IBM GLOBAL SERVICES INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE

BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 3464/Bang/2004 Assessment Year : 2000-2001

M/s. IBM Global Services India Pvt. Ltd., The Deputy 12, Subramanya Commissioner of Arcade, Income Tax, Bannerghatta Road, Circle – 11(1), Bangalore – 560 029. Vs. Bangalore. PAN: AAACI4403L APPELLANT RESPONDENT

Assessee by : Shri Sharath Rao, CA Revenue by : Shri D.K. Mishra, CIT-DR

Date of Hearing : 08-05-2024 Date of Pronouncement : 31-07-2024 ORDER PER BEENA PILLAI, JUDICIAL MEMBER The assessee company is in the business of export of software solution as well as maintenance services. For the relevant AY 2000-01, the assessee filed return of income declaring loss to the extent of Rs.28,55,17,275/-.

Page 2 of 19 ITA No. 3464/Bang/2004 2. The case was selected for scrutiny and notice u/s. 143(2) was issued, based on which the details as called for in notice u/s. 142(1) were furnished by the assessee. The assessment was thereafter passed on 31.03.2003, u/s. 143(3) r.w.s. 144A of the Act. One of the disallowance made in the assessment order was denying exemption claimed u/s. 10A of the act on the ground that, the export turnover brought into India does not amount to 75 percent of the total turnover of the STP unit. It was submitted by the assessee that, it treated export credits of the bank account maintained by it in the USA as export proceeds and that, this a/c was operated with the approval of the RBI. However, it is submitted that the Ld.AO considered the net inward remittances into India from such account which was net of the onsite expenses incurred by the assessee from the US a/c and also net of the sub-contractor payments from such a/c to Indian subcontractors as “export turnover”. The Ld.AO was of the view that since these inward remittances were less than the threshold of 75% of total turnover, minimum exports required as per section 10A(2)(ia) were not fulfilled.

2.1 Aggrieved by the order of the Ld.AO, assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) vide its detailed order dated 29.04.2003 held that service rendered by sub-contractor outside India has no effect on the assessee’s claim of exemption u/s. 10A of the act and further held that assessee is entitled to exemption u/s. 10A in respect of its income from STPI units.

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2.2 Aggrieved by the order of the Ld.CIT(A), the revenue filed appeal before this Tribunal vide ITA No. 3464/Bang/2004. The Hon’ble Tribunal vide order dated 31.10.2007 held as under: “The fact remains that the assessee has exported from STP units and the engagement of the sub-contractors by the assessee to whom assessee paid from its bank account maintained abroad, which only provided services to the assessee and have not exported anything by themselves and it would not be considered as exports unless provision of those services from one STP unit to another units that export is considered as exports within the meaning of the Act. Since, It is accepted that it is the assessee who had exported computer software, for which it was paid, the entitlement of exemption u/s 10A is satisfied.”

2.3 Aggrieved by the order of this Tribunal, the revenue filed appeal before the Hon’ble Karnataka High Court vide ITA No. 286/2010 raising the following substantial question of law amongst the other questions. (substantial question No. 5): “Whether the appellate authority were correct in holding that the assessee would be entitled to exemption under section 10A of the Act when the export (56.0056%) is less than 75% of the total sales as contemplated under section 10A(2)(1a) of the Act?” 2.4 The Hon’ble High Court disposed off the issue vide order dated 03.11.2020 by observing as under: “12…………From perusal of section 10A(2)(ia), which has been quoted supra, it is evident that the undertaking which beings to manufacture or produce any article or thing on or after 01.04.1995, its export of such articles or thins are not less than 75% of the total sales. However, the Commissioner of Income Tax (Appals) has held that there is no provision under section 10A of the Act, which requires such a condition to be fulfilled and no finding in this regard has been recorded by the tribunal. Therefore, the order passed by the tribunal to the extent of fulfillment of the requirement under section 10A(2)(ia) of the Act cannot be sustained.”

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2.5 The question therefore remanded for adjudication before this Tribunal by Hon’ble High Court relates to compliance u/s. 10A(2)(ia) of the Act i.e whether sales from STP units exceeded 75% of the total turnover during the relevant period as per the law applicable for relevant Assessment Year.

3.1 He submitted that, section 10A(2)(ia) as it prevailed for the relevant assessment year under consideration did not contain the definition of export turnover and the provision read as follows: “(ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;”

3.2 The Ld.AR submitted that, as per the above provision, the entire sales without considering any expenditure incurred or foreign inward remittances or any foreign exchange fluctuation etc. is to be treated as export turnover. He submitted that, the Ld.AO while considering the claim of the assessee ignored the

Page 5 of 19 ITA No. 3464/Bang/2004 gross sales credited in the overseas bank account maintained by the assessee with the approval of RBI. He thus submitted that the condition required u/s. 10A2(ia) to claim deduction u/s. 10A stands satisfied.

3.3 The Ld.AR submitted that, the Ld.AO imported the definition of “export turnover” for the purposes of 80HHE for the year under consideration, without considering Explanation 1 to section 80HHE, that was applicable for the purposes of computing the “total revenue” generated by the assessee from the STP units through exports.

3.4 To bring out the difference between the provisions as it was applicable for the year under consideration, the Ld.AR drew our attention to the amendment that was introduced by Finance Act, 2000 w.e.f. AY 2001-02 to the section 10A, wherein for the first time, the definition of export turnover was introduced. The said relevant amended provisions, was applicable from AY 2001-02 reads as under: Income-Tax Act, 1961 - Income-Tax Act, 1961 - As Amended by Finance Act 2000 As Amended by Finance Act 2001 Special provision in respect of newly Special provision in respect of newly established industrial undertakings in established undertakings in free trade free trade zones. zone, etc. 10A. (1) Subject to the provisions of this 10A. (1) Subject to the provisions of this section, any profits and gains derived by an section, a deduction of such profits and gains assessee from an industrial undertaking to as are derived by an undertaking from the which this section applies shall not be export of articles or things or computer included in the total income of the assessee. software for a period of ten consecutive (2) This section applies to any industrial assessment years beginning with the undertaking which fulfils all the following assessment year relevant to the previous year conditions, namely: in which the undertaking begins to [(i) it has begun or begins to manufacture manufacture or produce such articles or things or produce articles or things during the or computer software, as the case may be, previous year relevant to the assessment shall be allowed from the total income of the year assessee :

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Income-Tax Act, 1961 - Income-Tax Act, 1961 - As Amended by Finance Act 2000 As Amended by Finance Act 2001 (a) commencing on or after the 1st day of Provided that where in computing the total April, 1981, in any free trade zone; or income of the undertaking for any assessment (b) commencing on or after the 1st day of year, its profits and gains had not been April, 1994, in any electronic hardware included by application of the provisions of this technology park or, as the case may be, section as it stood immediately before its software technology park;] substitution by the Finance Act, 2000, the [(ia) in relation to an undertaking undertaking shall be entitled to deduction which begins to manufacture or referred to in this sub-section only for the produce any article or thing on or after unexpired period of the aforesaid ten the 1st day of April, 1995, its exports consecutive assessment years : of such articles or things are not less Provided further that where an undertaking than seventy-five per cent of the total initially located in any free trade zone or export sales thereof during the previous year;] processing zone is subsequently located in a (ii) it is not formed by the splitting up, or the special economic zone by reason of conversion reconstruction, of a business already in of such free trade zone or export processing existence: zone into a special economic zone, the period of Provided that this condition shall not ten consecutive assessment years referred to apply in respect of any industrial in this sub-section shall be reckoned from the undertaking which is formed as a result of assessment year relevant to the previous year the re-establishment, reconstruction or in which the [undertaking began to revival by the assessee of the business of manufacture or produce such articles or things any such industrial undertaking as is or computer software] in such free trade zone referred to in section 33B, in the or export processing zone : circumstances and within the period [Provided also that the profits and gains specified in that section; derived from such domestic sales of articles or (iii) it is not formed by the transfer to a new things or computer software as do not exceed business of machinery or plant previously twenty-five per cent of total sales shall be used for any purpose. deemed to be the profits and gains derived Explanation. The provisions of Explanation from the export of articles or things or computer 1 and Explanation 2 to sub-section (2) of software :] section 80-I shall apply for the purposes of Provided also that no deduction under this clause (iii) of this sub-section as they apply section shall be allowed to any undertaking for for the purposes of clause (ii) of that sub- the assessment year beginning on the 1st day section. of April, 2010 and subsequent years. [(3) The profits and gains referred to in sub- (2) This section applies to any undertaking section (1) shall not be included in the total which fulfils all the following conditions, income of the assessee in respect of namely :— any [ten] consecutive assessment years, [* (i)it has begun or begins to manufacture or * *]beginning with the assessment year produce articles or things or computer software relevant to the previous year in which the during the previous year relevant to the industrial undertaking begins to assessment year— manufacture or produce articles or things [* (a) commencing on or after the 1st day of * *]. April, 1981, in any free trade zone; or [* * *]] (b)commencing on or after the 1st day of April, (4) Notwithstanding anything contained in 1994, in any electronic hardware technology any other provision of this Act, in computing park, or, as the case may be, software the total income of the assessee of the technology park; previous year relevant to the assessment (c)commencing on or after the 1st day of April, year immediately succeeding the last of the 2001 in any special economic zone; relevant assessment years, or of any (ii) it is not formed by the splitting up, or the previous year, relevant to any subsequent reconstruction, of a business already in assessment year, existence : (i) section 32, section 32A, section 33, Provided that this condition shall not apply in section 35 and clause (ix) of sub-section (1) respect of any undertaking which is formed as of section 36 shall apply as if every a result of the re-establishment, reconstruction

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Income-Tax Act, 1961 - Income-Tax Act, 1961 - As Amended by Finance Act 2000 As Amended by Finance Act 2001 allowance or deduction referred to therein or revival by the assessee of the business of and relating to or allowable for any of the any such undertaking as is referred to in relevant assessment years, in relation to section 33B, in the circumstances and within any building, machinery, plant or furniture the period specified in that section; used for the purposes of the business of the (iii)it is not formed by the transfer to a new industrial undertaking in the previous year business of machinery or plant previously used relevant to such assessment year or any for any purpose. expenditure incurred for the purposes of Explanation.—The provisions of Explanation such business in such previous year had 1 and Explanation 2 to sub-section (2) of been given full effect to for that assessment section 80-I shall apply for the purposes of year itself and accordingly sub-section (2) of clause (iii) of this sub-section as they apply for section 32, clause (ii) of sub-section (3) of the purposes of clause (ii) of that sub-section. section 32A, clause (ii) of sub-section (2) of (3) This section applies to the section 33, sub-section (4) of section 35 or undertaking, if the sale proceeds of the second proviso to clause (ix) of sub- articles or things or computer software section (1) of section 36, as the case may exported out of India are received in, or be, shall not apply in relation to any such brought into, India by the assessee in allowance or deduction; convertible foreign exchange, within a (ii) no loss referred to in sub-section (1) of period of six months from the end of the section 72 or sub-section (1) [or sub-section previous year or, within such further (3)] of section 74 and no deficiency referred period as the competent authority may to in sub-section (3) of section 80J, in so far allow in this behalf. as such loss or deficiency relates to the Explanation 1.—For the purposes of this sub- business of the industrial undertaking, shall section, the expression "competent authority" be carried forward or set off where such means the Reserve Bank of India or such other loss, or, as the case may be, deficiency authority as is authorised under any law for relates to any of the relevant assessment the time being in force for regulating payments years; and dealings in foreign exchange. (iii) no deduction shall be allowed under Explanation 2.—The sale proceeds section 80HH or section 80HHA or section referred to in this sub-section shall be 80-I [or section 80-IA] [or section 80-IB]or deemed to have been received in India section 80J in relation to the profits and where such sale proceeds are credited to gains of the industrial undertaking; and a separate account maintained for the (iv) in computing the depreciation allowance purpose by the assessee with any bank under section 32, the written down value of outside India with the approval of the any asset used for the purposes of the Reserve Bank of India. business of the industrial undertaking shall [(4) For the purposes of sub-section (1), the be computed as if the assessee had claimed profits derived from export of articles or things and been actually allowed the deduction in or computer software shall be the amount respect of depreciation for each of the which bears to the profits of the business of relevant assessment years. the undertaking, the same proportion as the (5) Where an industrial undertaking in any export turnover in respect of such articles or free trade zone has begun to manufacture things or computer software bears to the total or produce articles or things in any previous turnover of the business carried on by the year relevant to the assessment year undertaking.] commencing on or after the 1st day of April, (5) The deduction under sub-section (1) shall 1977, but before the 1st day of April, 1981, not be admissible for any assessment year the assessee may, at his option, before the beginning on or after the 1st day of April, expiry of the time allowed under sub-section 2001, unless the assessee furnishes in the (1) or sub-section (2) of section 139, whether prescribed form,along with the return of fixed originally or on extension, for income, the report of an accountant, as defined furnishing the return of income for the in the Explanation below sub-section (2) of assessment year commencing on the 1st section 288, certifying that the deduction has day of April, 1981, furnish to been correctly claimed in accordance with the the [Assessing Officer] a declaration in provisions of this section.

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Income-Tax Act, 1961 - Income-Tax Act, 1961 - As Amended by Finance Act 2000 As Amended by Finance Act 2001 writing that the provisions of sub-section (1) (6) Notwithstanding anything contained in any may be made applicable to him for each of other provision of this Act, in computing the the relevant assessment years as reduced total income of the assessee of the previous by the number of assessment years which year relevant to the assessment year expired before the 1st day of April, 1981, immediately succeeding the last of the relevant and if he does so, then the provisions of assessment years, or of any previous year, sub-section (1) shall apply to him for each of relevant to any subsequent assessment such relevant assessment years and the year,— provisions of sub-section (4) shall also apply (i) section 32, section 32A, section 33, section in computing the total income of the 35 and clause (ix) of sub-section (1) of section assessee for the assessment year 36 shall apply as if every allowance or immediately succeeding the last of the deduction referred to therein and relating to or relevant assessment years and any allowable for any of the relevant assessment subsequent assessment year. years, in relation to any building, machinery, (6) The provisions of sub-section (8) and plant or furniture used for the purposes of the sub-section (9) of section 80-I shall, so far business of the undertaking in the previous as may be, apply in relation to the year relevant to such assessment year or any industrial undertaking referred to in this expenditure incurred for the purposes of such section as they apply for the purposes of the business in such previous year had been given industrial undertaking referred to in section full effect to for that assessment year itself and 80-I. accordingly sub-section (2) of section 32, (7) Notwithstanding anything contained in clause (ii) of sub-section (3) of section 32A, the foregoing provisions of this section, clause (ii) of sub-section (2) of section 33, sub- where the assessee, [before the due date section (4) of section 35 or the second proviso for furnishing the return of income under to clause (ix) of sub-section (1) of section 36, as sub-section (1) of section 139] [***], the case may be, shall not apply in relation to furnishes to the [Assessing] Officer a any such allowance or deduction; declaration in writing that the provisions of (ii) no loss referred to in sub-section (1) of this section may not be made applicable to section 72 or sub-section (1) or sub section (3) him, the provisions of this section shall not of section 74 in so far as such loss relates to apply to him for any of the relevant the business of the undertaking, shall be assessment years. carried forward or set off where such loss [(8) References in sub-section (5) to any relates to any of the relevant assessment other provision of this Act which has been years; amended or omitted by the Direct Tax Laws (iii) no deduction shall be allowed under (Amendment) Act, 1987 shall, section 80HH or section 80HHA or section 80-I notwithstanding such amendment or or section 80-IA or section 80-IB in relation to omission, be construed, for the purposes of the profits and gains of the undertaking; and that sub-section, as if such amendment or (iv) in computing the depreciation allowance omission had not been made.] under section 32, the written down value of Explanation. For the purposes of this any asset used for the purposes of the section, business of the undertaking shall be computed (i) free trade zone means the Kandla Free as if the assessee had claimed and been Trade Zone and the Santacruz Electronics actually allowed the deduction in respect of Export Processing Zone and includes any depreciation for each of the relevant other free trade zone which the Central assessment year. Government may, by notification in the (7) The provisions of sub-section (8) and sub- Official Gazette, specify for the purposes of section (10) of section 80-IA shall, so far as this section; may be, apply in relation to the undertaking [(ii) relevant assessment years means the referred to in this section as they apply for the ten consecutive assessment years referred purposes of the undertaking referred to in to in sub-section (3);] section 80-IA. [(iii) manufacture includes any (8) Notwithstanding anything contained in the (a) process, or foregoing provisions of this section, where the (b) assembling, or assessee, before the due date for furnishing

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Income-Tax Act, 1961 - Income-Tax Act, 1961 - As Amended by Finance Act 2000 As Amended by Finance Act 2001 (c) recording of programmes on any disc, the return of income under sub-section (1) of tape, perforated media or other information section 139, furnishes to the Assessing Officer storage device;] a declaration in writing that the provisions of [(iv) electronic hardware technology park this section may not be made applicable to means any park set up in accordance with him, the provisions of this section shall not the Electronic Hardware Technology Park apply to him for any of the relevant (EHTP) Scheme notified by the Government assessment years. of India in the Ministry of Commerce; (9) Where during any previous year, the (v) software technology park means any ownership or the beneficial interest in the park set up in accordance with the Software undertaking is transferred by any means, the Technology Park Scheme notified by the deduction under sub-section (1) shall not be Government of India in the Ministry of allowed to the assessee for the assessment Commerce; year relevant to such previous year and the (vi) produce , in relation to articles or things subsequent years. referred to in clause (i) of sub-section (2), includes production of computer Explanation 1.—For the purposes of this programmes.] section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty-one per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking : [Provided that nothing contained in this Explanation shall apply to any change in the shareholding of the company as a result of— (a) its becoming a company in which the public are substantially interested; or (b) disinvestment of its equity shares by any venture capital company or venture capital fund.] Explanation 2.—For the purposes of this section,— (i) "computer software" means,— (a)any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b)any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means; (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;

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Income-Tax Act, 1961 - Income-Tax Act, 1961 - As Amended by Finance Act 2000 As Amended by Finance Act 2001 (iii) "electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry; (iv)"export turnover" means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub- section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. (v) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section; (vi) ”relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section; (vii)"software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry; (viii)"special economic zone" means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.] [Explanation 3.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.]

3.5 The Ld.AR submitted that the definition of “export turnover” introduced by Finance Act, 2001 specifically excluded expenditure incurred in foreign exchange in providing technical

Page 11 of 19 ITA No. 3464/Bang/2004 services outside India. He further submitted that, legislature by way of Finance Act, 2000 w.e.f 1/04/2001 i.e; assessment year 2001-02, introduced the requirement to bring the export proceeds to India within 6 months from the end of the assessment year for the first time in section 10A. From the above, it becomes clear that there was no condition applicable for Assessment year 2000-01, to bring foreign exchange in India on account of the exports of sales. The Ld.AR also placed reliance on the CBDT Circular No. 794 dated 09.08.2000 to substantiate that the requirement to bring the export proceeds maintained by an assessee in a foreign bank into India within 6 months was an additional condition introduced by way of the Finance Act, 2000 made w.e.f. AY 2001-02.

3.6 Referring to the observations of Ld.CIT(A), upheld by this Tribunal vide order dated 31.10.2007, the Ld.AR submitted that any expenditure that is directly relatable in respect of income in the bank account outside India are clearly verifiable. He however submitted that, the exemption u/s. 10A is on the “export turnover” and not on the income.

3.7 Referring to the observations of Ld.CIT(A) at para 2.23, the Ld.AR submitted that admittedly there is no domestic sale that is identifiable as observed by this Tribunal in its order dated 31.10.2007. The Ld.AR submitted that profits from STP units have been tabulated and that assessee satisfies the requirement of section 10(2)(ia) of the act for the following reasons:

Page 12 of 19 ITA No. 3464/Bang/2004 a) ‘income from exports’ should be more than 75% of the total turnover under section 10A(2)(ia) of the Act and not the 'inward remittance' b) The bank account maintained by the assessee outside India is undisputedly approved by RBI c) The payment made to the sub-contractors are towards the STP course of business. d) 100% of the sales of the STP units relates to export sales and no domestic sales has been made during the relevant year under consideration.

3.8 The Ld.AR submitted that the assessee filed revised working of the profits attributable to STP units, exports u/s. 80HHE and domestic sales to the Ld.AO as well as the Ld.CIT(A), which has not been disputed by the authorities at any point of time.

3.9 The Ld.AR submitted that the provisions of section 80HHE cannot be borrowed into section 10A of the act in peacemeal. He also submitted that the gross credits in the overseas bank accounts maintained by the assessee is with the approval of RBI and since all these receipts pertains to exports from India the conditions required to be satisfied as per section 10A(2)(ia) stands fully complied with.

3.10 On the contrary, the Ld.DR vehemently relied on the orders passed by the Ld.AO. He also submitted that the Ld.CIT(A) has not clearly recorded the any findings in terms of importing the definition of “export turnover” as per section 80HHE into section 10A(2)(ia) of the act. He submitted that even the Tribunal while passing the order dated 31.10.2007 is silent on this aspect.

We have perused the submissions advanced by both sides in the light of records placed before us.

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4.1 Admittedly for the year under consideration, assessee earned income under 3 distinct heads: 1) STPI units covered u/s. 10A of the act 2) Export receipts as per section 80 HHE of the act and 3) Domestic sales

4.2 There is no dispute that assessee maintained foreign account with the approval of RBI and is allowed to receive export proceeds in the foreign account. From the assessment order, we note that, the Ld.AO denied exemption on various counts and this Tribunal decided the issues raised by the revenue on the relief granted by the Ld.CIT(A) in respect of calculation of export profits and gains earned from STPI units.

4.3 Against the Tribunal order, the revenue preferred appeal before the Hon'ble High Court and the Hon'ble High Court upon admitting the question of law reproduced hereinabove, returned the issue to this Tribunal to give a finding in respect of what would constitute the “export turnover” received by the assessee in

Page 14 of 19 ITA No. 3464/Bang/2004 the foreign account. In other words, the Hon'ble High Court directed this Tribunal to verify whether the export proceeds of the STP units in the foreign account is to be considered on gross basis or on the net amount that was remitted to India.

4.4 The Ld.AO considered net of export proceeds that was remitted to India, thereby computing the percentage of export turnover pertaining to the STPI unit to be 56.056%. It is thus the contention of the Ld.AO that, the assessee does not satisfy the criteria of, ‘not less than 75% of the total sales’, and the deduction is to be therefore denied.

4.5 Before we delve into the issue that is remanded by Hon’ble Karnataka High Court, we analyse the reason for insertion of sub- section (ia) to clause (2) of section 10A: It is noted that as per EXIM policy during the relevant period, the units established in FTZ, EHTP and STP got special treatment by virtue of the fact that they exported their entire produce. However, in order to provide economic flexibility and allow the units to dispose of the export rejects and by-products, the units were allowed to sell 25% of their produce in the domestic market. In effect, such units could avail exemption for 5 years even in respect of profits from the 25% domestic sales allowed to them.

4.6 Further, it was also ensured that the units could avail tax exemption, only if the exports are substantial. Section 10A was accordingly amended with effect from assessment year 1996-97 to provide that in case of the units which commences

Page 15 of 19 ITA No. 3464/Bang/2004 manufacture or production of any article or thing on or after 1-4- 1995, the tax holiday shall be available, only if its exports of such article or thing are not less than 75% of the total sales thereof during the previous year.

4.7 The amendment by introducing sub-section (ia) to clause (2) of section 10A stipulates that the exports should not be less than 75% of 'the total sales'. Now, sales can mean quantity sold or value of goods sold. Hence, the question arose whether the amendment imposes a turnover based or a quantitative restriction. The provisions of the Export-Import Policy, 1992-97 gives clue in this regard. It provides that 'the entire production of EOU/EPZ units shall be exported except 25% of the production in value terms may be sold in the Domestic Tariff Area when the use of indigenous inputs is more than 30% in value terms'. On the basis of the aforesaid provision, it appears that the section imposes a value based restriction and not a quantitative restriction. In other words, what is required to be satisfied as per sub-section (ia) to clause (2) of section 10A is that, the export turnover should constitute 75% of the total turnover, although in quantitative terms, the export quantity might be less than 75% of the total sale quantity.

4.8 Further, if one compares the language of section 10A with that of section 80HHC/80HHE that was applicable for the year under consideration. Section 80HHC/80HHE applies to a person/undertaking engaged in business of 'export out of India' [Section 80HHC(1)/80HHE(1)]. Whereas, section 10A applies to

Page 16 of 19 ITA No. 3464/Bang/2004 an undertaking which 'exports' certain articles or things [Section 10A(2)(ia)]. The words 'out of India' are conspicuously absent from the provision of section 10A. Hence, it can be said that the legislature intends to consider 'deemed exports' as 'exports' for the purpose of this section.

4.9 It is noted that, section 10A for assessment year 2000-01, did not provide for definition of “export turnover”. The definition was introduced by way of finance Act 2001 w.e.f. 1.04.2001 relevant to assessment year 2001-02 in Explanation (2) to section 10A. The expression, ‘export turnover’ was defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange, but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India or expenses if any incurred in foreign exchange in providing technical services outside India. Therefore in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges.

4.10 Be that as it may, in absence of definition of the term “export turnover” in sec.10A, for assessment year 2000-01, the Ld.AO considered the definition of “export turnover” for the purposes of section 80HHE of the act that reads as under: “India “export turnover” means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with subsection (2), but does not include freight, telecommunication charges or insurance attributable to the

Page 17 of 19 ITA No. 3464/Bang/2004 delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;” 4.11 While considering the above definition, the Ld.AO ignored the definition of 'total turnover' in Explanation (e) to section 80HHE that read as under:— 'Total turnover' shall not include —

(i) any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (ii) any freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India; and (iii) expenses, if any, incurred in foreign exchange in providing the technical services outside India."

4.12 At this juncture, it is also relevant to note the Ld.AO failed to consider Explanation 1 to section 80HHE that stood for the relevant period and reads as under: “Explanation 1 — The said consideration shall be deemed to have been received in India where it is credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.”

4.13 Thus, it is seen that expenditure incurred in foreign exchange are to be excluded from ‘total turnover’ and what is excluded from “total turnover” is also excluded from “export turnover”. Thus, the export turnover, in the numerator must have the same meaning as the export turnover, which is a constituent element of the total turnover in the denominator.

Page 18 of 19 ITA No. 3464/Bang/2004 We note that the revenue in the present facts of the case, computed “export turnover” based on the definition of export turnover as appearing in section 80HHE in peacemeal, without considering the other related provisions. Even otherwise section 10A(2)(ia) compares the export proceeds with total sales. It is not in dispute that, section 10A is a beneficial section like section 80HHE. Section 10A is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that is provided by section 80HHE, by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act. In any event, the EXIM policy explained hereinabove is clear on this aspect.

4.14 In this regard, Hon'ble Supreme Court in the case of K.P. Varghese v. ITO reported in (1981) 131 ITR 597 held that, a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. reported in (1991) 62 Taxman 480, with respect to relief for new industrial undertaking under section 15C of the Income-tax Act, 1922, held that, such provisions should be construed liberally. A literal Construction which defeats the very purpose of enacting the provision should be avoided. Thus The definition of the "export turnover", in sec. 10A excludes from its ambit any expenses incurred in foreign exchange in providing technical services outside India for the year under consideration.

Page 19 of 19 ITA No. 3464/Bang/2004 We therefore direct the Ld.AO to compute the 75% of total sales on gross receipt u/s. 10A(2)(ia) of the Act.

In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 31st July, 2024.

Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 31st July, 2024. /MS /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order

Assistant Registrar, ITAT, Bangalore