A recent decision of the Special Bench (SB) of the Chennai Income Tax Appellate Tribunal (ITAT) in the case of Scientific Atlanta India Technology Pvt. Ltd. (Taxpayer). The issue before the SB was that, while computing the amounts eligible for tax holiday under the Indian Tax Law (ITL), whether the losses of an undertaking of the Taxpayer which is not eligible for tax holiday (Non- eligible Undertaking), are required to be set off against the profits of another undertaking of the Taxpayer which is eligible for tax holiday (Eligible Undertaking).
The SB held that the amount eligible for tax holiday was specific to each undertaking of the Taxpayer. Further, for the purpose of determining the amount eligible for tax holiday under the ITL, the losses of a Non-eligible Undertaking are not required to be set off against the profits of an Eligible Undertaking.
Background and facts of the case
- The ITL provides tax holiday with respect to profits and gains derived from undertakings engaged in the export of articles or things or computer software for a period of 10 consecutive years, subject to conditions specified therein (Tax Holiday). Up to tax year 1999-00, the ITL provided for exemption of income derived from such undertakings i.e. income of Eligible Undertakings did not form part of the total income of a taxpayer. From tax year 2000-01, the ITL provides for a deduction of profit derived from Eligible Undertaking from its total income. Such profit forms part of the income of a taxpayer but is reduced later before arriving at the total income.
- The Taxpayer, a private limited company, carried on its business in 2 locations in India. One undertaking, engaged in the business of software development and registered with the Software Technology Parks of India, was an Eligible Undertaking for the purpose of Tax Holiday under the ITL. The other undertaking was engaged in carrying out trading activities of various products of the Taxpayer, hence a Non-eligible Undertaking. During the tax years 2002-03 and 2003-04, the Eligible Undertaking earned profits and the Non-eligible Undertaking reported a loss. The Taxpayer claimed the Tax Holiday for entire profits of the Eligible Undertaking without deducting losses incurred by the Non-eligible Undertaking. Such losses were carried forward to be set off in future years, as per the provisions of the ITL.
- The Tax Authority recomputed the amounts eligible for the Tax Holiday by reducing the losses incurred by the Non-eligible Undertaking from the profits earned by the Eligible Undertaking.
- The Taxpayer appealed to the first appellate authority which restricted the total amount eligible for the Tax Holiday to the extent of the total income of the Taxpayer i.e. aggregate of the income of both the undertakings along with income from any other sources. Total income was determined at Nil, after allowing benefit of the Tax Holiday.
- Aggrieved by the order of the first appellate authority, both the Taxpayer and the Tax Authority preferred an appeal before the ITAT. In view of the importance of the issue involved, an SB was constituted to adjudicate the issue referred under appeal.
Issue before the SB: –Whether losses of the Non-eligible Undertaking are required to be set off against the profits of the Eligible Undertaking for computing the amount eligible for the Tax Holiday under the ITL.
Contentions of the Taxpayer
The ITL provides the Tax Holiday by way of a deduction of the profits derived from the Eligible Undertaking, from the total income of a taxpayer. The Tax Holiday provided under the ITL is an exemption provision and, hence, the profits earned from the Eligible Undertaking should not be included in the computation of total income and should be computed separately.
