2016 (12) TMI 403 - AT - Income Tax

Denial of benefit of exemption claimed by the assessee u/s 10B - Held that - Considering the copy of the circular of CBDT dated 08th October, 2014 No.14/2014 wherein it is clarified that mere transfer of redeployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business so long as number of technical manpower so transferred does not exceed 50% of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit. It was demonstrated that in the case of the assessee, there was transfer of only 25% of technical employees from WWSPL to the assessee company. Thus, under these circumstances, we find force in the argument of the Ld. Counsel that transfer of the aforesaid employees from WWSPL to the assessee was within the limit prescribed in the CBDT circular and hence, such transfer of existing technical manpower from WWSPL to the assessee in the first year of commencement of business should not be construed as splitting up or reconstruction of an existing business. Thus, this contention of the Revenue also fails. We have gone through the other allegations made by the AO as well as the Ld. CIT(A). We find that these allegations are merely unsubstantiated doubts and, in any case, do not have any material bearing on the issue before us. Under these circumstances, we find that the lower authorities have mis-appreciated the facts and have not been able to bring any evidence on record on the basis of which the exemption u/s 10B could be denied to the assessee. Thus, after taking into account all the facts and circumstances of the case we find that deduction u/s 10B is allowable to the assessee and, therefore, the same is directed to be allowed - Decided in favour of assessee

Issues Involved:
1. Eligibility for exemption under section 10B of the Income Tax Act.
2. Allegation of formation by splitting up or reconstruction of existing business.
3. Transfer of employees and assets from the sister concern.
4. Invocation of section 10B(7) read with section 80IA(10).
5. Applicability of section 92E and initiation of penalty under section 271BA.
6. Levy of interest under section 234B.
7. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Eligibility for Exemption under Section 10B:
The appellant firm, engaged in exporting computer software, claimed exemption under section 10B for the assessment year (AY) 2004-05. The firm was formed in FY 1999-2000 and registered as a 100% Export Oriented Unit (EOU). Initially, the exemption was allowed from AY 2000-01 to AY 2003-04. However, the Assessing Officer (AO) denied the exemption for AY 2004-05, citing that the firm did not develop software independently and utilized the assets and manpower of its sister concern, Worldwide Software Pvt. Ltd. (WWSPL). The AO also noted discrepancies in the profit margins during the exemption period compared to subsequent years. The Income Tax Appellate Tribunal (ITAT) examined the agreements and found that the firm was engaged in different activities (software development vs. software architecting) from WWSPL, thus qualifying for the exemption.

2. Allegation of Formation by Splitting Up or Reconstruction of Existing Business:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] alleged that the appellant firm was formed by splitting up or reconstructing the existing business of WWSPL. The ITAT analyzed the nature of business carried out by both entities and concluded that the activities were distinct. The appellant firm was involved in software development, while WWSPL was engaged in software architecting. The ITAT found that the lower authorities had not properly understood the facts and wrongly concluded that the same business was carried out by both entities.

3. Transfer of Employees and Assets from the Sister Concern:
The AO alleged that the appellant firm did not purchase new computers and transferred employees from WWSPL. The ITAT noted that the firm had purchased computer parts and assembled them, which was economical and commercially expedient. The ITAT also found that less than 50% of the technical employees were transferred from WWSPL to the appellant firm, which was within the permissible limit as per the CBDT circular. Thus, the ITAT concluded that there was no violation of the conditions prescribed under section 10B.

4. Invocation of Section 10B(7) Read with Section 80IA(10):
The AO invoked section 10B(7) read with section 80IA(10), alleging that the appellant firm arranged its business to show higher profits and claim higher deductions. The ITAT found that the AO's analysis was based on unsubstantiated doubts and did not have any material bearing on the issue. The ITAT directed the AO to allow the exemption under section 10B.

5. Applicability of Section 92E and Initiation of Penalty under Section 271BA:
The AO held that the provisions of section 92E applied to the appellant firm and initiated penalty proceedings under section 271BA for not obtaining a report from an accountant. The ITAT, having allowed the exemption under section 10B, found these grounds to be infructuous and did not find it necessary to adjudicate them.

6. Levy of Interest under Section 234B:
The AO levied interest under section 234B. Since the ITAT allowed the exemption under section 10B, this ground also became infructuous and was not adjudicated.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c). With the exemption under section 10B allowed, this ground became infructuous and was not adjudicated.

Conclusion:
The ITAT allowed the exemption under section 10B for the appellant firm, directing the AO to follow the order for AY 2004-05 and allow the benefit of deduction under section 10B for all other years under appeal. The appeals were partly allowed in terms of the directions given.

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