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Sec 10A :Some clarity on set-off vs carry forward

Dinesh Khator Anuj Deshmukh | Updated on March 25, 2011 Published on March 25, 2011

In case of a company with multiple STP units (i.e. units located in Software Technology Park) which are eligible for deduction under Section 10A, whether deduction for profitable units should be computed without setting off loss of other units or after setting off loss of other units has always been a tax controversy.

A Special Bench of the Chennai Tribunal in the case of Scientific Atlanta (129 TTJ 273), held that in case of a company having Domestic Tariff Area unit (DTA unit) and a STP unit eligible for deduction under Section 10A , current year's loss of DTA unit cannot be set off against profits of the STP unit while computing deduction . However, the Bench, while pronouncing its ruling, observed that if there are multiple STP units in the company having a mix of profit and loss situation, it would be an entirely different case and its decision would not be applicable there.

Due to the Special Bench's observation, the assessees (having multiple STP units and taking aposition that deduction under Section 10A with respect to profits of a unit should be computed without set-off of loss of other unit) were facing an uncertain situation in defending their cases. The reason was that the tax authorities were treating the observation of the Special Bench as an expression of opinion that loss of another STP unit needs to be set off against profits of STP unit for computing deduction under Section 10A.



FCI Technology's case

Subsequent to the Special Bench's decision, the Cochin Tribunal in the case of FCI. Technology Services Pvt Ltd Vs ACIT has dealt with this issue. In this case, the assessee had three units; two STP units and one DTA unit. Further, the DTA unit and one of the STP units had losses and one STP unit had a profit. FCI had computed deduction under Section 10A with respect to profits of the STP unit, without setting off losses of the other DTA and STP units.

The Tax Department, ignoring the decision of Special Bench, but using the observation to its advantage, proceeded to set off the loss of DTA unit as well as the STP unit against the profits of the other STP unit.

The Cochin Tribunal held that loss of DTA unit cannot be set-off against profits of STP unit (following the Special Bench decision in the case of Scientific Atlanta)

The Tribunal held that deduction under Section 10A is to be computed qua profits of the unit, without set-off of loss from another STP or non-STP unit.

While giving ruling, the Cochin Tribunal commented on the Special Bench's observation in the case of Scientific Atlanta and stated that the issue in Scientific Atlanta's case was admissibility of set-off of loss of a DTA unit against profits of STP unit. Accordingly, Special Bench's observations are to be read in the context of the issue that was before it.

Further, the Cochin Tribunal stated that, when Special Bench states that its decision would have no application in a case where STP unit is having loss, the same does not tantamount to expressing any opinion in that regard.

The decision of Cochin Tribunal provides clarity on the legal position in connection with set-off of loss inter-se multiple units of an assessee. It remains to be seen whether the Tax department and other Benches across the country accept position.

(The authors are Senior Manager and Assistant Manager respectively of PwC India.)

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Published on March 25, 2011
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