2013 (11) TMI 1311 - AT - Income Tax

Tribunal rules in favor of assessee - Section 10A deduction allowed, some issues remanded for reconsideration.

The Tribunal ruled in favor of the assessee regarding the denial of deduction under Section 10A for the Chennai unit, finding it to be a separate and ... Exemption u/s 10A – The assessee is engaged in the business of rendering software development services and registered under STPI scheme - It has two units namely Hyderabad Unit and Chennai Unit - Held that:- The assessee invested capital separately and distinctly for creating infrastructure for Chennai unit - It has built up separate infrastructure, such as building, furniture, computers and other infrastructure, like employees etc. - The assessee has separately complied with all the legal as well as administrative requirements for starting a separate business unit at Chennai - Distinct capital was invested in creating a new unit at Chennai, without comprising the employees strength of the Hyderabad Unit - There is no relocation of transfer of plant and machinery in any form from Hyderabad Unit to Chennai Unit - The nature of services rendered by the assessee through both these units are classified into three categories, (1) BPM, (2)ECM and (3) Data warehousing - The services of both the units are distinct and separable - Existence of some old employees in the new undertaking is not a disqualification for granting exemption benefit to the assessee under S.10A as long as larger chunck of HR Department has not moved to the new unit from the old one - If both the units are existing and doing the declared business and are not formed out of the existing business, the assessee must not be denied the benefits of S.10A - The old as well as new unit engaged in the same business with identical product shall not contribute to the denial of the beneficial exemption to the assessee – Decided in favour of assessee. Computation of relief u/s 10A – Communication charges and insurance charges and reimbursement of expenses to exporter – Held that:- Following Patni Telecom (P) Ltd V/s. ITO [2008 (1) TMI 452 - ITAT HYDERABAD-A] - To constitute export turnover the consideration should have a nexus with the sale proceeds from export of goods or computer software and that there should be an element of profit in such consideration – Following California Software Co. Ltd. V/s. ACIT [2008 (8) TMI 430 - ITAT MADRAS-A] - The issue was restored for fresh decision. Disallowances u/s. 40A(3), u/s. 40A(7) and u/s. 43B – Held that:- Following Zawata India P. Ltd. [2010 (1) TMI 1102 - ITAT HYDERABAD] – Decided against Revenue. Issues Involved:1. Denial of deduction under Section 10A for the Chennai unit.2. Treatment of communication and insurance charges for the computation of deduction under Section 10A.3. Exclusion of reimbursement of expenses from export turnover.4. Consideration of statutory disallowances as eligible business profits for deduction under Section 10A.Issue-wise Analysis:1. Denial of Deduction under Section 10A for the Chennai Unit:The primary issue revolves around whether the Chennai unit was formed by splitting or reconstructing the existing Hyderabad unit, thereby making it ineligible for deduction under Section 10A. The assessing officer denied the deduction, citing reasons such as common clients, service agreements, and employee transfers between the units. The CIT(A) upheld this view, asserting that the Chennai unit was separate in form but not in substance, and the assessee failed to demonstrate the business necessity for starting the Chennai unit.The Tribunal, however, ruled in favor of the assessee. It noted that both units had separate STPI registrations, distinct investments in fixed assets, and different business processes. The Tribunal emphasized that the Chennai unit's services (data warehousing) were distinct from the Hyderabad unit's services (BPM and EPM). Additionally, the Tribunal referenced several judicial precedents to conclude that the Chennai unit was a separate and independent undertaking, not formed by splitting or reconstructing the Hyderabad unit. Consequently, the Tribunal allowed the assessee's grounds related to the denial of deduction under Section 10A.2. Treatment of Communication and Insurance Charges for Computation of Deduction under Section 10A:The CIT(A) held that communication and insurance charges should be reduced from both export turnover and total turnover as they were attributable to the delivery of software outside India. The Tribunal agreed with the need for parity in reducing these charges from both export and total turnover. However, it set aside the CIT(A)'s order and remanded the issue back to the assessing officer for fresh consideration, directing the officer to re-evaluate the matter in light of relevant case laws and after giving the assessee a reasonable opportunity to be heard.3. Exclusion of Reimbursement of Expenses from Export Turnover:The CIT(A) excluded the reimbursement of expenses from export turnover, arguing that the assessee did not prove these expenses were not part of 'other expenses' incurred for rendering technical services outside India. The Tribunal, while addressing this issue, referred to the definition of 'export turnover' and relevant judicial precedents, including the decisions in Patni Telecom P. Ltd. and California Software Co. Ltd. It remanded the matter back to the assessing officer for fresh consideration, instructing the officer to re-evaluate the exclusion of these reimbursements from both export and total turnover.4. Consideration of Statutory Disallowances as Eligible Business Profits for Deduction under Section 10A:The CIT(A) directed that statutory disallowances under Sections 40A(3), 40A(7), and 43B should be considered as eligible business profits for deduction under Section 10A. The Tribunal upheld this direction, citing consistent views taken by the Tribunal in similar cases, such as Planet Online (P) Ltd. and Zawata India P. Ltd. Consequently, this ground of the Revenue was dismissed.Conclusion:The Tribunal partly allowed the assessee's appeal, granting relief on the primary issue of deduction under Section 10A for the Chennai unit and remanding other issues for fresh consideration. The Revenue's appeal was also partly allowed for statistical purposes, primarily to re-evaluate the treatment of communication, insurance charges, and reimbursement of expenses.