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TMI Blog2007 (6) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1,58,27,453 from non-STPI Unit. The entire profit of the STPI Unit is claimed as exempt under section 10A of the Income-tax Act, 1961 and the loss from non-STPI Unit is carried forward to subsequent year. The STPI Unit is doing 100 per cent export sales while non-STPI Unit is engaged both in domestic as well as export sales. In the year ending 31-3-2001, the STPI Unit and non-STPI Unit have shown export sales to the tune of Rs. 10,65,21,516 and Rs. 9,88,637 respectively. The total turnover of the company is Rs. 27.87 crores, out of which the turnover of non-STPI Unit is around Rs. 17.21 crores as compared to Rs. 10.65 crores of STPI. 2.2 During the course of assessment, the Assessing Officer denied exemption under section 10A of the Act holding that the STPI Unit is not a new unit and there is a splitting or reconstruction of earlier business. 2.3 The Assessing Officer placed reliance upon Hon'ble Apex Court decision in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 and Hon'ble Madras High Court decision in the case of L.G. Balakrishnan & Bros. Ltd. v. CIT [1985] 151 ITR 270. The Assessing Officer held that: (i) The company cannot be said to have commenced operation fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n after the formation of STPI Unit, there is no change in the bank account and the foreign exchange inward remittances are through the same bank accounts. 2.5 From the above, Assessing Officer concluded that it is clear that the STPI Unit is not a new unit and merely it is an extension of earlier exporting activities. Prior to the formation of the STPI Unit, the company was involved in both domestic and export sales and after STPI came into existence, the exports are booked under STPI Unit and domestic sales are under non-STPI Unit and, hence, there is splitting up or reconstruction of already existing business. Merely making entries in the books of account does not substantiate that it is a new unit. Even after the formation of STPI Unit, physically it is not possible to distinguish between STPI Unit and non-STPI Unit as employees of both the units are same, the product and services are also same and the infrastructure is similar and hence, the intention of section 10A of the Act would be defeated if such kind of arrangement can be allowed to avail the benefit under section 10A of the Act. 3. Aggrieved by the aforesaid order, assessee appealed before the learned Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven above. (v) Details of fixed assets held as on 1-4-2000 and additions during the financial year 2000-01 for both the STPI Unit and non-STPI Unit was filed, which is as under;- Fixed Assets details for financial year 2000-01 ---------------------------------------------------- As on Domestic STPI (Rs.) (Rs.) ---------------------------------------------------- 1-4-2000 1,30,19,365 Nil ---------------------------------------------------- Additions during the year 3,56,53,582 1,43,70,174 ---------------------------------------------------- (vi) Details of sales for STPI Unit and non-STPI Unit are filed. STPI Unit is engaged on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loss Account for the year ended 31-3-1999 --------------------------------------------- Domestic Exports Total --------------------------------------------- Sales 33,678,104 10,718,13 44,396,217 --------------------------------------------- Net profit 2,318,644 5,168,100 7,486,744 before tax --------------------------------------------- Profit & Loss Account for the year ended 31-3-2000 ------------------------------------------------------ Domestic Exports Total ------------------------------------------------------ Sales 67,165,746 43,301,474 110,467,220 ------------------------------------------------------ Net Profit (loss) (7,945,846) 25,894,041 17,948,195 before tax -------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone; (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 undertakings 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 2to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section." Admittedly, it is revenue's case that assessee has not complied with clauses 2(ii) and (iii). In other words, the Assessing Officer has made up a case that the STPI Unit was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees are always interchanged between STPI and non-STPI Units. Moreover, in the said statement, Mr. Vinod himself had stated that he and his professional team were only 3 months old in the company and that they would provide all information relating to the assessment in question, i.e., year ended 31-3-2001 at the earliest". From the above, we find that the statement of Mr. Vinod cannot be taken as a basis for denying benefit of section 10A to the assessee. 5.2 We further note that Hon'ble Madras High Court in the case of CIT v. Gopal Plastics (P.) Ltd. [1995] 215 ITR 136 has held as under:- "The scheme of section 80J of the Income-tax Act, 1961, is to make available the benefit of tax holiday for a period of consecutive years, the commencement point of such period being the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles. The profits and gains derived from business are assessable in each assessment year. Therefore, in each assessment year falling within the stipulated number of years, the question will arise whether the new industrial undertaking which claims the benefit of tax holiday, satisfies the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Apex Court, with respect to relief for new industrial undertaking under section 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. Further, it was expounded in that case that, even if the new industrial undertaking is established by transfer of building, plant or machinery but it is not formed as a result of such transfer, the assessee cannot be denied the benefit. From the facts of the case, it is clear in this case that it cannot be said that the STPI Unit was formed as a result of any transfer of asset from the old unit. 5.6 In this context, it will be worthwhile to refer to Hon'ble Apex Court decision in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 wherein it was held that: "A new activity launched by the assessee by establishing new plants and machinery by investing substantial funds may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial 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 under section 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 under section 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. 5.9 In the background of above discussion and case laws cited above, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India." 6.3 However, there is no definition of 'total turnover' given in section 10A of the Act. But we note that section 80HHE which provides for deduction in respect of profits from export of computer software etc., defines 'export turnover' on similar lines as section 10A as under in Explanation (c):- "Export turnover means the consideration in respect of computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India." I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the concession there under when the entire deduction claimed cannot be regarded as relating to exports. Therefore, while interpreting the words "total turnover" in the formula in section 80HHC one has to give a schematic interpretation. The various amendments made therein show that receipts by way of brokerage, commission, interest, rent, etc., do not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3) : otherwise the formula becomes unworkable." 6.7 On the anvil of aforesaid exposition, 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 t ..... 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