CIT V. YOKOGAWA INDIA LTD. 2017

Author: Sunil Kumar Sharma, Rabindranath Tagore University, Bhopal


Citation
Cit v. Yokogawa India Ltd.  (2017) 2017 (1) AKR 752, AIR 2017 SUPREME COURT 463, AIR 2017 SC (CIVIL) 596, 2017 (2) SCC 1, (2016) 12 SCALE 992, 2017 (173) AIC (SOC) 26 (SC), 2017 ( 3) KCCR SN 238 (SC)

Facts and Background of the case
Facts:


Yokogawa India Limited is a software development company that earned its income through exports from abroad. The company claimed tax exemption on its foreign exchange earned profits under Section 10A of the Income Tax Act, 1961. Due to this exemption, the company’s foreign income is not taxable as the purpose of this provision is to encourage companies located in Special Economic Zones to export and bring foreign exchange into the country.


The Income Tax Department challenged the company’s exemption claim, arguing that the exemption given under Section 10A should be deducted from the “total income” and not from the “gross total income”. The department also argued that this exemption should also be included under Minimum Alternate Tax (MAT) so that the company can be taxed as per MAT.

Background:


Section 10A was specifically aimed at providing tax exemption to companies that were located in Special Economic Zones or Export Processing Zones and earned foreign exchange through exports. This provision was introduced to provide them tax relief, so that competition in the foreign market increases and the country’s economic condition is strengthened.


Under this provision, companies were exempted on their income earned in foreign currency for a certain period. Yokogawa India Limited claimed this exemption, but the Income Tax Department raised the issue whether the exemption should be determined before “gross total income” or “total income”. The department argued that if this exemption is deducted before “total income”, it will result in excessive profit for the company and loss of tax to the government.

Issues Involved
Nature of Deduction: Whether exemption under section 10A should be considered as a “deduction” or should it be considered as an “exemption”? That is, will the exemption be deducted from the “gross total income”, or deducted later from the “total income”?
Effect of exemption under Minimum Alternate Tax (MAT): Will the income exempted under section 10A be included under MAT, or will it be excluded from computation of MAT

Arguments from the Petitioner’s Side

The following arguments were raised on behalf of the petitioner (Income Tax Department)
Exemption in Gross Total Income: The petitioner argued that the exemption provided under section 10A should be considered as a part of the “gross total income” and not deducted before the “total income”. This will lead to correct computation of tax.
Wrong interpretation of deduction: The Income Tax Department argued that Yokogawa India Ltd. has wrongly used section 10A as a “deduction”. It should be considered as an exemption and hence should be added to the “gross total income”.
Applicability of Minimum Alternate Tax (MAT): The petitioner argued that the exemption provided under section 10A should not be availed to avoid MAT. Therefore, the exempted income should be included in the taxable income under MAT.


Protection of tax base: The Income Tax Department said that if Section 10A was treated as a “deduction”, it would indirectly reduce the taxable income and cause loss to the government’s tax revenue.
Scope of exemption: The petitioner also argued that the exemption should be applied in a limited manner so that it is not misused and only companies earning genuine foreign exchange are benefited from it.

Arguments From the Respondent’s Side

The following arguments were raised on behalf of the respondent (Yokogawa India Limited) in the case:


Section 10A exemption is a deduction: The respondent argued that the exemption provided under Section 10A should be viewed as a “deduction” and not just a part of the “gross total income”. It should be deducted before the “total income” to determine the correct tax on the income.


Exclusion of exemption under MAT: The respondent submitted that the exemption provided under Section 10A should not be included in the income under Minimum Alternate Tax (MAT), as the purpose of this exemption is to provide incentives to companies earning foreign exchange and not to impose additional tax burden on them.


Purpose of exemption: The respondent argued that the main purpose of Section 10A is to provide tax relief to export-oriented units (EOUs) so that they can earn more foreign exchange. If this exemption is not implemented properly, its purpose will fail.


Exemptions not included in taxable income: The respondent claimed that exemptions provided under section 10A should be deducted from taxable income before taxation. Including it in the “gross total income” will increase the tax burden and will be legally incorrect.


Right to earn more profits: The respondent said that if the exemptions are implemented properly, companies will be motivated to earn more and more foreign exchange, which will benefit the Indian economy. Its scope is more to boost the economy than tax revenue.


The Judgment


Judgment :-
Interpretation of Section 10A: The Supreme Court clarified that Section 10A of the Income Tax Act, 1961 will be treated as a deduction and not just an exemption. This means that the exemption under this provision will be deducted from the “Gross Total Income” (GTI) first, and then tax will be levied on the “Total Income” (TI).
Impact of MAT (Minimum Alternate Tax): The court also ruled that the income which is exempt under Section 10A will not be included in the income under MAT. This will prevent companies from paying additional tax under MAT.
Difference between deduction and exemption: The court clarified that the income under Section 10A will be treated as a “deduction”, which means that it will be calculated as profit before deducting it from the “Total Income”.

Analysis of the Court :-
Purpose of Section 10A: The Supreme Court in its analysis said that the purpose of Section 10A is to encourage companies that are located in Special Economic Zones (SEZ) or Export Processing Zones (EPZ) and which earn income in foreign currency. The purpose of this exemption is to make these companies more competitive by giving them tax relief.


Nature of deduction: The court interpreted Section 10A to be a “deduction”, not just an exemption. This simply means that the benefit of the exemption should be available before the “total income”, so that this exemption can be effective while calculating the taxable income.
Exemption under MAT: The Supreme Court directed not to include this exemption under MAT (Minimum Alternate Tax). The court held that if the income under Section 10A is included in the taxable income for MAT, it would be against the purpose of Section 10A and companies will have to bear the burden of additional tax.
Income Tax Department’s argument rejected: The court rejected the Income Tax Department’s argument that the exemption should be considered as part of “gross total income” and included under MAT. The court said that such an interpretation is contrary to the intent and purpose of section 10A.


FAQS


1. What is the main issue in the CIT v. Yokogawa India Ltd. case?
Answer:
The main issue was whether the tax exemption under Section 10A of the Income Tax Act, 1961, should be treated as a “deduction” from the gross total income or merely as an exemption that would apply later after determining the total income. Additionally, it raised the question of whether this exemption should be included while calculating Minimum Alternate Tax (MAT).



2. What is Section 10A of the Income Tax Act, 1961?
Answer:
Section 10A provides tax exemptions to companies located in Special Economic Zones (SEZ) or Export Processing Zones (EPZ) that earn income through foreign exchange. The primary objective is to promote exports by providing tax relief to such companies.


3. Why did the Income Tax Department challenge Yokogawa India Ltd.’s claim for exemption?
Answer:
The Income Tax Department argued that the exemption under Section 10A should be included in the “gross total income” and should also be considered while calculating MAT. They contended that treating it as a deduction before determining taxable income would reduce the taxable base and cause revenue loss for the government.


4. What were the respondent’s (Yokogawa India Ltd.) arguments in the case?
Answer:
Yokogawa India Ltd. argued that:
• Section 10A should be treated as a “deduction” and not merely an exemption.
• The exemption should apply before calculating the “total income.”
• The purpose of Section 10A is to provide tax relief to export-oriented companies to boost foreign exchange earnings.
• Including Section 10A income under MAT would defeat the purpose of the exemption.


5. What was the Supreme Court’s judgment in this case?
Answer:
The Supreme Court ruled that:
• Section 10A is a “deduction” that must be applied to the gross total income before arriving at the taxable income.
• The income exempted under Section 10A should not be included while calculating MAT.
• The court emphasized that the provision aims to encourage export-oriented businesses and strengthen the economy, not to impose an additional tax burden.


6. How did the court differentiate between “deduction” and “exemption”?
Answer:
The court clarified that a “deduction” under Section 10A reduces the gross total income before arriving at the taxable income, whereas an “exemption” would have been applied after determining the taxable income. This distinction ensures that Section 10A benefits are available to eligible companies without increasing their tax burden.


7. What is the significance of this judgment for companies in SEZs?
Answer:
The judgment provides clarity and relief to companies in SEZs by ensuring:
• Their profits from exports are not taxed before calculating taxable income.
• They are not subjected to additional tax liability under MAT on their exempt income.
This promotes competitiveness and incentivizes export-oriented businesses.


8. Why was MAT (Minimum Alternate Tax) a point of contention in this case?
Answer:
The Income Tax Department argued that even the exempt income under Section 10A should be considered while calculating MAT. However, the Supreme Court ruled against this, stating that including exempt income in MAT calculations would defeat the purpose of Section 10A.


9. How does this judgment impact the government’s tax revenue?
Answer:
While this judgment may reduce the government’s tax revenue in the short term, it aligns with the legislative intent to promote exports, boost foreign exchange earnings, and support businesses in SEZs, thereby contributing to long-term economic growth.


10. Why is the CIT v. Yokogawa India Ltd. case important in tax law?
Answer:
The case sets a precedent on how exemptions and deductions under Section 10A should be applied. It ensures that companies in SEZs receive the intended tax benefits without facing additional burdens like MAT, thereby maintaining the purpose of tax incentives and economic policy.


Conclusion


Conclusion of CIT v. Yokogawa India Ltd. (2017):
The Supreme Court held that the exemption under Section 10A of the Income Tax Act is a “deduction” to be applied before computing taxable income (from the gross total income). Additionally, the exempt income under Section 10A is not subject to Minimum Alternate Tax (MAT), ensuring that export-oriented units in Special Economic Zones receive the intended tax benefits to boost foreign exchange earnings and economic growth.

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