Understanding section 10A with latest case laws : Part – IV.

Section 10A is now only effective only for SEZ units and now become obsolete sections for other EOU units STPI etc. However, the  exemption is still disputed at various levels for the company and hence there is necessity to have knowledge of the section.  Earlier we had discuss the same in details and for your reference the link is given below.

01. http://taxbymanish.blogspot.in/2012/02/understanding-exepmtions-of-income-tax.html

02. http://taxbymanish.blogspot.in/2013/04/understanding-section-10-with-latest.html

03. http://taxbymanish.blogspot.com/2013/09/understanding-section-10-with-latest.html

Given below few more recent case judgments which enable taxpayer  to justify his 10A claim before tax appellate.

·         Since, Telecommunication charges and foreign currency excluded from export turnover so To be excluded from total turnover. Refer, July Systems and Technologies P. Ltd. v. ITO, VOL 33 PG 643.  Same also confirmed in the case of 

(i)            C3 i Support Services P. Ltd. v. Assistant CIT, VOL 33 PG 174.

(ii)          Sumtotal Systems India P. Ltd. v. Assistant CIT, VOL 32 PG 446

(iii)         Systech Integrators India P. Ltd. v. ITO, VOL 31 PG 697 excludes also foreign travel expenses. 

(iv)         Cognizant Technology Services P. Ltd. .v. ACIT, 28 ITR 125.

(v)          Infotech Enterprises Ltd. v. Addl. CIT, VOL 30 PG 542 - Softlink charges booked under communication expenses not to be reduced from export turnover and Gains from foreign exchange fluctuation accrued on conversion of Euro EEFC account balance belonging to merged company into Indian rupees--Not to be reduced from profit of business.

(vi)         Intoto Software India P. Ltd. v. Asst. CIT, VOL 30 PG 504.

(vii)        Qualcomm India(P) Ltd. .v. Dy.CIT, 87 DTR 259 - Foreign exchange fluctuation gain arising on ECB loan raised by the assessee is not derived from the business of exports of computer software and therefore, does not qualify for deduction u/s. 10A. 

(viii)      Patni Telecom Solutions P. Ltd.; ITO, 23 ITR 534 - Held issue was covered by decision of Tribunal in ITA No. 354/Hyd/2006 for A.Y. 2000-01. Agreement, invoices and turnover showed that assessee did not recover travelling expenses and  internet charges ; there was no scope of exclusion of such expenses from the export turnover. Appeal was dismissed applying principles of consistency. 

·         Director's remuneration liable to be allocated among domestic unit and export oriented unit in ratio of turnover. Refer, Millipore (India) P. Ltd. v. Deputy CIT, VOL 33 PG 508.

·         A part of manufacturing activity of the assessee was outsourced. Raw material for preparation of snack items was not procured and supplied by assessee. Only some follow up action taken by assessee for packing and storing snacks was done by the assessee. Held, this did not amount to manufacture or producing an article or thing. Hence, assesseewas not entitled to exemption. Refer, Deepkiran Foods P. Ltd. .v. ACIT, 361 ITR 437.

·         Process of making jewellery amounts to manufacture and assessee is entitled to exemption under section 10A. Refer, CIT .v. Jayshree Gems and Jewellery, 362 ITR 272.

·         Brought forward losses of non-export processing zone unit cannot be deducted or reduced from profit/income of export processing zone unit. Refer, CIT .v. TEI Technologies Pvt. Ltd, 361 ITR 36.  .   Same also confirmed in the case of 

(i)            Deputy CIT v. Birla Soft India Ltd, VOL 32 PG 117.

(ii)          Medusind Solutions India (P) Limited .v. ACIT, 56 SOT 177 - Deduction to be allowed before set off of brought forward unabsorbed  losses from earlier years against the current year profits of the unit eligible for deduction under section 10A of the Act.   

(iii)         Avineon India P. Ltd. v. Deputy CIT, VOL 29 PG 404 - Deduction under section 10A to be computed prior to setting off losses of other industrial units. 

(iv)         Himatasingike Seide Ltd. v. CIT (SC) - Unabsorbed depreciation and business loss of same unit brought forward from earlier years have to be set off against the profits before computing exempt profits. 

(v)          CIT v. Ganesh Polychem Ltd, 216 Taxman 179 - Deduction under s. 10B is to be allowed on profits of current year without setting off unabsorbed depreciation and brought forward business losses

·         To claim section 10B one of the condition is that unit should not be formed by reconstructing existing business. Conversion of domestic area into EOU is not a reconstruction and hence eligible for deduction. Refer, Super Auto Forge Ltd. v. Addl. CIT, 365 ITR 318.   Same also confirmed in the case of 

(i)            CIT v. Foresee Information Systems P. Ltd., 365 ITR 355 where it was partnership converted into company - Effect of CBDT circular 1 of 2005 dated 6-1-2005 

(ii)          Woco Motherson Elastomer Ltd. .v. DCIT, 59 SOT 147 - S.10B: Export Oriented undertaking-Splitting up or reconstruction-Takeover of business of  undertaking on slump sale cannot be considered as reconstruction of business and concerned  department has not deleted undertaking the from the category of 100 percent EOU A part of business of MSSL comprising of an undertaking which was engaged in manufacturing metal and plastic from rubber was split from rest of business of MSSL and was sold to assessee. The assessee-company took over business of said undertaking on slump sale basis. The said undertaking was already registered as 100% Export Oriented Unit and was eligible for benefit under section 10B. The assessee, while filing returns of income for years under consideration, continued to claim benefit of section 10B which was rejected by the Assessing Officer on three grounds, firstly, business of assessee was set up by splitting existing business of MSSL, secondly, assessee company derived domestic turnover from articles or things produced by the undertaking and, therefore, it was not a  100% EOU and, thirdly, pre-used machinery received by assessee from MSSL far exceeded allowable limit of 20% of total value of plant and machinery used in business of undertaking. It was noticed from records that whole undertaking consisting of all assets and liabilities as a going concern was acquired by assessee-company and, thus, it could not be concluded that undertaking had been formed by re-construction of business already in existence or assessee-company carried on business with  transferred machinery or plant previously used by another person. Also, the mere fact that some part of sale was effected in domestic area would not disentitle assessee from claiming exemption under section 10B unless undertaking was deleted from category of 100% EOU by concerned Department. Therefore, the impugned order passed by Assessing Officer was to be set aside and assessee's claim  for deduction was to be allowed.

(iii)         Exemption cannot be denied on the ground of transfer of plant and machinery previously used to export unit. Refer, Nagesh Chundur .v. CIT, 358 ITR 521.

·         Whether where what was purchased by assessee as raw material and exported as handicraft items of  dried flowers and parts of plants were totally different items and commercially known as a different products, process involved in producing final product would be 'manufacture' in terms of Explanation 4 to section 10B. Refer, CIT .v. Deco De Trend, 360 ITR 1 (Mad.)(HC).

·         Conversion of raw honey procured in the market to finished product to specifications of customer. Refer,  Little Bee Impex v. Deputy CIT, VOL 32 PG 352.

·         Assessee is a partnership firm engaged in the business of manufacture and export of brass items. It  claimed 100 percent export oriented undertaking. Assessee has not provided any interest or remuneration to partners. Considering the deed of partnership AO excluded the interest and remuneration from overall profits of business to work out profit eligible for exemption under section 10B. CIT(A) held that as per the partnership deed it was not mandatory to provide interest and remuneration decided the issue in favour of assessee. Appeal by revenue the Tribunal held that since the clauses of partnership deed did not violate prescription of section 40(b),interest on capital and remuneration payable to partners were admissible for deduction and were to be considered for computing profits eligible for exemption under section 10B, therefore AO correctly excluded interest on capital and remuneration to partners from overall profits of business. Refer, ACIT .v. Meridian Impex, 60 SOT 47.

·         Assessee-company was engaged in blending of iron ore and carried out processes to make crude ore  useable to Ispat industries, which had a different appearance, use, name and chemical composition, it amounted to manufacture as per section 2(29BA), and therefore, deduction under section 10B could  not be denied on ground that no  Manufacturing activity was carried on by assessee. Where assessee had infused new capital in existing units and value of existing plant was much below threshold limit of 20 per cent required for substantial investment for setting up of new unit for purpose of section 10B, deduction could not be denied on ground that assessee had not set up a new unit.  Refer, Sesa Goa Ltd. .v. JCIT, 60 SOT 121.

·         Some members of partnership firm were director of a closely held company and some workmen working in assessee's firm deal were also working in said company. Though both were engaged in similar line of export, while company dealt with low end products, assessee firm dealt with high end products. Further firm was constituted with capital contribution by partner's personal fund . On the facts the court held that it could not be said that assessee-firm was a mere splitting up of business of company and, thus, relief under section 10B could not be denied. Refer, CIT .v. Deco De Trend, 217 Taxman 179.

·         The orders of the lower authorities were based on the order passed by the Tribunal for the AY 1994- 95 and there were no materials placed before the court to contend that the assessee had violated the conditions of licence, thereby disentitling the assessee to the benefit of deduction under section 10B. Hence, the assessee was entitled to the exemption under section 10B for all the four assessment  years.  Refer, CIT .v. Relco P. Ltd, 359 ITR 291.

·          Assessee was an export oriented undertaking engaged in printing and export of books. After receipt of manuscripts from abroad, assessee had to do typesetting,  ake/process/print on paper and then bind printed pages into books. Held, “books” are articles or things and the process involved by assessee was certainly production, if not manufacture, for purpose of deduction under section 10B. Refer, Replika Press (P.) Ltd. .v. DCIT, 218 Taxman 399.

·         Where the assessee raised an additional ground before the Appellate Tribunal claiming exemption for the enhanced business income under section 10A, held that the additional ground raised by the assessee before the Tribunal was to be admitted as there was a reasonable cause for not raising the  issue before the lower authorities. The issue related to treatment of disallowance by the Assessing Officer while computing the income to be considered for exemption under section 10A and those additions made by the Assessing Officer would form part of the assessed income. The inflated business income on account of disallowance of expenditure qualified for deduction under section 10A. Refer, Brigade Global Services P. Ltd. .v. ITO, 28 ITR 411. 

·         The assessee originally claimed relief under section 10B and alternative relief was claimed under section 10A. The Court held that what is prohibited in section 10A(2)(iii) is the transfer of used machinery and plant to a new business undertaking and forming of an industrial undertaking by splitting or reconstruction of the existing industrial undertaking. There is no specific prohibition or even inference to an industrial unit formed by transfer of the entire business. In 2001, KGISL, which enjoyed exemption under section 10A, transferred the entire undertaking  engaged in the export business of medical transcription along with all transcriptions contracts, books, records, all rights, all permits, all warrants, including computer software to the assessee. The transfer was recognised and allowed by the Software Technology Park of India. By reason of the transfer of the entire business, the employees of the transferor company engaged in medical transcription were also transferred and employed by the assessee. Held, the assessee was entitled to exemption u/s 10A.As the relief was granted under section 10A, the assessee was not entitled to the relief under section 80HHE. Refer, CIT .v. Heartland KG Information Ltd., 359 ITR 1.   

·         Unfinished handicraft goods and applied various processes and producing finished handicrafts-Eligible for exemption. Refer, ITO .v. Makers Mart, 94 DTR 385 (Jd.)(Trib.).

·         Since no export was made prior to date of registration under Software Technology Parks of India even though manufacture commenced before registration, the unit was entitled to deduction. Refer, CIT .v. Expert Outsource P. Ltd, 358 ITR 518.

·         Deduction was claimed by assessee on branch sales. CIT(A) and ITAT had denied deduction to assessee. Assessee claimed that branch sales be considered as head office sales and should be considered as exports. The Tribunal held that, section 10B speaks only of exports out of India, irrespective of the purchases. Term "exports out of India" was not defined in Act and it means transfer of goods physically out of territory of India. Concept of ‘deemed exports’ as claimed by assessee in export policy, cannot be imported into IT Act unless Act specifically says so. Assessee goods was not physically exported out of India. Condition precedent for claiming deduction u/s 10B was not satisfied by assessee. Assessee’s application was dismissed. Refer, Seven Hills Business Solutions v. ACIT, 56 SOT 32.

·         Exemption cannot be allowed on training fees received from professionals, who were neither employees nor in any way associated with business. Refer, Penta Media Graphics Ltd. v. ACIT, 217 Taxman 117.

·         Excess sale proceeds received by assessee due to exchange rate fluctuation in foreign currency is income from export activity and is eligible for exemption under section 10A./ Assessee is not entitled to exemption under section 10A in respect of deemed export to another  Special Economic Zone. Refer, ITO v Electronic Controls & Discharge Systems (P.) Ltd., 58 SOT 59.

·         Foreign currency expenditure incurred on software development is to be excluded from export turnover while computing deduction under sections 10A and 80HHE. Foreign currency expenses which are not related to onsite software development cannot be excluded from export turnover for purpose of computing deduction under sections 10A and 80HHE./ Where assessee had kept deposits with Bank and earned some interest income which has nothing to  do with business of assessee, same was to be treated as income from 'other sources', and benefit of deduction under section 10A could not be given to interest income. Refer, Polaris Software Lab v. Add.CIT, 58 SOT 81.

·         The Assessee Company is engaged in the business of software development, filed its return of income for the year declaring a total income of Rs. 4,36,600. Subsequently, the assessee filed revised return on March 31, 2005, declaring Rs. nil income after claiming deduction under section 10B. The assessment was completed by the Assessing Officer under section 143(3) read with section 147 determining the total income at Rs. nil. A. O. disallowed the claim of the Assessee. Before the Commissioner of Income-tax (Appeals), the authorised representative for the assessee submitted that the assessee had got a clarification from the Joint Director, Software Technology Park of India, Hyderabad, where they have clearly mentioned that they have the power to grant approval and their approval is eligible to get exemption under section 10B of the Act. on that basis CIT(A) allowed claim of assessee. where assessee did not produce necessary material before Assessing Officer for consideration on having identical issue, it was just and proper to set aside order of Commissioner (Appeals) and remit matter back to Assessing Officer for passing a de novo order. Refer, ITO v. Singularity Software (India) (P.) Ltd, 143 ITD 483.

·         Provisions of section 14A are not attracted in the case of the unit suffering losses eligible for deduction under section 10B and further the assessee is entitled to set off of loss of STP unit under section 10B against other business income. Refer, Sandoz P. Ltd. v. DCIT, 25 ITR 347.

·         Held, plants were supplied in the form of sub-assemblies and components after manufacturing them or after getting them manufactured in accordance with the prescribed specifications. These sub-assemblies and components were manufactured outside and transported to the exports processing zone and thereafter, certain operations were carried out and disassembling was done prior to export of the subassemblies and components to the ultimate destination. This process was required for containerisation and packing of these items on account of their size which was a necessary process for transportation and installation. The assessee was engaged in the manufacturing and assembling the plants which were disassembled for export. Hence, the assessee was entitled to deduction under s. 10B. Refer, Aar Ess Exim P. Ltd. v. ITO, 25 ITR 14.

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