January 2023

Export Loss Set off Scope of section 10B Section 10B provides for deduction and not exemption Loss sustained in unit covered by section 10B can be set off against other business income.

K. B. Bhujle, Advocate

65. Principal CIT vs. Sandvik Asia Pvt. Ltd.
[2022] 449 ITR 312 (Bom.)
A.Y.: 2005-06
Date of order: 8th September, 2022
Section: 10B of ITA, 1961

Export Loss Set off Scope of section 10B Section 10B provides for deduction and not exemption Loss sustained in unit covered by section 10B can be set off against other business income.


The assessee-company was a part of the S group being a subsidiary of S Sweden, which was the holding company of the assessee. For A.Y. 2005-06, the assessee had made a provision for finished goods obsolescence of Rs. 19,52,000. However, this amount was disallowed by the AO, who held that the closing inventory had to be valued either at cost price or at market price. In its return of income, the assessee adjusted the loss of its newly set up export-oriented unit against the profits earned by its other units. In the return of income the assessee claimed that it had made a payment of Rs. 4,41,44,973 on account of management services to S Sweden. The AO referred the matter to the Transfer Pricing Officer (TPO). The TPO, however, was of the view that there was no evidence with regard to the receipt of services by the assessee and, therefore, made an adjustment of Rs. 4.41 crores. The Commissioner, held, based upon the additional evidence that the management services were rendered to the assessee. The AO accordingly deleted the addition of Rs. 4,41,44,973 based on the transfer pricing adjustment made by the TPO.

The Tribunal, in the appeal filed by the Revenue, upheld the order of the Commissioner. The Tribunal allowed the set off of losses claimed by the assessee.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

i) After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of profits and gains derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. There is no provision in section 10B by which a prohibition has been introduced by the Legislature on setting off a loss sustained from one source falling under the head of profits and gains of business against income from any other source under the same head. On the other hand, there is intrinsic material in section 10B to indicate that such a prohibition was not within the contemplation of the Legislature.

ii) A reading of the clauses of the agreement made it quite clear that the management services could be rendered by all or any of the S companies and such operations would be on behalf of S Sweden. The Tribunal committed no error in deciding the issue in favour of the assessee especially when the management service fees received by S Sweden had been taxed b

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