Scrap Sales & Incidental Receipts Linked to Eligible Undertaking Qualify for S.10A Deduction: Madras HC Rules in Favour of Cognizant [Read Order]

The Madras High Court in a recent case, has ruled that miscellaneous income, including scrap sales and interest on loans given to employees linked to eligible undertakings, qualifies for deduction under Section 10A of the Income Tax Act, 1961.

Cognizant Technology Solutions India Pvt. Ltd., a major software exporter operating multiple STPI units, claimed deduction under Section 10A for miscellaneous income earned during AYs 2003–04 and 2004–05. This income included scrap sales and other incidental receipts arising from the operations of eligible undertakings.

The Assessing Officer (AO) denied the claim, holding that such income was not derived from the export of software and therefore did not qualify for deduction under Section 10A. According to the AO, Section 10A applies only to profits directly attributable to the export of software, and miscellaneous income falls outside its scope.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] partly upheld the AO’s view but directed the AO to verify whether the miscellaneous income had a direct nexus with the eligible undertaking. The Income Tax Appellate Tribunal (ITAT), however, failed to adjudicate this ground, leaving the issue unresolved. Cognizant then appealed to the Madras High Court, raising the substantial question of law on whether miscellaneous income linked to eligible undertakings qualifies for deduction under Section 10A.

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Counsel for the assessee, relying upon the decisions in Commissioner of Income-tax v. Sankhya Technologies (P) and Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd22, submitted that interest on loans provided to the employees is to be considered as an integral part of the business of the entity and, hence, eligible for deduction under Section 10A/10B of the Act.

Counsel for Cognizant argued that miscellaneous income, including scrap sales, is directly linked to the operations of eligible undertakings and therefore qualifies for deduction under Section 10A. It was contended that Section 10A applies to profits derived from the business of the undertaking, not merely from export invoices. Scrap sales and ancillary receipts are incidental to the software development process and form part of the business income.

Reliance was placed on judicial precedents that interpreted “profits derived from the business of the undertaking” broadly, including incidental income connected to the undertaking.

The Revenue contended that Section 10A applies only to profits derived from the export of software and does not extend to miscellaneous income. It argued that scrap sales and ancillary receipts are not directly attributable to software exports and therefore fall outside the scope of Section 10A. The Revenue maintained that allowing a deduction for such income would expand the scope of Section 10A beyond legislative intent.

The Madras High Court examined the language of Section 10A, which provides for the deduction of profits derived from the business of eligible undertakings engaged in the export of software. The Court noted that the phrase “profits derived from the business of the undertaking” is broader than “profits derived from export,” and includes incidental income connected to the operations of the undertaking.

The Court observed that scrap sales and miscellaneous receipts arise directly from the business activity of software development and export. Such income, though not export invoices, is incidental to the undertaking’s operations and therefore qualifies for deduction under Section 10A.

Reliance was placed on the cases Commissioner of Income-tax v. Sankhya Technologies (P) and Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd22, for deciding the matter.

The Division bench of Chief Justice Manindra Mohan Shrivastava and Justice Sunder Mohan, observed that all profits and gains of the undertaking, including the incidental income by way of interest on bank deposits or staff loans, would be entitled to 100% exemption or deduction under Section 10A/10B of the Act, as such interest income arises in the ordinary course of export business of the undertaking, even though not as a direct result of export

The Madras High Court ruled in favour of Cognizant, holding that miscellaneous income linked to eligible undertakings qualifies for deduction under Section 10A of the Income Tax Act.

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