ITAT Upholds Section 10A Deduction on Software Sales, Forex Gains & Rejects TDS Disallowance

The assessee company engaged in software development and exports as a 100% EOU registered with STPI, filed its return of income for AY 2007-08 declaring total income of Rs. 1.45 crore. The case was scrutinised, and the Assessing Officer (AO) excluded Rs. 43.49 crore recorded as “Arbitration Award” from deduction under Section 10A, denied exemption on foreign exchange fluctuation gains of Rs. 1.23 crore, and disallowed Rs. 3.55 crore under Section 40(a)(ia) on the ground of short deduction of TDS on buy-back of shares.

CIT (A) Held: On appeal, the CIT(A) accepted the assessee’s explanation that the entry of “Arbitration Award” was a typographical error, in fact representing the sale of the source code of software. Relying on supporting documents, the CIT(A) allowed the claim under Section 10A. The CIT(A) also treated forex fluctuation gains as business income eligible under Section 10A and deleted the disallowance under Section 40(a)(ia).

Issue Raised: Whether the amounts relating to the arbitration award, foreign exchange fluctuation, and TDS disallowance were correctly excluded by the AO from exemption under Section 10A, and whether the CIT(A)’s order warranted interference.

ITAT Held: The Tribunal noted that in earlier years, the assessee’s sharp increase in profit margins and claim of deduction under Section 10A had been accepted without objection, and the TPO had not proposed any adjustments in respect of export pricing. It observed that supporting documents including Form 3CEB, Form 56F, SOFTEX forms, FIRCs, and TPO orders confirmed the turnover as export of software. The Tribunal held that the “Arbitration Award” entry was a typographical error and upheld the CIT(A)’s finding that it represented software sales, thereby eligible under Section 10A.

The Tribunal also agreed with the CIT(A) that foreign exchange fluctuation gains were directly linked to export activities and hence qualified for Section 10A relief. On the issue of disallowance under Section 40(a)(ia), it held that since the payment for buy-back of shares was not a claimable expenditure in the P&L account and TDS had been deducted at 10%, the provision did not apply. Therefore, the ITAT upheld the CIT(A)’s order and dismissed the Revenue’s appeal.

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