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2007 (6) TMI 273 - AT - Income TaxDenial for exemption u/s 10A - STPI Unit engaged in the business of software development and export - Free Trade Zone - newly established undertakings - provisions of section 10A are same as section 80HHE - HELD THAT - We find that in this case there is a clear establishment of new unit by substantial investment in Plant and Machinery. The STPI Unit is an integrated unit by itself. The assessee is engaged in export of computer software which duly qualifies for exemption u/s 10A. The assessee commenced export of computer software from the current assessment year. The assessee s activities include development and export of software. This inter alia includes onsite integration of software. The Assessing Officer s contention that earlier developed software is only being sold is unfounded and devoid of cogency. The fact that new unit also deals in the same products as that of old unit or that there are some old unit s employees or customers cannot be taken as a ground for denying the benefit u/s 10A as evident from the case laws cited above. The old unit s incurring of losses etc. has also been explained by giving data that the domestic turnover has resulted in a very small profit or loss in earlier years and it is only the exports which are profitable. Therefore it is clear that it cannot be said that the STPI Unit of the assessee was established as a result of splitting or reconstruction of the old unit. Hence we uphold the order of the ld CIT (A) in this regard and decide the issue in favour of the assessee. It will not be out of place here to mention that it is a settled proposition often reiterated by the Hon ble Apex Court that in cases where two views are possible the one favourable to the assessee should be adopted. CIT v. Podar Cements (P.) Ltd. 1997 (5) TMI 2 - SUPREME COURT and Mysore Minerals Ltd. v. CIT 1999 (9) TMI 1 - SUPREME COURT . Deduction u/s 80HHE - consultancy charges subscription charges exhibition expenses advertisement travelling expenses and software-expenses - expenditures incurred in foreign currency - HELD THAT - It is seen that what is excluded from export turnover is also excluded from total turnover. Now in this case the ld CIT (A) has held that section 10A is akin to section 80HHE hence the deduction can be properly computed only by deducting expenditure incurred in foreign exchange both from the total turnover and also from the export turnover. We find that Hon ble Apex Court in the case of CIT v. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME COURT had the occasion to consider the meaning of total turnover with respect to section 80HHC. We find that section 10A also is a beneficial section. It is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that provided by section 80HHE by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover the benefit granted by section 10A would be considerably reduced. This in our opinion cannot be the scheme of the Act. In this regard Hon ble Apex Court in the case of K.P. Varghese v. ITO 1981 (9) TMI 1 - SUPREME COURT had held that a literal construction that leads to absurdity unjust result or mischief should be avoided. Similarly Hon ble Apex Court in the case of Bajaj Tempo Ltd. 1992 (4) TMI 4 - SUPREME COURT with respect to relief for new industrial undertaking u/s 15C of the Income-tax Act 1922 has held that such provisions should be construed liberally. Very literal Construction which defeats the very purpose of enacting the provision should be avoided. Thus these expenditures incurred in foreign currency are to be excluded from export turnover and they should also be excluded from total turnover in order to properly work out and grant relief that is intended by this section. Hence in our opinion these items which are to be excluded from export turnover cannot be included in total turnover while calculating the relief u/s 10A. In the result this appeal by the revenue is partly allowed.
Issues Involved:
1. Entitlement to exemption under section 10A of the Income-tax Act, 1961. 2. Treatment of expenses incurred in foreign exchange in providing technical services outside India concerning section 10A and section 80HHE. Detailed Analysis: Issue 1: Entitlement to Exemption under Section 10A Facts of the Case: - The company was incorporated in 1993-94 and started export activities in 1998-99. - It registered under the Software Technology Park of India (STPI) on 25-3-2000 and completed custom formalities on 2-6-2000. - The company claimed exemption under section 10A for the profit from the STPI Unit and carried forward the loss from the non-STPI Unit. Assessing Officer's Findings: - Denied exemption under section 10A, claiming the STPI Unit was not a new unit but a result of splitting or reconstruction of an earlier business. - Relied on decisions from Bajaj Tempo Ltd. v. CIT and L.G. Balakrishnan & Bros. Ltd. v. CIT. - Cited reasons including the use of old software and hardware, similar products and customers, and shared employees and infrastructure between STPI and non-STPI Units. Commissioner of Income-tax (Appeals) Decision: - Found the STPI Unit to be a separate and distinct unit with substantial investment in infrastructure, separate employees, and generating significant turnover. - Rejected the Assessing Officer's conclusion of splitting up or reconstruction, noting separate bank accounts, books of account, and allocation of expenses. - Held that the assessee fulfilled the relevant conditions under section 10A and was entitled to the exemption. Tribunal's Analysis: - Section 10A applies to undertakings that are not formed by splitting up or reconstruction of an existing business and do not use old machinery. - The Tribunal noted the substantial investment in new machinery and infrastructure for the STPI Unit. - Statements from company officials and the timing of purchases and exports supported the claim that the STPI Unit was a new undertaking. - Cited various case laws, including Textile Machinery Corpn. Ltd. v. CIT, to support the view that the STPI Unit was not formed by splitting up or reconstruction. - Concluded that the STPI Unit was an integrated new unit and upheld the Commissioner of Income-tax (Appeals) decision, allowing the exemption under section 10A. Issue 2: Treatment of Expenses Incurred in Foreign Exchange Assessing Officer's Findings: - Granted deduction under section 80HHE but reduced the export turnover by the amount of expenses incurred in foreign exchange. Commissioner of Income-tax (Appeals) Decision: - Held that the provisions of section 10A are similar to section 80HHE regarding the exclusion of expenses incurred in foreign exchange from export turnover and total turnover. - Observed that the nature of the expenses did not qualify as expenses incurred in providing technical services outside India. Tribunal's Analysis: - Section 10A defines 'export turnover' but does not define 'total turnover'. - Noted that section 80HHE, which is similar to section 10A, excludes certain expenses from both export turnover and total turnover. - Cited the Hon'ble Apex Court decision in CIT v. Lakshmi Machine Works, which held that items excluded from export turnover should also be excluded from total turnover to maintain the formula's workability. - Concluded that excluding expenses from export turnover but not from total turnover would reduce the benefit intended by section 10A. - Held that expenses incurred in foreign exchange should be excluded from both export turnover and total turnover when calculating relief under section 10A. Conclusion: The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) granting exemption under section 10A to the assessee, finding that the STPI Unit was a new and separate undertaking. Additionally, it ruled that expenses incurred in foreign exchange should be excluded from both export turnover and total turnover for the proper calculation of relief under section 10A, aligning with the principles of section 80HHE and relevant case law. The appeal by the revenue was partly allowed.
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