Section 10A of Income Tax Act: Export Undertakings in Free Trade Zones, EHTP, STP and SEZ
Section 10A contains the historical deduction framework for profits derived by eligible undertakings from export of articles, things or computer software. It is especially relevant to older assessment years, legacy claims and pending tax disputes.
- It concerns specified export-oriented undertakings in free trade zones, EHTP, STP and, for the relevant historical period, SEZs.
- The deduction was linked to profits derived from export of eligible articles, things or computer software.
- Eligibility included conditions concerning commencement, reconstruction of an existing business and transfer of previously used plant or machinery.
- Export proceeds were generally required to be received in or brought into India in convertible foreign exchange within the statutory period or an extended period allowed by the competent authority.
- The section contains its own formula for determining export profits and specific definitions.
What does Section 10A provide?
In substance, Section 10A allowed a deduction of qualifying profits and gains derived by an eligible undertaking from export of articles or things or computer software for the prescribed tax-holiday period. The section evolved through amendments and therefore must be read with the law applicable to the particular assessment year.
The original page reproduced the detailed statutory provisions, including the ten-year framework and special rules formerly applicable to certain SEZ undertakings. Those provisions remain relevant when examining historical assessments and litigation.
Key eligibility conditions under Section 10A(2)
Broadly, the undertaking had to satisfy the commencement conditions prescribed for the relevant zone or technology park. The provision covered undertakings beginning manufacture or production in a free trade zone from the specified period, an Electronic Hardware Technology Park or Software Technology Park from the specified period, and an SEZ for the historical period stated in the section.
The undertaking should not have been formed by splitting up or reconstruction of an existing business, subject to the statutory exception connected with Section 33B. It also should not have been formed by transferring previously used machinery or plant to the new business, subject to the rules incorporated by reference in the section.
Export proceeds and convertible foreign exchange - Section 10A(3)
Section 10A(3) required sale proceeds of eligible exports to be received in, or brought into, India in convertible foreign exchange within six months from the end of the previous year, or within such further period as the competent authority might allow. For this purpose, the competent authority means the Reserve Bank of India or another authority authorised under the applicable foreign-exchange law.
The section also treats export proceeds credited to a qualifying separate bank account outside India, with Reserve Bank of India approval, as received in India.
How export profits are computed - Section 10A(4)
For the purposes of the deduction, Section 10A(4) uses a proportionate formula:
This statutory formula is central to the computation of the amount attributable to eligible exports.
Accountant's report - Section 10A(5)
For assessment years to which the requirement applies, the deduction is not admissible unless the assessee furnishes the prescribed accountant's report, as contemplated by Section 10A(5), certifying that the deduction has been correctly claimed. The provision refers to an accountant within the meaning of Section 288 and to the specified date referred to in Section 44AB.
Amalgamation and demerger - Section 10A(7A)
Where an eligible undertaking of an Indian company is transferred to another Indian company under a scheme of amalgamation or demerger before expiry of the eligible period, Section 10A(7A) regulates who may claim the deduction for the year of transfer and the remaining period.
SEZ transition - Section 10A(7B) and Section 10AA
Section 10A(7B) excludes an undertaking that is a Unit within the meaning of the Special Economic Zones Act, 2005 where it began the specified activity during the previous year relevant to an assessment year commencing on or after 1 April 2006. The separate provision for eligible newly established SEZ Units is Section 10AA of the Income Tax Act.
Important definitions in Section 10A
Computer software
The statutory definition includes a computer programme recorded on specified media and also customised electronic data or notified products or services of a similar nature, where transmitted or exported from India outside India by any means.
Convertible foreign exchange
This means foreign exchange treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 and the applicable rules or corresponding law.
Export turnover
Export turnover broadly refers to consideration for eligible exports received in or brought into India in convertible foreign exchange in accordance with Section 10A(3), subject to the statutory exclusions for specified freight, telecommunication, insurance and foreign-exchange expenditure on technical services outside India.
Electronic Hardware Technology Park and Software Technology Park
These expressions refer to parks set up in accordance with the respective EHTP or STP schemes notified by the Government of India through the concerned Ministry.
Free trade zone
The definition historically refers to the Kandla Free Trade Zone and Santacruz Electronics Export Processing Zone and includes other free trade zones notified by the Central Government for Section 10A.
Manufacture or produce
For Section 10A, the expression expressly includes cutting and polishing of precious and semi-precious stones.
Other important provisions
Section 10A also contains rules dealing with depreciation and specified deductions after the tax-holiday period, carry-forward or set-off of certain historical losses, interaction with deductions under provisions such as Sections 80-IA and 80-IB, transfers under amalgamation or demerger, and an option under sub-section (8) to furnish a written declaration that Section 10A should not apply for the relevant assessment years.
On-site development of computer software, including services for development of software outside India, is addressed by an explanation deeming qualifying profits and gains to arise from export of computer software outside India.
Section 10A cutoff from Assessment Year 2012-13
The fourth proviso to Section 10A(1) states that no deduction under the section shall be allowed to any undertaking for the assessment year beginning on 1 April 2012 and subsequent years. Accordingly, the section is now chiefly relevant when analysing earlier assessment years, reopening or appellate proceedings, legacy tax positions and judicial disputes concerning claims made for eligible years.
Related Income Tax provisions
For surrounding provisions, see Section 10 - incomes not included in total income, Section 10AA - SEZ Units, and Section 10B - hundred per cent export-oriented undertakings.
This page is an explanatory legal reference. The applicable text, amendments and judicial interpretation should be checked for the assessment year and facts concerned.