Software Exports and Foreign Exchange Fluctuation Gains: ITAT upholds Section 10A Income Tax Exemption [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) dismissed the appeal of the revenue and upheld the CIT(A) order. The tribunal upheld the exemption under section 10A on software exports and foreign exchangefluctuation gains.

The assessee Nuwave E Solutions is engaged in the business of development and export of software. The major shareholder in the assessee company is Shri Anil Gutpa, who has 99% shareholding, and he also took a substantial interest in its Associate Enterprises (“AE”) in the US, which is the sole buyer of the software developed by the assessee.

During the year under appeal, the assessee had shown a net profit @ 80% and claimed a deduction under Section 10A of the Act. The AO based on Schedule 12 to the financial accounts, wherein INR 49,33,50,421/- was shown as “Arbitration Award” held that this award is not the software sales and excluded the same from the claim of exemption under Section 10A of the Act and further, denied the exemption under Section 10A of the Act on the gain on account of currency fluctuation of INR 1,23,33,934/- by holding the same being not earned from the eligible business.

Besides this, AO made the disallowance of INR 3,55,47,260/- by invoking the provision of section 40(a)(ia) of the Income Tax Act, as the assessee has deducted 10% TDS on buy back of shares, which, as per AO, should be 20%. Thus, he made the disallowance of the proportionate payment without TDS. Accordingly, the total income of the assessee was assessed at INR 49,74,14,740/-.

Against the said order, the assessee preferred an appeal.CIT(A) allowed the appeal of the assessee, wherein the additions made as well as disallowances made were deleted. Aggrieved by the said order of CIT(A), Revenue filed an appeal before the ITAT.

The Appellant submitted that the assessee has shown an amount of INR 43.49 crores as “Arbitration Award” in the assessment order, “Arbitration Award” at INR 43,49,83,092/-.

The appellant argued that the claim of the assessee that it is a “typographical error” cannot be accepted as no evidences were filed in support of the claim. Further, if the amount of “Arbitration Award” is reduced from the amount of net profit, the resultant net profit is reduced to 12.59% only as against 87%. The appellant further argued that foreign exchange fluctuation gains are post-export funds and should not form part of export turnover for the Section 10A exemption.

The assessee argued that during the course of assessment proceedings, the AO had never asked any questions about the “Arbitration Award” shown in the Profit & Loss Account. The assessee contended that foreign exchange fluctuating gains arise in the normal course of software exports and were consistently treated as eligible income in prior years.

The Tribunal observed that the alleged “Arbitration Award” in the accounts was established as a typographical error, with multiple documents confirming genuine software export turnover. The ITAT aligned with the view of CIT(A), which found the gains directly linked to exports and upheld their eligibility under Section 10A.

The two-member bench of Sudhir Kumar (Judicial Member) and Manish Agarwal (Accountant Member) upheld that the CIT(A) had rightly held the foreign exchange fluctuation gain as income derived from the export of software. And also the AO’s contradictory approach in treating the same turnover differently was noted as biased.

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