2014 (11) TMI 141 - AT - Income Tax

Tribunal upholds denial of exemption under section 10B but allows deduction under section 10A for software export profits.

Clarion Technologies Pvt. Ltd. Versus Dy. Commissioner of Income Tax

The Tribunal upheld the denial of exemption under section 10B due to the requirement for approval by the Board appointed by the Central Government. ... Claim of exemption u/s 10B - Development and export of computer software – Held that:- The assessee is a 100% EOU is approved by the Director, STPI and therefore it should be taken as a substantive compliance with the prescription contained in Explanation 2(iv) below section 10B of the Act – In THE COMMISSIONER OF INCOME TAX Versus REGENCY CREATIONS LTD. [2012 (9) TMI 627 - DELHI HIGH COURT] similar issue has been decided - admittedly, the 100% EOU of the assessee does not enjoy any specific approval from the authority referred to in Explanation 2(iv) below section 10B of the Act – the decision relied upon by the assessee in COMMISSIONER OF INCOME TAX Versus TECHNOVATE E SOLUTIONS PVT LTD [2013 (3) TMI 372 - DELHI HIGH COURT] cannot be followed as the issue deals with the provisions of section 10A of the Act and not with section 10B of the Act, which is the subject-matter of controversy in the present case, thus, so far as the action of the lower authorities in holding that the 100% EOU of the assessee was not entitled for the benefit of section 10B of the Act is concerned is upheld – Decided against assessee. Alternate claim to allow deduction u/s 10A – Held that:- In the past years assessee has been allowed the claim of deduction u/s 10B of the Act - the stand of the Revenue that assessee cannot be allowed the benefits of section 10A of the Act merely because the prescribed Audit Report in Form No.56F was not filed in the return of income, is quite erroneous - Pertinently, after denial of deduction u/s 10B of the Act in the assessment order, the earliest opportunity for the assessee to stake claim for deduction u/s 10A of the Act was before the CIT(A) - section 10A of the Act provides a deduction of such profits and gains derived by an undertaking from export of articles or things or computer software manufactured or produced by it - The assessee claimed that it has undertaken export of computer software manufactured by it and its unit is registered with Director, STPI - The approval granted by Director, STPI has been held to be a sufficient compliance with requirements of section 10A(2)(i)(b) of the Act even as per the CBDT vide Instruction No.1 of 2006 dated 31.03.2006 - prima-facie the 100% EOU of the assessee, being registered with STPI, is eligible to stake claim for deduction u/s 10A of the Act, provided the other conditions laid down in section 10A of the Act are satisfied – the matter is remitted back to the AO for verification of claim of deduction u/s 10A – Decided in favour of assessee. Mark up of expenses to different units - Whether the CIT(A) has erred in holding that the profit is a markup of 20% on the expenditure attributable to Bangalore and Ahmedabad units and the same will not be eligible for deduction u/s 10B or 10A in respect of the profits – Held that:- The fact of the present case does not suggest that the support centers at Ahmedabad and Bangalore carry out any other business - The activities being carried out can, at best be, considered as supporting activities to the activity of software development and exports effectuated from the STPI unit at Pune - The finding of the CIT(A) that the specific jobs being executed by the Ahmedabad and Bangalore centers are inseparable part of software development and export unit at Pune coupled with the findings of the AO that the Bangalore and Ahmedabad centers do not have separate account books, expenditure or turnover reflects that the two centers cannot be said to be any other ‘businesses’ being run by the assessee - the stand of the CIT(A) in holding that the profits are required to be attributed to the Bangalore and Ahmedabad centers and only the resultant profit shall be eligible for the deduction u/s 10B or 10A of the Act is not justified – Decided in favour of assessee. Issues Involved:1. Eligibility for exemption under section 10B of the Income Tax Act.2. Alternate claim for deduction under section 10A of the Income Tax Act.3. Quantum of deduction under section 10B.4. Disallowance under section 14A of the Income Tax Act.Detailed Analysis:1. Eligibility for Exemption under Section 10B:The primary issue revolves around the eligibility of the assessee for exemption under section 10B of the Income Tax Act. The assessee's unit was registered with the Software Technology Park of India (STPI) and claimed exemption under section 10B. The Assessing Officer denied this claim based on the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Regency Creations Ltd., which held that approval by the STPI is not sufficient for section 10B benefits; the approval must come from the Board appointed by the Central Government under section 14 of the Industries (Development and Regulation) Act, 1951. The CIT(A) concurred with the Assessing Officer. The Tribunal upheld this view, stating that the approval by the Director, STPI, does not meet the requirement specified in Explanation 2(iv) below section 10B of the Act.2. Alternate Claim for Deduction under Section 10A:The assessee raised an alternate plea for deduction under section 10A of the Act, which was also denied by the CIT(A) on the grounds that the assessee did not demonstrate compliance with all the requirements, including furnishing the specified Audit Report in Form No.56F. The Tribunal found merit in the assessee's argument that the claim for section 10A was made after the disallowance of section 10B and directed the Assessing Officer to verify the claim for deduction under section 10A, considering the Form No.56F furnished by the assessee and any other relevant material.3. Quantum of Deduction under Section 10B:The Assessing Officer limited the deduction under section 10B to the profits of the Pune unit only, as the units at Bangalore and Ahmedabad were not registered under STPI. The CIT(A) upheld this view but re-computed the profits of the non-STPI units with a markup of 20% on their expenditure. The Tribunal disagreed with the CIT(A), stating that the activities at Bangalore and Ahmedabad were inseparable parts of the software exported from the Pune unit and did not constitute 'any other business' within the meaning of section 80-IA(8). Thus, the Tribunal held that the entire profits from the software development and export should be eligible for deduction under section 10B or 10A, as applicable.4. Disallowance under Section 14A:The assessee did not press the ground regarding the disallowance of Rs. 1,29,852/- under section 14A of the Act, and the Tribunal dismissed this ground accordingly.Conclusion:The Tribunal upheld the denial of exemption under section 10B based on the requirement for approval by the Board appointed by the Central Government. However, the Tribunal directed the Assessing Officer to consider the alternate claim for deduction under section 10A, subject to verification of compliance with the prescribed conditions. The Tribunal also ruled that the entire profits from the software development and export should be eligible for deduction, rejecting the proportionate disallowance applied by the lower authorities. The disallowance under section 14A was dismissed as not pressed.