Profits of the business of the Undertaking for the purposes of Section 10-A/ 10-B includes the Profits and Gains from export of the articles as well as all other incidental incomes
Section 10-A of the Income Tax Act, 1961 (‘the Act’ for short) deals with special provision in respect of newly established undertakings in free trade zone, etc. and section 10-B of the Act deals with special provisions in respect of newly established hundred per cent export-oriented undertakings.
Recently, in CIT vs. Hewlett Packard Global Soft Ltd. [ITA No.812/2007, decided on 30-10-2017], the following questions had been referred on 10/04/2017 by the Division Bench of Karnataka High Court for answer by Full Bench:
(1) 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 was not carrying any banking/financial activity.
(2) 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 Act.
The conflict of opinion of the Two Division Benches had resulted in the aforesaid Reference to the Full Bench. The earlier view was taken in favour of the assessee by the first Division Bench in I.T.A.No.428/2007 (CIT vs. Motorola India Electronics (P) Ltd.) on 11/12/2013. The subsequent Division Bench taking a different view on 10/04/2014 in I.T.A.No.812/2007 referred the aforesaid Questions of Law for consideration by the Full Bench.
The first Division Bench in its decision dated 11/12/2013 held that the Respondent – assessee, a 100% Export Oriented Unit (EOU) which was exporting Software like the Respondent-assessee was entitled to 100% deduction under section 10-A of the Act in respect of the interest income earned by it during the relevant Assessment Year from Exchange Earner’s Foreign Currency (EEFC) Account and the same would be construed as “Business Income of the assessee derived from the Undertaking” within the meaning of section 10-A of the Act. The Division Bench held that the Profits of the business of the Undertaking includes the Profits and Gains from export of the articles as well as all other incidental incomes derived from the business of the Undertaking and what is exempted under section 10- A/10-B of the Act is not merely Profits and Gains from the export of articles but also the income from the business of the Undertaking.
The Division Bench has held that the assessee –Motorola India Electronics (P) Limited was a 100% Export Oriented Unit which has exported Software and earned the income and a portion of that income is deposited in EEFC Account and yet another portion of the amount was invested within the country by way of Fixed Deposits and yet another portion was invested by way of loans to the sister concerns and on which the assessee derived interest or the consideration received from sale of Import Entitlements which was permissible in law and therefore the interest received and the consideration received by the sale of Import Entitlements was to be construed as income of the business of the Undertakings and the Division Bench held that there was a direct nexus between this income and the income of the business of the Undertaking, though it did not partake the character of a Profit and Gains from the sale of articles but it was the income which is derived from the consideration realized from export of articles. The assessee was thus held entitled to 100% deduction for the Assessment Year 2001-02 under section 10-A/10-B of the Act.
However, the subsequent Division Bench took a different view on 10/04/2014 in I.T.A.No.812/2007 and relying upon certain Supreme Court decisions referred therein, held that the Undertaking/Assessee could have more sources of income other than the profits and gains as are derived by them from the export of articles or things or Computer Software and such Undertakings contemplated under section 10-A(1) of the Act are entitled to seek benefit of deduction only in respect of the profit derived from export of articles or things or Computer Software.
The subsequent Division Bench further held that the expression “Total Turnover of the business carried on by the Undertaking” would mean only the turnover of the export business of the Undertaking and not any other activity from the Undertaking which earns profit, which could be a part of total income of the assessee. The Division Bench, therefore, proceeded to take a view that the Respondent assessee/Undertaking, Hewlett Packard Globalsoft P.Ltd. which invested its surplus funds in Banks and received interest thereon and also interest on the staff loans, such interest earned by the Undertaking/assessee had no direct nexus with the business of the Undertaking and in other words the business of the Undertaking as contemplated under section 10-A of the Act was only the export of articles or things or Computer Software and interest on surplus amount in Bank deposit or loans to staff could not have any nexus with the business of the Undertaking as contemplated under section 10-A(4) of the Act.
The Division Bench, therefore, held that they were unable to agree with the view taken by the earlier Division Bench in the case of Respondent Assessee – Motorola India Electronics (P) Ltd.(supra) and thus the matter was required to be referred to the Full Bench for its opinion.
The learned Judges of the Karnataka High Court, after taking into the account facts & circumstances of the case, exemption under section 10- A/10-B of the Act and the legal position, opined 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.
The learned Judges affirmed and agreed with the view expressed by the first Division Bench of Karnataka High Court in the case of Motorola India Electronics (P) Ltd.(supra) but did not agree with the view taken by the subsequent Division Bench on 10/04/2014 in the captioned case.
Both the questions as mentioned above were answered in favour of the Respondent Assessee and against the Revenue.