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Income Tax Appellate Tribunal, ‘C’ BENCH, BENGALURU
Before: SHRI N.V.VASUDEVAN & SHRI INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BENGALURU BEFORE SHRI N.V.VASUDEVAN, VICE PRESIDENT and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA No.1222/Bang/2017 (Assessment year:2011-12) M/s.Tata Elxsi Ltd., ITPB Road, Hoody, Whitefield Road, Bengaluru-560 048. … Appellant PAN:AAACT 7872 Q Vs
Deputy Commissioner of Income-tax, Circle 7(1)(1), Bengaluru. … Respondent AND ITA Nos.1516 & 1517/Bang/2017 (Assessment years: 2010-11 & 2011-12) (By Revenue) Assessee by : Shri Padamchand Khincha, CA. Revenue by : Shri Pradeep Kumar, CIT(DR) Date of hearing : 13/11/2018 Date of pronouncement : 05/12/2018 O R D E R Per INTURI RAMA RAO, AM : ITA Nos.1516 & 1517/Bang/2017 are appeals by the revenue directed against the order of the ld. Commissioner of Income-tax(Appeals),[CIT(A)], Mysore, dated 30/06/2016 for the assessment years 2010-11 and 2011-12. ITA No.1222/Bang/2017 is the cross appeal filed by the assessee directed against the order of the ld.CIT(A),Mysore, dated 30/6/2016 for the assessment year 2011-12.
Since common issues are involved, all these appeals are disposed of by this common order for the sake of convenience.
ITA No.1222, 1516 & 1517/Bang/2017 Page 2 of 13 ITA No.1516/Bang/2017: 3. This is an appeal filed by the revenue directed against the order of the ld.CIT(A), Mysore, dated 30/06/2016 for the assessment year 2010-11.
Briefly, the facts of the case are as under: The respondent-assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of distribution of computer systems etc. The return of income for the assessment year 2010-11 was filed on 30/09/2010 declaring ‘nil’ income under normal provisions and book profits u/s 115JB of Rs.7,77,33,533/-. Against the said return of income, the assessment was completed by the Deputy Commissioner of Income-tax, Circle 12(4), Bangalore, [hereinafter referred to as Assessing Officer (AO)] vide order dated 11/03/2013 passed u/s 143(3) of the Income-tax Act,1961 ['the Act' for short] at total income of Rs.18,05,19,790/-. While doing so, AO, allowed exemption u/s 10A in respect of STPI, Bangalore unit after set off loss of Rs.4,92,52,645/- in respect of 10A eligible unit of Bombay and other income in the form of sales of scrap of Rs.62,65,142/- was excluded from the business profits for the purpose of computing exemption u/s 10A of the Act. AO also reduced the amount of Rs.27,68,91,445/- from export turnover as the same was realized within due date prescribed nor was permission from RBI was furnished and also excluded insurance and telecommunication expenditure of Rs.3,41,59,000/- from export turnover for the purpose of computing benefit u/s 10A of the Act. AO held that expenditure incurred in foreign currency towards overseas office expenses, overseas travel and other expenses of Rs.69,52,38,000/-should be reduced from export turnover. Accordingly, AO made addition of Rs.18,65,13,852/- and brought to tax rental income under ‘other sources’.
Being aggrieved, an appeal was preferred before the ld.CIT(A), who, vide impugned order, allowed the claim of ‘other
ITA No.1222, 1516 & 1517/Bang/2017 Page 3 of 13 income’. The ld.CIT(A) held that ‘other income’ of Rs.62,65,141/- is part of business profits eligible for exemption u/s 10A of the Act, following the decisions of the Hon’ble Karnataka High Court in the cases of:
As regards export sales of Rs.27,68,91,445/- not realized within prescribed time, the ld.CIT(A), referring to the provisions of section 155(11A) of the Act, held that the same should be considered as export turnover of the current year, placing reliance on the decision of the Hon’ble Karnataka High Court in the case of Wipro Ltd v CIT in ITA No. 879 of 2008 and other connected matters decision dated 25/3/2015. 6.1 As regards set off of loss of 10A eligible units at Bombay against profits of 10A eligible units at Bangalore, the ld.CIT(A), following the decision of the ITAT in assessee’s own case for assessment year 2007-08 held that loss should not be set off against 10A eligible units.
ITA No.1222, 1516 & 1517/Bang/2017 Page 4 of 13 6.2 Regarding insurance expenditure of Rs.41,62,00,820/- incurred in foreign currency, the ld. CIT(A) held that same should be reduced from export turnover as well as total turnover following the decision of the Tribunal in the assessee’s own case. 6.3 As regards expenditure in foreign currency, the ld.CIT(A) held that same was not incurred for the purpose of export of software and therefore should not be reduced from export turnover.
Being aggrieved, revenue is in appeal before us raising the following grounds of appeals:
ITA No.1222, 1516 & 1517/Bang/2017 Page 5 of 13 8. Ground Nos.1, 7 and 8 are general in nature and do not require any adjudication.
Ground No.2 challenges the finding of the ld.CIT(A) that other income is also eligible for exemption u/s 10A of the Act. The issue in this ground of appeal is settled by the Full Bench decision of the Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd.(2018)(402 ITR 453)(Kar.)(FB) wherein the Hon’ble High Court, after referring to its earlier judgment in Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167 held as follows: “34. We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10-A and 10- B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the 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. 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
ITA No.1222, 1516 & 1517/Bang/2017 Page 6 of 13 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. 36. We have to take a purposive interpretation of the Scheme of the Act for the exemption under Section 10-A/10-B of the Act and for the object of granting such incentive to the special class of assessees selected by the Parliament, the play-in- the-joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon'ble Supreme Court in the following cases:— [I] In Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480, the Hon'ble Supreme Court held that:— "5. . . . . . 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. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief 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
ITA No.1222, 1516 & 1517/Bang/2017 Page 7 of 13 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 the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud [351 US 457 : 1 L Ed 2d 1485 (1957)] where Frankfurter, J., said in his inimitable style: "In the utilities, tax and economic regulation cases, there are good reasons for judicial self- restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events — self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on
ITA No.1222, 1516 & 1517/Bang/2017 Page 8 of 13 experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.' 37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds 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.”
Since the reasoning adopted by the ld.CIT(A) is in consonance with judgment of the Hon’ble High Court of Karnataka in the case of Hewlett Packard Global Soft Ltd.(supra), we do not find any merit in the ground of appeal raised by the revenue. This ground of appeal filed by revenue is dismissed.
Ground No.3 challenges the finding of the ld. CIT(A) treating export sale proceeds realized subsequently as part of current year export turnover. The finding of the ld. CIT(A) is in accordance with law laid down by the jurisdictional High Court in the case of Wipro Ltd. vs. DCIT (382 ITR 179) and nothing was brought to our notice that the judgment of the Hon’ble High Court in the case of Wipro Ltd. (supra) was reversed by the Hon’ble Supreme Court. Accordingly, we do not find any merit in the
ITA No.1222, 1516 & 1517/Bang/2017 Page 9 of 13 grounds of appeal filed by the revenue. This ground of appeal is dismissed.
Ground No.4 challenges the finding of the ld. CIT(A) not to set off loss of another eligible 10A unit against the profits of eligible 10A unit for the purpose of computing exemption u/s 10A. The decision of the ld. CIT(A) is in accordance with decision of the Hon’ble Supreme Court in the case of CIT vs. Yokogawa India Ltd.(2017)(391 ITR 274(SC) wherein it has been held as follows: “13. The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the un-amended Section. The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word 'deduction' in Section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions. 14. The difference between the two expressions 'exemption' and 'deduction', though broadly may appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal Nos. 8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units. 15. Sub-section 4 of Section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out of domestic sales, is one instance of deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head "profits and gains from business" in Chapter IV and denied the benefit of deduction. The provisions of Sub-section 6 of Section 10A, as amended by the Finance Act of 2003, granting the benefit of adjustment of losses and unabsorbed depreciation etc. commencing from
ITA No.1222, 1516 & 1517/Bang/2017 Page 10 of 13 the year 2001-02 on completion of the period of tax holiday also virtually works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand by acknowledging that any such reference or mention would have been a repetition of what has already been provided in Section 10A. The provisions of Sections 80HHC and 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and redundant if deductions under Section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the said provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in our view, indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to. 16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non- eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision." 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application.
ITA No.1222, 1516 & 1517/Bang/2017 Page 11 of 13 The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'.”
Ground Nos.5 & 6 challenge the finding of the ld. CIT(A) to reduce telecommunication and insurance expenditure incurred in foreign currency for export of software from both export turnover as well as total turnover. The decision of the ld. CIT(A) is in accordance with law laid down by the Hon’ble Supreme Court in the case of CIT vs. HCL Technologies Ltd.(2018)(404 ITR 719)(SC) wherein it was held as follows: “19. 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 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. 20. 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.”
In the result, the appeal filed by the revenue is dismissed.
ITA No.1517/Bang/2017: 14. This is an appeal filed by the revenue directed against the order of the ld.CIT(A), Mysore, dated 30/06/2016 for the assessment year 2011-12. The grounds of appeal and the issues
ITA No.1222, 1516 & 1517/Bang/2017 Page 12 of 13 raised in this appeal are same as in ITA No.1516/Bang/2017 for assessment year 2010-11. For the detailed reasons given by us while dealing with appeal bearing ITA No.1516/Bang/2017, the appeal filed by the revenue is dismissed.
ITA No.1222/Bang/2017:
This is the cross-appeal filed by the assessee directed against the order of the ld.CIT(A), Mysore, dated 30/06/2016 for the assessment year 2011-12.
The assessee raised the following grounds of appeal:
ITA No.1222, 1516 & 1517/Bang/2017 Page 13 of 13
The only issue in this appeal relates to write back of advances given to customers constitute business income or not. This issue is covered in favour of the assessee-company by the decision of the Hon’ble High Court of Karnataka in the case of Hewlett Packard Global Soft Ltd. (supra). The grounds of appeal are allowed.
In the result, the appeals filed by the revenue are dismissed and the appeal filed by the assessee is allowed.
Order pronounced in the open court on 05th December, 2018 sd/- sd/- (N.V.VASUDEVAN) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMBER Place : Bengaluru. D a t e d : 05/12/2018 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A) 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file
By order Assistant Registrar Income-tax Appellate Tribunal Bangalore