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2010 (10) TMI 1083 - AT - Income TaxSet off allowable u/s 10A/10B - A.O. observed that the assessee had suffered losses for the assessment year 2002-03, which it had carried forward and had set off against the profits of the subsequent years - A.O. was of the opinion that such a set off was not allowable u/s 10A/10B of the Act and relied on section 10B(6)to arrive at his conclusion - CIT (A) after considering the submissions made before him, allowed the ground of the assessee - HELD THAT - The undisputed fact in this case is that the assessee has not claimed deduction u/s 10A for the assessment year 2002-03. An order u/s 143(3) was passed on 24-3- 2005 for the assessment year 2002-03 and returned loss has been accepted. Thus the assessee is entitled for carry forward and set off of the assessed loss pertaining to the assessment year 2002-03. Sub-clause (2) of clause (6) to section 10A clearly states that no loss shall be carried forward or set-off where such loss relates to any of the relevant Assessment Years. There is no ambiguity in the Act and it is also an undisputed fact that the appellant was entitled to deduction u/s 10A which it had been allowed in the A.Y. 2001-02 and which it allegedly did not claim in the A.Y. 2002-03. It is also not in dispute by the A.O. that the appellant had not made a declaration as required u/s 10A(8) of the Act for not claiming deduction u/s 10A - appellant has pointed out to the declaration vide letter dated 08.10.2002 In view of the above facts and circumstances of the case, the stand of the A.O. not allowing the set-off of carry forward loss incurred during the A.Y. 2002- 03 cannot be sustained. - Ground No.1 of the Revenue is dismissed. Claim u/s. 10B - on-site development of computer software at the site of customers abroad - Employees who have worked onsite had left India for USA, before the date of setting up of SEEPZ Unit - HELD THAT - From the facts it is clear that the finding of the AO that the employees do not belong to the Company is incorrect. All the employees belong to the company. They are the employees of M/s Geebs Software International P. Ltd. which has amalgamated to the assessee company. Just because the employees were allocated to an other unit of the company which is exempt u/s 10A in the earlier years, and because these employees were assigned duties of the SEZ units in the impugned assessment year, it does not lead to a conclusion that the assessee cannot claim exemption u/s 10B. The AO has granted exemption u/s 80HHE. The allegation that the payments not made are at arm s length is also not correct because for the assessment year 2003-04 the Transfer Pricing Officer has passed an order u/s 92CA(3) upholding the price paid by the assessee as that which is an another employee - Ground No.2 of the Revenue is dismissed. Exemption u/s 10B as worked out on proportionate basis - payments as made to certain companies on account of job work and concluded that as the assessee is not a manufacturer to that extent - assessee submitted that there is no finding whatsoever in the assessment order that what was contributed to the assessee company by the job work contractors, was part of a module and not the module itself. He argued that there is no prohibition laid down in the Act for getting jobs done on job work basis - HELD THAT - Nowhere in the assessment order, the AO has given a finding, that what is got by the assessee from the job work contractors is a product by itself. The assessee had in fact contended before AO that only a part work was done through job work contracts. The AO, in our considered view, was wrong in coming to a conclusion that in the case of manufacture of software, no part job can be outsourced, as in the case of other manufacturing activities. Out of a total receipt on account of sale of software of 13.11 crores, the outsourcing billing was ₹ 1.36 crores. A software product, contains within its numerous sub software programmes which are integrated. The fact is that the appellant through its 100% export unit exported computer software and the profits on which deduction has been claimed is derived from the unit/undertaking. If part of the work has been done by outside parties, it cannot be concluded that the profit has not been derived by the appellant from the undertaking. It is not in dispute that the entire profit of 100% is only out of the export undertaking. Under the circumstances, the stand of the A.O. cannot be sustained. We also hold that this decision is in line with the judgment of the jurisdictional High Court in the case of CIT vs. Penwalt India Ltd. 1991 (4) TMI 33 - BOMBAY HIGH COURT . This ground of the Revenue is dismissed. Deduction u/s 10B disallowed - restructure of the unit - Out of 5000 sq.ft. premises, 2,000 sq.ft. was earmarked for the new unit, which received permission from the Development Commissioner on 17-11-2001. Thus he concluded that the SEEPZ unit was a restructuring of an existing unit - HELD THAT - As carefully examined the order of the AO and have taken into account the various details filed by the appellant pertaining to the assets in question which exclusively belongs to the STPI Unit which was situated outside the SEEPZ-SEZ area and the Unit which was situated within the SEEPZ SEZ and conclude that the AO erred on facts. The Schedule of assets as per Schedule E shows additions to the opening balances - further, the ledger account of Computers purchased during the year 2003-04 along with the copies of the invoices, bills and challans clearly supports the view of the appellant that the Unit situated outside the SEEPZ Unit i.e. the STPI Unit which was itself eligible for deduction u/s 10A and which had been in earlier year allowed the deduction was a separate and exclusive Unit distinct from the SEEPZ-SEZ Unit and that in the Unit established in the SEEPZ, the addition to the fixed assets. AO erred in holding that there was a restructuring of the 10B Unit located in the SEEPZ-SEZ area and the old assets had been utilized in this particular Unit. The two units continued to be exclusive and distinct unit during the year and the Schedule of assets clearly shows that there was no restructuring. The stand of the AO cannot be upheld. To conclude, AO erred in disallowing the claim of the appellant u/s 10B. Software being done of outsourcing on job work basis and that the employees who have done onsite development were not appointed by the SEEPZ unit - As we follow our earlier order and dismiss this appeal of the Revenue. The fact that the assessee has not maintained separate books of account also does not permit the AO to deny exemption as held in the case of DCIT vs. Arabian Exports Ltd. 2007 (3) TMI 287 - ITAT BOMBAY-G . Even otherwise when the entire income is from the 10B unit, no separate books need be maintained. Appeals of the Revenue are dismissed.
Issues Involved:
1. Set off of losses under Section 10A/10B. 2. Deduction under Section 10B on receipt of Rs. 3,60,04,610/-. 3. Deduction under Section 10B on proportionate amount of Rs. 1,74,34,738/-. 4. Restructuring of the unit and eligibility for deduction under Section 10B. Issue-wise Detailed Analysis: 1. Set off of losses under Section 10A/10B: The Assessing Officer (A.O.) disallowed the set-off of losses for the assessment year 2002-03 against profits of subsequent years, relying on Section 10B(6). The CIT (A) allowed the set-off, leading to the Revenue's appeal. The Tribunal upheld the CIT (A)'s decision, noting that the assessee did not claim deduction under Section 10A for the assessment year 2002-03, thus entitling it to carry forward and set off the assessed loss. The Tribunal referenced the retrospective amendment by Finance Act 2003, which allowed such set-offs for losses ending before April 1, 2001. Therefore, the Tribunal dismissed the Revenue's ground, affirming the CIT (A)'s interpretation. 2. Deduction under Section 10B on receipt of Rs. 3,60,04,610/-: The A.O. disallowed the deduction under Section 10B for on-site development of computer software, arguing that the employees had left India before the SEEPZ Unit was set up. The CIT (A) allowed the deduction, and the Revenue appealed. The Tribunal found that the employees were part of the company, previously working for another unit, and that the A.O.'s interpretation was incorrect. The Tribunal also noted that the A.O. had allowed deduction under Section 80HHE, which has similar conditions to Section 10B. The Tribunal upheld the CIT (A)'s decision, stating that the employees' assignment to different units did not invalidate the deduction under Section 10B. 3. Deduction under Section 10B on proportionate amount of Rs. 1,74,34,738/-: The A.O. argued that payments made for job work indicated that the assessee was not a manufacturer to that extent, thus requiring proportionate deduction under Section 10B. The CIT (A) disagreed, and the Revenue appealed. The Tribunal upheld the CIT (A)'s decision, stating that the A.O. failed to prove that the job work resulted in a complete product. The Tribunal emphasized that outsourcing parts of software development is permissible and does not affect the eligibility for deduction under Section 10B. The decision aligned with the jurisdictional High Court's precedent in CIT vs. Penwalt India Ltd. 4. Restructuring of the unit and eligibility for deduction under Section 10B: For the assessment years 2004-05 and 2005-06, the A.O. disallowed the deduction under Section 10B, claiming the SEEPZ unit was a restructuring of an existing unit. The CIT (A) found that the A.O. erred in facts and allowed the deduction. The Tribunal agreed with the CIT (A), noting that the SEEPZ unit was distinct and had separate assets. The Tribunal dismissed the Revenue's appeal, affirming that the SEEPZ unit was not a restructuring of the existing unit and was eligible for deduction under Section 10B. Conclusion: The Tribunal dismissed all grounds of the Revenue's appeals, upholding the CIT (A)'s decisions across all issues. The Tribunal affirmed the eligibility for set-off of losses, the deductions under Section 10B, and the distinct nature of the SEEPZ unit, ensuring compliance with the legal provisions and precedents.
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