The Karnataka High Court, in its recent ruling, in the case of CIT Vs. Expert Outsource Pvt. Ltd. [2011-TI01-236-HC-KAR-IT] held that deduction under section 10A of the Income-tax Act, 1961 is available to the assessee on conversion of existing Domestic Tariff Area (DTA) unit into a Software Technology Park (STP) unit.
• The assessee, a private limited company, is engaged in the business rendering software development services. It was incorporated on 17 Deceml 2003. An agreement was entered into with its parent company on October, 2003 for providing software development services.
• The first invoice was raised by the assessee on 29 December, 2003 from DTA unit. The assessee obtained the STPI registration for its unit on 4 Augi 2004 and the export commenced only after 4 August, 2004.
• Accordingly, the assessee claimed deduction under section 10A of the Income-tax Act, 1961 for the assessment year 2005-06.
• The assessing officer (“the AO”) disallowed the deduction claimed by the assessee under section 10A of the Income-tax Act, 1961 on the following grounds:
-The company was incorporated, and started business activity, prior to obtaining approval of STPI. Hence, the conditions laid down under section 10A(2)(i)(b) and 10A(2)(i)(c) of Income-tax Act, 1961 were not satisfied.
– The company had converted the DTA unit into an STP unit whereby the old plant and machinery, valuing more than 20 percent of the total plant, was transferred to STP unit. Hence, the condition that a ‘new’ unit was set up as required under the provisions of section 1OA(2)(iii) of Income-tax Act, 1961 were not satisfied.
• The Commissioner of Income-tax (Appeals) (“CIT(A)”) allowed the assessee’s appeal by placing reliance on the Central Board of Direct Taxes (“CBDT”) Circular No. 1 dated January 6, 2005 issued under section 10B of the Income-tax Act, 1961 which clarified that a DTA unit subsequently converted into a 100 percent Export Oriented Unit (“EOU”) shall be eligible to claim deduction under section 1oB of the Income-tax Act, 1961.
• The Bangalore Bench of Income Tax Appellate Tribunal (“the Tribunal”) thereafter upheld the CIT(A)’s order in favor of the assessee.
Whether the assessee is eligible to claim deduction under section 10A of the Income-tax Act, 1961 even though the assessee commenced its business activities prior to obtaining of approval from STPI and, therefore, the condition laid down in the Income-tax Act, 1961 with regard to commencement of manufacture / production of article / things / computer software in an STP, were not fulfilled [section 10A(2)(i)(b) and 10A(2)(i)(c)] ?
High Court Ruling
• The purpose of STP scheme is to encourage exports and gain valuable foreign exchange for the country.
• The STP scheme provides the benefit of converting a DTA unit into an STP unit and the same should also hold good for tax purposes.
• CBDT Circular No. 1 dated 6 January, 2005, provides that a unit set up in a DTA and later on converted into an EOU would be eligible for deduction under section 1oB of the Income-tax Act, 1961. Though the Circular is in the context of section 1oB of the Income-tax Act, 1961, the ratio of the Circular equally applies to section 10A of the Income-tax Act, 1961.
• Also, the export invoices establish the fact that exports were commenced only after 4 August, 2004 i.e., the date of registration of STPI, and accordingly, the benefit of deduction is rightly extended to the assessee by the appellate authority and the Tribunal.
• Hence, the appellate authority and the Tribunal were justified in extending the benefit of section IDA of the Income-tax Act, 1961 to the unit in question.
This ruling reinforces the view that tax holiday under section IDA of the Income-tax Act, 1961 would be available to a unit which initially commenced operation as a DTA unit and was later registered as an STPI unit. It may however be noted that the observation by the Court, that the assessee in this case, commenced export only after registration with the STPI, may not settle the controversy in cases of units which commenced export before the registration.
Further, the Court ruling also lays down the legal position that a Circular issued by the CBDT in the context of a particular provision of law can be applied for other provisions which are in pari materia. Hence, it would mean that the CBDT Circular No. 1 / 2005 issued in the context of section 1oB of the Income-tax Act, 1961, also applies to section 10A of the Income-tax Act, 1961. While the tax holiday under section 10A / 10B of the Income-tax Act, 1961 for export from STPI / EOUs has since been phased out, the ruling would help settling existing litigation on the issue.