PCIT Vs Technotree Convergence Ltd. (Karnataka High Court)
Summary: The Karnataka High Court, in Principal Commissioner of Income Tax-7 Vs M/s. Technotree Convergence Ltd., ITA No. 62 of 2021, decided on 17 September 2026, disposed of the Revenue’s appeal under Section 260A of the Income-tax Act, 1961, answering all four substantial questions of law in favour of the assessee. The appeal concerned the disallowance of commission paid to overseas recipients under Section 40(a)(ia) read with Section 195 and the tax treatment of amounts recovered from employees and liabilities written back in the context of export-oriented business income. The Court followed earlier Karnataka High Court decisions rather than undertaking a fresh detailed examination of the underlying facts.
The first two questions concerned whether the Income Tax Appellate Tribunal was justified in deleting the disallowance of commission payments on the ground that Section 195 did not apply. The Revenue contended that the assessee had not established the complete nature of services rendered by the overseas payees and that the payments might fall within the scope of fees for technical services. The assessee submitted that these questions were already covered by the coordinate Bench decision in Principal Commissioner of Income Tax-5 v. Puma Sports India Pvt. Ltd., ITA No. 223 of 2018. The Court noted that the Supreme Court had dismissed the special leave petition against that judgment on 29 October 2021 and that the same precedent had also been followed in an earlier appeal concerning Technotree Convergence. Consequently, questions one and two were answered against the Revenue.
The remaining questions concerned the classification of amounts recovered from employees and liabilities written back as business income rather than income from other sources. The Court relied on the Full Bench ruling in Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd., [2017] 87 taxmann.com 182 (Karnataka) (FB). That decision recognised that, for eligible export undertakings governed by Sections 10A and 10B, incidental interest earned on bank deposits and staff loans could form part of business profits rather than being separately taxed under Section 56, having regard to the integral connection with the export business.
Following the Full Bench judgment, the High Court answered substantial questions three and four in favour of the assessee and against the Revenue. The Revenue’s appeal was accordingly disposed of with all four questions answered against it. The judgment is significant for its application of binding precedent to foreign commission withholding-tax disputes and the treatment of incidental receipts of eligible export undertakings. The original judgment contains certain inconsistencies in its description of the Tribunal appeal numbers and the framing of the third substantial question; these have been retained in the reproduced full text.
List of Cases Discussed / Relied Upon:
1. Principal Commissioner of Income Tax-5 and Another v. M/s. Puma Sports India P. Ltd., ITA No. 223/2018 (Karnataka High Court) — Followed for deciding substantial questions one and two relating to the disallowance of commission payments and the applicability of Section 195. The judgment records that the Supreme Court dismissed SLP(C) No. 15834/2021 on 29 October 2021.
2. Principal Commissioner of Income Tax-7 v. M/s. Technotree Convergence Pvt. Ltd., ITA No. 834/2018 (Karnataka High Court) — Earlier appeal involving Technotree, disposed of by following the decision in Puma Sports India Pvt. Ltd.
3. Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd., [2017] 87 taxmann.com 182 (Karnataka) (FB) — Full Bench decision followed for substantial questions three and four, concerning the treatment of incidental income in the context of eligible export undertakings under Sections 10A and 10B.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This Appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 is directed against the order dated 03.07.2019 passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Bangalore, in ITA Nos.1447 and 1448/Bang/2017 for assessment years 2010-11 and 2011-12.
2. Heard learned counsel Sri.E.I.Sanmathi for the appellants and learned Senior Counsel Sri.K.R.Vasudevan for learned counsel Sri.P.D.Ankur for the respondent-assessee. Perused the entire appeal papers.
3. The above appeal was admitted on 28.06.2021 to examine the following Substantial Questions of Law:
“1. “Whether on the facts and circumstances of the case, the Tribunal was right in law in setting aside disallowance made under section 40 (a) (ia) of the Act in respect of commission payment by holding that the provisions of section 195 are not applicable in the facts of present case ignoring that assessee had failed to establish nature of payments and even during the appellate proceedings, the assessee had not submitted complete details about the nature of services rendered by the payees for which commission has been paid and whether this would fall beyond the scope for fee for technical services?”
2. “Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the nature of commission payments are not in dispute when the assessing authority has clearly disputed the same and made disallowance under section 40(a)(ia) of the Act since all the conditions set out in said provision was fulfilled”?
3. “Whether on the facts and circumstances of the case, the Tribunal was right in law in setting aside the addition made by assessing authority by treating amounts recovered from employees and liabilities written back as when the assessing authority has clearly disputed the same and made disallowance under section 40(a)(ia) of the Act since all the conditions set out in said provision was fulfilled”?
4. “Whether on the facts and circumstances of the case, the Tribunal was right in law in setting aside the addition made by assessing authority by treating amounts recovered from employees and liabilities written back as business income instead of ‘other income’ as claimed by assessee by following the decision of this Hon’ble Court in case of Hewlett Packard Global Soft Ltd even though the nature of receipt of income do not have any nexus with export turnover and same is not incidental to export business”?
4. At the outset, learned counsel for the respondent submits that the Substantial Questions of Law No.1 and 2 raised by the appellants-revenue is answered by the Co-ordinate Bench of this Court in ITA No.223/2018 in Principal Commissioner of Income Tax-5 and Another vs. M/s.Puma Sports India P., Ltd.
5. It is further submitted that the SLP filed against the said judgment was dismissed by the Hon’ble Apex Court by order dated 29.10.2021 in SLP(C) No.15834/2021. It is also pointed out that by following the judgment in M/s.Puma Sports India P., Ltd., ITA No.834/2018 [M/s.Principal Commissioner of Income Tax-7 vs. M/s.Technotree Convergence Pvt. Ltd.,] was also disposed of. By following the decision of Co-ordinate Bench in Ms.Puma Sports India Pvt Ltd., the substantial question Nos.1 & 2 are answered against Revenue and in favour of the assessee.
6. In so far as substantial question Nos.3 & 4 are concerned, it is submitted that the said question is answered by Full Bench of this Court in Commissioner of Income Tax v/s Hewlett Packard Global Soft Ltd., reported in [2017] 87 Taxmann.com 182 (Karnataka) (FB), wherein, relevant paragraphs 34 and 37 read 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.
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 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.”
7. Respectfully following the above Full Bench decision of this Court, we answer substantial question Nos.3 and 4 in favour of the respondent-Assessee and against the appellant-Revenue.
Accordingly, the appeal stands disposed of.
