The AO knocked freight and telecom charges out of my export turnover but left them in total turnover. Can he do that?
No. What is excluded from export turnover must also come out of total turnover, because export turnover is a component of total turnover. Reading the exclusion into the numerator alone would make the s.10A formula produce an absurd result. The Court declined to construe the section in a way that would work an injustice on the assessee.
Decided by the Supreme Court (Supreme Court of India — R.K. Agrawal and R. Banumathi, JJ; the judgment was delivered by Agrawal J. Civil Appeal Nos. 8489-8490 of 2013 and others) on 2018-04-24, reported as [2018] 404 ITR 719 (SC); [2018] 93 taxmann.com 33 (SC); [2018] 255 Taxman 313 (SC); [2018] 302 CTR 191 (SC) — Civil Appeal Nos. 8489-8490 of 2013 and others. It bears on section 10A, section 80HHC, section 80HHE of the Income Tax Act 1961, in Deductions & Disallowances and Capital Gains Exemptions matters.
The relief is a fraction, and the department's position had the effect of shrinking the numerator while leaving the denominator untouched — which reduces the deduction on every rupee of excluded expenditure twice over. Section 10A itself has run its course, but the identical fraction and an identically worded definition of export turnover sit in s.10AA, and Tribunals are applying this decision there. It is also a clean illustration of harmonious construction applied to a computation formula rather than to a charging provision.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The assessee developed and exported computer software and rendered technical services. For assessment year 2004-05 it returned gross business income of Rs 267,01,76,529 and claimed a deduction under s.10A of Rs 273,45,39,379, showing a net loss of Rs 6,43,62,850; the return was revised on 31 March 2005 and taken up for scrutiny. Its two units were in the Software Technology Park at Gurgaon. The Assessing Officer, by order of 28 December 2006, treated the software development charges as expenses incurred for technical services provided outside India, and — there being no bifurcation — estimated 40 per cent as software development and 60 per cent as technical services, reassessing the income at Rs 137,20,34,576. The Commissioner (Appeals) on 9 May 2007 reduced the estimate to 10 per cent. The Tribunal on 23 January 2009 allowed the assessee's appeal and dismissed the Revenue's, and the Delhi High Court dismissed the Revenue's appeal on 15 December 2009 in ITA Nos. 1244 and 1250 of 2009. Underlying it all was the computation question: Explanation 2(iv) to s.10A excludes freight, telecommunication charges and insurance attributable to the delivery of software outside India, and expenses incurred in foreign exchange in providing technical services outside India, from export turnover — the numerator of the statutory fraction. The Revenue said those items nonetheless stayed in total turnover, the denominator, because s.10A does not define total turnover and its technical meaning envisages no reduction; the assessee said what comes out of the numerator must come out of the denominator too.
The appeals were dismissed with no order as to costs (para 22). The definitions of 'total turnover' in ss.80HHC and 80HHE cannot be adopted for s.10A: those Explanations say 'for the purposes of this section only', and a definition binds across the Act only where it is in s.2; where the meaning is clear there is no necessity of importing one from another provision (para 14). What is excluded from export turnover must therefore also be excluded from total turnover, export turnover being one of the components of total turnover; any other interpretation would run counter to the legislative intent and is impermissible (para 17). The Court set out the resulting formula, with export profit as total business profit multiplied by export turnover as defined in Explanation 2(iv) over that export turnover plus domestic sale proceeds (para 18). The same principle applies to expenses incurred in foreign exchange for providing technical services outside India, which must equally be excluded from total turnover (para 21). On the estimate that had started the dispute, the Court recorded that the Assessing Officer could not bring any evidence that the assessee was providing simply technical services independent of software development for which the foreign currency expenditure was incurred (para 12).
The Court noted that neither s.10A nor s.2 defines total turnover, while ss.80HHC and 80HHE do, and asked whether a meaning may be imported from elsewhere in the same Act. It answered no: s.10A is a special beneficial provision meant to encourage new undertakings in free trade zones; a definition in s.2 would bind throughout, but the Explanations to ss.80HHC and 80HHE are expressed to apply 'for the purposes of this section only'; and if the denominator includes an amount of a type the numerator does not, the formula renders undesirable results (paras 10, 14). It then applied the rule of harmonious construction, which it called the thumb rule of interpretation, so that the enactment reads as a consistent whole (para 15), and drew on CIT v. J.H. Gotla for the proposition that where a plain literal reading produces a manifestly unjust result the Court may modify the language to achieve the legislature's intention and prefer a construction that results in equity rather than injustice (para 16). It adopted the reasoning of the Karnataka High Court in CIT v. Tata Elxsi Ltd., that where a word is not defined the ordinary meaning must conform to the context, so that what is excluded from export turnover must also be excluded from total turnover since export turnover is a component of it (para 17). Applied to these facts, allowing the deductions for freight, telecommunication and insurance only in export turnover would produce an inadvertent, unlawful, meaningless and illogical result causing grave injustice (para 19); and in common parlance, the object of the formula being to arrive at the profit from export business, any other reading makes it unworkable and absurd (para 20).
In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. What is excluded from export turnover must also come out of total turnover, because export turnover is a component of total turnover. Reading the exclusion into the numerator alone would make the s.10A formula produce an absurd result. The Court declined to construe the section in a way that would work an injustice on the assessee. This was decided by the Supreme Court (Supreme Court of India — R.K. Agrawal and R. Banumathi, JJ; the judgment was delivered by Agrawal J. Civil Appeal Nos. 8489-8490 of 2013 and others) and bears on section 10A, section 80HHC, section 80HHE of the Income Tax Act 1961. It is reported as [2018] 404 ITR 719 (SC); [2018] 93 taxmann.com 33 (SC); [2018] 255 Taxman 313 (SC); [2018] 302 CTR 191 (SC) — Civil Appeal Nos. 8489-8490 of 2013 and others. The relief is a fraction, and the department's position had the effect of shrinking the numerator while leaving the denominator untouched — which reduces the deduction on every rupee of excluded expenditure twice over. Section 10A itself has run its course, but the identical fraction and an identically worded definition of export turnover sit in s.10AA, and Tribunals are applying this decision there. It is also a clean illustration of harmonious construction applied to a computation formula rather than to a charging provision. If it applies to you, the first step is this: Put the deduction working in the return as a fraction and show the same exclusions on both lines, so the point does not first arise in appeal.
The assessee developed and exported computer software and rendered technical services. For assessment year 2004-05 it returned gross business income of Rs 267,01,76,529 and claimed a deduction under s.10A of Rs 273,45,39,379, showing a net loss of Rs 6,43,62,850; the return was revised on 31 March 2005 and taken up for scrutiny. Its two units were in the Software Technology Park at Gurgaon. The Assessing Officer, by order of 28 December 2006, treated the software development charges as expenses incurred for technical services provided outside India, and — there being no bifurcation — estimated 40 per cent as software development and 60 per cent as technical services, reassessing the income at Rs 137,20,34,576. The Commissioner (Appeals) on 9 May 2007 reduced the estimate to 10 per cent. The Tribunal on 23 January 2009 allowed the assessee's appeal and dismissed the Revenue's, and the Delhi High Court dismissed the Revenue's appeal on 15 December 2009 in ITA Nos. 1244 and 1250 of 2009. Underlying it all was the computation question: Explanation 2(iv) to s.10A excludes freight, telecommunication charges and insurance attributable to the delivery of software outside India, and expenses incurred in foreign exchange in providing technical services outside India, from export turnover — the numerator of the statutory fraction. The Revenue said those items nonetheless stayed in total turnover, the denominator, because s.10A does not define total turnover and its technical meaning envisages no reduction; the assessee said what comes out of the numerator must come out of the denominator too. The matter was decided on 2018-04-24 by the Supreme Court (Supreme Court of India — R.K. Agrawal and R. Banumathi, JJ; the judgment was delivered by Agrawal J. Civil Appeal Nos. 8489-8490 of 2013 and others). On those facts the Supreme Court held as follows. The appeals were dismissed with no order as to costs (para 22). The definitions of 'total turnover' in ss.80HHC and 80HHE cannot be adopted for s.10A: those Explanations say 'for the purposes of this section only', and a definition binds across the Act only where it is in s.2; where the meaning is clear there is no necessity of importing one from another provision (para 14). What is excluded from export turnover must therefore also be excluded from total turnover, export turnover being one of the components of total turnover; any other interpretation would run counter to the legislative intent and is impermissible (para 17). The Court set out the resulting formula, with export profit as total business profit multiplied by export turnover as defined in Explanation 2(iv) over that export turnover plus domestic sale proceeds (para 18). The same principle applies to expenses incurred in foreign exchange for providing technical services outside India, which must equally be excluded from total turnover (para 21). On the estimate that had started the dispute, the Court recorded that the Assessing Officer could not bring any evidence that the assessee was providing simply technical services independent of software development for which the foreign currency expenditure was incurred (para 12).
The Court noted that neither s.10A nor s.2 defines total turnover, while ss.80HHC and 80HHE do, and asked whether a meaning may be imported from elsewhere in the same Act. It answered no: s.10A is a special beneficial provision meant to encourage new undertakings in free trade zones; a definition in s.2 would bind throughout, but the Explanations to ss.80HHC and 80HHE are expressed to apply 'for the purposes of this section only'; and if the denominator includes an amount of a type the numerator does not, the formula renders undesirable results (paras 10, 14). It then applied the rule of harmonious construction, which it called the thumb rule of interpretation, so that the enactment reads as a consistent whole (para 15), and drew on CIT v. J.H. Gotla for the proposition that where a plain literal reading produces a manifestly unjust result the Court may modify the language to achieve the legislature's intention and prefer a construction that results in equity rather than injustice (para 16). It adopted the reasoning of the Karnataka High Court in CIT v. Tata Elxsi Ltd., that where a word is not defined the ordinary meaning must conform to the context, so that what is excluded from export turnover must also be excluded from total turnover since export turnover is a component of it (para 17). Applied to these facts, allowing the deductions for freight, telecommunication and insurance only in export turnover would produce an inadvertent, unlawful, meaningless and illogical result causing grave injustice (para 19); and in common parlance, the object of the formula being to arrive at the profit from export business, any other reading makes it unworkable and absurd (para 20). In the words reproduced by the source cited on this page: "In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature." The decision followed or applied CIT v. J.H. Gotla [1985] 156 ITR 323 (SC); CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 / 204 Taxman 321 (Kar.).
It was decided by the Supreme Court on 2018-04-24 and is reported as [2018] 404 ITR 719 (SC); [2018] 93 taxmann.com 33 (SC); [2018] 255 Taxman 313 (SC); [2018] 302 CTR 191 (SC) — Civil Appeal Nos. 8489-8490 of 2013 and others. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10A, section 80HHC, section 80HHE, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed with no order as to costs (para 22). The definitions of 'total turnover' in ss.80HHC and 80HHE cannot be adopted for s.10A: those Explanations say 'for the purposes of this section only', and a definition binds across the Act only where it is in s.2; where the meaning is clear there is no necessity of importing one from another provision (para 14). What is excluded from export turnover must therefore also be excluded from total turnover, export turnover being one of the components of total turnover; any other interpretation would run counter to the legislative intent and is impermissible (para 17). The Court set out the resulting formula, with export profit as total business profit multiplied by export turnover as defined in Explanation 2(iv) over that export turnover plus domestic sale proceeds (para 18). The same principle applies to expenses incurred in foreign exchange for providing technical services outside India, which must equally be excluded from total turnover (para 21). On the estimate that had started the dispute, the Court recorded that the Assessing Officer could not bring any evidence that the assessee was providing simply technical services independent of software development for which the foreign currency expenditure was incurred (para 12). It arises in Deductions & Disallowances and Capital Gains Exemptions matters, on section 10A, section 80HHC, section 80HHE of the Income Tax Act 1961, and was decided by Supreme Court of India — R.K. Agrawal and R. Banumathi, JJ; the judgment was delivered by Agrawal J. Civil Appeal Nos. 8489-8490 of 2013 and others. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Identify the excluded items by reference to the statutory definition — freight, telecommunication charges and insurance attributable to delivery of the software outside India, and expenditure in foreign exchange in providing technical services outside India — rather than by category names used in the accounts. For a current s.10AA claim, cite this decision together with the Tribunal decisions applying it to s.10AA; the Court itself was construing s.10A. Do not read it as authority for excluding an item from total turnover that was never excluded from export turnover in the first place.
Still good law. Followed by the Delhi Bench of the Tribunal in HCL Technologies Ltd. v. Deputy Commissioner of Income-tax, Central [2026] 189 taxmann.com 11 (Delhi - Trib.), decided 30 July 2026, which records this decision as followed at its para 189 and directs that foreign currency expenditure attributable to technical services and data and link charges reduced from export turnover be reduced from total turnover as well. This decision affirmed three High Court judgments — CIT v. Samsung Electronics Co. Ltd. [2012] 17 taxmann.com 250 (Kar.), CIT v. Tata Elxsi Ltd. [2012] 17 taxmann.com 100 (Kar.) and CIT v. Gem Plus Jewellery India Ltd. [2010] 194 Taxman 192 (Bom.) — so the position it settles was already the law in three High Courts. Section 10A itself no longer applies to current years; the provision carrying the same formula is s.10AA, and the reasoning is applied to s.10AA by the Tribunal, but this judgment says nothing about s.10AA. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
ON THE REPORT AND THE QUOTATION. The judgment is reported at [2018] 404 ITR 719 (SC) and at three other references, which are set out in 'reported'. The sentence quoted on this page is taken verbatim from paragraph 19, including its own typography - 'Section10A' without a space, and 'the Respondent' rather than 'the assessee'. It is reproduced as printed rather than tidied. THE MOST IMPORTANT CAUTION ON THIS PAGE. The Court decided the point on section 10A. Section 10AA is not mentioned anywhere in the judgment. The statement that the same reasoning applies to section 10AA rests on later Tribunal decisions, not on anything said here, and a reply that attributes a section 10AA holding to this judgment will be answered in a line. Cite the decision for the construction of the section 10A formula and cite the Tribunal decisions separately for the carry-over to section 10AA. THIS WAS A BATCH. Appeals from the Delhi, Karnataka and Bombay High Courts were disposed of by a common judgment, and three High Court decisions were affirmed - the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. and in CIT v. Tata Elxsi Ltd., and the Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. The position the judgment settles was therefore already the law in two High Courts before it, which is worth saying when the decision is met with an argument that it changed the law. HOW THE DISPUTE ACTUALLY AROSE, which is not how it is usually cited. It began not as a pure computation question but as an estimate. The Assessing Officer attributed 60 per cent of the software development charges to technical services rendered outside India and the Commissioner (Appeals) attributed 10 per cent. The Court recorded at paragraph 12 that the Assessing Officer could not bring any evidence that the assessee was providing simply technical services independent of software development for which the foreign currency expenditure was incurred. So the estimate fell for want of evidence, and the computation point was decided on the footing that whatever is excluded from export turnover comes out of total turnover as well. ON THE DEFINITIONS POINT, which travels furthest. The Court held that the definitions of 'total turnover' in sections 80HHC and 80HHE cannot be carried into section 10A, because those Explanations are expressed to apply 'for the purposes of this section only', and a definition binds across the Act only where it sits in section 2. That is a general proposition about the Act's drafting and it is useful well beyond this fraction. It does not decide what else may or may not be inside total turnover — scrap sales, other income, foreign exchange gains — and it does not deal with the s.10AA sunset or with units whose deduction period has partly run. It does not lay down how to bifurcate a composite charge between software development and technical services rendered abroad; on these facts it held only that the Assessing Officer had produced no evidence for the split he made, so the question of how such a split should be made if evidence existed is untouched. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with no order as to costs (para 22). The definitions of 'total turnover' in ss.80HHC and 80HHE cannot be adopted for s.10A: those Explanations say 'for the purposes of this section only', and a definition binds across the Act only where it is in s.2; where the meaning is clear there is no necessity of importing one from another provision (para 14). What is excluded from export turnover must therefore also be excluded from total turnover, export turnover being one of the components of total turnover; any other interpretation would run counter to the legislative intent and is impermissible (para 17). The Court set out the resulting formula, with export profit as total business profit multiplied by export turnover as defined in Explanation 2(iv) over that export turnover plus domestic sale proceeds (para 18). The same principle applies to expenses incurred in foreign exchange for providing technical services outside India, which must equally be excluded from total turnover (para 21). On the estimate that had started the dispute, the Court recorded that the Assessing Officer could not bring any evidence that the assessee was providing simply technical services independent of software development for which the foreign currency expenditure was incurred (para 12).
TaxSphere, “CIT v HCL Technologies Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-hcl-technologies-export-turnover-total-turnover/ (validity last checked 2026-08-22)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
When I reduce export profits from book profit under section 115JB, do I take the full section 80HHC(3) figure or only the 80 per cent the phase-out allows?
What if the law itself was unsettled when the officer decided?
Must my 10A unit's profits be reduced by other units' losses before the deduction?
Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
