Macquarie Global Services Vs DCIT (ITAT Delhi)
Once the claim of deduction u/s 10AA has been accepted in the first year of the operations and also in the second year, then in the third year same cannot be withdrawn by examining the factors which were required to be seen in the first year of the claim. Thus, on this ground alone, we hold that the AO cannot deny the claim of deduction u/s 10AA with the assessee in this year and hence is directed to allow the same.
Even on the merits, we find that none of the allegation which has been made by the AO appears to be correct, because if he see the expansion and growth of revenue of EOU unit and the revenue of the SEZ unit, as incorporated above, we find that there has been substantial increase in the revenue in the EOU unit also from the financial year 2011-12 to financial year 2016-17. Thus, it cannot be held that after the sun set period the revenue of the EOU has gone down. The chart as submitted by the Ld. Counsel clearly vitiates the observation and the finding of the AO; and hence on the point that there is a less growth of revenue in EOU unit and therefore, presumption can be drawn for splitting up or reconstruction of EOU unit is incorrect and cannot be upheld. Further we find that the assessee continued to make addition to the fixed assets in the SEZ unit independently and there is no iota of any material to show that the additions to the fixed assets has been by way of transfer from EOU units. Likewise from the perusal of the list of technical man power, we find that except for two or three employees out of 30 employees are newly hired and therefore, it is not a case where the old employees of EOU unit have been entirely shifted to SEZ unit which seems to be the allegation of the AO. Thus, all the issues raised by the AO does not hold ground on the facts and material placed before us and hence on factual matrix also we hold that assessee has not violated any of the conditions prescribed in section 10AA and therefore, it is entitled for claim of deduction u/s 10AA in this year.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
The aforesaid appeal has been filed by the assessee against final assessment order dated 27.9.2017 passed u/s 143(3) read with section 144C(5) in pursuance of directions given by the Dispute Resolution Panel (DRP) vide order dated 7.9.2017. In various grounds of appeal the assessee has mainly challenged the disallowance of deduction u/s 10AA amounting to Rs. 10,43,46,127/- relating to profits derived by SEZ unit of the assessee from the export of IT-enabled services. For the sake of ready reference the relevant ground on this issue reads as under:-
2.1 The Ld. AO/ DRP erred in denying the deduction claimed by the Appellant under section 10AA of the Act amounting to Rs.10,43,46,127 relating to profits derived by eligible SEZ unit of the Appellant from the export of IT-enabled services.
2.2. That, without prejudice, the Ld. AO/ DRP erred in not appreciating that the relevant conditions of section 10AA of the Act are to be examined in the year of formation of SEZ unit and that the deduction was allowed to the Appellant in the year of formation and in the subsequent year.
2.3. The Ld. AO/ DRP erred in holding that the SEZ unit has failed to comply with the requirements of Section 10AA (4) of the Act.
2.4 The Ld. AO/DRP erred in not appreciating that the principle of consistency is applicable on the facts of the present case.
2.5. The Ld. AO/ DRP erred in holding that the SEZ unit has been formed by splitting up and diversion of the existing business in the EOU unit considering the revenue and employee growth in SEZ unit vis-a-vis EOU unit. The addition is based on mere surmises and conjectures and without any material on record.
2.6. The Ld. AOI DRP erred in not appreciating that during the year under consideration, all conditions of Section 10AA are satisfied and hence Appellant is entitled to the benefit thereof.
2.7. The Ld. AO/ DRP erred in ignoring the fact that the Appellant has complied with the conditions mentioned in Circular 14/2014 dated 08 October 2014 in relation to hiring of new employees and the Learned AO erred in not following Instruction 17/2013 dated 17 January 2013.
2. Brief facts and background of the case are that the assessee company is a wholly owned subsidiary of ‘Macquarie Global Services (Mauritius) Limited’ and was set up in India in March, 2007. It is a captive contract service provider, engaged in the business of provision of back office support services to its associated enterprises (AE). For rendering such services, assessee is remunerated on a cost plus mark up basis. During the relevant financial year the assessee company was operating from two separate units’ i.e., ‘CN61D (EOU)’ unit and ‘SEZ unit’. The operations from the said SEZ unit had commenced during the financial year 2010-11; and accordingly, had claimed deduction u/s 10AA in the assessment year 2011-12 and also in assessment year 2012-13. During the year under consideration which was its third year of operation, the assessee had claimed deduction of Rs. 10,43,46,127/- u/s 10AA. The said claim was duly supported by audit report in Form No. 56F. During the course of the assessment proceedings the AO noted that assessee has been claiming deduction u/s 10B/ 10A in the earlier years from its EOU Unit and the last year of deduction was assessment year 2011-12, from which period onwards deduction was not allowable due to sun set period of EOU unit. In order to verify the claim for deduction u/s 10AA for the SEZ unit, the Ld. AO issued show cause notice which has been incorporated at page 4 to 5 of the impugned order. In sum and substance his observations in the show cause notice was as under:-
i) The assessee was asked to justify whether there is any splitting up or reconstruction of the existing business.
ii) Whether the new customer in the business of 10AA unit was added by the assessee without compromising the business of the existing business as overall growth in the business was 18% in financial year 2012-13 and 97% in the financial year 2009-10; and in the financial year 2011 12 and 2012-13 the overall growth was only 3% and 7%; whereas growth in SEZ business for these years was 1166% and 33% respectively from which he deduced that there is a splitting and diversion of the existing business.
iii)The assessee was asked to submit total number of the employees of the company and the employees hired for the new business and existing units and to submit year wise details of old and new employees from the date of set-up of new unit. The details of which have been incorporated in the said show cause notice itself. He required the assessee to submit, whether the employees added by the assessee are without compromising the existing business of the EOU Unit as there was an overall growth in the employee in hiring of SEZ business in financial year 2012-13 which was at 12%; and in the financial year 2009-10, it was at 112%, whereas employee hiring of SEZ business was 370% and 21% in these years.
iv) Lastly, the assessee was required to submit year wise revenue billed to the customers.
In response, the assessee filed detail submissions, which has been dealt by the AO in the following manner:-
“4.3 The assessee vide reply dated 23.12.2016 has submitted the reply and which was placed on records. The assessee has submitted that MGSL set up a new unit under the SEZ legislation with projected employment of 225 people and projected investment of INR 1,005 lakhs. For the purpose of new SEZ unit, additional area of 28,008 square feet was taken on lease. The Assessee commenced operations from the SEZ unit during FY 2010-11 and accordingly claimed deduction u/s 10AA of the Act for eligible profits. Hence, the first year of tax holiday claimed under section 10AA of the Act is AY 2011-12. The assessee has submitted that the conditions prescribed above need to be fulfilled at the time “formation of SEZ unit” i.e. during the first year of commencement of operations. The SEZ unit commenced operations in FY 2010-11 and accordingly, relevant year for examination of formative conditions is AY 2011-12. In that year there is no dispute on satisfaction of formative conditions.
4.4 The assessee has further submitted that MGSPL has met all the conditions for claiming the deduction u/s 10AA of the Act. As alleged in the show cause on allowbility of deduction under section 10AA of the Act that it has begun or beings to manufacturing or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone. It was submitted that the Assessee, during FY 2010-11, has set up an SEZ unit for providing ITES services duly approved by SEZ Authority vide letter of approval dated 21 June 2010. Further, the Assessee duly commenced commercial operations in nature of export of IT /ITES services from the SEZ Unit with effect from 1 January 2011. Accordingly, it is submitted that the Assessee has begun to provide services from its SEZ unit after 01 April 2006. It was submitted by the assessee that it is not formed by the splitting up, or the reconstruction, of a business already in existence. In respect of the SEZ unit it is submitted by the assessee:-
