WIPRO LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX*

/feedback.html /library.html WIPRO LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX* ITAT, BANGALORE A BENCH P. Mohanarajan, J.M. & N.L. Kalra, A.M. ITA Nos. 426 & 427/Bang/2006; Asst. yrs. 2001-02 & 2002-03 30th May, 2008 (2010) 34 DTR (Bang)(Trib) 493 Section 2(47), 5, 10A, 10A(3), 14A, 36(1)(vii), 45(1), 45(2), 80HHC, 80HHC, Expln. (baa), 80-IB, 145A Asst. Year 2001-02, 2002-03, Decision in favour of Revenue, Assessee Counsel appeared : K.R. Pradeep & B.K. Manjunath, for the Assessee : Etwa Munda, for the Revenue by the bench : ORDER The assessee as well as the Revenue have filed the appeals against the respective orders of the learned CIT(A). Since the issues involved are mostly common, therefore, these appeals are being disposed of by the single consolidated order. 1. The issues which have been raised in the present appeals have been considered by the Tribunal in the case of the assessee for earlier years. The learned Authorised Representative has filed a chart in which it has been indicated that most of the issues are covered by the decision of this Bench; hence, we will adjudicate the issues on the basis of the chart and the decision of this Bench in the case of the assessee for the earlier years. 2. First we shall take up the Departmental appeals. The first ground of appeal raised for the asst. yrs. 2001-02 and 2002-03 is general in nature and will stand disposed of in view of the findings to be recorded against other grounds of appeal. 3. Grounds of appeal Nos. 2 and 3 for both the assessment years are the same. The grievance of the Revenue is that the learned CIT(A) has erred in vacating the allocation of the corporate expenses made by the AO to s. 10A units forming part of the Wipro Technologies Division in the ratio of turnover of various business units and directing the /about.html Page 1 of 66 /contact.html

/feedback.html /library.html AO to consider only on such expenses for allocation as admitted by the assessee during the assessment proceedings. 4.1 The learned CIT(A) has followed the decision of the Tribunal for the earlier year and as per the Revenue, that decision has not become final and appeal before the High Court is pending. Before the AO it was contended that the company operates various business units, each of which runs as independent profit centers. Wipro Corporate units is one of such separate business units. Wipro Corporate is a set up which evolves the growth plans of the company and the manner in which the plans will be achieved. As per the assessee, the medium and long-term vision of the company is defined by the corporate and it evaluates various business opportunities and investment strategies. The ability to earn profit in the future in a competitive environment depends on the strategies and investment decision made on an ongoing basis. Wipro Corporate incurs expenses by way of salary, travel and other administrative overheads and interest to meet such business objectives and manages its own assets. Corporate also acts as a fund manager and mobilizes its funds for the purpose of business of the company and maintains current account with all business units. 4.2 The AO after considering the main contention of the assessee that each division works as a profit centre and further allocation of expenses is not desirable, observed that for better understanding of the activity, it will be useful to reproduce as to what has been reported by chairman and managing director in their address to the shareholders. According to the AO, the following was reported by the chairman and the managing director in their address to the shareholders : (1) 57 per cent of Wipro revenue and 82 per cent of operating income is attributable to Wipro Technologies. (2) During the year, the sales of the company grew by 34 per cent and the increase was attributable to 70 per cent, 3 per cent and 2 per cent in revenue of Global IT (Wipro Technologies), Indian IT services and products and consumer care and lighting. (3) The increase in manpower cost is primarily due to increase in the number of employees and due to annual compensation revision. Global IT added 3,287 employees. (4) Travel and allowances has increased by 42 per cent. The increase was primarily due to increase in the number of employees who were deployed at customer premises, frequency of travel and increase in all allowances (undertaken by Global IT). (5) Global IT has increased advertisement and sales promotion by 100 per cent. (6) During the year, the company invested Rs. 2,772 millions on fixed assets. These investments were primarily on creating software development centre for Global IT. Of the total investment, Rs. 2,301 million was invested in Global IT. (7) During the year on the company s recommendation shares have been allotted by Wipro Employees Reward Trust to employees of Wipro Technologies and Consumer Care and Lighting. No other subdivisions got any shares from WERT. The allotment of shares was based on the recommendations of the company alone. On account of the allotment of shares, the corporate has made a notional recovery of Rs. 4.2 crores from Wipro Technologies only. Needless to say WERT allotted shares to employees for their performance and the fact that employees of Wipro Technologies were identified for such incentives shows the focus of the company during the year. A perusal of the audited annual report shows that in each respect from investment to increase in manpower, sales and expense the primary focus has been of Global IT services. In the above context, it /about.html Page 2 of 66 /contact.html

/feedback.html /library.html would be equally imperative for the corporate to provide vision, leadership to the Global IT division in the proportion and manner. (8) The company has gone for ADR issue in the month of October, 2000. The prospectus defines the company as a leading Indian based provider of IT service globally. It would not be out of place to state that the confidence to float an ADR issue was directly linked to the recognition acquired by the company in the global market on account of its Global division s performance being controlled by Wipro Technologies. 4.3 The AO also analysed the P&L a/c of the corporate division and observed as under : (1) Out of sales income, an amount of Rs. 12.5 crores is shown as income by way of sale of property at Brunton Road. Actual cost of land has been debited. However, in the tax computation, a reverse entry of Rs. 10,52,96,825 was made and thus in the tax computation it was shown that no revenue has been earned on this transaction. (2) Notional recovery of Rs. 4.7 crores is made on account of allotment of shares of WERT (Wipro Employees Reward Trust). Out of this, Rs. 4.2 crores has been shown from Wipro Technologies, a unit whose income is exempt under s. 10A. By showing such notional recovery, the expenses in the corporate unit were reduced from Rs. 38 to Rs. 33.5 crores. However, while computing deduction under s. 10A, the recovery as shown from Wipro Technology was not reduced. Thus, benefit under s. 10A was increased to the extent of Rs. 4.5 crores and profit was shown in the corporate unit. (3) The other income of the corporate is on account of interest, dividend, rental income, recoveries from corporate totalling Rs. 40.3 crores. The expenses incurred are Rs. 33.5 crores for manufacture, administration and marketing head. As per AO, there was no requirement of spending a sum of Rs. 33 crores for earning the other income of Rs. 40.3 crores. (4) As per s. 14A, the expenses in relation to income exempt under the provisions of s. 10A is not allowable and adjustments are required to be done. The learned AO relied on the observations of the Bench in the case of the assessee for the asst. yr. 1997-98 vide which it was observed that if the expenses, which could be related to the income, which do not form part of total income, the same cannot be allowed. (5) The corporate unit made rent recovery and recovery for WERT. The WERT recovery was reversed for computation of s. 10A. Rent recovery was also not taken into consideration for computation of s. 10A implying that such account has not been considered while arriving at the profits of s. 10A. (6) The sum of Rs. 2.96 crores has been incurred in foreign currency and the break-up is as under : These expenses have been incurred by corporate for the employees attached to chairman s office but the purpose of such travel expenses have been undoubtedly connected to business associations outside the country. This primarily pertains to Global IT division. (7) Commission paid to various directors is fixed at a certain percentage of profit of the company. Since 82 per cent of such profit was attributable to Wipro Technologies, similar amount should have been booked to the account of Wipro Technologies. Except Shri Vivek Paul s commission, commission of other directors was not allocated by the assessee to Wipro Technologies on profit-sharing business. It is true that the entire commission of Vivek Paul is debited towards Wipro Technologies but according to the AO, 18 per cent of commission of Shri Vivek Paul should be booked to units of Wipro Infotech and the balance should be reduced from Wipro Technologies. Similarly, commission paid to other directors should also be allocated in the ratio of 82 to 18. (8) 57 per cent of the revenue is attributable to Wipro Technologies, therefore, the /about.html Page 3 of 66 /contact.html

/feedback.html /library.html common expenses allocation should have been done on the basis of percentage of revenue from Wipro Technologies. The AO in his order at p. 29 has mentioned that the assessee has agreed for allocation on only a part of the expenditure (related to salary, wages and allowance and director s fee) at 20 per cent to Wipro Technologies. (9) The AO from pp. 30 to 32 of the order has discussed various expenses covered under the commission expenses and has given his finding as to how the expenditure should be allocated. 4.4 The AO after considering the above referred observation, invoked the provisions of s. 14A to allocate the expenses towards income, which is claimed as exempt under s. 10A. 4.5 The learned CIT(A) has not discussed all the issues raised by the AO in his order. Before the learned CIT(A) it was contended that the issues stand covered in favour of the assessee by the decision of the Tribunal, Bangalore Bench. It was further submitted that the learned CIT(A) has deleted the additions for the asst. yrs. 1998-99, 1999-2000 and 2000-01 following the order of the Tribunal. After considering such submission, the learned CIT(A) directed as under : "I have perused the assessment orders for asst. yrs. 2001-02 and 2002-03 and the appellant orders for the earlier years. The order of the Hon ble Tribunal, Bangalore Bench in the appellant s own case in ITA No. 651/Bang/1994 for asst. yr. 1997-98 has held as under (paras 27.1 to 27.14 in pp. 76 to 92) : 27.12 In view of these entire facts of the case and, in the absence of any specific finding by the authorities below that the expenditure is incurred for the various units claiming exemption/deduction in an artificial way for allocating the expenses and that too on surmises is not justifiable. We are, therefore, of the opinion that the profits of the undertaking eligible for exemption under s. 10A is correctly worked out and no artificial working can be attributed thereto. The ground taken by the assessee, is therefore, allowed and the order of the CIT(A) is reversed on this aspect. The AO has stated that the Department is in appeal before the Hon ble Karnataka High Court on the above issue. There is no change in facts and the order of the Tribunal squarely covers the appellant s case. Being a covered issue, respectfully following the decision of the Tribunal, I vacate the allocation made by the AO in respect of expenses incurred by the corporate division. It is also seen that the appellant on its own has submitted that 20 per cent of certain expenses be considered for allocation to the various software units. I direct the AO to consider only such expenses for allocation as admitted by the appellant during the assessment proceedings." 4.6 During the course of proceedings before us, the learned Authorised Representative submitted that the above-referred issue stands covered by the decision of the Tribunal in the case of the assessee for the asst. yr. 2000-01. The learned Authorised Representative drew our attention to para 16 of the order dt. 22nd March, 2006 in ITA Nos. 669 and 804/Bang/2005. 4.7 On the other hand, the learned Departmental Representative stated that the order of the Tribunal has not been accepted by the Revenue. The learned Departmental Representative further pointed out that the AO has discussed in detail the various expenses and has shown that how the exemption under s. 10A has been claimed on /about.html Page 4 of 66 /contact.html

/feedback.html /library.html inflated figures. The learned Departmental Representative particularly drew our attention to the entry of Rs. 4.2 crores credited in corporate division and debited in Wipro Technologies but for computation of deduction under s. 10A, the same was not considered. Similar is the position in respect of rental recovery. 4.8 We have heard both the parties. For the asst. yr. 2000-01, the following grounds of appeal were raised in the appeal before the Tribunal : 1. The CIT(A) erred in directing the AO to delete 50 per cent of expenditure incurred by the corporate office to the s. 10A units amounting to Rs. 9,28,37,380. 2. The CIT(A) ought to have appreciated that since the corporate office is not involved in any activity and the income earned is mainly on account of interest and dividend hence all the other expenses which are not attributable to earning this income is required to be allocated to the other business units in view of s. 14A of the IT Act. The conclusion of the Tribunal is mentioned at para 16.4 of the order. The same is reproduced as under : "We have gone through the records and the submissions of both the sides on the above issue. From the submissions made by the Department, we find that no new point or reason has been brought to our notice to deviate from our stand in the earlier years orders mentioned supra other than submitting that the Department has not accepted the findings of the Tribunal. We agree with the learned Authorised Representative of the appellant that the issue stands covered by the decision of the Tribunal for the earlier years and the CIT(A) has rightly decided the issue in favour of the assessee. Accordingly, we dismiss the grounds of the Department and uphold the orders of the CIT(A) on this issue." 4.9 Sec. 14A as existing during the relevant assessment year mentioned that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It is true that by amendment through Finance Act, 2006, the AO has been authorized to determine such amount of expenditure in accordance with the method, which may be prescribed. However, for the assessment year under consideration, there was no power to the AO to determine the expenditure incurred in relation to income, which does not form part of the total income as per any prescribed method. 4.10 The learned Karnataka High Court in the case of Maharashtra Apex Corporation Ltd. vs. CIT (2006) 203 CTR (Kar) 45 : (2006) 286 ITR 585 (Kar) had an occasion to consider the deduction of notional expenditure from the gross dividend for computing deduction under s. 80M of the IT Act. The learned High Court observed that benefit under s. 80M is based on a net income and if no expenditure is incurred in earning the dividend income, then gross income would become the net income. There is no scope for any estimate of expenditure being made or any amount being deducted as notional expenditure. If no actual expenditure is incurred for earning dividend, then on estimate basis, expenditure cannot be deducted for the purpose of computing deduction under s. 80M. The learned jurisdictional High Court has referred to the decision of the Bombay High Court in the case of CIT vs. Central Bank of India (2003) 184 CTR (Bom) 225 : /about.html Page 5 of 66 /contact.html

/feedback.html /library.html (2003) 264 ITR 522 (Bom). In this judgment, the Bombay High Court held that rate of proportionate interest and expenses was applicable to income from interest on securities and not income from dividend. Reference was made on s. 20(1) of the IT Act. Sec. 20(1) of the IT Act permitted the deduction of proportional expenses for interest on securities. In the instant case, s. 14A does not authorize for the assessment year under consideration to estimate proportionate expenditure in respect of indirect expenses. Thus, only direct expenses can be considered for the purpose of computing income eligible for deduction under s. 10A and such expenses should be in relation to earn such income. 4.11 Prior to asst. yr. 2001-02, s. 10A permitted that profits and gains derived from industrial undertaking is not to be included in the total income of the assessee. However, with effect from asst. yr. 2001-02, s. 10A has been amended and now the deduction is to be allowed from the total income. Sec. 14A mentions that expenditure is not to be allowed in relation to income which does not form part of the total income under the Act. Now we have to consider as to whether the deduction allowed under s. 10A is part of the total income or not. 4.12 The learned apex Court in the case of CIT vs. Willamson Financial Services & Ors. (2007) 213 CTR (SC) 612 : (2008) 297 ITR 17 (SC) had an occasion to consider the meaning of word income. At p. 30, the apex Court observed that s. 10 groups in one place various incomes, which are exempt from tax. The incomes enumerated in s. 10 are not only excluded from the taxable income of the assessee but also from its total income. The learned apex Court further observed as under : "Exemptions granted under the IT Act cover incomes, which are exempt from charge and also from total income of the assessee whereas there are incomes, which are exempted from income-tax but they are to be included in the total income of the assessee. In the first case, we have agricultural income, which is exempt from charge as also from the total income whereas in the second case, we have incomes, which are exempted from the charge but they are included in the total income of the assessee, for example, at any point of time, certain incomes were exempted under ss. 86 and 86A but expressly declared by s. 66 to be included in the total income. Sec. 110 indicates incomes, which are free from the charge but which are required to be included in the total income of the assessee. The fact of including exempted income in the total income of the assessee is two folds. Firstly, the rate of tax is determined with reference to the total income and therefore, exempted income, which is included in the total income would affect the rate of tax applicable to the chargeable portion of total income". 4.13 Considering the language of s. 10A relevant for the assessment year under reference, it is clear that the profit of the undertaking, which is eligible for deduction under s. 10A, is not an income, which will not form part of total income. Hence, indirect expenses cannot be apportioned under s. 14A of the IT Act. However, what is exempt is the profit of the undertaking. The direct expenses relating to the unit for which deduction under s. 10A is being claimed are to be considered for the purpose of computing deduction under s. 10A as such expenses are required to be considered for ascertaining the profits and gains of the undertaking. /about.html Page 6 of 66 /contact.html

/feedback.html /library.html 4.14 Total income is defined in s. 2(45) of the IT Act. As per this definition, total income means the total amount of income referred to in s. 5 computed in the manner laid down in this Act. Sec. 5 of the IT Act says that total income of any previous year of a person will include the income, which is received or deemed to be received, accrues or arises or deemed to accrue or arise to him in India and accrues, or arises to him outside India. Such inclusion is in respect of a person, who is resident and in the instant case, we are concerned with an assessee, who is a resident. Sec. 14 of the IT Act says that all incomes for the purposes of charge of income-tax and computation of total income is to be classified under five heads of income mentioned in that section. Sec. 29 of the IT Act says that income referred to in s. 28, i.e., income chargeable under the head Profits and gains of the business is to be computed in accordance with the provisions contained in ss. 30 to 43D. As mentioned earlier, s. 10A as amended from the asst. yr. 2001-02 has provided the deduction from the total income in respect of profits and gains of the undertaking from the export of computer software. Thus, the income from the undertaking, which is engaged in the business of export of computer software is an income to be assessed under the head Profits and gains of business or profession and is to be reduced from the total income. Such income is chargeable to IT Act but no tax is payable in view of s. 10A of the IT Act. Since s. 14A is applicable for disallowing the expenses in respect of income, which is not includible in total income, therefore, s. 14A cannot be invoked when income is deductible under s. 10A. 5. Now, the next question arises is as to whether the income as shown by the assessee from such undertaking has to be accepted without making any adjustment. 5.1 As per s. 29 of the IT Act, profits and gains of the undertaking are to be computed with reference to ss. 30 to 43D of the IT Act. 5.2 Sec. 10A provides deduction of such profits and gains as derived by the undertaking from the export of article or thing or computer software. Hence to ascertain such profits, one has to consider all relevant expenses, direct as well as indirect, to arrive at deduction allowable under s. 10A. 5.3 Under s. 80-IA, such profits of the industrial undertaking as included in the gross total income is allowed as deduction, provided other conditions are satisfied. 5.4 The Delhi Tribunal in the case of Relaxo Rubber Ltd. vs. Dy. CIT (2006) 152 Taxman 47 (Del) (Mag) held that all relevant expenses are to be taken into account to arrive at the deduction allowable under s. 80-IA. 5.5 The Bangalore Bench in the case of Wipro GE Medical Systems Ltd. vs. Dy. CIT (2003) 81 TTJ (Bang) 455 had an occasion to consider the allowability of deduction under s. 80-IA. In that case, the assessee was having units in Bangalore and Goa. The Bangalore Bench held that there was no need for allocation of any expenses when the expenses were directly connected. What is required is the allocation of common expenses or indirect expenses. The assessee himself has shown the allocation of salaries, wages, bonus and commission. The working relating to the deduction was accepted. /about.html Page 7 of 66 /contact.html

/feedback.html /library.html 5.6 The Delhi Tribunal in the case of Dy. CIT vs. Catvision Products Ltd. (2004) 84 TTJ (Del) 241 held that only those expenses which have direct nexus with carrying on activity of undertaking is to be reduced for determining the quantum of deduction under s. 80-I and those expenses which have indirect or remote nexus should not be deducted. 5.7 The Chennai Bench in the case of Alstom Ltd. vs. Dy. CIT (2005) 95 TTJ (Chennai) 139 held that common expenses incurred by the assessee for marketing the industrial products should be proportionately distributed in respect of each industrial undertaking. This is to be done to reflect the correct profit derived from the industrial undertaking. 5.8 The apex Court in the case of Motilal Pesticides (I) (P) Ltd. vs. CIT (2000) 160 CTR (SC) 389 : (2000) 243 ITR 26 (SC) held that special deduction is to be allowed only on net income and not on gross income. Thus, amount of income, which is included in the total income, is to be considered for the purposes of deduction under s. 10A. The amount, which is to be included in the total income, is to be computed as per ss. 30 to 43A. Hence, all the expenses, which are necessary for earning income of the undertaking, are to be allowed as deduction for the purposes of computing income from that undertaking. 5.9 The jurisdictional High Court in the case of CIT vs. H.M.T. Ltd. (1993) 203 ITR 811 (Kar) had an occasion to consider the quantum of deduction admissible under ss. 80J and 80HH. The learned High Court held that for the purpose of ss. 80J and 80HH, profits and gains of new undertakings are not commercial profits but only such profits as are computed in the manner laid down under the Act in pursuance of s. 80AB, as if such undertaking was a separate assessee. From the above-discussion, it is clear that we have to compute the profit of the undertaking in accordance with the provisions of the Act and all the expenses to earn that income are to be considered. 5.10 The AO in his order at p. 27 has mentioned that the assessee has paid commission fixed at certain percentage of profit of the company. 82 per cent of the profit is attributable to Wipro Technologies, hence, the AO has allocated 82 per cent of commission of Wipro Technologies, whose income is exempt under s. 10A. Thus, the commission so received by the directors is directly attributable to the profits of the undertaking and accordingly, it has direct nexus to the profit of an undertaking. What the directors have received as commission is relatable to the profit earned from Wipro Technologies. The apex Court in the case of CIT vs. Canara Workshops (P) Ltd. (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) held with reference to s. 80E that profits of an industry eligible for deduction under s. 80E cannot be reduced by the losses of other unit, which is not eligible for deduction under s. 80E. The profits of the priority industry, which is included in the total income will qualify for the computation of deduction under s. 80E. In the instant case, we have to consider as to whether for the purpose of computing income of the undertaking exempt under s. 10A, we should consider the commission paid to the directors as percentage of profit for computation of profits and gains of such undertaking. The profit from the undertaking, which is qualifying for exemption under s. 10A is a source of making payment of commission to the directors. The Madras High Court in the case of CIT vs. Best & Co. (P) Ltd. (1995) 128 CTR /about.html Page 8 of 66 /contact.html

/feedback.html /library.html (Mad) 285 : (1995) 213 ITR 164 (Mad) held that bonus and commission paid to the directors is to be deducted for the purposes of computing deduction under s. 80E. Since the payment of commission is directly relatable to the profits, therefore, the AO has rightly allocated the commission expenditure in respect of undertaking whose income is deductible under s. 10A. 6. Another issue which arises before us is in respect of allocation of commonexpenditure. As per the AO, 57 per cent of revenue is generated by Wipro Technologies; therefore, he has allocated the common expenses in that ratio. It will be useful to reproduce the allocation of rates and taxes as made by the AO : "Rates and taxes Of an amount of Rs. 4,65,72,898 an amount of Rs. 3.1 crores pertains to Wipro Infotech and has been wrongly accounted in the books. Only the balance amount is being taken as common expenditure. (Net allocation of Rs. 1,55,72,898) for allocation." From the above, it is clear that when direct expenses of rates and taxes were known in respect of the unit whose income is deductible under s. 10A then otherwise allocation cannot be made. The allocation of common expenditure cannot be made on the basis of revenue generated. The assessee himself has agreed to allocation of 20 per cent of such expenditure and the same has been confirmed by the learned CIT(A). We, therefore, feel that allocation @ 20 per cent of common expenses is in order. Hence, direct expenditure disallowed by the AO is confirmed and disallowance of 20 per cent of common expenditure as confirmed by learned CIT(A) is upheld. 7. Grounds of appeal Nos. 4 to 6 for both the assessment years relates to the finding of the AO that receipts from the sale of scrap cannot be considered as profit derived by the undertaking whose income is deductible under s. 10A. 7.1 Before us, the learned Authorised Representative has submitted that the issues stand covered by the decision of the Tribunal in the case of the assessee for the asst. yrs. 1998-99 and 19992000. 7.2 On the other hand, the learned Departmental Representative supported the order of the AO. 7.3 The above referred issue stands covered by the decision of the Tribunal in the case of the assessee for the asst. yrs. 1998-99 and 1999-2000. The Tribunal while disposing of the appeal vide order dt. 21st June, 2005 in ITA Nos. 881, 882, 895 and 896/Bang/2005 [reported as Wipro Ltd. vs. Dy. CIT (2005) 96 TTJ (Bang) 211 Ed.] referred to the following observations made by the Tribunal while deciding the appeal of the assessee for the asst. yrs. 1998-99 and 1999-2000 : "4.5 We have gone through the records and the submissions made by both sides. We find that the issue involved in this year is identical and similar to the issue decided by the Tribunal in its order mentioned supra for the earlier year which is found in paras 22.1 and 22.2 which is extracted hereunder : 22.1 The next ground of appeal relates to Wipro Ltd. for asst. yr. 1997-98. The issue relates to deduction of claim in respect of income derived from an export-oriented unit under s. 10A of the Act. The AO held that the income from sale of old newspaper, diesel drum, wooden racks, etc. aggregating to Rs. 21,144 is not in the nature of income derived from /about.html Page 9 of 66 /contact.html

/feedback.html /library.html the eligible unit. The CIT(A) held that the assessee does not require the above items to manufacture or produce the electronics or software items the income on account of which is claimed to be exempt under s. 10A. The assessee has not explained how the newspaper, diesel drum, wooden racks etc. are connected with the industrial activity. 22.2 We have considered the facts of the case. It is not in dispute that the very nature of expenses in the form of newspaper, diesel drum and certain packing materials have formed part of the expenses incurred in the course of carrying on export-oriented units. The expenses of such nature have reduced the eligible profit of the export-oriented unit. When the same items of expenses are reduced while calculating the eligible profit the income which actually reduces such type of expenses should not be treated as other income not forming part of profit of eligible business. While calculating the profit of the eligible business the expenses and the income of the same unit are required to be netted out. The expenses and the income are relatable to the same nature. We direct that the computation should be made after netting out the expenditure by reducing the income of the nature in dispute. In other words, though it cannot be held that the income of the nature in dispute is income arising out of the activity of an export-oriented unit, however, the expenses are to be calculated on net of income basis. In the result, the income of the eligible business of a unit as prescribed under s. 10A will go up by an amount of Rs. 21,142. The ground is, therefore, accordingly allowed." From the above, it is clear that the sale of scrap reduced the quantum of expenditure debited for that purpose. On that basis, the amount received from the sale of scrap cannot be excluded for the purpose of computing deduction under s. 10A. 8. Grounds of appeal Nos. 7 to 9 relevant for the asst. yr. 2001-02 is for the exclusion of export incentive for the purpose of computing the deduction admissible under s. 10A. 8.1 The AO relying on the decision of the Supreme Court in the case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC) held that the source of export incentive lies in the Export Promotion Scheme of the Central Government and is not profits and gains derived from the industrial undertaking. The nexus is not direct but only incidental. 8.2 Before us, the learned Authorised Representative submitted that the issues stands covered by the decision of the Tribunal in the case of the assessee in respect of asst. yrs. 1998-99 and 19992000. 8.3 On the other hand, learned Departmental Representative supported the order of the AO. 8.4 The jurisdictional High Court in the case of Sterling Foods vs. CIT (1991) 95 CTR (Kar) 36 : (1991) 190 ITR 275 (Kar) held that income received from the sale of import license and incentive for export is within s. 28 of the IT Act and therefore, is entitled to deduction under s. 80HH. The matter went to the apex Court and the apex Court observed that amended provisions have no relevance to the point of issue and therefore, incentive receipts is not income derived from the industrial undertaking. /about.html Page 10 of 66 /contact.html

/feedback.html /library.html 8.5 We have heard both the parties. This Bench in the case of the assessee for the asst. yrs. 199899 and 1999-2000 followed the earlier order in the case of the assessee and held that export incentives should not be excluded from the receipts while computing deduction under s. 10A. Thus, issues stand covered by the earlier order of the Tribunal. Moreover, s. 10A(4) has been amended from the asst. yr. 2001-02. Before amendment, s. 10A(4) stated that for the purposes of sub-s. (1) of s. 10A, the profit derived from export on articles or things or computer software shall be the amount which bears to the profit of the business, 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 assessee. After amendment w.e.f. 1st April, 2001, the words profits of the business in the earlier provision were substituted by the words profits of the business of the undertaking. In the Notes on Clauses to the Finance Bill, 2001, it has been mentioned that the amendment has been made to clarify that proportion is to be calculated with reference to the profits and gains of the business of the undertaking and not from any other business carried on by the assessee. When the legislature has provided basis for ascertaining the profit derived from the export of articles or things or computer software then that basis is to be applied for the purpose of computing deduction permissible under s. 10A. Export incentives are chargeable to income-tax under the head Profits and gains of business or profession as per s. 28 of the IT Act. Export incentives are relatable to the undertaking, which is exporting the software and therefore, any incentive which is taxable under s. 28 of the IT Act will be taxable in respect of the undertaking engaged in export. 8.6 The Bangalore Bench had an occasion to consider the exemption under s. 10B on account of amendment of s. 10B(4). Amendment in s. 10B(4) is on similar lines as in s. 10A(4). After quoting ss. 10B(1) and 10B(4), this Bench in the case of Asstt. CIT vs. Motorola India Electronics (P) Ltd. (2007) 112 TTJ (Bang) 562 : (2007) 295 ITR 376 (Bang)(AT) observed at p. 385 as under : "Other sub-sections of this section are not relevant for the issue in dispute. The above section supports the argument of learned counsel for the assessee. The section has undergone a change. Earlier it was an exemption section and income from these undertakings which are covered by this section did not form part of total income. From this particular year, though the section appears in Chapter III, which classifies income which do not form part of total income, a deduction from business income from the undertaking is granted by including the special provision. Another important feature is in sub-s. (4) is that the methodology of arriving at the export profits of the business of the undertaking is given in a formula, as in the case of s. 80HHC and it shall be the same proportion as the export turnover bears to total turnover in respect of such articles or things or computer software. The word shall has been used to make it mandatory. Another important feature is that the terminology used in sub-s. (4) is profits of the business of the undertaking in contradistinction to the word profits and gains derived by the assessee from a 100 per cent export-oriented undertaking. In s. 80- IA, the term profits and gains from the business has been used. Similar terminology has been used in many other sections such as 80JJ or 80JJA etc. Whereas under s. 80-I and other sections the terminology used is profits and gains derived from industrial undertaking. The term from the business of is much wider than the term derived from industrial undertaking. Keeping this distinction in mind, we have to necessarily hold that /about.html Page 11 of 66 /contact.html

/feedback.html /library.html the entire profits deriving from the business of undertaking should be taken into consideration, while computing the eligible deduction under s. 10A/10B of the Act, by applying the mandatory formula." 8.7 The Delhi High Court in the case of CIT vs. Eltek SGS (P) Ltd. (2008) 215 CTR(Del) 279 : (2008) 3 DTR (Del) 241 had an occasion to consider as to whether duty drawback is a profit derived from business of industrial undertaking. The learned High Court observed that there is a material difference between the language used in s. 80HH and s. 80-IB of the IT Act. Sec. 80HH requires that the profits and gains should be derived from the industrial undertaking while s. 80-IB of the Act requires that profits and gains should be derived from any business of industrial undertaking. It was therefore held that there need not necessarily be direct nexus between the activity of an industrial undertaking and the profits and gains. Considering the language used in s. 10A(4), one is required to ascertain the profits and gains derived by the undertaking as profits and gains of the business of the undertaking. Accordingly, the export incentives, which are includible in profit of the business of the undertaking, will be entitled to deduction under s. 10A. 9. Ground Nos. 10 to 12 relevant for the asst. yr. 2001-02 relate to exclusion of rent from the receipts of the undertaking eligible for deduction under s. 10A for the purpose of computing deduction under that section. 9.1 Rent is not a profit from the business. Before us, the learned Authorised Representative submitted that the issue is covered by the decision of the Tribunal in the case of the assessee for the asst. yr. 1997-98. 9.2 On the other hand, learned Departmental Representative supported the order of the AO. 9.3 We have heard both the parties. The AO in his order has commented that rent received is not in the nature of direct income derived from the undertaking. However, in the computation of total income, the AO has not taxed such rent under the head Income from house property or Income from other sources. It is true that the rent received either through letting out of property or leasing out manufacturing facility is not an income derived from industrial undertaking but unless that rent was taxed under the head Income from house property or Income from other sources, the same cannot be excluded in view of the provisions of s. 10A(4). Hence, we are of the opinion that the learned CIT(A) was justified in directing the AO not to exclude rent from the receipts for the purpose of computing deduction under s. 10A. 10. Ground Nos. 13 to 15 for the asst. yr. 2001-02 and ground Nos. 7 to 8 for the asst. yr. 200203 are in respect of exclusion of interest from the receipts for the purpose of computing deduction under s. 10A. 10.1 Before us, the learned Authorised Representative submitted that this issue also stands covered by the decision of the Tribunal in the case of the assessee for the asst. yrs. 1998-99 and 1999-2000. /about.html Page 12 of 66 /contact.html

/feedback.html /library.html 10.2 On the above-referred issue, we have heard both the parties. We have also gone through the computation of income made by the AO. The AO in his order has not stated the interest income as income from other sources. The treatment to be meted out to interest had been under dispute while computing profits of the business under s. 80HHC of the IT Act. As per Expln. (baa) to s. 80HHC, 90 per cent of the interest is not to be included in the profits of the business. The issue as to whether the interest to be treated as business income or income from other sources has been considered by various High Courts. The Delhi High Court in the case of CIT vs. Shri Ram Honda Power Equip & Ors. (2007) 207 CTR (Del) 689 : (2007) 289 ITR 475 (Del) has discussed such an issue at length. However, it was observed by the Delhi High Court that in a given case if the AO has held the interest income as business income and this has not been challenged by the Department thereafter, then the question cannot be permitted to be reopened and the only question then will be if netting should be allowed. In the instant case, the interest receipts have not been taxed as income from other sources. The AO has also not discussed the nature of the interest income. It is not the case of the Revenue that interest income is not business income of the undertaking eligible for deduction under s. 10A. Under the circumstances, we hold that the learned CIT(A) was justified in directing for not excluding the interest for the purpose of computing deduction under s. 10A as the AO has not treated the interest income as income from other sources or has not held that such income does not belong to the undertaking to which s. 10A is applicable. 11. Ground Nos. 16 to 18 for the asst. yr. 2001-02 and ground Nos. 10 to 12 for the asst. yr. 2002-03 relate to exclusion of exchange fluctuation from the receipts for the purpose of computing deduction under s. 10A. 11.1 The AO has held that exchange fluctuation is not an income derived from the undertaking and therefore, not entitled for deduction under s. 10A. 11.2 The learned Authorised Representative submitted that the issue under reference stands covered by the decision of the Tribunal in the case of the assessee for the asst. yr. 2000-01. 11.3 It is seen that the Tribunal for the asst. yr. 2000-01, following its order for the asst. yrs. 1998-99 and 1999-2000, held that foreign exchange gain due to fluctuation in the rate of rupee is to be included in the profit of the undertaking and is to be considered as eligible for deduction under s. 10A. The excess amount is received because the sale proceeds when received are more as compared to the price at which the goods were exported on account of exchange rate fluctuation. The exports are made at a price in foreign exchange and the amount is received in India subsequently and therefore, some gain is there on account of fluctuation. For the purpose of s. 80HHC, the Mumbai Bench in the case of Asstt. CIT vs. Kiran Exports (2006) 10 SOT 148 (Mumbai) held that exchange gain itself is to be considered as part of the export turnover. Hence, following the decision of the Bench in the case of the assessee for the earlier years, it is held that exchange fluctuation is to be considered as part of the profit of the undertaking eligible for deduction under s. 10A. /about.html Page 13 of 66 /contact.html

/feedback.html /library.html 11.4 The apex Court in the case of Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC) held that if the remittance is on capital account then exchange profit is capital and if it is trading asset, then such profit is revenue. Thus, profit arising on account of exchange fluctuation is revenue as the remittance is not under capital field. Once it is profit of the business, the same is permissible as deduction in view of s. 10A(4). 11.5 This Bench in the case of Sasken Communication Technologies Ltd. vide order dt. 27th Feb., 2007 in ITA No. 244/Bang/2005 held that profit of the business of the undertaking is to be considered for computation of deduction under s. 10A in view of amendment in s. 10A(4). 12. Grounds of appeal Nos. 34 to 36 for the asst. yr. 2001-02 and ground Nos. 26 to 27 for the asst. yr. 2002-03 are against the finding of the learned CIT(A) that losses of s. 10A units should not be adjusted against profits of s. 10A units for computing deduction under s. 10A of the IT Act. 12.1 The above-referred issue stands discussed at pp. 52 and 53 by the AO in his order. The AO has mentioned that prior to the amendment w.e.f. 1st April, 2001, the provisions of s. 10A allowed the income to be exempt from the total income of the assessee. Sec. 10A is covered under Chapter III of the IT Act which deals with exempted income. The AO has referred to s. 10A(6)(ii) of the IT Act, according to which, no loss referred to in s. 72(1) or 74(1) or 74(3) insofar 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 i.e., ending before 1st day of April, 2001. From the above subsection, the AO concluded that loss of any of the undertaking can be carried forward and hence, it cannot be adjusted against any income. The AO, therefore, concluded that the net profit of the undertakings is being considered for the allowability under s. 10A. 12.2 The learned CIT(A) has disposed of the above point of appeal vide his findings recorded at pp. 27 to 29 of the appellate order. Before the learned CIT(A), the assessee relied on the decision of the Bangalore Bench in the case of Mindtree Consulting (P) Ltd. s case ITA No. 606/Bang/2005, dt. 1st Dec., 2005. As per the learned CIT(A), the need to carry forward will arise only if it cannot be set off within the assessment year as per the provisions of s. 70 or 71 of the IT Act. Therefore, the losses of the STP units can be set off from other taxable business income. The learned CIT(A) accordingly directed the AO to set off the said losses from other taxable business income. 12.3 Before us, the learned Authorised Representative submitted that the issue is covered in favour of the assessee by the decision of the Tribunal in the case of the assessee for the asst. yr. 2000-01. The learned Authorised Representative drew our attention to para 13 and para 24 of the order of the Tribunal in ITA Nos. 669 and 804/Bang/2005. 12.4 On the other hand, the learned Departmental Representative relied on the order of the AO. The learned Departmental Representative drew our attention towards the /about.html Page 14 of 66 /contact.html

/feedback.html /library.html decision of the jurisdictional High Court in the case of CIT vs. Himatasinghke Seide Ltd. (2006) 206 CTR (Kar) 106 : (2006) 286 ITR 255 (Kar) in which it has been held that income which is to be treated as exempt is to be computed as per the provisions of the IT Act. 12.5 We have heard both the parties. The Tribunal while deciding the appeal of the assessee for the asst. yr. 2000-01 vide order dt. 22nd March, 2006 in ITA Nos. 669 and 804/Bang/2005 observed vide para 13.4 as under : "13.4 We find that the appellant has raised this issue before the CIT(A) for the first time as additional ground and the CIT(A) has sent the issue to the file of the AO since the same was not raised before him. As submitted by Sri Pradeep, we find that the issue stands covered by the order of Mumbai Tribunal in the case of Navin Bharat Industries Ltd. vs. Dy. CIT (2005) 92 TTJ (Mumbai) (TM) 1166 : (2004) 90 ITD 1 (Mumbai)(TM) and moreover recently this Tribunal in the case of Mindtree Consulting (P) Ltd. in ITA No. 606/Bang/2005, dt. 1st Dec., 2005 following the decision of the Mumbai Tribunal mentioned supra has allowed the loss from s. 10A units to be set off against other income of the assessee. We do not find any infirmity in the orders of the CIT(A) on this issue as he has sent it to the AO as the same was raised for the first time before him, however since the issue stands covered by decisions mentioned supra, we direct the AO to allow set off of loss from s. 10A units against the other business income of the assessee or income from other sources." Similar issue arose in the case of I Gate Global Solutions Ltd. vs. Asstt. CIT. This Tribunal vide order dt. 27th Nov., 2007 in ITA Nos. 248 and 249/Bang/2007 [reported at (2007) 112 TTJ (Bang) 1002 Ed.] decided the issue in favour of the assessee after observing as under : "18. Sec. 10A(4) has also been amended w.e.f. 1st April, 2001. Before amendment, the profits derived from export of articles or things was the amount which bears to the profit of the business, the same proportion as the export turnover in respect of such article or thing or computer software, bears to the total turnover of the business. With effect from 1st April, 2001, instead of profits of the business, the words profit of the business of the undertaking has been substituted. The word undertaking has not been defined under s. 10A. The words industrial undertaking has been defined in the book Law Lexicon by Venkataramiya at p. 1133 it has been defined as under : The expression industrial undertaking must have a technical and economic content. An industrial undertaking would normally be in its ordinary acceptation some industrial concern or enterprise for adventure which is undertaking to be done by the person concerned. The definition of industrial undertaking in s. 3(d) of the Industrial Development and Regulation Act, 1951, means any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government. CIT vs. Textile Machinery Corpn. Ltd. (1971) 11 ITJ 105 at pp. 112, 113 (Cal) : 75 CWN 186 (Cal) : AIR 1971 Cal 1, see also Union of India vs. Sakseria Cotton Mills Ltd. (1973) 75 Bom. LR 100 at p. 105. 1. Industrial undertaking has been defined in s. 33B of the IT Act for that section. As per this definition, industrial undertaking means an undertaking, which is mainly engaged in the business of generation of distribution of electricity or another form of power or in the construction of ships or in that manufacture of processing of goods or in mining. Hence, the meaning of industrial undertaking is not restricted to one unit. The /about.html Page 15 of 66 /contact.html