Understanding Section 10 with latest case laws Part-III

The most important & disputed clause under section 10 is exemption allowed to STPI and SEZ under clause 10A, 10B & 10AA. However,  from FY 2011-12, the exemption is no more allowed to STPI and EOU units, however continued to allowed to SEZ Units. Still the section requires discussion for pending cases.

We had earlier discuss in detail about the concepts of exemption of section 10 along with various case laws earlier in part –I & part - II. In case you want to refer, the part –I & II, please click on the link below:

Understanding Section 10 with latest Case Laws Part-II

Over a period of time, there are number of judgements comes from various levels of courts from different locations of India and hence it is very important to know the same for the correct treatment of exemption of section 10.

· In the case of American Express (India) (P) Ltd. v. JCIT, 79 DTR 127, it was held that Loan was given to the employees during the course of carrying on of the assessee’s business. There is also a direct nexus between interest paid and interest received by the assessee. Therefore, deduction u/s. 10B is allowable in respect of interest earned on housing loans.

· Activity of cutting marble blocks and converting into the polished slabs and tiles constitutes manufacture or production and therefore assessee was entitled to exemption u/s. 10B. Refer, Grace Exports v. ITO, 79 DTR 361.

· In the absence of any notification or official document suggesting that either the Inter Ministerial Committee or any other officer or agency was nominated to perform the duties of the Board constituted under s. 14 of Industries (Development and Regulation) Act, 1951 for the purposes of approvals under s. 10B, mere approval for the purpose of STP does not entitle the unit to benefit under S. 10B.Appeal of revenue was allowed. Refer, CIT v. Regency Creations Ltd, 79 DTR 24.  Similar judgment was pronounced in the case of CIT v . Technovate E Solutions P. Ltd, 354 ITR 110.

· Rajkot ITAT in the case of Saffire Garments v.ITO, 151 TTJ 114 held that The special bench was constituted to decide the following question , “Whether the proviso to section 10A(IA) of the Income-tax Act which says that no deduction under section 10A shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under section 139(1) is mandatory or merely directory?” The Tribunal held that provisions of section 10A(IA) are mandatory and not directory ; deduction under section 10A cannot be allowed to an assessee who does not furnish return on or before due date specified under sub section (1) of section 139. The charging of interest is held to be mandatory. When one of the consequences for not filing return of income within due date prescribed under section 139(1) is mandatory then other consequences cannot be held to be directory and the same is also mandatory.

· Conversion of DTA to STP is allowed hence there is no splitting up or reconstruction of existing business assessee is entitled to exemption.  Refer, Cadtrium Engineering Solutions (P) Ltd v. ITO, 78 DTR 347.

· Mumbai ITAT in the case of Capital Foods Exports (P.) Ltd. v. ACIT held that Assessee, engaged in business of manufacturing and export of processed food products, claimed deduction under section 10A. It was held that In terms of provisions of section 10A, unless foreign remittances are credited in the account of the assessee or at least credited in account of bank, it cannot be said that export proceeds have been received in or brought into India. Since certificate issued by Bank did not state that foreign remittances had been credited in its account within period of six months so that it could be considered as having brought into India, assessee’s claim was rightly rejected.

· Provisions of section 10A are no longer provisions which provides for excluding an income from total income of an assessee (exempt income) but which envisages and allows a deduction of profits and gains specified therein. Refer, Opus Software Solutions Ltd. v. ACIT , 139 ITD 427.

· Finding of fact of Tribunal based on material on record to the effect that the STP unit was not reconstruction of existing unit so as to be hit by s. 10A(2)(ii) and that the lower authorities were not justified in denying relief under s. 10A only because assessee did not maintain separate accounts for old and new units not being perverse, no interference was called for – Material produced by the assessee would clearly show that the STP unit was established with plant and machinery and assets purchased after 31st March, 1996 only and the staff was also recruited and the earlier establishment also continued to work with the machinery that was purchased prior to 31st March, 1996. Refer, CIT v. Fusion Software Engg. (P) Ltd, 79 DTR 130 .

· The assessee purchased new plant and machinery , out of 70 employees only 8 were from the earlier concern, there was no diversion of funds .The finding of CIT(A) as well as Tribunal and other facts and circumstances of the present case, make it clear that all these questions are relating o questions of facts and there is a concurrent finding of facts recorded by CIT(A) as well as Tribunal. No substantial questions of law involved appeal dismissed.  Refer, CIT v. Sagun Gems (P) Ltd, 253 CTR 614(Raj)(High Court).

· In case of conversion of proprietorship into partnership , Partnership entitled to exemption. Refer Circular No.7 of 2003, dated 5-9-2003 and  beneficial circular binding on the Revenue.   Refer, CIT v. Bullet International, 349 ITR 267.

· Section 10A provides for an exemption and not merely a deduction even after the amendment by the Finance Act, 2000, as it has been retained in Chapter III of the Act notwithstanding the change in the language of sub-s (1) hereof and therefore, current loses as well as brought forward losses of the non EPZ unit cannot be deducted or reduced from the profits of EPZ unit for computing the deduction under s. 10A. Refer, CIT v. Tei Technologies (P) Ltd, 78 DTR 225.

· Exemption u/s. 10A has to be computed without setting off of the loss from the trading unit against the profits of the export oriented unit entitled to deduction u/s. 10A. Refer, CIT v. Schmetz India (P) Ltd, 79 DTR 356.

· Gross profit cannot be reduced by applying the provisions of section 10A (7),read with section 80IA(10)( S.80IA (10) ). Refer, CIT v. Schmetz India (P) Ltd, 79 DTR 356.

· In the case of CIT v. Western Outdoor Interactive P. Ltd, 349 ITR 309, it was held that Section 10A exemption is allowable in case allowed in earlier years and there is no change in the business.

· As per Supreme Court, assessee’s claim for exemption has been rejected without examination of the transaction in detail and the nexus between the interest and industrial undertaking. Therefore, impugned judgment is set aside and the matter is remitted to the Tribunal for deciding the same afresh after examining the transaction in question and giving opportunity to the assessee to produce relevant documents in support of the transaction. Refer, India Comnet International v. ITO, 79 DTR 303.

· As per Delhi High Court, Reimbursement of expenses incurred in obtaining ISO certification, relating to rent satellite charges, printing, stationery corporate charges paid form sister concern is entitled to exemption. Refer, CIT v.Perot Systems TSI India Ltd, 349 ITR 563.

· Determination of quantum of profits derived by undertaking from exports. General principles--Interest on monies in fixed deposit with bank for availing of credit facilities is allowable if part of a normal business arrangement by bank for extending non-fund based credit facilities to its constituents and not mere collateral security. Further, interest on fixed deposits and bank accounts on surplus funds not derived from assessees business and to be excluded. Sales tax refund and excise duty drawback not derived from business, as flows from Government policy and Profit from sale of scrap is assessees business direct source of profit. For Canteen recovery, Assessing Officer to verify and allow relief to extent amount went to reduce expenditure already claimed and allowed and Fine from the workers not integral part of assessees business and Discount, If not an independent receipt but only reduces purchase cost to that extent part of profits derived from eligible business. Refer, Tessitura Monti India P. Ltd. v. ITO, voL 22 Pg 329.

· Court held that when computing the relief under section 10A of the Income-tax Act, 1961, the expenditure incurred by the assessee should be excluded from the total turnover if they are reduced from the export turnover. Refer, CIT v. Samsung Electronics Co. Ltd, 350 ITR 65.

· Assessee having two units, one of which qualifying for exemption. Apportionment of income and expenditure on basis of head-count of employees in two units. Method consistently used and accepted by department is not to be disturbed. U. K. company providing training to employees of assessee in India. Payment for services rendered by U. K. company. Technical services is not provided outside India. Expenses relating to technical services not to be deducted. Satellite charges not telecommunication charges to be excluded from export turnover. Refer, Wills Processing Services (India) P. Ltd. v. Dy. CIT, 21 ITR 1/ 151 TTJ 555.

· Bangalore ITAT in the case of Karle International (P.) Ltd. v. ACIT held that Assessee had three units, two were section 10B eligible units and one was non- eligible unit. There were losses incurred in eligible units during the year which were sought to be set-off from profits of non-eligible unit. It was held that losses of eligible units during tax holiday period could not be allowed to be set-off against income of non-eligible units as per provisions of S. 10B(6) allow such losses to be kept in suspense to be set-off only after tax holiday period is over. Therefore the claim of set off made by assessee was disallowed. Appeal of assessee was dismissed.

· Loan of money in foreign currency to foreign subsidiaries--Domestic prime lending rate not applicable and International rate, LIBOR, to be taken as benchmark. Assessee having an arrangement for loan with bank for less than 4 per cent. but for loans to associated enterprises charging 4 per cent. Interest. Assessee profits exempt under section 10B. No case that assessee would benefit by shifting profits outside India. No adjustment for arms length price warranted. Refer, Cotton Naturals (I) P. Ltd. v. Deputy CIT (Delhi), VOL 22 PG 438.

· Allocation of expenses among units--Expenses attributable to any other unit or head office expenses which have no relevance to industrial undertaking not to be deducted. Expenses relating to operations at head office were not connected to running of units not to be allocated. Other common expenses to be allocated, Research expenditure not to be allocated to units claiming deduction unless there was nexus & No interest expenditure claimed for investment in unit, hence Expenditure not to be allocated on common expense basis. Refer, Hindustan Unilever Ltd. v. Additional CIT (Mumbai), VOL 22 PG 737.

· Unabsorbed depreciation of other undertakings cannot be set off against profits of such undertaking. Refer, CIT v . Cheslind Textiles Ltd , 354 ITR 29.

· Assembled machines partially disassembled for proper packaging for export, transportation and installation. Assessee entitled to exemption. Refer, ITO v. Aar Ess Exim P. Ltd. (Delhi), VOL 25 PG 14.

· Assessee entitled to deduction in respect of profits of eligible units and set-off of loss sustained by other unit against normal business income and Provisions of section 14A not attracted. Refer, Sandoz P. Ltd. v. Deputy CIT, VOL 25 PG 347.

· Software developed transmitted to foreign countries through internet cannot treated as bogus transaction. Refer, CIT v. Nova Petrochemicals Ltd.

· The assessee established three units and claimed deduction u/s 10A. The Revenue denied the deduction on basis of approval letter issued by authority of Software Technology Park stating that, these units were to be considered as part of existing units. On other hand, Tribunal found that all three units had fulfilled conditions u/s.10A, and therefore, allowed deduction holding those units as separate and independent production units, and not as mere expansion of existing unit. Since the decision of the Tribunal was based on finding of fact, no interference was required. Refer, CIT v. Patni Computer Systems Ltd. 215 Taxman 108.

· Where the assessee followed head count method of accounting for computing deduction u/s 10A, which had been accepted by revenue in earlier years, it could not be disallowed in relevant assessment year. The expenditure towards insurance, freight and communication incurred in foreign exchange, which do not pertain to delivery of goods out of India and satellite link charges and technical service fee are not deductible from export turnover. Refer, Willis Processing Services (I) (P) Ltd. DY. CIT, 57 SOT 339.

· The assessee software company carried out deemed exports by raising bills on local parties and received sale proceeds in convertible foreign exchange thereby claimed deduction on same under section 10A. On ground that deemed exports are exports as per EXIM policy. On appeal Tribunal held that that deduction under section 10A is to be allowed only when foreign exchange is received on export of software and EXIM policy cannot overrule Income- tax Act which is a separate code in itself. In view of same claim of assessee could not be allowed Further, Assessing Officer excluded foreign tax (VAT/GST) collected from customers from export turnover as well as from total turnover, thereby, granting lower deduction under section 10A to assessee a STP unit, on ground that tax collected was subsequently remitted to government. the Tribunal held that once this sum is not included in export turnover then the same cannot be included in the total turnover.. Refer, Wipro Ltd. v. Dy.CIT, 143 ITD 1 (Bang.)(Trib.).

· Expenses reduced from export turnover were also to be reduced from total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A. Refer, Bearing Point Business Consulting (P.) Ltd. v. DCIT, 57 SOT 244 (Bang.)(Trib.).

· Ahmedabad ITAT in the case of DCIT v. Tyco Valves & Control India (P.) Ltd., held that The Assessing Officer rejected the assessee's claim holding that the assessee had employed used machinery value of which exceeded 20% of total value of machinery employed by assessee. It was noted from records that the claim u/s 10B was allowed in the past and the year under consideration was found to be 5th year of claim. There was no evidence on record establishing that assessee had purchased used machinery during relevant assessment year. Held in order to claim exemption u/s 10B, assessee has to prove its eligibility in initial year of production only and not in every year of claim. 

· Whether when EoU Unit acquires whole business of medical transcription and claims deduction u/s 10B, benefit of Sec 10A allowed by higher appellate forums is legally sustainable - YES: Madras HC 

· Whether while claiming deduction under section 10A, assessee is compulsorily required to claim depreciation under section 32 - NO: ITAT 

· THE issues before the Bench are - Whether the benefit available u/s 10B is an exemption or a deduction; Whether the benefit u/s 10B can be allowed only in case an assessee is indulged in activities as pre-determined under the statute; Whether u/s 10B, which is a clear exemption provision, unless the assessee is in a position to show any ambiguity in the provisions of the Act, there can be any liberal interpretation given to the provisions of the Act, for the purpose of granting relief to the assessee and Whether an assessee is entitled for exemption u/s 10B with respect to receipts from training activity, when no foreign inward remittance has taken place. And the verdict goes against the assessee. Madras HC.

· The assessee, a 100 % EOU, commenced commercial production in AY 1992-93 and was entitled to claim exemption u/s 10B(3) in any 5 consecutive assessment years falling within the period of 8 years. The assessee did not claim a deduction in the first 3 assessment years as there was a loss and claimed it for the first time in AY 1995-96. The eligibility period was upto AY 1999-2000. With effect from 1.4.1999, the period of exemption prescribed u/s 10B(3) of 5 years was substituted by 10 years. The assessee claimed that it was entitled for exemption u/s 10-B for a further period of two years i.e. AY 2000-01 and 2001-02. Thereafter, w.e.f. 1.4.2001, s. 10B was substituted by the Finance Act, 2000. The assessee’s claim was resisted by the AO & CIT (A) on the ground that the benefit applied only to “new undertakings” set up after that date and not to existing units. HELD by the Special Bench. Refer, Maral Overseas Ltd vs. ACIT (ITAT Indore Special Bench) .

· THE issue before the Bench is - Whether when Revenue had issued notice against the assesssee for reopening of assessment on the ground that deduction under Section 10B had resulted in underassessment of the assessee’s income, and the deduction on account of deferred revenue expenditure being expenditure on technical know-how, was inadmissible and should have been disallowed, it amounted to tangible material which had live link to validate a legitimate formation of opinion. And the verdict goes against the Revenue. Delhi HC.

· THE issues before the Bench are - Whether the action of Finance Minister to move a bill seeking amendment of the SEZ Act, which comes under the domain of Ministry of Commerce, lacks legislative competence; Whether it is a settled principle that there can be no permanent tax exemption or incentive in fiscal legislation; Whether a roadmap to end the tax exemption is not a condition precedent for the Parliament to introduce sunset clause; Whether Doctrine of Promissory estoppel and Legitimate expectation are the offsprings of equity and flexible in nature; Whether there is a difference between the doctrine of promissory estoppel and Doctrine of Legitimate Expectancy and Whether the former is based on a legal relationship and constitutes a superior relief. And the verdict goes against the assesses. Refer, Karnataka HC.

· The assessee had two undertakings, one of which was a SEZ unit and the other which was a STPI unit. Both units were eligible for deduction u/s 10A. By the Special Economic Zone Act, 2005, s. 10AA was inserted w.e.f. 10.2.2006 to provide deduction in respect of units established in SEZs. By the same Act, sub-sec (6) was inserted in s. 115JB to provide that the profits of an SEZ unit would not be liable to MAT. By the Finance Act, 2007, clause (f) to explanation (1) to s. 115JB (2) was amended w.e.f. 1.4.2008 so as to delete the words “sections 10A or 10B” though sub-sec (6) of s. 115JB was retained. The AO & CIT(A) held that the effect of the deletion of the reference to s. 10A & 10B in s. 115JB meant that the units which were eligible for s. 10A & 10B deduction were no longer exempt from s. 115JB and only units which were eligible for s. 10AA deduction would be exempt from s. 115JB. On appeal by the assessee, HELD allowing the appeal. Refer, Genesys International Corpn. Ltd vs. ACIT (ITAT Mumbai).  

· Two issues where before the High Court for AY 2001â€02 & onwards, (i) Whether the loss incurred by a non-eligible unit & (ii) whether the brought forward unabsorbed loss & unabsorbed depreciation of the eligible unit has to be setâ€off against the profits of the eligible unit before allowing deduction u/s 10A/ 10B. Held that:

(a) S. 10A allows deduction “from the total income”. The phrase “total income” in s. 10A means “the total income of the STP unit” and not “total income of the assessee“. Consequently, s.10A deduction has to be given before computing the “profits & gains of business” under Chapter IV.

Though s. 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III and was not moved to Chapter VI-A. The result is that even now s. 10A is in the nature of an “exemption” provision and the profits of the eligible unit have to be deducted at source level and do not enter into the computation of income.

(b) S. 10A(6) as amended by the FA 2003 w.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday. This amendment does not militate against the proposition that the benefit of relief u/s 10A is in the nature of exemption with reference to commercial profits. However, to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that a notional computation of business income and the depreciation should be made for each year of the tax holiday period. Such loss is eligible to be carried forward. But, as the income of the 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Refer, CIT v Yokogawa India Ltd. (Karn) (High Court)

· The CBDT has issued a Circular dated 16th July 2013 giving its view on the controversial issue as to whether the profit of a unit eligible for deduction u/s 10A/ 10B has to be first set-off against the loss suffered by an ineligible unit before computing the available deduction u/s 10A/10B. The CBDT has expressed the view that as s. 10A/10B is now a "deduction" provision, first, the income/loss from various sources i.e. eligible and ineligible units, under the same head have to be aggregated in accordance with s. 70 of the Act and thereafter, the income from one ahead has to be aggregated with the income or loss of the other head in accordance with section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc, the same shall be allowed in computing the total income of the assessee.

Contrast with the view taken in Scientific Atlanta vs. ACIT 129 TTJ 273 (Che)(SB), CIT vs. Yokogawa India Ltd 341 ITR 385 (Kar), CIT vs. Black & Veatch Consulting 348 ITR 72 (Bom), CIT vs. TEI Technologies 78 DTR 225 (Del) and other judgements

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