VALUE LABS LLP,HYDERABAD vs. ACIT CIRCLE-8(1), HYDERABAD

Assessee preferred a further appeal to the Tribunal and a coordinate Bench of this Tribunal, by order dated 24/01/2018 in allowed an amount of Rs. 41,39,680/-, comprising of Page 2 of 11 Excess provisions reversed of Rs. 27,57,647/-, Bad debts reversed of Rs. 6,35,968/- and the miscellaneous receipts of Rs. 6,96,068/-being the profits u/s 41(1) has direct nexus with profits of export oriented unit, Pursuant to the said order, the learned Assessing Officer passed an order dated 31/12/2018, determining the assessee’s taxable income at Rs. 5,08,37,135/- a�er allowing exemp�on u/s 10A of the Act for an amount of Rs. 57,52,44,813/-.

Against such an order, the assessee had preferred an appeal before the learned CIT(A) and the learned CIT(A), by way of the impugned order, upheld the determina�on of the assessee’s taxable income at Rs. 5,08,37,135/-. Hence this appeal by the assessee contending that the total interest income of Rs.4,62,35,101/- is eligible for deduc�on u/s 10A of the Act, as it was earned by the assessee during the course of its business, by temporarily parking the surplus funds from its export business in deposits with various banks and earned interest which forms part of export business so as to be eligible in the computa�on of deduc�on u/s 10A of the Act. learned AR submits that the interest income in ques�on has direct nexus with the export business of the assessee and therefore, it is eligible for deduc�on u/s 10A of the Act. learned AR further contended that the Assessing Officer while passing the consequen�al order dated 31.12.208, did not follow the direc�ons of the Tribunal in respect of the treatment of the amount of Rs.41,39,680/- in the computa�on of deduc�on u/s 10A of the Act. According to the learned AR, in terms of the order of the Tribunal, the amount of Rs.41,39,680/- is not excludable from “Profits and gains of the undertaking” in the computa�on of deduc�on u/s 10A of the Act, and the learned Assessing Officer should have adopted the “Profits and gains of the undertaking” at Rs.57,98,46,547/- in stead of Rs.57,57,06,867/- that was taken in the computa�on of deduc�on u/s 10A of the Act.

Main plank of argument of learned AR is that the interest earned from parking of surplus funds as Fixed deposits and Current account with banks is directly relatable to the assessee’s export business income and is to be allowed as exemp�on u/s 10A of the Act. According to him, under Sec 10A of the Act, interest earned on the funds which are surplus and idle and temporarily parked with the banks is directly linked with the assessee’s 100% export business ac�vity and the same shall be given exemp�on u/s 10A of the Act, and that the same cannot be treated as other sources u/s 56 of the Act as if it is unconnected with assessee’s business. He, therefore, submits that the income generated by way of bank interest from such ac�vity is directly relatable to the assessee’s export business ac�vity and that the same is qualified for exemp�on u/s 10A of the Act.

In support of the above conten�ons, learned AR placed reliance on the decisions of the Delhi ITAT in the case of Cognizant Technology Solu�ons India Private Limited vs ITO in by order dated 30/06/2022, ITAT Mumbai in the case of Tech Mahindra Business Services Limited vs DCIT in by order dated 30/06/2021, Karnataka High Court in the case of CIT Vs Hawle� Packard Global So� Ltd. [2018] 403 ITR 453(Karnataka) (FB), High court Madras in the case of M/s Sankhya Technologies Private Limited 427 ITR 318 ( Madras), Hon’ble Apex court in the case of Bajaj Tempo Limited AIR 1992 SC 1622, ITAT Delhi in the case of R. Systems Interna�onal Ltd. vs ACIT in ITA No. 6506/DEL/2016 [A.Y 2011/12] by order dated 4/10/2019.

Per contra, learned DR has vehemently supported the impugned Order, by taking us through various observa�ons and findings of the learned Assessing Officer and the learned CIT(A), jus�fying the addi�ons.

We have gone through the record in the light of the submissions made on either side. Assessee is a hundred percent export unit of so�ware enjoying the benefit of exemp�on u/s 10A of the Act; that during the financial year 2008-09 the assessee has export turnover of Rs. 1,68,75,25,333/- and that the assessee parked certain funds generated from the export business in two bank accounts as FDs, which accrued some interest amount and was shown in the P & L A/c. Claim of the assessee is that such interest income is directly generated from surplus business funds and, therefore, directly relatable to export oriented business, forming part and parcel of export business, en�tled for exemp�on u/s 10A of the Act. learned AR stressed that the funds parked in banks are not from borrowed funds to earn other source of income u/s 56 of the Act.

In the Return of Income, the assessee claimed an exemp�on for a sum of Rs. 62,55,84,569/- under Sec�on 10A of the Tax Act. However, during a review of the balance sheet, learned Assessing Officer discovered that the assessee had received interest from bank deposits amoun�ng to Rs. 4,62,35,101/- and another sum of Rs. 41,39,680/- totaling Rs. 5,03,74.78/-. These amounts were credited to the Profit and Loss (P&L) account, and the assessee also claimed these sums as exempt under Sec�on 10A of the Act. learned Assessing Officer, a�er verifica�on of the record, classified the interest amount of Rs. 5,03,74,781/- as income from other sources under Sec�on 56 of the Act. As a result, learned Assessing Officer denied the exemp�on under Sec�on 10A of the Act, sta�ng that the claimed exemp�on was deemed invalid due to the interest income being categorized under a different sec�on. learned Assessing Officer relied on the decision of the Hon’ble Apex Court in the case of CIT vs Pandian Chemicals Limited, 262 ITR 278 (SC).

Assessee's grievance, therefore, essen�ally revolves around the classifica�on of interest earned from bank deposits as income from other sources. The core ques�on involved in this appeal is, therefore, whether this interest, derived from parking of the surplus funds in bank accounts, should be treated as profits from an export/oriented business and thus be exempt under Sec�on 10A of the Income Tax Act. learned AR argues that the interest income accrued from fixed deposits made with surplus funds generated by the export business. According to the assessee, the funds were temporarily parked in bank accounts, and the interest income was credited to the profit and loss account. The assessee claims that since the interest earned is directly linked to the export-oriented business ac�vity, it should be eligible for exemp�on under Sec�on 10A of the Act. This exemp�on is generally granted for profits derived from the export of goods or services, and the assessee believes that the interest income falls under this category due to its connec�on to the export business. Therefore, the primary conten�on is whether the interest income qualifies as part of the business profits and should be exempt.

In the case of Bajaj Tempo Limited vs. CIT AIR 1992 SC 1622 Hon’ble Apex Court held that, since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it.

In the case of CIT Chennai vs Sankhya Technologies Private Limited (427 ITR 318), Hon’ble Madras High Court dealt with this issue of whether interest earned on bank deposits by a 100% export-oriented unit (EOU) could be included in the profits of the unit for the purpose of claiming a deduction under Section 10A or 10B of the Income Tax Act. Hon’ble Court held that the interest earned on bank deposits is eligible to be included in the profits of the export-oriented unit for the purpose of claiming a Page 6 of 11 deduction under Section 10A or 10B, provided the interest income is closely linked with the business activities of the EOU. Hon’ble Court held that where the interest was earned from parking surplus funds generated from the export-oriented business, it should be considered as part of the business income, emphasizing that the interest earned on such deposits, which were made from the surplus funds of the business, is considered to have a direct nexus with the export business and hence eligible for exemption under Section 10A or 10B, thereby holding the issue in favour of the assessee’s claim to include the interest income in the profits of the EOU, enabling the company to claim the deduction under the relevant provisions.

In the case of Motorola India Electronics Private Limited, Hon’ble Karnataka High Court addressed the issue of whether interest income earned by an export-oriented unit (EOU) on deposits made with banks and from staff loans qualifies for exemption under Sections 10A or 10B of the Income Tax Act. It was held in this case that the dedicated nature of the business of such undertakings, especially those located in Special Economic Zones (SEZs) or Software Technology Parks of India (STPIs), makes them eligible for a 100% deduction under Sections 10A and 10B. This exemption applies to the entire income derived from the export business, including interest income earned from temporary parking of funds or from staff loans. The Court emphasized that these types of interest income should not be treated as income from other sources under Section 56 of the Act. Hon’ble Court further explained that the incidental activities of parking surplus funds or advancing staff loans are integral to the export business operations of such units. These activities are undertaken for commercial expediency and should be considered as part of the export business income. Therefore, the interest income generated from these activities is closely linked to the business's export activity and should not be segregated or taxed separately. As a result, the Page 7 of 11 Court ruled that the assessee was entitled to 100% exemption under Section 10A in respect of the interest income earned from these activities, as the income was incidental to its export business.

In the case of Cognizant Technology Solutions India Private Limited vs ITO, the Delhi ITAT dealt with the issue of whether interest income earned by a 100% export-oriented unit (EOU) could be considered as part of its export profits eligible for exemption under relevant tax provisions. In this case, learned CIT(A) observed that the assessee failed to prove that the interest income was derived from funds that were part of total export proceeds received in convertible foreign exchange. The Tribunal, however, disagreed with this reasoning, emphasizing that the assessee's status as a 100% export-oriented unit (EOU) registered as a special economic zone (SEZ) unit meant that the entire turnover from international transactions would have been in convertible foreign exchange. The Tribunal considered the incidental activity of parking surplus funds to earn interest as an integral part of the export business. Since this activity is linked to the export operations, the interest income could not be separated from the overall profits of the undertaking. The Tribunal relied upon the Karnataka High Court's decision in the case of CIT & Anr. Vs. M/s. Hewlett Packard Global Soft Pvt. Ltd., which held that such incidental income should be treated as part of the export profits. The ITAT, therefore, ruled in favour of the assessee, allowing the interest income to be included in the profits derived from export activities for the purpose of claiming the exemption.

In the case of Tech Mahindra Business Services Limited vs DCIT, the coordinate Bench of the Mumbai Tribunal dealt with the question as to whether the interest income earned by the assessee from deposits made for bank guarantees and the temporary parking of surplus funds could be eligible for deduction under Section 10A of the Income Tax Act.

Page 8 of 11 The Tribunal considered the rival submissions and reviewed the facts. It was noticed that the assessee, a unit involved in the export of ITES (Information Technology Enabled Services), earned interest income from deposits made for securing bank guarantees and from temporarily parking surplus funds. The Bench noted that the assessee's only business activity was the export of ITES through its 10A unit. It was, therefore, concluded that the interest income earned from these deposits was directly related to the assessee's business activities. Deposits made for bank guarantees were clearly part of the business, and the temporary parking of surplus funds in fixed deposits was also part of the regular business activity when such funds were not immediately needed for operations. In this case also, reliance was placed on the Full Bench decision of the Karnataka High Court in the case of Hewlett Packard Global Soft Ltd., wherein it was held that incidental income, including interest on bank deposits, earned by an export-oriented unit, is eligible for deduction under Sections 10A or 10B. It also referred to the Cybertech Systems & Software case, which upheld the deduction of interest income under Section 10B following the same rationale. It was, therefore, held that the assessee was eligible to claim a deduction under Section 10A for the interest income earned from its business related deposits.

In the case of R. Systems International Ltd. vs ACIT, in [A.Y 2011/12] by order dated 4/10/2019 it was categorically held that, the interest earned on short term export surplus deposit has to be treated as ‘Business income” for the purposes of computation of deduction u/s 10A(4) of the Act.

On a careful consideration of the facts involved in this appeal and application of the settled principles of law to the facts, we reach a conclusion that the interest earned from the bank deposits made from Page 9 of 11 the surplus funds of the export oriented unit partakes the character of profits and gains of the assessee’s export oriented business activity, since such interest income is directly relatable to the assessee’s 100% export/oriented business, and the same cannot be separated from export oriented unit activity to be treated as income from other sources u/s 56 of the Act. It logically follows that since it forms part of the assessee’s profits from export oriented unit, the same is also exempt u/s 10A of the Act.

Now turning to the grievance of the assessee that the learned Assessing Officer not followed the direction of the Tribunal, in allowing the sum of Rs. 41,39,680/- towards excess provision reversed, bad debts recovered, and Miscellaneous receipt learned Assessing Officer is hereby directed to give effect to such a direction given in the earlier order. All the grounds are answered accordingly.

In the result, the appeal of the assessee is allowed. Order pronounced in the open court on the 23rd January, 2025.