M/S R SYSTEMS INTERNATIONAL LTD.,,NEW DELHI vs. ACIT, NEW DELHI

PER N.K. BILLAIYA, ACCOUNTANT MEMBER,

This appeal by the assessee is preferred against the order of the

Commissioner of Income Tax [Appeals] - 44, New Delhi dated

05.08.2016 pertaining to assessment year 2011-12.

the bank interest on short term export surplus deposits as ‘Business

income’, and secondly, the assessee is aggrieved by the disallowance

of legal and professional fee of Rs. 1,93,250 and foreign taxes of Rs

51,384/-.

company is engaged into the business of software development and IT

enables services, primarily export sales.

total interest of Rs. 5,20,16,070/- as under:

[Rs.]

Interest on FDRs 3,82,03,086/-

Interest on ICD and other deposits and advances

- Out of surplus from export proceeds 77,83,788/-

Interest on FDRs 5,929,196/-

- Out of IPO Funds [Public Issue, 2006] 52,016,070/-

kept out of the purview of ‘business income’ and offered for tax as

“Income from other sources”. During the course of assessment

proceedings, the assessee requested the Assessing Officer to rework

the interest component and consider the interest on FDR out of surplus

from export proceeds amounting to Rs 3,83,03,086/- under the head

“Business income” in the light of the provisions of section 10A(4) of the

Income tax Act, 1961 [hereinafter referred to as ‘the Act’]

the ld. counsel for the assessee and treated the interest of Rs. 3.83

crores as “Income from other sources”.

but without any success.

the provisions of section 10A(4) of the Act and vehemently stated that

as per the provisions, as applicable from A.Y 2001-02, the interest

income forms part of the profit from business of industrial undertaking

and once the formula is applied as specified in sub-section (4) of

section 10A of the Act, the assessee would be entitled for deduction,

as the assessee is a 100% EOU, the entire business of the assessee

consists of development and export of software.

terminology used in sub-section (4) is “Profits of the business” of the

undertaking in contradiction to the words “Profits and gains” derived

by the assessee from a 100% EOU. According to the ld. counsel for the

assessee, the term “from the business of” is much wider than the term

“derived from industrial undertaking”. The ld. counsel for the

assessee further stated that the entire profits derived from the

business of undertaking should be taken into consideration while

computing the eligible deduction u/s 10A of the Act.

Assessing Officer.

and have carefully perused the orders of the authorities below.

Section 10A(4) reads as under:

“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.”

of Hewlett Packard Global Soft Ltd 403 ITR 453 was seized with the

following substantial questions of law:

"(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?"

“29. In Riviera Home Furnishing v. Addl. CIT [2016] 65 taxmann.com 287/237 Taxman 520 (Delhi), the Division Bench of Delhi High Court dealing with a case of Export Oriented Undertaking, for the Assessment Year 2008-09, 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- 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 derived from the business of the industrial undertaking was eligible for exemption within the meaning of Section 10B and applied the formula under Section 10B(4) of the Act for determining the profits from exports. The Assessee's contention that the expression "profits of the business of the undertaking" in Section 10B(4) was wider than the expression "profits and gains derived by" the Assessee from a 100% EOU occurring in Section 10B(1) was accepted by the ITAT. The ITAT noticed that unlike Section 80 HHC, where there was an express exclusion of the interest earned from the 'profits of business of undertaking', there was no similar provision as far as Sections 10A and 10B were concerned.

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."

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 Court in the case of Motorola India Electronics (P.) Ltd. (supra) is quoted below for ready reference.

"3. A bare reading of sub-section (1) suggests that 100 % export oriented undertakings are entitled to a deduction of profits and gains derived from the export of articles for a period of 10 years. The aforesaid entitlement is, however, subject to the provisions of Section 10B. In other words, subject to the provisions contained in the other parts of the Section 10B, the benefit is available to an assessee. It was not disputed that the only relevant provision to be taken into account is sub-section (4) which we already have quoted. Sub-section (4) provides the quantum of deduction which can be availed by an assessee. The quantum of deduction is dependent upon the total turnover of the business of the undertaking and the export turnover of the undertaking. Once these two figures are available, one has to divide the total turnover by the export turnover in order to work out the percentage of the export turn over, vis-à-vis the

total turn over. Suppose total turn over is Rs. 100/- and total export turn over is for Rs. 10/-, then the export turn over is 10 % of the total turnover. Then one has to find out the total profit of the business of the undertaking. Suppose the total profit of the business of the undertaking is Rs. 100, in that case, deduction available to the assessee under Section 10 sub-section (1) of Section 10B shall be 10% of Rs. 100, i.e. to say Rs. 10/-. This is the formula which has been provided by subsection (4) for the purpose of working out the benefit or deduction under subsection (1). Total turnover shall naturally include receipt on account of interest. The legislature does not appear to have provided for excluding the amount of interest from the total turnover as has been done in the case of 80HHC by explanation (baa) of sub-section (4C) thereof. In that case, 90% of the income arising out of interest has to be excluded from the 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 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 character of a profits and gains from the sale of an

article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of income from Profits and Gains incorporated in Sub-section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ITA No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue.

In the light of the aforesaid findings, the second question of law in both the appeals do not arise for consideration."

the Gross Total Income is determined by adding the income under various independent Heads of Income in Chapter IV comprising of Sections 14 to 59 of the Act.

"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 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 making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the

decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance.

"21. Therefore, when this Court has held that Chapter VIA provides for deduction to be made in computing the total income and section 80HH deals with deduction in respect of profit and gains from the newly established undertaking or Hotel business in backward areas, then the attempt of the Revenue to telescope Chapter VIA in the context of the deduction, which is permissible under section 10A falling in Chapter III, cannot be countenanced.'

assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these 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.

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' as defined under Section 80- B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10- A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction.”

ITR 274 had the occasion to explain the meaning of the phrase ‘Total

Income”. The Hon'ble Supreme Court held as under:

“15. The phrase "total income" has been used in the Income- tax Act in several places with different connotations and shades. The phrase "total income" used in section 10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the undertaking. A business might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession", as under the above head, the income from business as a whole has to be computed. The phrase "total income" used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of

the assessee. The definition of any tern: given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP undertaking as understood in its commercial sense.

and process of computation of "profits and gains of business or profession" begins thereafter. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits.

on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament despite being conversant with the implications of this Chapter, has consciously chosen – to retain. section 0A in Chapter III.

It is after the deduction under Chapter VI-A that the 19. total income of an assessee as arrived at. Chapter VI- A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions.

From the aforesaid discussion it is clear that the 20. income of the section 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of the section 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption under section 10A would not enter into computation as the same has to be deducted at source level.”

judicial decisions discussed hereinabove, we are of the considered

view 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. Ground No. 1 is accordingly allowed.

expenditures, namely, legal and professional fee of Rs 1,93,250/- and

Rs 51,384/- on foreign taxes.

the details of rates and taxes, the Assessing Officer noticed that the

above mentioned expenditures were claimed u/s 37(1) of the Act. The

Assessing Officer was not convinced with the claim of expenditure and

disallowed the same.

amount of Rs. 1,92,250/- was incurred towards stamp duty and

registration charges for execution of lease deed by Noida IT Unit of the

assessee and Rs. 51,384/- has been deducted by the overseas customer

while releasing the payment against invoices raised by way of turnover

tax. It is the say of the ld. counsel for the assessee that both these

expenditures are allowable u/s 37(1) of the Act.

Officer. It is the say of the ld. DR that the expenditure incurred

towards stamp duty and registration charges are in the nature of

capital expenditure and the same cannot be allowed u/s 37(1) of the

Act.

authorities below and have carefully perused the relevant material on

record. We are of the considered view that the expenses towards

registration of stamp duty and legal expenses incurred in connection

therewith have to be considered in the light of the provisions of

section 37(1) of the Act.

137 ITR 652 has held “The impugned expenditure did not involve any

element of premium in the amount claimed as expenditure. It was

incurred only to draw up and get registered an effective and proper

lease deed and would have remained the same irrespective of the

period of lease as long as it was more than one year. Further, the

period of lease itself could not be decisive of the question whether the

asset was of enduring nature. On these facts, the impugned

expenditure was revenue in nature.

the case of Hoechst Pharmaceuticals Ltd 113 ITR 877 and in the case of

Octavious Steel and Co. Ltd 221 ITR 810. Considering the nature of

expenditure in the light of the judicial decisions, legal expenses have

to be allowed u/s 37(1) of the Act. We order accordingly.

concerned, the facts on record show that this amount was deducted by

overseas customer while releasing payment against invoices raised by

the assessee. The deduction was on account of turnover taxes. In our

considered opinion, this deduction by overseas customer is not a tax on

profit of business as such but on the applicable laws of those countries.

The assessee is very much entitled to deduction in respect of such

expenditure u/s 37(1) of the Act. Moreover, the assessee has recorded

the sales on gross basis, i.e. invoiced amount has been taken as sales,

therefore, any deduction from invoiced amount has to be allowed as

deduction from business income of the assessee. We direct

accordingly. Ground No. 2 is allowed.

6506/DEL/2016 is allowed.

The order is pronounced in the open court on 04.10.2019.

Sd/- Sd/-

[SUDHANSHU SRIVASTAVA] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 04th October, 2019

VL/