Professional Documents
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Precedents:
Citation
[2018] 404 ITR 719 (SC)
Court:
In the Supreme Court of India
Date of Judgement
April 24, 2018
Bench
R. K. Agrawal J (Author), R. Bhanumathi
Decision in favour of
Assessee
ABSTRACT
The Income Tax Act, 1961 consists of various provisions that permit deductions
applicable to encourage some activities. One of these provisions is Section 10A of the
Income Tax Act, that intends to promote and increase new enterprises placed in free
trade zones with the aid of imparting suitable deductions.
It provides for a 100 percent deduction of earnings and profits derived through
undertakings engaged in export of articles or computer software programs. The
deduction is available for ten evaluation years from the year wherein the entity
commences operations. These profits are to be decided based totally on the ratio of total
turnover to the export turnover of the undertaking.
The Assessing Officer (AO) disallowed the same, on the basis that – whilst
claiming for expenses incurred in foreign exchange had to be excluded for calculating
export turnover (because of specific requirements), the same could not be excluded
from total turnover, since there was no specific provision for making such adjustments
according to Section 10A of the Income Tax Act, 1961.
The above mentioned facts gave rise to the condemning issues of interpretation
to be discussed in the Court that were in violation of the provided statutory provisions,
as follows:
Arguments
“The Revenue asserted that since total turnover is not defined in Section 10A of
the IT Act, the ordinary meaning of the term must be adopted. Since total turnover is a
technical term, its technical meaning under Section 80HHC and 80HHE of the IT Act
should be used to compute the deduction under Section 10A. Such meaning does not
envisage reduction of any expense from the total amount. Therefore, the claim of
expenses incurred in foreign exchange under total turnover, was not in accordance with
the applicable provisions.”
“HCL, on the other hand, argued that the export turnover is the numerator, while
the total turnover is the denominator, in the formula for computing profits from exports.
The term export turnover has been defined under Section 10A of the IT Act to exclude
freight, telecommunication charges or insurance incurred in foreign exchange and are
attributable to the delivery of goods outside India for providing technical services
outside India. Consequently, the same must also be excluded from the total turnover in
the denominator to avoid undesirable results.”
“The term total turnover has not been defined in section 10AA under which the
deduction is sought. Export Turnover means the consideration in respect of export by
the undertaking of articles or thing or computer software received in, or brought into
India by the assessee in convertible foreign exchange, within a period of six months
from the end of the previous year or within such further period as may be permitted by
the RBI, 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.”
“Section 10AA deduction depends on arriving at the profit from export business,
thus, expenses excluded from export turnover must also be excluded from total
turnover, since one of the components of total turnover is export turnover. Expenses
incurred in foreign exchange for providing the technical services outside are thus to be
excluded from total turnover also.”
Since a lot of such litigation pertains to the availability of tax deductions under
Section 10A of the IT Act, this decision of the Supreme Court should bring clarity and
resolve the issue permanently. Additionally, since the Supreme Court has also
approached the issue from a practical understanding of the relevant terms and derived
its decision on the basis of an application of logic, the same principles should also be
applicable to similar cases where similar terms have been used.
If this decision is adhered to, in form as well as in spirit, it may go a long way to
grant relief to all such taxpayers who have been embroiled in similar disputes, not
limited to the interpretation of the principles under Section 10A of the IT Act. The
principles enunciated in this decision of the Supreme Court could be applied to similar
issues relating to other provisions of the IT Act, wherein the final understanding can be
derived based on the application of common sense and practical implementation.
Comments
“Following the said decision, the Delhi Tribunal in the case of Global Logic
India Pvt. Ltd.§ held that freight telecommunication or insurance charges that are
reduced from the export turnover will also have to be reduced from the total turnover of
the company for the purpose of computation of deduction under Section 10A of the
Act.”
“The Supreme Court in the present case has held that expenditure such as
freight, telecommunication, and insurance attributable for delivery of software and
expenditure incurred in foreign exchange for providing the technical services outside
India excluded from 'export turnover' shall also have to be excluded from "total
turnover' for computing deduction under Section 10A of the Act. Even though the
Supreme Court has rendered this decision on the issue with respect to the provisions of
Section 10A of the Act which has been phased out, the said decision can be helpful
while dealing with other similar provisions under the Act.”
“In the instant case, the High Court affirmed the order of the Tribunal where it
was held that enhanced profit due to disallowance under Section 40(a)(ia) is eligible for
a deduction under Section 10A of the Act. The tax department had filed an SLP against
the order of the High Court which has been dismissed by the Supreme Court.”
CONCLUSION
Over the years, there have been several disputes over the manner in which this
ratio is to be determined. This is largely because while the term ‘export turnover’ was
stated under Section 10A of the Income Tax Act, “total turnover” has not. In other
words, there is no explicit provision that allows the taxpayer to exclude amounts from
total turnover in case such amounts have already been excluded from export turnover. In
the discussed case of CIT v HCL Technologies Limited, the Supreme Court of India
dealt with this issue and provided much needed clarity on the subject.
“The Supreme Court in the case of HCL Technologies Ltd.' (the taxpayer) dealt
with the issue that whether for determining the benefit under Section 10A of the
Income-tax Act, 1961 (the Act), any specified expenses excluded from the 'export
turnover' are also to be excluded from the 'total turnover' in the specified formula. The
Supreme Court held that expenditure such as freight, telecommunication, and insurance
attributable for delivery of software excluded from the 'export turnover' shall also have
to be excluded from the total turnover' for computing deduction under Section 10A of
the Act. Similarly, the expenditure incurred in foreign exchange for providing the
technical services outside India are also to be excluded from the total turnover.”