9911796707
TMI Blog2008 (5) TMI 361X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of an enactment. In any case interpretation of these words for the purpose of deduction under s. 10B of the Act, cannot solely be decided on the statement of employees alone. Sec. 10B was inserted by the Finance Act, 1988 w.e.f. 1st April, 1989 and later on it was amended from time to time. According to this provision, any profits and gains derived by an assessee from a hundred per cent EOU shall not be included in the total income of the assessee. As provided in cl. (2) of s. 10B, the exemption is available to undertakings. Sec. 10BB: The profits a gains derived by an undertaking from the production of computer programs u/s 10B, as it stood prior of its substitution by s. 7 of the Finance Act, 2000 00 of 2000), shall be construed as if for the words 'computer programs', the words 'computer programs or processing or management of electronic data' had been substituted in that section . When the provisions of s. 10BB of the Act, stipulate the profits and gains derived by an undertaking from the production of computer programs or processing or management of electronic data, to be eligible for deduction u/s 10B of the Act, we are inclined to accept t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue that the ld CIT(A) has completely overlooked that 'computer software' as defined under the section means any computer program recorded on any disc, tape, perforated media or other information storage device and does not include any services of qualified personnel given by the assessee, is not in accordance with the intent expressed in the circular and Expln. 3 to s. 10B applicable for the year under consideration. The next plea of the Revenue that even tools for manufacturing are not available with the company, is also baseless since for development of software, what is necessary is skilled manpower, computer and internet apart from certain reference books. Even otherwise, assuming this plea is accepted, then on what basis the AO allowed deduction u/s. 80HHE of the Act, has not been explained. Another argument of the Revenue is that learned CIT(A) erred in applying the definition of computer software under the Copyright Act and not under the IT Act. We find from the order of learned CIT(A) that while referring to decision of the Tribunal in the case of Asstt. CIT vs. Amadeus India (P) Ltd.[ 2001 (1) TMI 918 - ITAT DELHI] , it was observed that computer pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same was not allowable on following grounds: (i) Object clause The AO, on the basis of evidence and facts brought on record, had held that the object clause of the memorandum of association did not include any object as to software development. The learned CIT(A) relying on the two decisions has held that the object clause is not conclusive to decide the nature or business. The learned CIT(A) has erred in overlooking the fact that there is no dispute as to the settled legal position as per those decisions cited. But the very same decisions have further held that it is necessary to see that whether the company is doing that work or not. In this case the learned CIT(A) has overlooked this finding of the AO in the assessment order. (ii) No new undertaking The AO, on the basis of evidence and facts collected during the course of survey and assessment proceedings and also after recording statements of the responsible technical employees, had held that the assessee company was not a new undertaking as it was incorporated in the year 1988. The provisions of s. 10B of the Act came into force from asst. yr. 1991. No new undertaking was established in asst. yr. 1996-97 and it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not engaged in manufacturing computer software. The AO has pointed out that the assessee company is providing technically qualified personnel to its clients. The statement of employees of the assessee further fortify that no manufacturing is done in the company. Even tools required for manufacturing are not available with the company. The learned CIT(A), after elaborate discussions, has rejected the said ground holding that the assessee company is manufacturing computer software, relying on the definitions of Copyright Act. The learned CIT(A) has erred in not appreciating the fact that in their statements recorded during the course of survey, the employees of the assessee company have specifically stated that there is no manufacturing activity. The assessee company is mainly providing qualified personnel as per the requirements of overseas parties. It is not concerned whether or not these personnel are used for any software development work. Even the assessee does not have any control on them. This aspect is supported by the clauses of the work agreement. The learned CIT(A) has completely overlooked that 'computer software' as defined under the said section means any computer prog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B of the Act for an amount of Rs. 5,17,58,672, in the statement of computation of income, recorded a note that it was engaged in the business of software development and alternatively, claimed deduction under s. 80HHE of the Act. On perusal of main object clause in the memorandum of association, the AO noticed that in terms of the said clause, the taxpayer was to provide, supply, maintain and operate engineering, consultancy services in the field of data processing, computer microprocessor, process control instruments, telecommunication masscommunication, development for chemical, power, computer, instrumentation and telecommunication industries. On the strength of statement of employees, recorded during the course of survey/assessment proceedings and perusal of few work agreements, the AO came to the conclusion that no software product was developed and the assessee was providing only engineering consultancy services. The copies of work agreements between the taxpayer and the buyer of services, revealed that as per requirements of the buyer, the technical persons were trained and services were provided. The AO, inter alia, recorded the statements of Shri Pratul Krishnakant Shroff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware. Besides this, in this division we also make our products. Q.13 Please give details of work carried out in third division? A.13 Our third division is software, quality assurance and testing (QA and testing). In this division we do the work of quality assurance and testing of application software. Software products of most of the customers is put on web. Therefore, our work of QA and testing is done on web only. In this division work of quality assurance and testing is carried out. Q.14 In your company there are 3 divisions. In first division work of chip designs and verification is done. In second division work of embedded system is carried out and in third division work of quality assurance and testing is carried out. This is correct as per your knowledge. Please explain if any other work is carried out in your company; A.14 The work of company is carried out in above 3 divisions i.e., correct. No manufacturing is done in any of the 3 divisions mentioned above." In the light of reply to question Nos. 13 and 14, Shri Shroff submitted that the taxpayer is testing programs developed by clients for products quality and workability. It was specifically admitted that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT(A) recorded his findings on various aspects of the issue. Adverting first to the issue of object clause and the taxpayer being not engaged in manufacture or production of computer software, the AO, after analysing the statements of CMD and other employees and the memorandum of association of the company observed on p. 2 of his order: "As per its object clause assessee was to be engaged providing engineering consultancy services in data processing, computers. As per statement recorded of its employees also, the assessee was providing engineering and consultancy services. No software product was developed." 3.1 In this regard, the learned Authorised Representative on behalf of the taxpayer submitted before the learned CIT(A) that main objects of the company in the memorandum of association are in conformity with the nature of business carried on by it. In respect of relevance of objects vis-a-vis actual activities undertaken, reliance was placed on the following decisions: (i) Lakshminarayan Ram Gopal Son Ltd. vs. The Government of Hyderabad (1954) 25 ITR 449 (SC); pp. 460 and 461 Justice Rowlatt followed the above view of Lord Sterndale, MR., in IRC vs. Birmingh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, submitted that software development was not an object of the taxpayer company. In this connection he referred to p. 391 of the paper book and the statement of Shri Pratul Krishnakant Shroff, managing director of the company during the course of the survey in reply to question Nos. 9, 12 and 13, and pointed out that initially, there was only one division in the company. Since no new unit had been set up for manufacturing of software, the taxpayer filed an application before the Excise Department for setting up of software unit. While inviting our attention to Annex. 'D' of the order, it was further pointed out that the taxpayer converted existing unit to STPI unit. Besides, right since asst. yr. 1995-96, no new machines have been purchased as mentioned at p. 15 of the assessment order. The managing director of the company and employees of the company stated that no software product was developed as evident from pp. 2 and 3 of the assessment order. The learned Departmental Representative further invited our attention to p. 2 of Annex. A of the assessment order and submitted that the taxpayer has no authority to undertake manufacturing. 3.4 On the other hand learned Authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data processing, computer, micro processor, process control equipments, telecommunication, mass communication, development for chemical, power, computer, instrumentation and telecommunication industries." The AO held that the aforesaid clause does not talk of software development while the learned Authorised Representative vehemently argued that the said objects entitle them to undertake software development. As is apparent from the aforesaid objects, taxpayer company was set up to provide for technical, executive engineering consultancy services in the field of data processing, computer, microprocessor, process control equipments, telecommunication, mass communication, development for chemical, power, computer, instrumentation etc. By virtue of these objects, taxpayer claims to have undertaken manufacture or production of software programs for the computer. Now how far objects are relevant in deciding the actual activities undertaken? Here we may refer to the decisions relied upon in this connection. Hon'ble Supreme Court in the case of Oriental Investment Co. Ltd. vs. CIT observed. "In the instant case the Tribunal in its appellate order has set out the amount of profits made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that "when the assessee company held shares on which dividends were received, tax has to be computed under s. 12 and the assessee cannot say that this being its main activity the income received was its 'business income' under s. 10". The assessee challenged the aforesaid decision of the High Court before the apex Court and the Hon'ble Supreme Court, after referring to various decisions laid down the following legal proposition: "It seems to us that on principle before dividends on shares can be assessed under s. 10, the assessee, be it an individual or a company or any other entity must carry on business in respect of shares; that is to say, the assessee must deal in those shares. It is evident that if an individual person invests in shares for the purpose of earning dividend he is not carrying on a business. The only way he can come under s. 10 is by converting the shares into stock-in-trade, i.e., by carrying on the business of dealing in stocks and shares as did the assessee in CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC). Mr. Desai laid a great deal of stress on the argument that the very fact that a company is incorporated to carry on investment shows that the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lained each of the three activities and the terms of payment enumerated in the contract with the clients. Learned CIT(A) summed up the submissions on behalf of the taxpayer regarding nature of activities as under: "The above referred persons are engineers by qualification. Mr. Pratul K. Shroff is the managing director who is having the degree of B.E. Electronics from BITS, Pilani and M.S. (computer engineering) from Cornell University, USA has worked as an electronic designer and computer professional in USA for almost 10 years including companies such as Intel Corporation, USA. The learned AO, Ward-4(1), Ahmedabad, during the course of assessment proceedings under s. 143(3) had required the assessee to explain the nature of business in view of the statements of various persons recorded by him during the course of survey proceedings. The assessee, vide its various submissions from time-to-time including its letter dt. 19th Sept., 2002 has explained the nature of business carried on by it which submissions are summarized as under: The 100 per cent export oriented undertaking (EOU) of the assessee, registered with STPI, Gandhinagar is having three divisions: (1) Chip design a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients and tests it. From time to time, it is also involved in testing of such software to ensure that there are no defects in such programs. That EOU is involved in software development activity meaning thereby that though it may not be selling 'off the shelf products' nonetheless it is involved in writing 'programs' to carry out the services as per the agreements with various customers." 4.1 It was further submitted before the learned CIT(A} that- (i) The learned AO has analysed the statements of above persons in bits and pieces and relying on certain questions and answers which are considered on isolated basis, which should have been considered by the learned AO in totality. The statements of the various persons recorded during the course of survey proceedings should have been considered in light of the definition of the term "computer software" as given in Expln. 2 below s. 10B and read together with s. 10BB and various circulars of CBDT. (ii) The learned AO has relied on the statement of Shri Dipak Kamdar who has joined the appellant undertaking in April, 2001 i.e., after the end of the previous year relevant to the asst. yr. 2001-02 and in the circumstances his state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware prepared 'on site' abroad. The clarifications issued by the CBDT through the aforesaid circular provided the much desired uniformity of Government policy among the Department of Electronics, CBEC and CBDT. That in the statement of Mr. Pratul Shroff the reply in respect of "consultancy" should be read in the above context. (vi) The assessee has filed detailed chart of the employees with the AO as well as before the CIT(A). It is found that most of the engineers employed are in India and only a few have been deputed abroad at the site of the client for software development work. (vii) The AO had issued a specific notice dt. 10th Oct., 2002 on various issues concerning the allowability of the claim of exemption under s. 10B. The assessee has filed a detailed reply to the said notice vide its reply dt. 11th Nov., 2002 and met with each of the objections raised by the learned AO vide the said notice dt. 10th Oct., 2002. (viii) The AO had required the appellant to explain certain issues concerning the statements of the managing director and the employees recorded on 18th Sept., 2002 during the survey proceedings. The appellant had explained and made submissions of such issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e difference, the AO held that there is a retraction of statement by filing of affidavit. In my opinion, there is no retraction, however, even if it is presumed to be retraction or substantial variation from original statement; the inference of the AO drawn on the basis of original statement are not conclusive. The work carried out and its nature is a matter of facts. The agreements between the parties, the contents of job assigned, the tools i.e., software/hardware used to carry out job assigned, the method of billing used for the job performed etc. are the factors required to be considered to arrive at the conclusion whether the industry fulfils the requisite condition or not to entitle its claim under s. 10B. 8.1 As is explained by the appellant, chip designing is a highly capital intensive and requires large scale of production. The object required to be fulfille9 by a chip are conceptualized by the big clients and a part of chip design, for the reasons of secrecy, is assigned to one client like appellant. The appellant with active interaction with the client carries out the testing and suggests the improvement in the module. The group leader, an expert employee of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors, integrator and circuitors is carried out and verification of this design is carried out. Regarding the work the main contractors are of America. We fulfil needs of customers by preparing software through internet.' From the above extract it will also be clear that, in the chip designing, verification at various stages is one of the major functions. It also clarifies that it is a very complex task where in the complex computer programs are required to be written. Therefore there is no doubt that the first activity of the appellant is covered by the production of computer software program. 8.2 Regarding quality assurance and testing division, it is stated that the work could be consultancy but testing and quality assurance requires tools which are software programs purchased by the appellant. Reply to query 7 reproduced on p. 5 of the assessment order clarifies the position as under: 'We also develop application software which assist quality assurance and testing in my mind all of these were part of quality assurance and testing consultancy when I asked question Nos. 33 and 34.' 8.3 It is clarified that the embedded system design activity carried out by the appellant du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at assessee was engaged in notified services of human resources, engineering and data processing.' (iii) The text of notification is as under: In exercise of the powers conferred by cl. (b) of item (i) of Expln. 2 of s. 10A, cl. (b) of item (i) of Expln. 2 of s. 10B and cl. (b) of Explanation to s. 80HHE of the IT Act, 1961 (43 of 1961), the CBDT had specified the information technology enabled products or services, as the case may be, for the purpose of said clause. The services relevant to the appeal are: (i) Back office operations; (ii) Call centres; (iv) Data processing; (v) Engineering and design; (vi) Human resource services; (xiv) Support centres; and (xv) Web site services. The above notification was made applicable from asst. yr. 2001-02 whereby the Government extended the scope of definition of 'computer software' to include certain other services related to the computer industry. The learned AO has held that the assessee is carrying on the business of providing services as notified by the Board both under s. 10B as well as under s. 80HHE. However, the AO has not allowed the deduction under s. 10B. In view of his other objections had allowed the dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India supports the co-ordinator and performs jobs here as specified by such person from time-to-time. It is seen that the employee continued to retain its job with the appellant after specific assignments are over. The agreement provides for secrecy and also that such employee will not be taken on employment by the client. This all indicates that there is no body shopping. It was explained by Shri Naik, vice president of the company, that the billing is done with reference to such co-ordinator and that it is the common practice followed wherever by the agreements made 'on site' consultancy is required. While quoting, expected number of hours involved, employees involved, cost of employee, administrative expenses and margins, are taken into consideration. The billing is done in the name of the appellant and the payment is also received by the appellant. As he was asked to explain the terms with reference to one concrete contract, the Authorised Representative explained the system with reference to the engineering services agreement entered with VxTel Inc. USA which was in chip designing and was taken over by the 'Intel' subsequently. It is submitted that the employees of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S S Consultants (P) Ltd. (Mumbai 'A' Bench) and ITO vs. Mastek Ltd. (Ahmedabad Bench). He added that no doubts have been expressed that exports are not genuine. 6. We have heard the rival contentions and gone through the facts of the case as also orders of the lower authorities. The deduction under s. 10B, as the heading of the s. suggests, is in respect of "newly established hundred per cent export oriented undertakings". Sec. 10B was inserted by the Finance Act, 1988 w.e.f. 1st April, 1989 and later on it was amended from time to time. According to this provision, any profits and gains derived by an assessee from a hundred per cent EOU shall not be included in the total income of the assessee. As provided in cl. (2) of s. 10B, the exemption is available to undertakings which fulfil all the following conditions, namely: "(2) This section applies to any undertaking which fulfils all the following conditions, namely: (i) it manufactures or produces any articles or things or computer software; (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im processing; (ix) Legal databases; (x) Medical transcription; (xi) Payroll; (xii) Remote maintenance; (xiii) Revenue accounting; (xiv) Support centres; and (xv) Web site services. (F. No. 142/49/2000-TPL)" 6.4 Sec. 10BB as introduced by Finance Act, 2001 w.e.f. 1st April, 1994 clarifies profits and gains derived from production of computer programs as under: "Sec. 10BB: The profits a gains derived by an undertaking from the production of computer programs under s. 10B, as it stood prior of its substitution by s. 7 of the Finance Act, 2000 00 of 2000), shall be construed as if for the words 'computer programs', the words 'computer programs or processing or management of electronic data' had been substituted in that section". 6.5 In the light of aforesaid provisions, especially when the provisions of s. 10BB of the Act, stipulate the profits and gains derived by an undertaking from the production of computer programs or processing or management of electronic data, to be eligible for deduction under s. 10B of the Act, we are inclined to accept the findings of learned CIT(A), who after analyzing the details of activities of the taxpayer concluded that taxpayer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was engaged in notified services of human resources, engineering and data processing." At p. 14 of assessment order (para before conclusion) "So after reading of director's report for asst. yrs. 1995-96 and 1996-97 it is clear that the software development work was started in 1995-96 and which was continued in asst. yr. 1996-97." At p. 21 of assessment order (in last para) "No own software program developed or produced at client's site abroad. So assessee's business is not covered in s. 80HHE(1) of the IT Act. However, Expln. (b)(ii) below s. 5 of s. 80HHE has included notified services with effect from asst. yr. 2001-02. These services have been notified by Board which includes human resources, engineering and design data processing. Assessee has in his submission also stated that it is engaged in providing notified services of engineering and design and data processing." 6.6 As regards manufacture or production of computer programs, the Tribunal, Ahmedabad Bench in the case of ITO vs. Mastek Ltd. in ITA Nos. 1530/Ahd/2000 and 1867 and 368/Ahd/2001, dt. 7th Aug., 2007 held that the receipts of training, software consultancy, maintenance, enhancement of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India." Thus the argument of the Revenue that the learned CIT(A) has completely overlooked that 'computer software' as defined under the said section means any computer program recorded on any disc, tape, perforated media or other information storage device and does not include any services of qualified personnel given by the assessee, is not in accordance with the intent expressed in the aforesaid circular and Expln. 3 to s. 10B applicable for the year under consideration. 6.9 The next plea of the Revenue that even tools for manufacturing are not available with the company, is also baseless since for development of software, what is necessary is skilled manpower, computer and internet apart from certain reference books. Even otherwise, assuming this plea is accepted, then on what basis the AO allowed deduction under s. 80HHE of the Act, has not been explained. 6.10 Another argument of the Revenue is that learned CIT(A) erred in applying the definition of computer software under the Copyright Act and not under the IT Act. We find from the order of learned CIT(A) that while referring to decision of the Tribunal in the case of Asstt. CIT vs. Amadeus India (P) Ltd., it was obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g., 1993 that export benefits will be available to software exporting units for providing consultancy services for development of software 'on site' abroad and that consultancy fees received by software units in convertible foreign currencies shall be deemed to be export earning. 27. The CBDT was approached thereafter who very kindly in paras 5 and 6 of their Circular No. 694, dt. 22nd Nov., 1994 [(1994) 122 CTR (St) 13] issued a similar clarification and extended the benefit of s. 80HHE to software prepared 'on site' abroad. The clarifications issued by the CBDT through the aforesaid circular provided the much desired uniformity of Government policy among the Department of Electronics, CBEC and CBDT. 28. In early 1996 further new areas of software related activities like data entry and conversion, data processing, data analysis and control and data management emerged in international trade in which India could grab a significant share in exports. These activities are covered by the definition of 'computer program' as given in Copyright Act. Accordingly, CBEC on the recommendations of Department of Electronics issued further clarifications that export benefits will be available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s industry. If the assessee is registered as a unit for manufacture and export of software and is such a one for all the other aspects referred to above, it would be not only anomalous but unjust to say that it is not an exporter of software for purposes only of income-tax merely because the various Departments of Government have not kept abreast of each other in the issue of their clarificatory notifications and instructions. 33. In the absence of a specific definition of the word 'program' in the Act, the expression 'computer program' should be understood as defined in the Copyright Act and should be interpreted broadly, liberally and consistently with other relevant legislations of Government to include export to 'data processing software' as well. Only this way can one give effect to a comprehensive policy of Government in regard to this sensitive, strategic and dominant industry which fetches crores of foreign exchange for the country. There is judicial authority for the propositions that in fiscal statutes, unless the context otherwise warrants, the same expression occurring in different enactments where the colour, content and context of such statutes is the same or simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate of Andhra Pradesh, which was rendered in a different context, not relevant to the facts in the case under consideration in respect of deduction under s. 10B of the Act, is misplaced. 6.12 The taxpayer supplied manpower in terms of the work agreements annexed to the assessment order in order to provide services dealing with "design verification" of a network co-processor chip with tasks including creation of functional tests suites for certain modules in the design, writing behavioral models in C/Verilog. Apparently, these services cannot be provided without developing highly sophisticated software. Similarly other consultancy services were in respect of tasks in the field of computer programming and computer software development. The AO has not brought on record any evidence that if these personnel were not deputed for software development, then what else these highly skilled personnel were doing overseas and what for the clients paid the taxpayer. 6.13 As regards reliance on decisions in the case of CIT vs. Sesa Goa Ltd., CIT vs. Superstar Music, CIT vs. Giza Impex (P) Ltd. and CIT vs. Oracle Software India Ltd. by the learned Authorised Representative, in our view these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 5th year, claim has to allowed. 7. Now adverting to other aspects relating to no new undertaking having been established and violation of STPI norms, the AO found that the taxpayer was engaged in the business of software development since 1995 and was registered as 100 per cent EOU with STPI on 31st Aug., 1995. According to the AO, the undertaking was old and by conversion it cannot become a newly established undertaking, as is required under s. 10B. Since at the time of registration with STPI the undertaking was already in existence, AO held that it could not be held to be a new established undertaking. He also referred to the facts regarding no new purchase of machineries and commencement of software development in asst. yr. 1995-96 and exports in asst. yr. 1996-97. This proves that the EOU was and existing unit which had started production and was in operation before registration. Besides the AO also found that though the taxpayer was having status of 100 per cent EOU, he had made local sales of Rs. 4,73,290 without taking prior approval from STPI. He also pointed out the violation of the provisions of the Customs Act in December, 2000, detected during the search by the ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warehouse to a premises other than bonded warehouse without obtaining any permission from competent authority, which can be considered as a procedural lapse. There is no duty involvement in respect of imported capital goods." 7.1.1 It was further submitted before learned CIT(A) that since the undertaking has been registered with STPI, which fact has been accepted by the AO, he was not competent to question the recognition by the STPI on the basis of alleged violation of any of the conditions prescribed by STPI while granting the approval. If the AO sits in judgment over the approval granted by STPI, then it will amount to judicial indiscipline which is not permitted. In this respect taxpayer relied on the judgment in the case of Gestetner Duplicators (P) Ltd. vs. CIT (1979) 8 CTR (SC) 371 (1979) 117 ITR 1 (SC), wherein it is held: "The facts in the present case that need be stressed in this behalf are that it was as far back as 1937 that the CIT had granted recognition to the provident fund maintained by the assessee under the relevant rules under the 1922 Act, that such recognition had been, granted after, the true nature of the commission payable by the assessee to its salesm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO on this ground is not justified. The status of the EOU of the appellant does not get disqualified by any of the condition of sub-s. (2). 10.3 Having held that the business of the assessee is covered by the provision of s. 10B and that the undertaking fulfils all the conditions of sub-s. (2), the only requirement for claim of deduction is its registration with STPI. In the year involved the undertaking continued to be registered with STPI. For the default in making advance declaration to STPI for local sales, the EOU did not lose its registration with the STPI or did not get disqualified as 100 per cent EOU. In view of the proviso that, in case domestic sales are less than 25 per cent of total sales it may be deemed as export sales, the default was purely technical. Similarly the Customs Department has also treated the lapse of removing the capital goods from the bonded warehouse without prior permission as procedural lapse. This lapse also did not result in derecognition of the unit under STP scheme. The learned AO therefore clearly erred in dovetailing two different issues namely, violation under the Customs Act and the claim for exemption under s. 10B of the Act. It appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to various arguments given in the ground of appeal on p. 20 of the assessment order and pleaded that the order of the AO should be sustained. 7.4 The learned Authorised Representative on behalf of the taxpayer submitted that there was no default in terms of provisions of s. 10B of the Act. The default by the taxpayer in undertaking domestic sales of software, had been condoned vide letter dt. 18th Nov., 2005 of FTDO. He further invited out attention to pp. 422 and 423 of the paper book and submitted that by mistake, they had taken out a machine out of the limits prescribed by the custom authorities, but this machine was in the same premises. He added that none doubted that the exports were not genuine. In nutshell, the taxpayer relied upon the order of the learned CIT(A) and submitted that the order of the learned CIT(A) should be sustained. 7.5 We have heard the rival contention and gone through the facts of the case. On the aspects of violation of STPI norms and establishment of new undertaking, we do not find any infirmity in the findings of learned CIT(A). In respect of finding of the AO regarding conversion of unit into STPI unit, we may have a look at the following ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the profits derived from exports, from and after the date of approval of the DTA unit as 100 per cent EOU. Moreover, the deduction to such units in any case will not be available after asst. yr. 2009-10. 5. To clarify the above position, certain illustrations are given as under: (i) Undertaking 'A' is set up in DTA and starts manufacture or production of computer software in financial year 1999-2000 relevant to asst. yr. 2000-01. It gets approval as 100 per cent EOU on 10th Sept., 2004 in the financial year 2004-05 relevant to asst. yr. 2005-06. Accordingly, it shall be eligible for deduction under s. 10B from asst. yr. 2005-06, i.e., the year in which it fulfils the basic condition of being a 100 per cent EOU. Further, the deduction shall be available only for the remaining period of ten years i.e., from asst. yr. 2005-06 to asst. yr. 2009-10. This deduction under s. 10B for asst. yr. 2005-06 shall be restricted to the profits derived from exports, from and after the date of approval of the DTA unit as 100 per cent EOU. (ii) Undertaking 'B' set up in DTA, begins to manufacture or produce computer software in financial year 1996-97 relevant to asst. yr. 1997-98. It gets app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A), with which we agree, there is no ground for denial of claim for deduction under s. 10B of the Act, the taxpayer having registered as 100 per cent EOU in the period relevant to asst. yr. 1996-97. As regards violation of norms of STPI, we are of the view that unless violation of conditions of approval, impinge on conditions for grant of deduction under the relevant provisions of the Act, there is no ground for denial of deduction. In this case the status of taxpayer as 100 per cent EOU and under STPI scheme continues. For the default, already penalty has been imposed by the concerned authorities. 7.7 As regards domestic sales, second proviso to the extant s. 10B(1) itself permits that that the profits and gains derived from such domestic sales of articles or things or computer software as do not exceed twenty-five per cent, of total sales shall be deemed to be the profits and gains derived from the export of articles or things or computer software. 7.8 Regarding permission of central excise authorities referred to in grounds of appeal, to a query by the Bench, learned Departmental Representative could not explain as to how in the absence of such permission, taxpayer could ..... 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