c) Without prejudice to the above, erred in reducing the hedging gain of Rs.106,68,32,843/- from the profits of the business instead of considering the net amount of Rs.63,66,53,406 credited to profit and loss account for the purpose of computing deduction u/s 10A of the Act”.
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. 16. In CIT v. J.H. Gotla [1985] 23 Taxman 14J/156 ITR 323 (SC) this Court has held as under: "46. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of statutory provision is an attempt to discover the intention of the Legislature from the language used…. 47 ….If the purpose of a particular provision is easily discernible from the whole scheme of the Act which, in the present case, was to counteract, the effect of the transfer of assets so far as computation of income of the Respondent was concerned, then bearing that purpose in mind, the intention should be found out from the language used by the Legislature
Page 4 of 10 and if strict literal, construction leads to an absurd result, i.e. result not intended to be subserved by the object of the legislation found out in the manner indicated above, then if other construction is possible apart from strict literal construction, then that construction should be preferred to the strict literal construction. Though equity an taxation are often strangers , attempt should be made that these do not remain so always so and if a construction results in equity rather than in injustice , then such construction should be preferred to the literal construction. Furthermore, in the instant case, we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer…."
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
Page 5 of 10 Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
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
Page 6 of 10 No.66 of the Annexure to the M.A. The learned AR has referred to page 10 of the assessment order and submitted that the Assessing Officer has considered the gross amount instead of the net amount. The learned CIT(DR) has referred to para No.12.2 of the order of the learned CIT (A) and submitted that the learned CIT (A) has considered this issue and has given a finding that the loss of foreign exchange fluctuation claimed by the assessee is a separate transaction which is speculative in nature and therefore, the same cannot be set off against the gain of foreign exchange on the turnover received by the assessee which is a business income of the assessee. She has relied upon the impugned order of the learned CIT (A).
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 Page 7 of 10
part of export turnover. They are basically sort of speculation gains/notional gains which are not part and parcel of export activity. The Hon'ble Bangalore tribunal in the case of K. .Mohan & Co. (Exports) (P.) Ltd. [126 ITD 59], held as under: "In order to avoid risk of loss due to foreign exchange fluctuation it entered into forward contracts in respect of foreign exchange to be received as a result of export. During relevant assessment year, assessee claimed deduction under section 10B in respect of its entire income including profits derived from forward contracts – Whether since forward contracts had been taken in respect of 46 per cent of export turnover and it was not an isolated transaction, in view of Explanation 2 to section 28, profit from forward contracts was to be assessed as profit from speculation business - Held, yes - Whether since for purpose of computing deduction under section 10B, speculation business cannot be considered as business of undertaking, Assessing Officer was justified in rejecting assessee's claim for deduction in respect of profits derived from forward contracts - Held, yes." 12.2 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
Page 8 of 10 fluctuation in respect of the export turnover is in the nature of business profit or loss. Since the Assessing Officer has not examined this aspect of foreign exchange fluctuation gain/loss in respect of the so called hedging transaction of derivative, therefore, we are of the considered opinion that this issue requires a proper verification and examination of the relevant facts and transactions to arrive at the conclusion that the claim of forward contract of foreign exchange is taken by the assessee only to hedge the risk of loss due to foreign exchange fluctuation in respect of the export proceeds. Thus, the relevant details regarding the forward contracts of foreign exchange entered into by the assessee are directly related to the export proceeds to cover the risk of foreign exchange loss are required to be verified and examined. Hence, this issue is set aside to the record of the Assessing Officer for considering the claim of the assessee and in case the Assessing Officer is satisfied that the forward contracts taken by the assessee are only to cover the risk of loss due to foreign exchange fluctuation in respect of export proceeds, then the transaction shall be considered as hedging and then only the net profit or loss is required to be taken into consideration while computing the deductions u/s 10A of the I.T. Act, 1961.
10. In the result, Ground No.6(b) is allowed and Ground No.6(c) is allowed for statistical purposes.