Compensation received on termination of export contract eligible for deduction u/s 10A – High Court

Compensation received on termination of export contract eligible for deduction u/s 10A being in the course of export business – High Court

ABCAUS Case Law Citation:
ABCAUS 2605 (2018) (11) HC

Important Case Laws Cited/relied upon:
Commissioner of Income Tax and Anr. vs. Tata Elxsi Ltd. : (2012) 349 ITR 98
Commissioner of Income Tax vs. Yokogawa India Ltd. : (2017) 391 ITR 274 (SC)
Commissioner of Income Tax vs. Hewlett Packard Global Soft Ltd. : (2018) 403 ITR 453

The respondent assessee was in the business of manufacture and export of software, which claimed the benefit under Section 10A of the Income Tax Act, 1961, (the Act).

The return filed by the assessee was taken up for scrutiny. The Assessing Authority disallowed expenditure incurred in the foreign currency as well as from total turnover; disallowed compensation received on termination of export/service contract as he was of the view that it could not be treated as business income, arising out of export activity and denied the claim of brought forward losses against income claimed as deduction under Section 10A of the Act.

The CIT(A) allowed the appeal of the assessee holding that the compensation received by the assessee on termination of export/service contract was capital in nature. Further he held that if certain expenses are to be reduced from the total turnover, deduction is to be calculated under Section 10A of the Act. The Appellate Authority also allowed set off of brought forward loss.

Aggrieved by the said order of the Appellate Authority, the revenue filed appeal before the Income Tax Appellate Tribunal.

The Tribunal held that the amount received by the assessee under the contract and particularly, on termination of the export/service contract had a direct nexus with the business activity of the assessee and further held that such compensation is income derived from the business and would be part of profits of business. With regard to exclusion of expenses incurred in foreign exchange from the export turnover as well as from the total turnover and the issue setting off of brought forward losses, the ITAT held in favour of the assessee.

For the disallowance of deduction under Section 10A in respect of deemed export on account of sale to another STP unit, the Tribunal also held in favour of the assessee.

Aggrieved by the order of the Tribunal, the revenue was before the Hon’ble High Court.

The Hon’ble High Court held the issues in favour of the assessee.

One interesting question was whether compensation received for termination of export/service contract is an income derived from the export of articles or things or computer software?

The Hon’ble High Court observed that it was not in dispute that the assessee had entered into agreement for export of software and the assessee was 100% export oriented unit. But, for the cancellation or termination of contract, the assessee would have supplied or exported the software. For no fault of the assessee, the contract was terminated and the compensation for such termination was received by the assessee, which income was to be treated as income derived from out of the export. Hence the compensation/damages received by the assessee on account of termination of service/export contract was to be treated as profits of business.

The Hon’ble High Court noted that it had previously held that Court held that incidental income of export EOU unit, by way of interest on Bank deposits or staff loans would be entitled to 100% exemption.

Accordingly, the Hon’ble High Court held that compensation/damages received by the assessee on termination of export contract would be in the course of his export business and is to be treated as income derived from out of the business, which qualifies for deduction under Section 10A of the Act

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