9911796707
TMI Blog2014 (12) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... lready in existence of the assessee and not of any other person. AO while denying assessee’s claim of exemption has concluded that assessee company has been formed by splitting up, or reconstruction of CG CoreEL Logic Systems Pvt. Ltd., a business already in existence - Chetan Sanghvi and Crompton Greaves, who are 100% share holders of CG CoreEL Logic Systems P. Ltd. are also holding respectively 29.8% and 28.9% shares in CMS, the parent company of assessee, rest 41.3% shares in CMS are held by others - AO’s conclusion that ultimate shareholders of both the companies are same is without any basis - in the year of formation i.e. AY 2000-01 there is no transfer of assets from CG CoreEL Logic Systems P. Ltd. to assessee - assessee has not violated any of the conditions of section 10B(2) - As the AO has rejected assessee’s claim of exemption only on the ground of violation of clause (ii) and (iii) of section 10B(2), which will not apply to the facts of assessee’s case, it is to be presumed that assessee satisfies all other conditions of the provision - Hence, assessee would be eligible for exemption u/s 10B. Exemption u/s 10B/10A is not granted to Pune Unit, 10A deduction to Bang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sign verification, assistance in verifying intellectual property design and assistance in supporting FPGA customers in India. CMS itself performed intellectual property architecture and key technology critical design. In 1999, major changes occurred in the business model of CMS because of the following reasons: - Its main customer Xilinx Inc which accounted for 45% of the revenue was sold out. - OKI Semiconductor decided to close its development subsidiary in USA in1999. In addition Exar Corporation project was completed in 1999. - Design agreements with other major customers were either terminated or came to an end. 2.2 Due to the drastic set back in business of CMS in 1999 which also affected the business executed by CGCLS for CMS, CMS had only two option, either to close its operations or start afresh by raising additional funding and recruit a new engineering team. Towards achieving the aforesaid purpose, CMS was able to raise a small round of funding from venture capitalists on the condition that it would get out all IP and design service business in which it was engaged during the period 1996 to 1999 and focus on developing its own product. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of assessee, held that assessee is not eligible to claim deduction u/s 10B and completed the assessment accordingly. The reasons on which AO came to his conclusion are as under: (i) that the ultimate shareholders of both the companies were same (ii) that the business / product of the Appellant is same (iii) that the Directors of both companies were the same (iv) that CGCLS has transferred its entire P M and computer software to the Appellant in AY 2001-02 (i.e. second year of operation of the Appellant) (v) that in the first year of formation all the five employees of the Appellant were earlier working with CGCLS. 58% of the employees of the Appellant were from CGCLS in AY 2001-02 (i.e. second year of operation of the Appellant vi) As per the press note dated April 20, 2000 - which stated that CoreEL Labs has undertaken all of the research, development and application engineering functions of the parent company at its facilities in Pune and Bangalore . The AO has presumed that the word 'parent' referred to in the press note refers to CGCLS as CMS did not have any facilities in Pune and Bangalore. (vii) that the approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Act. The Ld. AR supporting the additional ground has also submitted that the assessee is actually eligible for the deduction u/s 10A of the Act, but, has mistakenly claimed deduction u/s 10B of the Act. We, prima facie, find substance in the above submission of the Ld. AR in support of the claimed deduction. At the same time, we are of the view that the related facts regarding the fulfillment of the claimed deduction as submitted by the ld. AR herein above in detail needs fresh verification to test the entitlement of assessee to claimed deduction in question. We thus in the interest of justice set aside the matter to the file of the Ld. CIT(A) for fresh consideration and adjudication of the issue after affording reasonable opportunity of being heard to the parties and considering the material already available on record. Ground Nos. 1, 2 3 are allowed for statistical purposes. 16. So far as the issue raised in additional ground as to whether the assessee is entitled to claim deduction u/s 10B or 10A of the section is concerned, we are of the view that entitlement of deduction under the proper provisions of law is examined by the AO as per the established propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Even if the Directors of both the units are same, lOA deduction cannot be denied on the ground that a new unit is formed by way of reconstruction of existing unit. (c) That the product of the CGCLS and the appellant company are different: (i) CGCLS was a designing company. It used to accept designing work from CMS. In contrast, the appellant designed and developed products (Chips) for CMS. (ii) The specific tasks undertaken by the appellant can be broken down as under: 1. Products requirements study 2. System level architecture 3. Detailed IC architecture 4. Detailed IC Design broken into multiple semi independent block 5. Block level RTL design 6. Block level RTL test bench 7. Block level RTL simulation and validation 8. Block level synthesis 9. Block level pre-layout and timing validation 10. System level test bench 11. Full chip simulation and validation 12. Full chip level synthesis 13. Scan chain design and fault coverage vector generation 14. Functional vector generation 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) The Assessing Officer has totally misunderstood the Press note and held that CGCLS is the parent company of the appellant. Infact, it is the eMS which is the parent company of the appellant (g) The business of CGCLS had continued even during A.Y.200S-06. CGCLS is a running company even in A.Y.2005-06, as per the annual report of 2005-06, it bagged orders worth ₹ 98,OO,000j- and has been elected as Agency for Development of Remote Surveillance System by Military College of Electrical and Mechanical Engineering, Hyderabad. Therefore, forming of appellant company is not a device to extend the period of deduction. Even otherwise, an act valid in law cannot be treated as non-est merely on the ground that some benefit resulted out of such action. Reliance is placed on (h) The first year of appellant company was A.Y.2000-01 : (i) The appellant was incorporated on 01.12.1999 and obtained permission from STPI on 17.01.2000 and made exports to CMS before the year 2000. Therefore, the first year of appellant company was A.Y. 2000-01 and not A.Y.200l-02. (ii) Even if eligibility of deduction is to be tested in every year the appellant fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-02 58% of the employees were from CGCLS. (d) The press note dated 20.04.2000 given as mentioned at para 6.{d) clearly reveals that the activities of CGCLS were taken over by the appellant company. Further, the appellant's claim that CGCLS continued for subsequent years also is of not much relevance as old company can always continued to exist, rather, than only it amounts to splitting up. Hence, the appellant company can be considered as formed by splitting up of CGCLS. e) As rightly pointed out by the AO though a single sale was made before March 2000, by employing 5 persons from CGCLS, though technically the production started before F.Y.1999-2000 practically, the operations started only in the subsequent year i.e., F.Y.2000-01 (A.Y. 2001-02). (f) The appellant's claim that the STPI registration to the Pune unit was given on 17.01.2000. However, it is verified from the copy of registration submitted by the appellant that such registration is in the name of CoreEL Micro Systems Inc. USA (CMS, USA) and not in the name of the appellant company. On this ground alone, the exemption u/s l0A/10B can be denied to the appellant. Taking into account the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) It is not by transfer of used plant and machinery (however, transfer of used plant and machinery to the extent of 20% is allowed). 8.4.1 Again at the cost of repetition, it is to be emphasized that both the above conditions have to be fulfilled. It is not that all the new units where the plant and machinery transfer is zero to 20% are eligible for deduction u/s 10A/10B. In the beginning when the section was introduced, the condition was, the second hand machinery should not be used at all as the deduction is meant for new undertakings only. However, over a period of time the Courts have interpreted this condition liberally and held that transfer of used machinery to the new unit in small proportions can always be allowed. Since the proportion of second hand machinery was always matter of subjective interpretation, the legislation in its wisdom had to put the seal of 20% on transfer of plant and machinery. Further, for the formation of a new industrial undertaking, plant and machinery is only one part of several other factors like - men, material, management etc. etc. Hence, the focus is on the formation of the company, that it should not be formed by splitting up or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that 10A deduction is allowable to the business houses where the units are located in SEZ, APEZ, ETPH for the units with 100% exports or at least more than 75% sales are exports. Whereas 10B is enacted to take care of units which are 100% exported oriented and not located in APEZ, SEZ ETPH etc. She observed that if interchanging of 10A and 10B were to be permitted there was no need for the legislature to have two sections separately. Therefore, the alternative claim of assessee for exemption u/s 10A for Bangalore unit is not allowable. Further, learned CIT(A) noted that for AY 2001- 02, the original return of income was filed on 31/10/2001 claiming exemption u/s 10B. Subsequently, in response to notice u/s 148, assessee filed a return on 28/11/05. However, in the said return no separate computation for Pune and Bangalore Unit was given. Further, assessee filed one more return on 31/03/06 submitting separating computation for Pune and Bangalore for the first time. CIT(A) observed that there is no provision permitting assessee to revise a return filed u/s 148. In this connection, learned CIT(A) referred to the order earlier passed by her predecessor. Ultimately, CIT(A) conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the new undertaking is formed by way of reconstruction of a business already in existence. - The fact that sales of CGCLS has gone down is an irrelevant consideration for the purpose of determining whether the appellant has been formed reconstruction or splitting up. 10. The gist of the submissions of learned DR justifying denial of exemption u/s 10A as taken from the written submission are as under: a) Approvals dated 07-01-2000 for Pune Unit and 20-05-2010 for Bengaluru Unit granted by STPI clearly indicate the fact that the permitted activity was computer software development . In fact the approval for Pune unit is in the name of Core EL Micro Systems Inc, which is the US parent of the appellant. b) M/s Core El Logic Systems Ltd commenced operations in April, 1996 and eligible for deduction for 5 years from F.Y 1996-97 as it got its registration with STPI cancelled. Just before the expiry of the said period, the assessee obtained approval from STPI. It is also evident from the press note 20-04-2000 issued by Core EL Micro Systems Inc, USA that the design operations of CG Core EL Logic Systems Pvt Ltd would be taken over by the appellant, which would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the in the opinion of the undersigned, the ratio is artificially shown at 19%, apparently to avoid the 20% mark, which would make the assessee ineligible for deduction u/s 10A. It is also submitted that he argument that old assets were transferred only in A.Y 2001-02 also appears to be fallacious because there was only one transaction during A.Y 2000-01 and the substantial activity commenced only in A.Y 2001-02. Again, this could be a case of careful manipulation of the affairs so that the conditions are not violated in letter. e) The sales of CG Core EL Logic Systems Ltd also drastically fell, once the assessee was established. This clearly indicates transfer of business and clients, which resulted in substantial turnover in case of the assessee from A.Y 2001-02, which is the first year of substantial operations. f) It is also argued by the assessee that the business of CG Core EL Logic Systems Pvt Ltd continued even after formation of the assessee. However, the Hon 'ble Bench may kindly notice that the business of the subsequent period for M/s CG Core EL Logic Systems Pvt Ltd was domestic in nature (admittedly the activity was on development of remote sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B. Firstly because it is formed by splitting up or reconstruction of a business already in existence and secondly it is formed by transfer of machinery or plant previously used for any purpose. The factors which led the AO to come to such conclusion are as under: - CG CoreEL Logic System Pvt. Ltd. is a sister concern of assessee having common directors. - CG CoreEL Logic System Pvt. Ltd. started its operation in April, 1996 after getting STPI approval on 12/07/1996. It filed its return of loss for AY 2002-03. The notes given to the return of income state that the company has cancelled its registration as STPI unit and the company was an STPI unit till PY 1999-00. - Press note dated 20/04/2000 submitted by assessee during the assessment proceeding indicate that assessee company has taken over all the research, development and application engineering functions of CG CoreEL Logic System Pvt. Ltd. and the term parent in the said press note refers to CG CoreEL Logic System Pvt. Ltd. as CMS Inc. USA does not have any facility in Pune and Bangalore. - FY 1999-00 is the first year of operation for assessee and there were only five employee who were earlier work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the previous year relevant to the assessment year- (a) commencing on or after the 1st day of April, 1981, 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 up26a, or the reconstruction26a, 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 2 to 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertakings - (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking or hotel, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. 2) This section applies to any industrial undertaking which - i) is not formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant previously used in any other business. The Hon ble Supreme Court while interpreting the true import of the aforesaid provision held as under: Again, the new undertaking must not be substantially the same old existing business. The third excluded category mentioned above is significant. Even if a new business is carried on but by piercing the veil of the new business, it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the business which was already being carried on by the assessee and the new industrial undertaking must have been formed as a result of the splitting up of the previously existing business of the assessee or the reconstruction of the previously existing business of the assessee. Thus, so far as the first two clauses are concerned, the only conclusions possible looking to the object of the Legislature and the words used by the Legislature in the relevant provisions laying down the conditions then obtaining regarding s. 84, are that in the first two conditions the previously existing business must be of the assessee himself. Similarly, the previously existing business which is resuscitated or reconstructed or which is being split up must be of the assessee himself. If that is so, the position is very clear, namely, that so far as the third condition mentioned at p. 202 is concerned, namely, that the new industrial undertaking of the assessee should not be formed by the transfer to the new business of building, machinery or plant used by another prior to April I, 1948, must apply in the context of the previous business being carried on by the assessee himself. These words must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio laid down in case of Textile Machinery Corpn. Ltd Vs. CIT and CIT Vs. Suessin Textile Bearing Ltd. and held as under: We are principally concerned with cl. (ii) of sub-so (4) of s. 80J, which says that the undertaking must be one which is not formed by transfer to a new business of machinery or plant previously used for any purpose. Sec. 80J applies to all industrial undertakings except the three categories mentioned in cls, (i) and (ii). The two excluded categories under cl. (i) are: where the undertaking is formed by splitting up of the existing business or by reconstruction of the existing business. These two categories are necessarily referable to the same assessee. Otherwise, the question of splitting up or reconstruction does not arise. The words splitting up or reconstruction of the business already in existence necessarily suggests the splitting up or reconstruction of the existing business of the assessee. The words of the assessee have necessarily to be read into the sub-section. Similarly, the third excluded category in cl. (ii) also must necessarily refer to the case of the same assessee. The words by the assessee must be read at the end of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assuming for the sake of argument that shareholders of both the companies are same, it cannot be denied that both assessee and CG CoreEL Logic Systems P. Ltd. are two separate entities having distinct identity and are capable of independent existence. The Hon ble Supreme Court in case of Textile Machinery Corporation Ltd. Vs. CIT (supra) laid down tests for identifying a newly established industrial undertaking. They are: a) investment of substantial fresh capital in the industrial undertaking set up. b) employment of adequate labour c) manufacture or production of articles in the said undertaking d) earning of profits clearly attributable to the said undertaking e) a separate and distinct identity of the industrial set up. 21. The same view has also been expressed in a number of decisions of different high courts as well as this tribunal. Reference in this regard can be made to the following decisions: 1. CIT Vs. Finolex Cables Ltd., [2012] 209 Taxman 79 (Bom) 2. M/s Kakatiya Cements Vs. ACIT (ITA No. 931/Hyd/2011, dt. 04/01/12 3. Gujarat Alkalies and Chemicals Ltd. Vs. CIT 350 ITR 94 (Guj.) 4. ACIT Vs. Changepond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith identical product but the same shall not contribute to the denial of exemption to assessee u/s 10A. The ITAT Chennai Bench in case of ACIT Vs. Change Pond Technologies P. Ltd., 119 TTJ 13 also expressed similar view. 24. The other reasonings of AO, such as, both companies are having common directors, press note dated 28/04/2000 referring to CG CoreEL Logic Systems P. Ltd. as assessee s parent , no STPI approval in assessee s name, drastic reduction in sale of CG CoreEL Logic Systems P. Ltd. or even the allegation that assessee was formed only in AY 2001-02, in our view, are either irrelevant or are based on incorrect assumption of facts or wrong facts hence not relevant to conclude that assessee has been formed by splitting up or reconstruction. Though, in earlier round of litigation, the coordinate bench after considering all these facts had directed the ld. CIT(A) to consider assessee s claim of exemption in the light of facts considered by the Tribunal but ld. CIT(A), in our view, has done precious little to either establish the fact that assessee is formed by split up, or reconstruction of business already in existence of assessee or to controvert the submissions of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of such assets constitute 19.81% of the total cost of plant and machinery of the assessee which is less than prescribed limit of 20% as envisaged in explanation 1 to clause (iii) of section 10B(2) read with explanation 1 2 to sub-section (2) of section 80I. This factual aspect has not been controverted either by the AO or by the ld. CIT(A) by bringing on record any substantive evidence. 27. In the aforesaid view of the matter, we have no hesitation in holding that assessee has not violated any of the conditions of section 10B(2). As the AO has rejected assessee s claim of exemption only on the ground of violation of clause (ii) and (iii) of section 10B(2), which in our view, will not apply to the facts of assessee s case, it is to be presumed that assessee satisfies all other conditions of the provision. Hence, assessee would be eligible for exemption u/s 10B. 28. Having held that AO and ld. CIT(A) were not correct in rejecting assessee s claim of exemption u/s 10B, it is necessary to decide the appropriate section, i.e. 10A or 10B under which assessee is entitled to claim deduction. Though, the coordinate bench while remitting the matter has specifically directed ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that assessee while claiming deduction u/s 10B for the Bangalore unit has filed a consolidated form No. 56G and only in the revised return filed in pursuance to notice u/s 148 for AY 2001-02, assessee claimed separate deduction for both the units. The learned DR submitted that as per the provisions of the Act, claim under section 10A must be filed along with return of income as per section 139(1). Whereas the assessee has not made any such claim in the original return. Further, the correct form to be for claiming exemption u/s 10A 56F whereas the assessee filed a common form for both the units u/s 56G. Therefore, it was submitted that as assessee itself not treating both the units are separate while filing a consolidated form 56G, there is no question of granting exemption u/s 10A for the Bangalore unit. 33. We have considered the submissions of the parties and perused the materials on record. This is an alternative claim made by assessee in the event of denial of exemption in respect of Pune Unit. In our view, this issue is of mere academic interest because of our decision that assessee is entitled for exemption u/s 10A, for ten consecutive asst. years which will be app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the learned CIT(A). 36. In course of appeal before the first appellate authority, it was submitted by assessee that provision made in the books of account pertained to service availed by assessee against which expenses have been incurred. However, as no invoices were received until the close of the year, the value of the services were appropriately determined and provided in the books, hence, the provision made cannot be considered as contingent liability but they are in the nature of ascertained liability. In support of such contention, assessee relied upon a decision of Hon ble Supreme Court in case of Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62. Assessee submitted that as provisions made are in the nature of ascertained liability the same cannot be added to the book profit u/s 115JB. Assessee also made an alternative claim that in case expenses are treated as contingent and added back to the business profits of assessee, then, increased profit should be considered for the purpose of 10A deduction. 37. The learned CIT(A), however, did not find merit in the submissions of assessee. Ld. CIT(A) held that as assessee has not furnished the details of expen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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