AI Drafter 
TaxTMI 
TaxTMI 
2014 (12) TMI 253
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....OKO Semiconductor and Exar Corporation - 26 • Local consulting - 10% • Other intellectual property, distribution & design service business - 19%. 2.1 CMS performed certain services and used to outsource some of its activities to CG CoreEL Logic Systems Ltd. (CGCLS) a Pune based Indian company. The particular tasks outsourced involved field programmable gate array (FPGA) design, BLSI design verification, assistance in verifying intellectual property design and assistance in supporting FPGA customers in India. CMS itself performed intellectual property architecture and key technology critical design. In 1999, major changes occurred in the business model of CMS because of the following reasons: - Its main customer Xilinx Inc which accounted for 45% of the revenue was sold out. - OKI Semiconductor decided to close its development subsidiary in USA in1999. In addition Exar Corporation project was completed in 1999. - Design agreements with other major customers were either terminated or came to an end. 2.2 Due to the drastic set back in business of CMS in 1999 which also affected the ....
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.... us, we consider it inappropriate to deal with that issue. However, so far as wrong claim of deduction u/s 10B is concerned, AO was of the view that as the assessee is not a new undertaking but has been created by splitting up/reconstruction of a business already in existence i.e. CGCLS, the exemption claimed u/s 10B cannot be allowed. He, therefore, proposed to disallow the exemption claimed. Though, assessee objected to proposed disallowance of exemption claimed but the AO rejecting all submissions of assessee, held that assessee is not eligible to claim deduction u/s 10B and completed the assessment accordingly. The reasons on which AO came to his conclusion are as under: (i) that the ultimate shareholders of both the companies were same (ii) that the business / product of the Appellant is same (iii) that the Directors of both companies were the same (iv) that CGCLS has transferred its entire P&M and computer software to the Appellant in AY 2001-02 (i.e. second year of operation of the Appellant) (v) that in the first year of formation all the five employees of the Appel....
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....arious arguments in support of its claim of exemption u/s 10A. The ITAT after considering the submissions of assessee and other materials on record, prima-facie, was of the view that the assessee has wrongly claimed exemption u/s 10B though legally assessee may be eligible for exemption u/s 10A. Ultimately, the ITAT set aside the order of the CIT(A) and restored the matter back to the file of ld. CIT(A) for considering assessee's claim of exemption afresh by observing as under: "15. After having gone through the above submissions, we find that before us, the ld. AR has tried to meet out the above stated objections raised by the authorities below while denying the claimed deduction u/s 10B of the Act. The Ld. AR supporting the additional ground has also submitted that the assessee is actually eligible for the deduction u/s 10A of the Act, but, has mistakenly claimed deduction u/s 10B of the Act. We, prima facie, find substance in the above submission of the Ld. AR in support of the claimed deduction. At the same time, we are of the view that the related facts regarding the fulfillment of the claimed deduction as s....
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....e not same and were different: (i) The Directors of the companies as on 31.03.2000 i.e., in the 1st year are as under: CGCLS Appellant K. K. Nohria T. A. Ramaswamy B. M. Suri S. Javaram Mr. Chetan V. Sanghavl Mrs. Champa V. Sanahavi V. M. Sanghavi (ii) Even if the Directors of both the units are same, lOA deduction cannot be denied on the ground that a new unit is formed by way of reconstruction of existing unit. (c) That the product of the CGCLS and the appellant company are different: (i) CGCLS was a designing company. It used to accept designing work from CMS. In contrast, the appellant designed and developed products (Chips) for CMS. (ii) The specific tasks undertaken by the appellant can be broken down as under: 1. Products requirements study 2. System level architecture 3. Detailed IC architecture 4. Detailed IC Design broken into ....
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....dertaken by the appellant. (vi)Though the generic names of the product developed by both the companies is one and the same, the specific tasks performed by two companies are different. (vii) Even if the product manufactured by both the units is same, lOA deduction cannot be denied on the ground that there was a reconstruction of an existing unit. (d) That the CGCLS has not transferred its plant and machinery and computer software to the appellant: (ii) In A.Y.2001-02 CGCLS transferred its fixed assets to the appellant. However, such additions transferred constituted less than 20% of total assets of the appellant. (iii) Even if limit of 20% is to be seen every year, the appellant has satisfied this criteria as well. (e) That the 58% of the employees were from CGCLS : (i) There is no legal requirement that the appellant should not employ the persons who were previously employed by any other company. The employees who were earlier working with CGCLS resigned from their jobs and joined the appellant company. In any case 10A deduction ....
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....(iv) The Bangalore unit did not suffer from the purported defects pointed out for Pune unit. (v) That section 10A(S) does not prescribe that form nO.S6F has to be filed before the time allowed u/s.139(1). Instead it requires that Form No.S6F has to be filed alongwith the return of income. Since Form No.56F was filed with revised return of income, the claim u/s.10A is allowable. (j) That the STPI approval dated 17.01.2000 is in the name of appellant only and not in the name of CMS." 6. Ld. CIT(A) noted that the ultimate ownership of CGCLS and of CMS is in the hands of Crompton Greaves and Chetan Sanghvi. The product produced by both the units is one as revealed from the annual reports of the respective companies. In this context, learned CIT(A) referred to the observations made by her predecessor in the appeal order passed earlier which was set aside by the Tribunal. Further, learned CIT(A) noted the following facts: a) The appellant had only one sale in the AY 2000-01 in March 2000 of Rs. 2,93,153. b) The depreciation schedule for AY 2000-01 of assessee company and that of CGCLS show that the....
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....onstruction of existing unit, CGCLS. The very purpose of introducing section 10A I 10B were to encourage the new industrial units and not to extend the benefits to the units which were formed by way of splitting up I reconstruction of the existing units. The deductions u/s.l0A/l0B and similar incentives of the other sections are given especially in the initial stages of the company as there would be several teething problems in the beginning. And these exemptions I deductions help the companies to take off in the initial years smoothly. The Assessing Officer has also discussed elaborately by relating case laws on this subject. The case laws relied upon by the Assessing Officer discussed para 6(1) are very much applicable to the facts of the case, wherein similar circumstances the business was held to have been reconstructed out of the existing unit. Further, the facts of the appellant's case are identical with the facts in the case of China Information Technologies Pvt. Ltd. Vs. ITO, (2008) 25 SOT 432 (Mumbai, ITAT). The facts in China Information Technologies Pvt. Ltd. were there was an existing unit in SEEPZ the unit which was not entitled to lOA. The assessee took certain nu....
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....rt in the case of Sumati Dayal Vs. CIT 214 ITR 801 held that the human probability and circumstantial evidence has to be kept in mind to decide the genuineness of the transactions. Further, in case of Som Nath Maini VS CIT 306 ITR 414 the Hon'ble Punjab & Haryana High Court, held that genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy. 8.5 In view of the details discussed above, it is concluded that the appellant company was formed by splitting / reconstruction of CGCLS to get the extended benefits u/s 10B, just before 10A benefit lapses for CGCLS with a clear motive of getting extended benefit u/s. 10A / 10B beyond 5 years of period. It is also pertinent to mention that the deductions under both the sections 10A I 10B are not allowable if the unit is formed by way of splitting up I reconstruction. Therefore, the appellant's grounds of appeal on the issue of claiming deduction u/s.l0Ail0B for A.Y.2001-02, 2002-03, 2003*04 & 2004-05 are dismissed. " 7. In course of proceeding before the ld. CIT(A), assessee also made an alternative claim to the effect that if assessee's claim of exem....
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....r the reasoning of AO and ld. CIT(A) in rejecting assessee's claim as culled out from the submissions made are as under: - Deduction u/s 10A for separate units cannot be denied when the new unit has a separate and distinct identity capable of independent existence from fresh investment, new plant and machinery, substantial increase in capacity, separate identifiable premises and a separate license. - Splitting up and reconstruction of the business already in existence suggests the splitting up or reconstruction of the existing business of assessee. - The owners/management of the newly formed undertaking/company are the same as the old undertaking/company cannot be the basis for denying the benefit of section 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence. - The fact that the newly formed undertaking dealt with the same or similar product; or carried on similar business activities as of the old undertaking, cannot be the basis for denying the benefit of section 10A on the alleged ground that the new undertaking is formed by....
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....also submitted that merely because the assessee was discharging larger functions, the fact that the existing business of CG Core EL Logic Systems Pvt Ltd was taken over cannot be wished away. It is also misnomer on the part of the appellant to state that it is a product company because the STPI registration is for "development of computer software". It is submitted even if a product is developed, it is only a software product, which would not be in technical terms much different from the consultancy service on software project because both the developments are as per the specifications of the client. c) It is also submitted that the fact that there were five employees with the assessee in the first year of operation and all of them resigned from CG Core EL Logic Systems Pvt Ltd and joined the assessee. In the second year, there were 118 employees, out of which 68 joined from CG Core EL Logic Systems Pvt Ltd. This clearly shows that the activity was shifted to the assessee from CG Core EL Logic Systems Pvt Ltd. The Hon'ble Bench may kindly note that in "computer software development", man power is the key and the entire business would be closed if the techn....
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....eEL Logic Systems Pvt. Ltd. was transferred to assessee which amounts to reconstruction of existing business and which makes assessee ineligible for deduction u/s 10A. 11. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions relied upon by the parties before us. For the sake of clarity, it needs to be mentioned that against the order passed by the learned CIT(A) earlier assessee came in appeal before the ITAT, Pune Bench. In course of hearing of appeal before the ITAT, Pune Bench apart from challenging the disallowance of deduction claimed u/s 10B, assessee raised an additional ground by claiming that it is eligible for deduction u/s 10A but it has mistakenly claimed deduction u/s 10B of the Act. After considering the submissions of assessee, the Tribunal though prima-facie found substance in the aforesaid claim of assessee but considering the fact that related issues regarding fulfillment of conditions of deduction claimed needs fresh examination remitted the issue back to the file of the learned CIT(A). 12. As can be seen from the ope....
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.... approval dated 17/01/2000 is not in the name of assessee but in the name of CG CoreEL Micro Systems Inc. - There were transfer of assets from CG CoreEL Logic System Pvt. Ltd to assessee on 30/06/00 worth Rs. 17,16,681. - The products produced by assessee and CG CoreEL Logic System Pvt. Ltd are similar, which as per the submissions of assessee are "design and application support services for developing communication ICs and telecommunication silicon IPs". - CG CoreEL Logic System Pvt. Ltd. was an STPI unit since 1996-97 to 1999-00 and it was claiming 10A deduction. Since assessee company was formed, the sales of CG CoreEL Logic System Pvt. Ltd. has gone down drastically whereas assessee got STPI approval on 17/01/2000 and its sales were Rs. 11,90,17,282 in FY 2000-01 when the products of both the companies are same. 13. As can be seen from the impugned order of learned CIT(A), while rejecting assessee's claim she has merely adopted the reasonings of AO and her predecessor in the earlier round of litigation. 14. In the aforesaid factual background it is to be decided whether the conclusion drawn by AO and ld. CI....
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....y, section 10B speaks of exemption to newly established 100% export oriented undertakings in respect of income derived from export of articles or things or computer software for a period of 10 consecutive assessment years subject to fulfillment of conditions imposed under sub-section (2) which is reproduced hereunder: "10B(2): This section applies to any undertaking which fulfils all the following conditions, namely :- (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.-The provisions of Explanation 1 and Explanation....
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....carried on but by piercing the veil of the new business, it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investment of new capital is imperative. The words 'the capital employed' in the principal clause of s. 15C are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under s. 15C. Sub-so (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under s. 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly s....
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....d not be formed by the transfer to the new business of building, machinery or plant used by another prior to April I, 1948, must apply in the context of the previous business being carried on by the assessee himself. These words must be held to take colour from the context in which they are appearing." 18. Further, the Hon'ble AP High Court also had an occasion to interpret section 80J which also employed similar expression. For the sake of convenience section 80J is reproduced hereunder: "80J (1): Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under s. 80HH or s. 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking o....
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....econstruction" of the business already in existence necessarily suggests the splitting up or reconstruction of the existing business of the assessee. The words "of the assessee" have necessarily to be read into the sub-section. Similarly, the third excluded category in cl. (ii) also must necessarily refer to the case of the same assessee. The words "by the assessee" must be read at the end of the sub- section. The expression "transfer" in the context, means not transfer as used in the Transfer of Property Act, but transfer by the assessee of the assets used by him previously for any purpose, i.e., where the assessee does not invest any capital, but merely transfers plant and machinery used by him previously either in an existing business or for any other purpose, he will not be entitled to the benefit. The words "for any purpose" were introduced by the 1961 Act by s. 84 which corresponds to the present s. 80J. In the 1922 Act, the words used were "plant and machinery previously used in any other business". The change brought about by the amendment is, the plant and machinery must not only not have been used in any business, but it should not have been used for any purpose. But the ....
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....distinct identity of the industrial set up. 21. The same view has also been expressed in a number of decisions of different high courts as well as this tribunal. Reference in this regard can be made to the following decisions: 1. CIT Vs. Finolex Cables Ltd., [2012] 209 Taxman 79 (Bom) 2. M/s Kakatiya Cements Vs. ACIT (ITA No. 931/Hyd/2011, dt. 04/01/12 3. Gujarat Alkalies and Chemicals Ltd. Vs. CIT 350 ITR 94 (Guj.) 4. ACIT Vs. Changepond Technologies P. Ltd., [2008] 119 TTJ 13 (Chennai) 22. Applying the tests laid down in the decisions referred to above to the facts of assessee's case it is seen that assessee has made substantial capital investment of Rs. 2 crore out of which about Rs. 1.23 crores was in new plant and machinery, fixed assets etc. which is clearly evident from the balance sheet and P&L A/c for AY 2000- 2001 submitted in the paper book. Assessee has employed substantial work force. It has started manufacture or production of articles in the industry set up as per annual report for year ended 31/03/2000. Though, assessee incurred loss in F.Y. 1999-2000 but it returned profit....
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....ot relevant to conclude that assessee has been formed by splitting up or reconstruction. Though, in earlier round of litigation, the coordinate bench after considering all these facts had directed the ld. CIT(A) to consider assessee's claim of exemption in the light of facts considered by the Tribunal but ld. CIT(A), in our view, has done precious little to either establish the fact that assessee is formed by split up, or reconstruction of business already in existence of assessee or to controvert the submissions of assessee which are supported by facts and evidences. Ld. CIT(A) has merely repeated the reasonings of AO and her predecessor in the appeal order passed earlier. On the contrary, the facts and evidences brought on record by assessee if considered in the light of the decisions referred to hereinbefore, clearly demonstrate that assessee company cannot be said to have been formed by splitting up, or reconstruction of a business already in existence of assessee or for that matter CG CoreEL Logic Systems P. Ltd. Thus, seen from any angle AO's and ld. CIT(A)'s view that assessee is formed by splitting up or reconstruction of a business already in existence cannot be accepted. ....
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....hile remitting the matter has specifically directed ld. CIT(A) to decide this issue but ld. CIT(A) has not given any specific finding. Be that as it may, undisputedly, both the units of assessee are approved as STPI units. While the Pune unit has been approved on 07/01/2000, the Bangalore unit was approved on 20/05/2000. Therefore, the appropriate provision under which assessee is entitled to claim exemption is section 10A. Accordingly, we direct the AO to verify and allow assessee's claim of exemption u/s 10A. 29. The next common issue in all these appeals is the alternative claim of the assessee that in case exemption u/s 10B/10A is not granted to Pune Unit, 10A deduction to Bangalore unit should be granted as it is not formed by splitting up or reconstruction of Pune Unit. 30. So far as the issue of 10A deduction claimed in respect of Bangalore Unit, the departmental authorities have denied such exemption to assessee on the ground that for availing the deduction assessee has to file return within the due date specified u/s 139(1). Further along with the return of income assessee has to furnish Form No. 56F certified by a qualified auditor quantifying the deduction claimed.....
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....10A, for ten consecutive asst. years which will be applicable to the income of assessee as a whole. However, considering the fact that parties were heard on this issue, we thought it appropriate to record our findings on this issue. Assessee's claim for deduction u/s 10A for the Bangalore unit has been basically rejected for two reasons. No separate books of account are maintained for both the units and assessee has not claimed 10A benefit in the original return filed. However, we are of the view that these cannot be the sole criteria for denying exemption u/s 10A if otherwise it can be proved that the Bangalore unit is not formed by splitting up or reconstruction of existing business of assessee. However, the assessee has to prove such fact by producing necessary evidence. As the issue has not been properly examined either by AO or by learned CIT(A), we are inclined to remit the matter back to the AO for considering afresh, if warranted, after affording reasonable opportunity of being heard to the assessee. 34. One more issue which arises only in AY 2008-09 is in respect of disallowance of an amount of Rs. 98,77,157, being provision for expenses, while computing book profit u/s....