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TMI Blog2013 (11) TMI 1311X X X X Extracts X X X X X X X X Extracts X X X X ..... ng is not a disqualification for granting exemption benefit to the assessee under S.10A as long as larger chunck of HR Department has not moved to the new unit from the old one - If both the units are existing and doing the declared business and are not formed out of the existing business, the assessee must not be denied the benefits of S.10A - The old as well as new unit engaged in the same business with identical product shall not contribute to the denial of the beneficial exemption to the assessee – Decided in favour of assessee. Computation of relief u/s 10A – Communication charges and insurance charges and reimbursement of expenses to exporter – Held that:- Following Patni Telecom (P) Ltd V/s. ITO [2008 (1) TMI 452 - ITAT HYDERABAD-A] - To constitute export turnover the consideration should have a nexus with the sale proceeds from export of goods or computer software and that there should be an element of profit in such consideration – Following California Software Co. Ltd. V/s. ACIT [2008 (8) TMI 430 - ITAT MADRAS-A] - The issue was restored for fresh decision. Disallowances u/s. 40A(3), u/s. 40A(7) and u/s. 43B – Held that:- Following Zawata India P. Ltd. [2010 (1) TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee failed to prove correctness of the profits of both the units separately and failed to furnish separate financial statements and audit reports as required u/s 44AB of the Act; diversion of employees of the Hyderabad unit for software manufactured in Chennai unit; the assessee claimed exemption u/s 10A for the first time in this year, despite the fact that it is third year of registration under STPI scheme, and it may be due to incurring of losses in the preceding two years i.e. assessment years 2004-05 2005-06. Aggrieved with the above additions and reasons, the assessee filed the appeal before the CIT(A). 3. The Commissioner of Income-tax(Appeals) concurred with the assessing officer in holding that the Chennai unit is separate only in form, but it is same in substance. Reasons of advantages to the assessee vide availability of concessions to the assessee in matters of location of clients, resources, manpower, should not influence decision in matters of cases of split and reconstruction . Mere investment in assets in Chennai unit alone is not a determining and conclusive factor and such investment cannot be equated with the one in Plant and Machinery of any regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 8 of the order that deduction under section 10A of the Act cannot be denied on account of non-maintenance of separate books of account, erred in dismissing the ground no.4 raised by the Appellant on requirement of maintenance of separate books of accounts for each of the STPI undertakings for claiming deduction under section 10A of the Act. 4. Failed to adjudicate on ground no.3 raised by the Appellant in relation to disallowance of deduction under section 10A of the Act for the Chennai unit on the ground that the Appellant has not furnished tax audit report under section 44AB of the Act for each of the STPI undertakings separately. 5. Without prejudice to ground 1 to 4 above, erred in law and on facts in not allowing the deduction under section 10A of the Act on the combined profits of both the units by considering that the Chennai unit is an extension of the Hyderabad unit of the Appellant. 6. Without prejudice to ground 1 to 4 above, having held that the Chennai unit is formed by reconstruction/splitting up of the existing Hyderabad unit of the Appellant, ought to have directed the Learned Assessing officer to compute the deduction under section 10-A of the Act by con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement(BPM) and enterprise process management(EPM) services, the Chennai unit services the projects requiring data warehouse services. As mentioned in the written submissions of the assessee, in both the units, the books are maintained separately and filed Forms No.56F separately. Regarding the business turnover of both the units the learned counsel brought to our notice that the turnover of the Chennai Unit grew from Rs.1.92 crores (March, 2005 ) to Rs.16.02 crores(March, 2009), as against turnover growth of the Hyderabad Unit from Rs. 62.07 Crores(March, 2004) to Rs.166.79 crores(March, 2009). 8. On the technical/legal submissions front, the learned counsel took us through the provisions of S.10A of the Act and mentioned that the assessee s entitlement to the deduction provisions should be at the undertaking level of its operations. Referring to the conditions of S.10A in general and with specific reference to the expression splitting or reconstruction , learned counsel mentioned that the deductions are available through an industrial undertaking and not to an undertaking, which is formed by way of splitting or reconstruction. The expression splitting implies severance of on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Hon ble Bombay High Court in the case of Associated Cement Companies Ltd. (118 TR 406); and Abbas Nabi Shaikh V/s. ACIT( ITA No.1496 2586/Ahd/2007), for the proposition that carrying on the same business in the new unit or stoppage of business of old business cannot be the criteria to hold that it is a case of reconstruction of business already in existence. Further, the learned Authorised Representative relied on the Mumbai Bench decision of the Tribunal in the case of DCIT V/s. Classic Diamonds (I) Ltd. (ITA 5120/Mum/2007) for the proposition that there is no case of reconstruction or split of existing unit merely because a new unit is opened at different location with installation of new plant and machinery after obtaining necessary approvals of various Government departments and maintaining separate books of account. 9. In the light of the above technical as well as factual matrix of the instant case, the learned counsel argued vehemently stating that the Chennai Unit is a separate and independent undertaking and not extension of the existing Hyderabad unit and summed up his submissions, vide para 27 of the written submissions, as followsITA 27. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employees who are working in the Chennai Unit were earlier working in the Hyderabad unit of the assessee. Considering the similarity of services rendered by the employees of both the units of the assessee to the common customers abroad, assessee s case falls within the meaning of split or reconstruction of the existing business. Therefore, the Revenue authorities have rightly denied the benefit of S.10A to the assessee. 12. We heard both the parties and perused the orders of the Revenue and the information filed before us. The prime question to be decided revolves around the issue whether the assessee s case falls within the mischief of splitting up, or the reconstruction, of a business already in existence within the meaning of expression used in S.10A of the Act. Revenue is under the belief that considering the common services agreement, and common clientele, assessee is not entitled for exemption under S.10A of the Act. In the process, the assessing officer preferred to ignore the fact that Chennai unit obtained separate and independent approvals and licences of the Government authorities under STPI related rules for setting up of a separate business at Chennai. Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t properly appreciated by the Revenue authorities, who were merely carried away by the common service agreement for coming to the conclusion that the business of both the units are same. But, the fact is that the services of both the units are distinct and separable. Therefore, from the infrastructure point of view which involves land and building, plant and machinery and employees, etc., as well as from the business processes/activities point of view, both the units are separate and distinct with different objects and challenges of the clients. Thus, commonness of the projects/services should not be the basis of rejection of claim of exemption in principle. As such, the services of both the units are different, for different purposes and thus, the conclusions of the assessing officer and CIT(A) are not as per the law in force. Relevant decisions are discussed in the preceding paragraphs. In our opinion, the Revenue has stepped into wrong decision making area, while denying exemption under S.10A of the Act in respect of the projects of Chennai Unit. Further, we also examined the available judicial pronouncement on the subject. It is a settled issue that existence of some old employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernative claim, are rendered academic. As such, they are dismissed. 19. Ground No.7 in assessee s appeal relates to treatment to be given to the communication charges and insurance charges incurred by the assessee, while computing the relief under S.10A of the Act. Similarly, Ground No.8 relates to exclusion of the amount of reimbursement of expenses to Virtusa Corporation , USA of Rs.33,96,032 from the export turnover for the purpose of computation of deduction under S.10A of the Act for the Hyderabad unit. In this regard, the assessee informed that an identical issues are adjudicated by the Tribunal for the assessment year 2003-04. 20. Learned counsel for the assessee that the assessee develops computer software in synchronization with other development teams across the globe and requires to be networked with the other teams on a continuous basis. Further, the assessee has obtained the data link services from service providers. The communication charges are largely incurred for inter office and intra office communication (i.e. since the nature of the business of the assessee is such that it requires substantial interaction between the personnel of the assessee and personnel o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted on the basis of the said definition that the items sought to be covered within the exclusion are those items which are incidental expenses recovered by the exporter and which do not have a profit element therein. In this behalf, reference is also invited to the provisions relating to incentives under S.80HHC and 80HHE of the Act and reference is also made to the decisions of the Bombay High Court in the case of CIT V/s. Sudarshan Chemicals Industries Ltd. (245 ITR 769).; Calcutta High Court decision in the case of CIT V/s. Chloride India Ltd. (256 ITR 625(Cal); as well as the Karnataka High Court in the case of CIT V/s. Bharat Earth Movers Ltd. (268 ITR 232), and it is submitted that the principle which emerges from the above decisions is that to constitute export turnover the consideration should have a nexus with the sale proceeds from export of goods or computer software and that there should be an element of profit in such consideration. Reference in this behalf is also made to the decision of the Hyderabad Bench of the Tribunal in the case of Patni Telecom (P) Ltd V/s. ITO(129 ITD 105). Further reference, more specifically in relation to treatment in respect of reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,701/-), Virtusa UK(P)Ltd. (Rs.42,88,632/-) and Virtusa (P)Ltd., Colombo(Rs.2,57,09,133/-), aggregating to Rs.6,81,45,466/- as part of the export turnover, the same is also not includible in the total turnover. (iii) The CIT(A) has erred in directing to consider Rs.31,44,491/- representing statutory disallowances u/s. 40A(3), u/s. 40A(7) and u/s. 43B in the eligible business profits for computation of deduction u/s. 10A, since the provisions of sec.10A(1) provides that the income should have been derived from the export of articles or things or computer software. (iv) .... 26. We heard both sides and perused the impugned orders of the lower authorities and other material available on record. As for grounds No.(ii) regarding exclusion of communication charges and insurance from total turnover, the same having been excluded from the export turnover, in view of our findings on these aspects while dealing with the grounds of the assessee in relation to these very items, for the reasons discussed in that context, these grounds of the Revenue also stand allowed for statistical purposes for being decided afresh by the assessing officer, while redeciding the same in accordance ..... 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