The Income Tax Act, 1961 (IT Act) contains several special beneficial provisions that allow for deductions in order to promote certain activities. One such provision is Section 10A of the IT Act, which seeks to promote and boost new business undertakings situated in free trade zones by providing suitable deductions. It provides for a 100 percent deduction of profits and gains derived by undertakings engaged in export of articles or computer software. The deduction is available for ten assessment years from the year in which the entity commences operations. These profits are to be determined based on the ratio of export turnover to the total turnover of the undertaking.

Over the years, there have been several disputes over the manner in which this ratio is to be determined. This is largely because while the term ‘export turnover’ has been defined under Section 10A of the IT Act, “total turnover” has not. In other words, there is no explicit provision that allows the taxpayer to exclude amounts from total turnover in case such amounts have already been excluded from export turnover.

In the recent case of CIT v HCL Technologies Limited[1], the Supreme Court of India dealt with this issue and provided much needed clarity on the subject.

CIT v HCL Technologies Limited

HCL Technologies Limited (HCL) was engaged in the business of development and export of computer software and rendering technical services. This involved the carrying out of activities at software development centres in India and at client sites outside India. HCL claimed deductions under Section 10A of the IT Act and took the export turnover as the total turnover for the same. The Assessing Officer (AO) disallowed the same, on the basis that – whilst claiming for expenses incurred in foreign exchange (like freight, telecommunication and insurance attributable to the delivery of software outside India) had to be excluded for calculating export turnover (because of specific requirements), the same could not be excluded from total turnover, since there was no specific provision for making such adjustments under Section 10A of the IT Act.

Aggrieved by the decision, HCL appealed before the Commissioner of Income Tax (Appeals), who granted partial relief, post which both parties approached the Income Tax Appellate Tribunal, who ruled in favour of HCL. The tax authorities (Revenue) then approached the Delhi High Court, but being unsuccessful there, brought the issue to the Supreme Court.


The Revenue asserted that since “total turnover” is not defined in Section 10A of the IT Act, the ordinary meaning of the term must be adopted. Since “total turnover” is a technical term, its technical meaning under Section 80HHC and 80HHE of the IT Act should be used to compute the deduction under Section 10A. Such meaning does not envisage reduction of any expense from the total amount. Therefore, the claim of expenses incurred in foreign exchange (freight, telecommunication and insurance, attributable to the delivery of software outside India) under total turnover, was not in accordance with the applicable provisions.

HCL, on the other hand, argued that the “export turnover” is the numerator, while the total turnover is the denominator, in the formula for computing profits from exports. The term “export turnover” has been defined under Section 10A of the IT Act to exclude freight, telecommunication charges or insurance incurred in foreign exchange and are attributable to the delivery of goods outside India for providing technical services outside India. Consequently, the same must also be excluded from the “total turnover” in the denominator to avoid undesirable results.


While deciding on the issue, the Supreme Court observed that the term “total turnover” was neither defined in Section 10A (which was the specific provision the definition would pertain to), nor in Section 2 of the IT Act (which is a general definition clause applicable to the entire IT Act). It ruled out the adoption of the definition of total turnover under Section 80HHC and 80HHE as the provisions were unrelated and specifically stated that those definitions were to be used “for the purposes of those Sections only”.

The Court then applied the rule of harmonious construction and cited the ratio of the Karnataka High Court in CIT v Tata Elxsi Limited[2], which involved similar facts, to hold that if the denominator included amounts of a certain type that the numerator did not, the results would be undesirable. Consequently, what is excluded from export turnover would also have to be excluded from total turnover, since it is one of the components of total turnover. It also stated that any other interpretation would be contrary to the legislative intent and make the formula unworkable and absurd.

Impact of the Judgment

The controversy in relation to exclusion of expenses from total turnover, if they are not to be included in export turnover, has now been around for several years and has been subjected to litigation under different provisions of the IT Act. While the Supreme Court has ruled in the past that taxes excluded from export turnover under Section 80HHC would also be excluded from total turnover, protracted litigation has nonetheless been carried out on similar issues with reference to Section 80HHE[3] and Section 10A[4] of the IT Act.

Consequently, the Supreme Court’s decision is in line with the judicial precedents available on such issues. It was also the only feasible view in this regard, as the adoption of the Revenue’s reasoning would have defeated the objective of the provision, which was to provide a tax holiday to encourage exports.

Since a lot of such litigation pertains to the availability of tax deductions under Section 10A of the IT Act, this decision of the Supreme Court should bring clarity and resolve the issue permanently. Additionally, since the Supreme Court  has also approached the issue from a practical understanding of the relevant terms and derived its decision on the basis of an application of logic, the same principles should also be applicable to similar cases where similar terms have been used.

If this decision is adhered to, in form as well as in spirit, it may go a long way to grant relief to all such taxpayers who have been embroiled in similar disputes, not limited to the interpretation of the principles under Section 10A of the IT Act. The principles enunciated in this decision of the Supreme Court could be applied to similar issues relating to other provisions of the IT Act, wherein the final understanding can be derived based on the application of common sense and practical implementation.

[1] C.A. Nos. 8489-8490/2013.

[2] 349 ITR 98 (Karnataka HC)

[3] CIT v Infosys Technologies (2011) ITA Nos. 2972/2005 (Karnataka HC)

[4] CIT v Gem Plus Jewellery India Ltd. (2011) ITA Nos. 2426 OF 2009 (Bombay HC); CIT v Tata Elxsi Ltd. (2011) 349 ITR 98 (Karnataka HC); CIT v Genpact India (2011) ITA 1519/2010 (Delhi HC)