Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A
The assessee was in the business of export of software solutions and maintenance services. For the A.Y. 2000-01, the assessee claimed exemption u/s 10A. The A.O., inter alia, held that the assessee had a software technology park unit as well as other units and all overhead expenses had been charged in relation to the other unit and no expenditure was claimed in respect of the software technology park unit for which exemption u/s 10A had been claimed. He also held that the assessee had not fulfilled the stipulations laid down in the Software Technology Parks of India Scheme or the conditions laid down by the Reserve Bank of India regarding maintenance of separate accounts and other conditions and, therefore, the assessee was not entitled to exemption u/s 10A. He further held that the audit report did not exclude payment made to sub-contractors or other expenses incurred abroad. He held that the turnover brought into the country was 56.056% which was below 75% as stipulated u/s 10A. Accordingly, he disallowed the exemption u/s 10A.
The Commissioner (Appeals) allowed the appeal partly. The Tribunal dismissed the appeal preferred by the Revenue and allowed the appeal preferred by the assessee in part.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:
‘i) Section 10A is a special provision in respect of newly-established undertakings in free trade zones. The exemption is dependent on fulfilment of the conditions mentioned in sub-section (2). Sub-section (2) does not contain any requirement with regard to maintenance of separate accounts. Wherever the Legislature intended to incorporate the requirement of maintenance of either separate accounts or separate books of accounts, it has expressly said so. The requirement of maintenance of separate accounts has been provided in the STPI registration scheme and no consequences for non-compliance therewith have been prescribed. Therefore, the requirement is directory.
ii) From a perusal of section 10A(2)(ia) it is evident that it applies to an undertaking which begins to manufacture or produce any article or thing on or after 1st April, 1995 and whose exports of such articles or things are not less than 75% of the total sales thereof during the previous year. Thus, the total export has to be not less than 75% of the total sales.
iii) The A.O. in his remand report to the Commissioner (Appeals) had stated that the assessee had been able to bifurcate the software technology park receipts, section 80HHE receipts and domestic receipts. The direct expenses relating to domestic receipts and export receipts had also been segregated and direct expenses of export turnover were apportioned on the basis of the percentage of turnover of the software technology park unit and section 80HHE receipts.
iv) The Commissioner (Appeals) had concluded that since the assessee had identified the turnover relating to the software technology park units and there was a reasonable basis for quantifying direct and indirect expenses pertaining to the software technology park units, the income pertaining to the software technology park units and therefore, exemption u/s 10A could be worked out. The Tribunal had held that the assessee had units spread over various parts of the country and even abroad, and hence the only plausible method of reasonably allocating the overhead expenses was by relating them to the turnover. The Tribunal had upheld the order to the extent of Rs. 68,72,88,748 holding this to be a reasonable figure. These concurrent findings of fact were based on meticulous appreciation of evidence on record. The Tribunal had rightly held that the allocation of the overhead expenses had to be made on the basis of the turnover.
v) The Commissioner (Appeals) had held that the sub-contractors had given software support activity to the assessee and not to the customers of the assessee. The employees of the sub-contractors operated from the software technology park unit itself and the sub-contractors had claimed exemption u/s 10A on the basis of the foreign inward remittance certificate, which had no bearing with regard to the assessee’s claim to exemption u/s 10A. The question of double deduction did not arise.
