IBM Global Services India Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle-11(1), Bangalore

ITA 3464/BANG/2004

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 5483 (ITAT-BANGALORE)
• Duration Of Justice: 19 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-05-2024
• Assessment Year: 2000-2001
• Appeal Filed On: 21-11-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation
• Section: 143(3); 80HH; 143(2); 72; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No. 3464/Bang/2004 Assessment Year : 2000-2001 M/s. IBM Global Services India Pvt. Ltd., 12, Subramanya Arcade, Bannerghatta Road, Bangalore – 560 029. PAN: AAACI4403L Vs. The Deputy Commissioner of Income Tax, Circle – 11(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Sharath Rao, CA Revenue by : Shri D.K. Mishra, CIT-DR Date of Hearing : 08-05-2024 Date of Pronouncement : 31-07-2024 ORDER PER BEENA PILLAI, JUDICIAL MEMBER The assessee company is in the business of export of software solution as well as maintenance services. For the relevant AY 2000-01, the assessee filed return of income declaring loss to the extent of Rs.28,55,17,275/-. Page 2 of 19 ITA No. 3464/Bang/2004 2. The case was selected for scrutiny and notice u/s. 143(2) was issued, based on which the details as called for in notice u/s. 142(1) were furnished by the assessee. The assessment was thereafter passed on 31.03.2003, u/s. 143(3) r.w.s. 144A of the Act. One of the disallowance made in the assessment order was denying exemption claimed u/s. 10A of the act on the ground that, the export turnover brought into India does not amount to 75 percent of the total turnover of the STP unit. It was submitted by the assessee that, it treated export credits of the bank account maintained by it in the USA as export proceeds and that, this a/c was operated with the approval of the RBI. However, it is submitted that the Ld.AO considered the net inward remittances into India from such account which was net of the onsite expenses incurred by the assessee from the US a/c and also net of the sub-contractor payments from such a/c to Indian subcontractors as “export turnover”. The Ld.AO was of the view that since these inward remittances were less than the threshold of 75% of total turnover, minimum exports required as per section 10A(2)(ia) were not fulfilled. 2.1 Aggrieved by the order of the Ld.AO, assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) vide its detailed order dated 29.04.2003 held that service rendered by sub-contractor outside India has no effect on the assessee’s claim of exemption u/s. 10A of the act and further held that assessee is entitled to exemption u/s. 10A in respect of its income from STPI units. Page 3 of 19 ITA No. 3464/Bang/2004 2.2 Aggrieved by the order of the Ld.CIT(A), the revenue filed appeal before this Tribunal vide ITA No. 3464/Bang/2004. The Hon’ble Tribunal vide order dated 31.10.2007 held as under: “The fact remains that the assessee has exported from STP units and the engagement of the sub-contractors by the assessee to whom assessee paid from its bank account maintained abroad, which only provided services to the assessee and have not exported anything by themselves and it would not be considered as exports unless provision of those services from one STP unit to another units that export is considered as exports within the meaning of the Act. Since, It is accepted that it is the assessee who had exported computer software, for which it was paid, the entitlement of exemption u/s 10A is satisfied.” 2.3 Aggrieved by the order of this Tribunal, the revenue filed appeal before the Hon’ble Karnataka High Court vide ITA No. 286/2010 raising the following substantial question of law amongst the other questions. (substantial question No. 5): “Whether the appellate authority were correct in holding that the assessee would be entitled to exemption under section 10A of the Act when the export (56.0056%) is less than 75% of the total sales as contemplated under section 10A(2)(1a) of the Act?” 2.4 The Hon’ble High Court disposed off the issue vide order dated 03.11.2020 by observing as under: “12............From perusal of section 10A(2)(ia), which has been quoted supra, it is evident that the undertaking which beings to manufacture or produce any article or thing on or after 01.04.1995, its export of such articles or thins are not less than 75% of the total sales. However, the Commissioner of Income Tax (Appals) has held that there is no provision under section 10A of the Act, which requires such a condition to be fulfilled and no finding in this regard has been recorded by the tribunal. Therefore, the order passed by the tribunal to the extent of fulfillment of the requirement under section 10A(2)(ia) of the Act cannot be sustained.” Page 4 of 19 ITA No. 3464/Bang/2004 2.5 The question therefore remanded for adjudication before this Tribunal by Hon’ble High Court relates to compliance u/s. 10A(2)(ia) of the Act i.e whether sales from STP units exceeded 75% of the total turnover during the relevant period as per the law applicable for relevant Assessment Year. 3. The Ld.AR submitted that the entire income earned by the STP units are from exports, and therefore 100% of the revenue becomes export turnover in the hands of the assessee. He submitted that, the assessee satisfied the requirement u/s. 10A(2)(ia) of the act. The Ld.AR submitted that the assessing officer went on a wrong footing that, only 56% of the revenue relates to export turnover as against the claim of 100% made by the assessee. 3.1 He submitted that, section 10A(2)(ia) as it prevailed for the relevant assessment year under consideration did not contain the definition of export turnover and the provision read as follows: “(ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;” 3.2 The Ld.AR submitted that, as per the above provision, the entire sales without considering any expenditure incurred or foreign inward remittances or any foreign exchange fluctuation etc. is to be treated as export turnover. He submitted that, the Ld.AO while considering the claim of the assessee ignored the Page 5 of 19 ITA No. 3464/Bang/2004 gross sales credited in the overseas bank account maintained by the assessee with the approval of RBI. He thus submitted that the condition required u/s. 10A2(ia) to claim deduction u/s. 10A stands satisfied. 3.3 The Ld.AR submitted that, the Ld.AO imported the definition of “export turnover” for the purposes of 80HHE for the year under consideration, without considering Explanation 1 to section 80HHE, that was applicable for the purposes of computing the “total revenue” generated by the assessee from the STP units through exports. 3.4 To bring out the difference between the provisions as it was applicable for the year under consideration, the Ld.AR drew our attention to the amendment that was introduced by Finance Act, 2000 w.e.f. AY 2001-02 to the section 10A, wherein for the first time, the definition of export turnover was introduced. The said relevant amended provisions, was applicable from AY 2001-02 reads as under: Income-Tax Act, 1961 - As Amended by Finance Act 2000 Income-Tax Act, 1961 - As Amended by Finance Act 2001 Special provision in respect of newly established industrial undertakings in free trade zones. 10A. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely: [(i) it has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year Special provision in respect of newly established undertakings in free trade zone, etc. 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Page 6 of 19 ITA No. 3464/Bang/2004 Income-Tax Act, 1961 - As Amended by Finance Act 2000 Income-Tax Act, 1961 - As Amended by Finance Act 2001 (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park;] [(ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;] (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation. The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub- section. [(3) The profits and gains referred to in sub- section (1) shall not be included in the total income of the assessee in respect of any [ten] consecutive assessment years, [* * *]beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things [* * *]. [* * *]] (4) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the [undertaking began to manufacture or produce such articles or things or computer software] in such free trade zone or export processing zone : [Provided also that the profits and gains derived from such domestic sales of articles or things or computer software as do not exceed twenty-five per cent of total sales shall be deemed to be the profits and gains derived from the export of articles or things or computer software :] Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. (2) This section applies to any undertaking which fulfils all the following conditions, namely :— (i)it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year— (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b)commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c)commencing on or after the 1st day of April, 2001 in any special economic zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction Page 7 of 19 ITA No. 3464/Bang/2004 Income-Tax Act, 1961 - As Amended by Finance Act 2000 Income-Tax Act, 1961 - As Amended by Finance Act 2001 allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the industrial undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub- section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction; (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) [or sub-section (3)] of section 74 and no deficiency referred to in sub-section (3) of section 80J, in so far as such loss or deficiency relates to the business of the industrial undertaking, shall be carried forward or set off where such loss, or, as the case may be, deficiency relates to any of the relevant assessment years; (iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I [or section 80-IA] [or section 80-IB]or section 80J in relation to the profits and gains of the industrial undertaking; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the industrial undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment years. (5) Where an industrial undertaking in any free trade zone has begun to manufacture or produce articles or things in any previous year relevant to the assessment year commencing on or after the 1st day of April, 1977, but before the 1st day of April, 1981, the assessee may, at his option, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income for the assessment year commencing on the 1st day of April, 1981, furnish to the [Assessing Officer] a declaration in or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii)it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1.—For the purposes of this sub- section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2.—The sale proceeds referred to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. [(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.] (5) The deduction under sub-section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed form,along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. Page 8 of 19 ITA No. 3464/Bang/2004 Income-Tax Act, 1961 - As Amended by Finance Act 2000 Income-Tax Act, 1961 - As Amended by Finance Act 2001 writing that the provisions of sub-section (1) may be made applicable to him for each of the relevant assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1981, and if he does so, then the provisions of sub-section (1) shall apply to him for each of such relevant assessment years and the provisions of sub-section (4) shall also apply in computing the total income of the assessee for the assessment year immediately succeeding the last of the relevant assessment years and any subsequent assessment year. (6) The provisions of sub-section (8) and sub-section (9) of section 80-I shall, so far as may be, apply in relation to the industrial undertaking referred to in this section as they apply for the purposes of the industrial undertaking referred to in section 80-I. (7) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, [before the due date for furnishing the return of income under sub-section (1) of section 139] [***], furnishes to the [Assessing] Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. [(8) References in sub-section (5) to any other provision of this Act which has been amended or omitted by the Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for the purposes of that sub-section, as if such amendment or omission had not been made.] Explanation. For the purposes of this section, (i) free trade zone means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section; [(ii) relevant assessment years means the ten consecutive assessment years referred to in sub-section (3);] [(iii) manufacture includes any (a) process, or (b) assembling, or (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,— (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub- section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction; (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub section (3) of section 74 in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years; (iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year. (7) The provisions of sub-section (8) and sub- section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. (8) Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, before the due date for furnishing Page 9 of 19 ITA No. 3464/Bang/2004 Income-Tax Act, 1961 - As Amended by Finance Act 2000 Income-Tax Act, 1961 - As Amended by Finance Act 2001 (c) recording of programmes on any disc, tape, perforated media or other information storage device;] [(iv) electronic hardware technology park means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce; (v) software technology park means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce; (vi) produce , in relation to articles or things referred to in clause (i) of sub-section (2), includes production of computer programmes.] the return of income under sub-section (1) of section 139, furnishes to the Assessing Officer a declaration in writing that the provisions of this section may not be made applicable to him, the provisions of this section shall not apply to him for any of the relevant assessment years. (9) Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. Explanation 1.—For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than fifty-one per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking : [Provided that nothing contained in this Explanation shall apply to any change in the shareholding of the company as a result of— (a) its becoming a company in which the public are substantially interested; or (b) disinvestment of its equity shares by any venture capital company or venture capital fund.] Explanation 2.—For the purposes of this section,— (i) "computer software" means,— (a)any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b)any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means; (ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force; Page 10 of 19 ITA No. 3464/Bang/2004 Income-Tax Act, 1961 - As Amended by Finance Act 2000 Income-Tax Act, 1961 - As Amended by Finance Act 2001 (iii) "electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce and Industry; (iv)"export turnover" means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub- section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. (v) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section; (vi) ”relevant assessment year" means any assessment year falling within a period of ten consecutive assessment years referred to in this section; (vii)"software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry; (viii)"special economic zone" means a zone which the Central Government may, by notification in the Official Gazette, specify as a special economic zone for the purposes of this section.] [Explanation 3.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.] 3.5 The Ld.AR submitted that the definition of “export turnover” introduced by Finance Act, 2001 specifically excluded expenditure incurred in foreign exchange in providing technical Page 11 of 19 ITA No. 3464/Bang/2004 services outside India. He further submitted that, legislature by way of Finance Act, 2000 w.e.f 1/04/2001 i.e; assessment year 2001-02, introduced the requirement to bring the export proceeds to India within 6 months from the end of the assessment year for the first time in section 10A. From the above, it becomes clear that there was no condition applicable for Assessment year 2000-01, to bring foreign exchange in India on account of the exports of sales. The Ld.AR also placed reliance on the CBDT Circular No. 794 dated 09.08.2000 to substantiate that the requirement to bring the export proceeds maintained by an assessee in a foreign bank into India within 6 months was an additional condition introduced by way of the Finance Act, 2000 made w.e.f. AY 2001-02. 3.6 Referring to the observations of Ld.CIT(A), upheld by this Tribunal vide order dated 31.10.2007, the Ld.AR submitted that any expenditure that is directly relatable in respect of income in the bank account outside India are clearly verifiable. He however submitted that, the exemption u/s. 10A is on the “export turnover” and not on the income. 3.7 Referring to the observations of Ld.CIT(A) at para 2.23, the Ld.AR submitted that admittedly there is no domestic sale that is identifiable as observed by this Tribunal in its order dated 31.10.2007. The Ld.AR submitted that profits from STP units have been tabulated and that assessee satisfies the requirement of section 10(2)(ia) of the act for the following reasons: Page 12 of 19 ITA No. 3464/Bang/2004 a) ‘income from exports’ should be more than 75% of the total turnover under section 10A(2)(ia) of the Act and not the 'inward remittance' b) The bank account maintained by the assessee outside India is undisputedly approved by RBI c) The payment made to the sub-contractors are towards the STP course of business. d) 100% of the sales of the STP units relates to export sales and no domestic sales has been made during the relevant year under consideration. 3.8 The Ld.AR submitted that the assessee filed revised working of the profits attributable to STP units, exports u/s. 80HHE and domestic sales to the Ld.AO as well as the Ld.CIT(A), which has not been disputed by the authorities at any point of time. 3.9 The Ld.AR submitted that the provisions of section 80HHE cannot be borrowed into section 10A of the act in peacemeal. He also submitted that the gross credits in the overseas bank accounts maintained by the assessee is with the approval of RBI and since all these receipts pertains to exports from India the conditions required to be satisfied as per section 10A(2)(ia) stands fully complied with. 3.10 On the contrary, the Ld.DR vehemently relied on the orders passed by the Ld.AO. He also submitted that the Ld.CIT(A) has not clearly recorded the any findings in terms of importing the definition of “export turnover” as per section 80HHE into section 10A(2)(ia) of the act. He submitted that even the Tribunal while passing the order dated 31.10.2007 is silent on this aspect. We have perused the submissions advanced by both sides in the light of records placed before us. Page 13 of 19 ITA No. 3464/Bang/2004 4. The assessee is a limited company carrying out services related to computer global. It has units under STPI located at Bangalore, Pune and Delhi and also units outside the STP catering to the main business of providing services globally. For the year under consideration, assessee has claimed deduction u/s. 10A of the act on the profits derived from export of computer software, programs and related materials. 4.1 Admittedly for the year under consideration, assessee earned income under 3 distinct heads: 1) STPI units covered u/s. 10A of the act 2) Export receipts as per section 80 HHE of the act and 3) Domestic sales 4.2 There is no dispute that assessee maintained foreign account with the approval of RBI and is allowed to receive export proceeds in the foreign account. From the assessment order, we note that, the Ld.AO denied exemption on various counts and this Tribunal decided the issues raised by the revenue on the relief granted by the Ld.CIT(A) in respect of calculation of export profits and gains earned from STPI units. 4.3 Against the Tribunal order, the revenue preferred appeal before the Hon'ble High Court and the Hon'ble High Court upon admitting the question of law reproduced hereinabove, returned the issue to this Tribunal to give a finding in respect of what would constitute the “export turnover” received by the assessee in Page 14 of 19 ITA No. 3464/Bang/2004 the foreign account. In other words, the Hon'ble High Court directed this Tribunal to verify whether the export proceeds of the STP units in the foreign account is to be considered on gross basis or on the net amount that was remitted to India. 4.4 The Ld.AO considered net of export proceeds that was remitted to India, thereby computing the percentage of export turnover pertaining to the STPI unit to be 56.056%. It is thus the contention of the Ld.AO that, the assessee does not satisfy the criteria of, ‘not less than 75% of the total sales’, and the deduction is to be therefore denied. 4.5 Before we delve into the issue that is remanded by Hon’ble Karnataka High Court, we analyse the reason for insertion of sub- section (ia) to clause (2) of section 10A: It is noted that as per EXIM policy during the relevant period, the units established in FTZ, EHTP and STP got special treatment by virtue of the fact that they exported their entire produce. However, in order to provide economic flexibility and allow the units to dispose of the export rejects and by-products, the units were allowed to sell 25% of their produce in the domestic market. In effect, such units could avail exemption for 5 years even in respect of profits from the 25% domestic sales allowed to them. 4.6 Further, it was also ensured that the units could avail tax exemption, only if the exports are substantial. Section 10A was accordingly amended with effect from assessment year 1996-97 to provide that in case of the units which commences Page 15 of 19 ITA No. 3464/Bang/2004 manufacture or production of any article or thing on or after 1-4- 1995, the tax holiday shall be available, only if its exports of such article or thing are not less than 75% of the total sales thereof during the previous year. 4.7 The amendment by introducing sub-section (ia) to clause (2) of section 10A stipulates that the exports should not be less than 75% of 'the total sales'. Now, sales can mean quantity sold or value of goods sold. Hence, the question arose whether the amendment imposes a turnover based or a quantitative restriction. The provisions of the Export-Import Policy, 1992-97 gives clue in this regard. It provides that 'the entire production of EOU/EPZ units shall be exported except 25% of the production in value terms may be sold in the Domestic Tariff Area when the use of indigenous inputs is more than 30% in value terms'. On the basis of the aforesaid provision, it appears that the section imposes a value based restriction and not a quantitative restriction. In other words, what is required to be satisfied as per sub-section (ia) to clause (2) of section 10A is that, the export turnover should constitute 75% of the total turnover, although in quantitative terms, the export quantity might be less than 75% of the total sale quantity. 4.8 Further, if one compares the language of section 10A with that of section 80HHC/80HHE that was applicable for the year under consideration. Section 80HHC/80HHE applies to a person/undertaking engaged in business of 'export out of India' [Section 80HHC(1)/80HHE(1)]. Whereas, section 10A applies to Page 16 of 19 ITA No. 3464/Bang/2004 an undertaking which 'exports' certain articles or things [Section 10A(2)(ia)]. The words 'out of India' are conspicuously absent from the provision of section 10A. Hence, it can be said that the legislature intends to consider 'deemed exports' as 'exports' for the purpose of this section. 4.9 It is noted that, section 10A for assessment year 2000-01, did not provide for definition of “export turnover”. The definition was introduced by way of finance Act 2001 w.e.f. 1.04.2001 relevant to assessment year 2001-02 in Explanation (2) to section 10A. The expression, ‘export turnover’ was defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange, but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India or expenses if any incurred in foreign exchange in providing technical services outside India. Therefore in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges. 4.10 Be that as it may, in absence of definition of the term “export turnover” in sec.10A, for assessment year 2000-01, the Ld.AO considered the definition of “export turnover” for the purposes of section 80HHE of the act that reads as under: “India “export turnover” means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with subsection (2), but does not include freight, telecommunication charges or insurance attributable to the Page 17 of 19 ITA No. 3464/Bang/2004 delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;” 4.11 While considering the above definition, the Ld.AO ignored the definition of 'total turnover' in Explanation (e) to section 80HHE that read as under:— 'Total turnover' shall not include — (i) any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (ii) any freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India; and (iii) expenses, if any, incurred in foreign exchange in providing the technical services outside India." 4.12 At this juncture, it is also relevant to note the Ld.AO failed to consider Explanation 1 to section 80HHE that stood for the relevant period and reads as under: “Explanation 1 — The said consideration shall be deemed to have been received in India where it is credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.” 4.13 Thus, it is seen that expenditure incurred in foreign exchange are to be excluded from ‘total turnover’ and what is excluded from “total turnover” is also excluded from “export turnover”. Thus, the export turnover, in the numerator must have the same meaning as the export turnover, which is a constituent element of the total turnover in the denominator. Page 18 of 19 ITA No. 3464/Bang/2004 We note that the revenue in the present facts of the case, computed “export turnover” based on the definition of export turnover as appearing in section 80HHE in peacemeal, without considering the other related provisions. Even otherwise section 10A(2)(ia) compares the export proceeds with total sales. It is not in dispute that, section 10A is a beneficial section like section 80HHE. Section 10A is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that is provided by section 80HHE, by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act. In any event, the EXIM policy explained hereinabove is clear on this aspect. 4.14 In this regard, Hon'ble Supreme Court in the case of K.P. Varghese v. ITO reported in (1981) 131 ITR 597 held that, a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. reported in (1991) 62 Taxman 480, with respect to relief for new industrial undertaking under section 15C of the Income-tax Act, 1922, held that, such provisions should be construed liberally. A literal Construction which defeats the very purpose of enacting the provision should be avoided. Thus The definition of the "export turnover", in sec. 10A excludes from its ambit any expenses incurred in foreign exchange in providing technical services outside India for the year under consideration. Page 19 of 19 ITA No. 3464/Bang/2004 We therefore direct the Ld.AO to compute the 75% of total sales on gross receipt u/s. 10A(2)(ia) of the Act. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 31 st July, 2024. Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 31 st July, 2024. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order Assistant Registrar, ITAT, Bangalore