2011 (11) TMI 631 - AT - Income Tax

Claim of deduction under section 10A in respect of Unit-B primarily - whether the said Unit is neither separate and nor has a distinct identity but was a mere expansion of the existing business - Held that - Approach of the Assessing Officer is untenable inasmuch as on facts and in law as succinctly brought out by the Commissioner of Incometax (Appeals) Unit-B is entitled to be understood as a separate and independent Unit for the purpose of claiming deduction under section 10A of the Act. Moreover in the course of hearing before us the learned Counsel for the respondent-assessee pointed out that even after the expiry of tax holiday period of 10 years in Unit-A the activities and profits of Unit-A have shown positive growth and this itself shows that there was no intention to claim separate deduction for Unit-B merely for the purposes of enjoying tax holiday. The aforesaid plea has not been controverted before us. Considering the totality of circumstances in our view the Commissioner of Income-tax (Appeals) rightly dis-agreed with the apprehension of the Assessing Officer on this matter and has correctly upheld the assessee s claim for treating Unit-B as a separate and independent Unit for the purposes of claim of deduction under section 10A of the Act. In this view of the matter we therefore find no merit in the Ground of appeal raised by the Revenue and the same is dismissed accordingly. Incomes by way of sales-tax refund liabilities no longer required written back and Profit on sale of assets are eligible incomes for computing deduction under section 10A of the Act for Unit-A

Issues Involved:
1. Eligibility of Unit-B for deduction under section 10A.
2. Inclusion of certain incomes for computing deduction under section 10A.
3. Setting-off loss of Unit-B against profits of Unit-A.
4. Adjustment of telecommunication charges from export turnover.
5. Adjustment of telecommunication charges and expenses incurred in foreign currency from total turnover.

Detailed Analysis:

1. Eligibility of Unit-B for Deduction under Section 10A:
The primary issue was whether Unit-B, set up during the assessment year 2004-05, was a separate and distinct entity eligible for deduction under section 10A. The Assessing Officer (AO) argued that Unit-B was merely an expansion of Unit-A and not independently eligible for the deduction. Key reasons included shared premises, common bond register, and no specific recruitment for Unit-B. The Commissioner of Income-tax (Appeals) (CIT(A)) disagreed, concluding that Unit-B was a physically new and separate undertaking. This conclusion was based on lease agreements, site inspections, and distinct business activities (Call Centre) carried out by Unit-B. The Tribunal upheld the CIT(A)'s findings, emphasizing that the approval from STPI and other governmental permissions supported the independent status of Unit-B.

2. Inclusion of Certain Incomes for Computing Deduction under Section 10A:
The second issue was whether incomes from sales-tax refund, liabilities no longer required, and profit on sale of assets should be included in the profits for computing deduction under section 10A. The AO excluded these incomes, citing that they were not derived from export activities. The CIT(A) reversed this, stating that section 10A's statutory formula required all business profits to be considered, not just those directly from exports. The Tribunal supported this view, referencing the Mumbai Bench decision in Livingstones Jewellery (P) Ltd., which held that all profits with a nexus to the business should qualify for deduction under section 10A.

3. Setting-off Loss of Unit-B against Profits of Unit-A:
The AO set off the loss of Unit-B against the profits of Unit-A to compute the deduction under section 10A. The CIT(A) upheld this, but the Tribunal overturned it, citing the Cochin Bench decision in M/s F.C.I Technology Services Ltd. The Tribunal held that each unit's deduction under section 10A should be computed independently without setting off losses from other units, whether eligible or non-eligible.

4. Adjustment of Telecommunication Charges from Export Turnover:
The assessee contested the reduction of 80% of telecommunication charges from the export turnover, arguing that only 5-10% should be attributable. However, this ground was not pressed during the hearing, and the Tribunal dismissed it as not pressed.

5. Adjustment of Telecommunication Charges and Expenses Incurred in Foreign Currency from Total Turnover:
The AO adjusted telecommunication charges and expenses incurred in foreign currency only from the export turnover, not from the total turnover. The CIT(A) upheld this, but the Tribunal disagreed, referencing the Bombay High Court decision in Gem Plus Jewellery India Ltd. The Tribunal ruled that for parity, these expenses should also be reduced from the total turnover when computing the section 10A deduction.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, affirming the independent status of Unit-B for section 10A deduction, including all business-related incomes in the deduction computation, and ensuring parity in adjusting expenses from both export and total turnover.

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