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Ostensibly, while denying the assessee’s claim of carried forward unabsorbed loss/depreciation assessed under the normal provisions of the Act, the Assessing Officer has proceeded on the basis that section 10A of the Act provides an exemption and, therefore, loss suffered in such unit is not allowed to be set off or carried forward for further set off against other normal business income.
Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasised in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd Vs. Deputy Commissioner of Income Tax 2. (2010) 325 ITR 102 at para 24.
Plain reading of above provisions makes it abundantly clear that for the purposes of section 10A, the eligible business (appellant’s branch office in this case) is to be considered as a separate entity and transfer of goods or services by eligible business to/from other business of the assessee are to be treated as if such transfer has been made to/from an unrelated third party. Therefore, supply of software by appellant’s branch office to appellant’s head office is to be considered as export to an unrelated third party and profits derived by appellant from such export are eligible for exemption u/s 10A of the Act.
ITAT held that tax withholding provisions under section 195 of the Income-tax Act, 1961 (the Act) are not applicable to payments made by the Indian head office to its foreign branch, as both are ‘residents’ according to the Indian Income-tax Act, 1961 and the relevant Double taxation avoidance agreement (the tax treaty) between India and the US. Furthermore, sales made by the Indian HO to its foreign branch are eligible for deduction under section 10A of the Act and are therefore to be included in the ‘export turnover’ when calculating deduction under section 10A of the Act of the Act.
ACIT Vs. Symantec Software India P. Ltd. (ITAT Pune)- Based on the specific facts of the case, the Tribunal has reiterated that the fulfillment of the conditions of section 10A(2) is of utmost importance for claiming a deduction under section 10A. A reference to the new undertaking as expansion by the STPI would not dis-entitle the assessee from claiming a deduction under section 10A of the Act.
CIT v. EHPT India P. Ltd. (Delhi High Court)- Section 10A provides for deduction for profits derived from the export of software for a period of ten years. During the period of tax-holiday, it is desirable that the same method of computing the profits of the STP unit is adopted so that any distortion is avoided. We must however clarify that we are not to be understood as laying down as a proposition that in all cases arising under Section 10A, where the question of apportionment of common/indirect expenses between the taxable and the exempt units arises, the head-count method is the most appropriate method.
Commissioner of Income Tax, Cochin Vs Electronic Controls & Discharge Systems (P) Ltd [2011] 13 Taxmann.com 193 (Kerala High Court)- Benefit of deduction under Section 10A is not available in respect of sales made to a unit in Special Economic Zone even though such sales are considered as ‘deemed exports’ under the provisions of the Special Economic Zones Act, 2005.
CIT vs. Yokogawa India Ltd (Karnataka High Court)- The High Court had to consider two issues for AY 2001-02 & onwards: whether (i) the loss incurred by a non-eligible unit & (ii) the brought forward unabsorbed loss & unabsorbed depreciation of the eligible unit has to be set-off against the profits of the eligible unit before allowing deduction u/s 10A/ 10B.
Convergys India Services Pvt Ltd Vs DCIT (ITAT Delhi) – In the present case, we note that gain is not on account of fluctuation in foreign exchange relating to assessee’s export activities. The same is with respect to the external commercial borrowings. This cannot be termed as derived from the export activity of the assessee. The assessee’s reliance in this regard on section 10A(4) does not come to its rescue, as the said sub-section only provides the formula for computing profits derived from the export activity. First, the income or gain has to be derived from export activity, only then the computation formula can be applied.
The Karnataka High Court, in its recent ruling, in the case of CIT v. Expert Outsource Pvt. Ltd. held that deduction under section 10A of the Income-tax Act, 1961 is available to the assessee on conversion of existing Domestic Tariff Area (DTA) unit into a Software Technology Park (STP) unit.