Section 10A deduction is available to a new unit even though STPI approval refers to it as expansion of existing unit

ACIT Vs. Symantec Software India P. Ltd. (ITAT Pune)- Based on the specific facts of the case, the Tribunal has reiterated that the fulfillment of the conditions of section 10A(2) is of utmost importance for claiming a deduction under section 10A. A reference to the new undertaking as expansion by the STPI would not dis-entitle the assessee from claiming a deduction under section 10A of the Act. This ruling re- emphasizes the need for detailed factual submissions to be made at the earliest opportunity. With regard to the loss set-off, the Tribunal has held that the entire profits of an eligible unit can be claimed as deduction under section 10A without setting off losses pertaining to another undertaking.

INCOME TAX APPELLATE TRIBUNAL, PUNE

Asstt. Commissioner of Income-tax Vs. Symantec Software India P. Ltd.

ITA No. 787/PN/09- (Asst. Year 2004-05)

ITA N0 805/PN/09 -( Asst. Year: 2004-05))

Date of pronouncement : 30.11 .2011

ORDER

PER G S PANNU, AM:

The cross-appeals by the Revenue and the assessee arise out of the order of the Commissioner of Income-tax (Appeals)-III, Pune dated 26.3.2009, which in turn have arisen from the order passed by the Assessing Officer under section 143(3)(3) of the Income-tax Act, 1961 ( in short “the Act”) pertaining to the assessment year 2004-05.

2. We shall first take up Revenue’s appeal, vide ITA No.787/PN/09.

3. Although the Revenue has raised four Grounds of appeal, but essentially the dispute is on two issues. Firstly, as per the Revenue the assessee is not entitled to the claim of deduction under section 10A in respect of Unit-B primarily   for the reason that the said Unit is neither separate and nor has a distinct identity but was a mere expansion of the existing business. The second issue raised by the Revenue is with regard to the order of the Commissioner of Income-tax (Appeals) in holding that incomes by way of sales-tax refund, liabilities no longer required written back and Profit on sale of assets are eligible incomes for computing deduction under section 1 0A of the Act for Unit-A. The former issue being the substantive dispute, the same is being taken up at the outset.

4. In order to appreciate the background of the first issue, the following discussion is relevant. The assessee is a company incorporated under the provisions of Companies Act, 1956 on 12.9.1995 and is engaged in the business of software development services. It was registered with the STPI authorities initially on 16.11.1995 and thereafter, approvals were sought for expansion and in this manner, over the years upto the instant assessment year, the following tabulation extracted in para 3.2 of the order of the Commissioner of Income-tax (Appeals) shows the business operations being carried out by the assessee:

Since the past years, the assessee has been claiming deduction under section 1 0A for the profits relating to the businesses carried out aforesaid at Unit-A and the Assessing Officer has noted that the said period of exemption of ten years was expiring in the assessment year 2005-06. With regard to item 7 of the aforesaid tabulation, the said business Unit classified as Unit-B was set-up during the year under consideration in terms of an STPI approval dated 8.10.2003. The said Unit-B was treated by the assessee as a separate undertaking independent of Unit-A and was claimed to be eligible for benefit of deduction under section 1 0A in an independent manner, though during the year no deduction in relation to Unit-B was claimed, as it had incurred a loss. So, however, the Assessing Officer did not agree to the assessee’s claim that Unit-B was independently eligible for deduction under section 10A since, according to him, there was no separate existence of Unit-B. In coming to such conclusion, the Assessing Officer has enumerated various reasons, which can be summarized as under:

i) that Unit B is situated in the same building in which the erstwhile Unit A was situate;

ii) that expansions carried out in the past years at different premise were claimed as expansions of Unit A and that it is only expansion in the instant year that is being claimed as a new and separate undertaking;

iii) that the STPI permission obtained in October, 2003 is for expansion of business and not for starting a new business;

iv) that common Bond register for the purposes of custom duty has been maintained for the two Units situated in the same building;

v) that there was no specific recruitment of employees in the case of Unit B;

vi) that Unit B was set up by transferring some of the assets of Unit A;

vii) that the new Unit has a common source of power as there is a common electricity meter;

viii) that Unit B was not carrying out any new business activities and the technical support was obtained from Unit-A also; and,

ix) that the intention behind the assessee’s claim of treating Unit-B as a separate undertaking was to extend the tax holiday available under section 10A of the Act, which was otherwise expiring in assessment year 2005-06 as the period of ten years in case of Unit-A was nearing completion.

5. For all the above reasons, the Assessing Officer concluded that Unit-B was not independently eligible for the claim of deduction under section 1 0A of the Act and that it was merely an expansion of the existing business and was a part and parcel of Unit-A itself.

6. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) and submitted point-wise rebuttal to the reasons advanced by the Assessing Officer. The stand of the assessee before the Commissioner of Income-tax (Appeals) was that the reasons advanced by the Assessing Officer were contrary to the facts on record and that on the basis of the evidences/information on record, the Unit-B was a separate unit carrying on different activities and was independently eligible for the claim of deduction under section 10A of the Act. The Commissioner of Income-tax (Appeals) has succinctly noted the points raised by the assessee in paras 3.4 and 3.5 of the impugned order, which are not being reproduced herein for the sake of brevity. The Commissioner of Income-tax (Appeals) thereafter called for a Remand report from the Assessing Officer, contents of which have been reproduced in para 3.6 of the impugned order. It transpires that in the remand proceedings, physical inspection of the assessee’s business premises housing Unit-B was also carried out by the Department. On the basis of the aforesaid exercise, the Commissioner of Income-tax (Appeals) has thereafter dealt with each of the points made out by the Assessing Officer and ultimately in para 3.9 has concluded that Unit-B is a physically new and separate undertaking which could exist on its own and therefore, the Assessing officer was not justified in treating it as a mere expansion of Unit-A. Not being satisfied with the aforesaid conclusion of the Commissioner of Income-tax (Appeals), Revenue is in appeal before us.

7. Before us, the learned Departmental Representative has argued that the Assessing officer was justified in holding that Unit-B could not be treated as independently eligible for the deduction under section 1 0A of the Act. According  to him, the elaborate points made out by the Assessing Officer have been wrongly negated by the Commissioner of Income-tax (Appeals) inasmuch as the intention of the assessee to claim Unit-B as a separate Unit was merely to extend the tax holiday of ten years which was being enjoyed by Unit-A and the same was coming to an end in assessment year 2005-06. In sum and substance, the arguments set up by the learned Departmental Representative is that the Assessing Officer was justified in treating Unit-B as not eligible for the claim of deduction under section 1 0A of the Act.

8. On the other hand, the learned Counsel appearing for the assessee, has assailed the arguments of the learned Departmental Representative by pointing out that the Commissioner of Income-tax (Appeals) has duly deliberated upon the points raised by the Assessing Officer and, after due examination of the factual position, he has held Unit-B as a new and separate undertaking. In this regard, reference has been made to findings of the Commissioner of Income-tax (Appeals) in para 3.8 of the impugned order, which deal with each of the points raised by the Assessing Officer and in this regard he has also referred to paper Book filed which, inter alia, contains the material and evidences which support such findings of the Commissioner of Income-tax (Appeals). In particular, it has been argued that during the remand proceedings, the premises of unit-B were subject to physical inspection and its distinct physical separateness stood established. It has also been submitted that the plea of the Assessing Officer that Unit-B was merely an expansion of the business of Unit-A has been found to be factually erroneous inasmuch as the business of Call Center undertaken in Unit-B is peculiar to the said Unit which was not being hitherto carried out in Unit-A. Referring to the plea of the Revenue that merely because the approval issued by STPI for Unit-B contains the word ‘expansion of your operations’ the same would not be fatal to the plea that Unit-B was an independent Unit. In this connection, it is pointed out that a similar objection in the context of claim for deduction under section 1 0A of the Act in the case of Patni Computers Systems  Ltd. (ITA No 687/PN/07 for assessment year 2002- 03) was dealt with by the Tribunal in its order dated 30.6.2011 in favor of the assessee. A copy of the said order has been placed on record. In sum and substance, the learned Counsel has defended the order of the Commissioner of Income-tax (Appeals) by placing reliance on the findings contained therein.

9. We have carefully considered the rival submissions. In this case, the assessee is a company which is engaged in the business of development of computer software and in the month of November, 2003 it started a new activity of Call Centre which was claimed as Unit-B. The said Unit-B was claimed to be a separate and distinct Unit and was registered with software Technology Parks of India (STPI) vide approval dated 8.10.2003, a copy of which has been placed in Paper Book at page 17. The sum and substance of the case made out by the Assessing Officer is that Unit-B is not to be understood as a separate unit but a mere expansion of the erstwhile Unit-A and, therefore, the Unit-B is not to be reckoned as a separate Unit for the purposes of claim of deduction under section 1 0A of the Act. The Commissioner of Income-tax (Appeals) has, however, appreciated the plea of the assessee and has held Unit-B as a separate undertaking and in terms thereof, it has been held to be eligible for the claim of deduction u/s 1 0A independent of the old Unit-A. Section 1 0A of the Act provides for a deduction in respect of profits and gains as are derived by an undertaking from export of computer software, etc. for a period of 10 consecutive assessment years, subject of-course to fulfilment of the conditions specified by sub-section (2) of section 1 0A of the Act. The conditions prescribed in sub-section (2) of section 1 0A of the Act are, namely, that the undertaking has to begin manufacture or produce computer software during the previous year relevant to the assessment year commencing on or after the first day of April, 1994 in any software technology park; and that the undertaking is not formed by splitting up or reconstruction of the business already in existence; and, that the undertaking is not formed by transfer to a new business of machinery or plant previously used  for any purpose. Pertinently, before we proceed further, we may observe that there is no dispute between the parties that the activity being carried out in Unit-B is otherwise eligible for the benefits of section 1 0A of the Act. Coming back to the order of the Commissioner of Income-tax (Appeals), it is noticed that he has factually concluded that Unit-B is a physically new and separate undertaking. The Commissioner of Income-tax (Appeals) has dealt with the principal objection of the Assessing Officer that Unit-B is operating from the same premises. In fact, in point (a) in para 3.8 of the impugned order, the Commissioner of Income-tax (Appeals) records a finding on the basis of the lease agreements, lay out plan of the premises, photographs of the premises that Unit-B is housed in different premises. In coming to such conclusion, the Commissioner of Income-tax (Appeals) has also been guided by the remand report of the Assessing Officer, which inter alia included the site inspection by the Departmental authorities. Before us, no material has been brought out so as to negate the aforesaid findings of the Commissioner of Income-tax (Appeals). Secondly, the plea that assessee was maintaining a common bond register and therefore, it was inferred that no separate license was obtained for Unit-B, in our view, has been appropriately addressed by the Commissioner of Income-tax (Appeals) in point (c) of para 3.8 of the impugned order. The Commissioner of Income-tax (Appeals) has reproduced the terms of the license issued by the Assistant Commissioner of Central Excise dated 20.10.2003 which clearly brings out that the permission to new Unit-B was granted in addition to the permission contained in the original license. Merely because the new permission contains reference to the original license cannot be considered as conclusive that the new Unit is not a separate or independent Unit. In this light, we may also refer to letter dated 8.10.2003 issued by STPI permitting assessee to carry out activities in Unit-B wherein it has been stated as under:

“This office has no objection to the expansion of your operations to the premises at unit No. 501 to 504, 601 to 604, and 701 to 704, Building B, S. No. 41/C, 41-A. 1/5, 34 Pune I. T Park, Bhau Patil Marg Bopodi, Pune 411 003 subject to your fulfilling the Excise & Customs related formalities.”

The aforesaid has been interpreted by the Revenue to infer that the approval by STPI is only an expansion of the old Unit and not to set-up a new and separate Unit. Similar objection in the context of section 10A of the Act was a subject-matter of consideration by the Pune Bench in the case of Patni Computer systems Ltd. (supra) wherein reference was made to an earlier decision of the Tribunal in the case of Jayant Agro Organics Ltd. Akhandanad, Mumbai v. Jt. CIT (ITA No 5439/Mum/01 dated 3.3.2006) and it was held that the said plea was not cogent to deny the claim of deduction under section 1 0A of the Act. The relevant portion of the order of Tribunal contained in para 41 & 42 is reproduced:

“41. The only plea of the Revenue is that in the approvals granted by the STPI, the three units have been referred to as an expansion of the corresponding old units. The moot question is as to whether such a plea of the Revenue is potent to effect the assessee’s entitlement for deduction under section 10A of the Act. Similar plea of the Revenue in the context of section 10B of the Act was a subject matter of consideration by our co-ordinate Bench in the case of Jayant Agro Organics Ltd. Akhandanad, (supra) wherein following discussion is worthy of notice:

“8. Revenue has vehemently contended that there is no independent Government approval of the new unit and all that the Government has permitted is enhancement in capacity of the existing unit. As evident from the land allotment letter dated 19th July, 1995 issued by the Gujarat Industrial Development Corp. Ltd. it is clear that the land allotted for the new unit is plot #624/1 and 2, and 625 to 627 whereas the existing plant was in plot 3 602. The production of 12 Hydroxy Stearic Acid is authorized by the letter dt 27th January 1995 which states that the Government has taken note of assessee’s wish to manufacture Hydroxy Stearic Acid also by way of forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that “Govt also approves of your request for the import of additional capital goods worth Rs 550 lakhs for the project”. That clearly demonstrates that the production of Hydroxy Stearic Acid of 12,000 MT was viewed by the Government as an independent project. It was not a case for purchase of addition capital goods for the existing project. The assessee is irrespective of the number of units, is one of artificial juridical person. Therefore, a combined permission, which involves setting up for different units, is quite in order. The fact of amendment of earlier permission or of grant of separate permissions, is not really relevant. What is really to be examined is whether the units are independent of unit and whether the units are covered by the permission or not. In our humble understanding it meets both the tests. We have also noted that it is not an statutory requirement that there has to be separate permission for each unit and therefore just because the permission is granted by the Government by way of amending the original permission letter does not affect the eligibility for deduction u/s 10B in any manner.”

42. From the aforesaid, it is quite clear that the manner in which the approval has been granted is not relevant to examine the assessee’s case for claim of deduction under section 10A of the Act with respect to the three units. What is really to be examined is as to whether the three units are independent units and that they fulfill the conditions prescribed under section 10A(2) of the Act. There is no prohibition that an expansion in the same line of business achieved by setting up a new independent unit would lead to denial of deduction under section 10A of the Act. In this background, in the earlier part of this order we have already noted with approval the factual findings of the Commissioner of Income-tax (Appeals) that the three units are separate and independent production units and the same cannot be treated as mere expansions of the existing undertakings.

Therefore, the mere fact that the requisite permissions from STPI refer them as expansions of the existing units, would not dis-entitle the assessee from the claim of deduction under section 10A of the Act. In this view of the matter, we find no error in the approach of the Commissioner of Income-tax (Appeals) in having allowed the claim of assessee for the benefits under section 10A of the Act on the three units treating the same as independent units. Thus, Ground Nos 1 & 2 of the appeal of the Revenue are dismissed.”

10. Following the aforesaid parity of reasoning, in our view, the aforesaid plea would not dis-entitle the assessee from claiming that Unit-B was an independent and separate unit and not merely an expansion of the old Unit. In fact, the assessee has referred to various milestones to point out that Unit-B was set-up to carry out a new activity namely, a Call Centre and various permissions from Governmental authorities were independently obtained for this purpose. In this connection, reference has been made to the following:

(i) STPI permission dated 8.10.2003;

(ii) Customs Bonding Permission dated 20.10.2003;

(iii) Lease agreement between the assessee and Vasum Industries to take on lease premises of Unit-B; and,

(iv) Permission from Department of Telecommunication dated 3.11.2003 for setting up an International Call centre, which is treated as Unit-B.

11. Apart therefrom at pages 2 to 6 of the Paper Book are placed the activities being carried out at Unit-A and Unit-B and the said material clearly supports the finding of the Commissioner of Income-tax (Appeals) that the activities being carried out in Unit-B are new and distinct from those of Unit-A. Factually speaking, there is no cogent material or reasoning brought out by the Revenue which would require us to interfere with the ultimate conclusion of the Commissioner of Income-tax (Appeals) contained in para 3.9 of his order, which is reproduced hereinafter:-

“3.9: In view of the facts that there is a clear difference in activities carried out by Unit-B, new plant and machinery has specifically been purchased for Unit B and a separate DOT license has been taken for Unit B, it is clear that Unit B is a physically new and separate undertaking which could exist on its own and, therefore, the AO is not justified in treating as mere expansion of Unit A. This ground of appeal succeeds.”

12. The aforesaid conclusion is well supported by the relevant material on record which has not been shown to be incorrect or lacking in bona fides. Another aspect which prevailed with the Assessing Officer was that the intention of the assessee in claiming Unit-B as a separate and independent Unit was to get deduction under section 1 0A of the Act beyond the period of 10 years, which was expiring in assessment year 2005-06 in relation to Unit-A and that in the earlier years, the expansions were not claimed as separate Units for the purposes of claiming deduction under section 10A of the Act. In our considered opinion, the aforesaid approach of the Assessing Officer is untenable, inasmuch as on facts and in law, as succinctly brought out by the Commissioner of Income-tax (Appeals), Unit-B is entitled to be understood as a separate and independent Unit for the purpose of claiming deduction under section 10A of the Act. Moreover, in the course of hearing before us, the learned Counsel for the respondent- assessee pointed out that even after the expiry of tax holiday period of 10 years in Unit-A, the activities and profits of Unit-A have shown positive growth and this itself shows that there was no intention to claim separate deduction for Unit-B merely for the purposes of enjoying tax holiday. The aforesaid plea has not been controverted before us. Considering the totality of circumstances, in our view, the Commissioner of Income-tax (Appeals) rightly dis-agreed with the apprehension of the Assessing Officer on this matter and has correctly upheld the assessee’s claim for treating Unit-B as a separate and independent Unit for the purposes of claim of deduction under section 1 0A of the Act. In this view of the matter, we, therefore, find no merit in the Ground of appeal raised by the Revenue and the same is dismissed accordingly.

13. The last Ground in appeal of the Revenue is with regard to the manner of computing deduction under section 10A of the Act. The dispute pertains to the inclusion of the following incomes for the purposes of computing deduction under section 1 0A of the Act:

(i) Sales-tax refund Rs 21,13,822/-

(ii) Liabilities no longer required and written back Rs 12,79,558/-

(iii) Profit on sale of assets Rs 74,104/-

The Assessing Officer found that while working out the eligible profits under section 1 0A, assessee had not excluded the aforesaid incomes, which as per him cannot be said to have been derived from the export activities. The Commissioner of Income-tax (Appeals) has since negated the claim of the Assessing Officer by making the following discussion in para 7.4 of his order:

“7.4: The submission has been considered and is found to have merit. It is seen from the assessment order that in excluding income of Rs 92,33,705/- from the profits derived from export activities, the AO has relied upon the judgment in the case of CIT v Sterling Food Ltd. 237 ITR 579 (SC) wherein, while interpreting the words ‘derived from’ used in section 80HH, Hon’ble Apex Court has held that there must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking. However, while applying the ratio of the decision mentioned supra, the distinction between the provisions of section 80HH and section 10A cannot be lost sight of. While the provisions of section 80HH leave margin for interpretation of the phrase ‘profits and gains derived from an industrial undertaking’ for want of any definition in section 80HH, section 1 0A categorically clarifies that the profits derived from export of computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such computer software bears to the total turnover of the business carried out by the assessee. The statutory formula prescribed in section 1 0A, rules out the applicability of the ratio of the judgment of the Hon’ble Supreme Court in the case of CIT v. Sterling Food Ltd., given in the context of section 80HH. The AO is, therefore, directed no to exclude the amounts of profit on sale of assets, sales tax refund and liabilities written back from the profits derived from export activities while computing deduction u/s 1 0A. This ground of appeal succeeds.”

14. Against the aforesaid, the learned Departmental Representative has reiterated the arguments set up by the Assessing Officer that the aforesaid incomes do not meet the tests of having been “derived by an undertaking from the export of articles” as contained in section 1 0A of the Act and, therefore, the Commissioner of Income-tax (Appeals) erred in allowing appropriate relief to the assessee.

15. In this connection, the Counsel for the respondent- assessee has defended the conclusion of the Commissioner of Income-tax (Appeals) by relying upon an order of the Mumbai Bench of the Tribunal in the case of Livingstone Jewellery (P) Ltd. V.DCIT 31 SOT 323 (Mum), wherein similar argument has been dealt with in favor of the assessee.

16. We have carefully considered the rival submissions. In our view, the assessee is correct in asserting that a similar situation has been dealt with by the Mumbai Bench of the Tribunal in the case of Livingstone Jewellery (P) Ltd (supra) wherein an identical argument set up by the Revenue in the context of the claim of deduction under section 1 0A has been found to be untenable. The following discussion contained in para 5 of the said decision is worthy of notice:

“Coming back to section 10A we find that sub-section (1) also employs the expression derived from the export of articles. But it is not the end of the matter. The expression ‘profits derived from export of articles or things or computer software’ as employed in sub-section (1) or (1A) has been given a specific meaning in sub-section (4). The sub¬section (4) states that the ‘profits derived from export of articles or things or computer software’ shall be the amount which bears to the ‘profits of the business of the undertaking’, the same portion as the export turnover in respect of such articles o things or computer software bears to the total turnover of the business carried on by the undertaking. By providing for considering the ‘profits of the business of the undertaking’, the position has been made clear that the restricted general meaning given to eligible profits as derived from the export of articles in sub-section (1) has been given a go by in sub-section (4) and the scope of the benefit has been expanded by extending to the al profits of the business carried on by the undertaking. Once the expression ‘derived from’ having restricted scope has been specifically defined in the same section, then the meaning of such expression as understood in common parlance will not be applicable. Rather the specific meaning given to it will come into play. We further note that sub¬section (4) has been worded on the pattern of section 80-IA, prior to its substitution with effect from 1.4.2000, which referred to ‘profits and gains derived from any business of an industrial undertaking’. In the context of section 80IA, the Amritsar Bench of the Tribunal in the case of Dy. CIT v Chaman Lal & Sons (2005) 3 SOT 333 (to which one of us, namely the AM, is party) held that in such a worded section, the benefit of deduction has to be made available in respect of purchase and sale which was part and parcel of the business of the industrial undertaking. Thus when sub-section (1) of section 10A is read in juxtaposition to sub-section (4), we are not inclined to accept that only the profits and gains as derived by the undertaking from the export of articles is eligible for deduction. All the profits which have nexus with the business of the undertaking will qualify for deduction. From the facts of the instant case it is noted that the assessee had given FDRs to the bank for obtaining credit facility. Such interest income has nexus with the business of the undertaking and falls under the head ‘Profits and gains of business or profession’ as having relation with the carrying on of the business. Similar view has been taken in the case of Motorola India Electronics (P) Ltd. (supra). In our considered opinion the ld CIT(A) was not justified in treating the interest income as not derived from the export activity. We, therefore hold that the assessee was entitled to deduction u/s 10A in respect of the interest income. The resultant denial of deduction under section 10A is deleted.”

17. Following the aforesaid precedent, we endorse the view of the Commissioner of Income-tax (Appeals) and Revenue fails on this Ground.

18. In the result, Revenue’s appeal is dismissed.

19. In the assessee’s appeal, vide ITA No 805/PN/09, the first Ground of appeal raised is that the Commissioner of Income-tax (Appeals) was not justified in upholding the action of the Assessing Officer in setting-off loss of Unit-B against profits of Unit-A for the purposes of computing the deduction u/s 1 0A of the Act relating to Unit A.

20. During the course of assessment proceedings, the Assessing Officer observed that the assessee company had shown a loss of Rs 1 ,78,08,674/- in Unit B and had shown profit of Rs 13,15,75,991/- in Unit A. He further observed that the assessee claimed deduction under section 1 0A of the Act in respect of the net profit of Rs 13,15,75,991/- pertaining to Unit A alone and loss of Rs 1 ,78,08,674/- of Unit B was carried forward by the assessee. The Assessing Officer was of the view that the profit of Unit A was to be set-off against loss of Unit B as both the units were eligible for deduction under section 1 0A of the Act. According to the Assessing Officer, income under section 1 0A was part of total income and income or loss of 1 0A unit needed to be set off against the loss of other unit as per section 70 of the Act to arrive at the total income. Accordingly, he set-off the loss of Unit B against the profits of Unit A and worked out net profit of Unit A at 11,37,67,317/- and the deduction under section 1 0A of the Act was accordingly allowed. The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals).

21. Before the Commissioner of Income-tax (Appeals), the assessee reiterated its stand that while computing deduction under section 10A of the Act in respect of the profits of Unit-A, loss pertaining to Unit-B is not required to be set off against it. In support of this contention, assessee placed reliance on a catena of judicial decisions, including the decision of the Bangalore Bench of the Tribunal in the case of M/s Wipro Ltd. vide ITA Nos 426/Bang/2006, etc. dated 30.5.2008. The Commissioner of Income-tax (Appeals) after considering the detailed submissions of the assessee and the judicial decisions relied upon by the assessee, held that the issue at hand is squarely covered by the ratio of the decision in the case of Navin Bharat Industries Ltd. v. DCIT 90 ITD 1 and that the decision in the case of Wipro Ltd. (supra) relied upon by the assessee did not  directly deal with the issue under consideration. He accordingly held that the action of the Assessing Officer in setting-off the loss of Unit B against profit of Unit A was in accordance with law and thus affirmed the same. Aggrieved, assessee is in further appeal before us.

22. Before us, the learned Counsel for the assessee vehemently submitted that the lower authorities were not justified in rejecting the claim of the assessee for computing deduction under section 10A of the Act for the Unit-A without deducting the loss pertaining to Unit-B. In this connection, reliance has been placed on the decision of the Cochin Bench of the Tribunal in the case of M/s F.C.I Technology Services Ltd., Cochin v. ACIT in ITA No 616/Coch/2008 dated 04.06.2010, a copy of which is placed on record.

23. On the other hand, the learned Departmental Representative, appearing for the Revenue has defended the orders of the authorities below and has in particular referred to the decision of the Commissioner of Income-tax (Appeals) wherein the assessee’s claim has been rejected by relying on the decision of the Tribunal in the case of Navin Bharat Industries Ltd. (supra).

24. We have considered the rival submissions. In this case, the stand of the assessee has been negated by the Commissioner of Income-tax (Appeals) following the decision of the Tribunal in the case of Navin Bharat Industries Ltd. (supra). In so far as the decision in the case of Navin Bharat Industries Ltd (supra) is concerned, we have carefully perused the same and find that the ratio decidendi contained therein is inapplicable to the facts in the present case. In the case of Navin Bharat Industries Ltd (supra), the issue related to assessee’s claim for setting off of the loss incurred in a SEEPZ Unit against income of other units while working out the total income of the assessee. The Revenue had negated such claim of the assessee on the ground that since total income of the Unit was exempt under section 1 0A of the Act, therefore, the loss of such exempt Unit would also have to be ignored/ excluded for working out total income of the assessee. The Tribunal noted that benefit of section 1 0A was available to the assessee for 5 years, but it was claimed only for 3 years and for rest of the years, assessee did not claim benefit of section 1 0A of the Act and the assessee opted to get assessed the income of the Unit under the normal provisions. It also noticed that section 10A of the Act is a code by itself and cannot be compared with section 10 of the Act. Therefore, in this background, the Tribunal upheld the plea of the assessee and held that assessee was entitled to set-off loss incurred by SEEPZ Unit against its other income under the normal computation procedure for the purposes of computing total income. Thus, the stand of the assessee was upheld. Quite clearly, the dispute in the instant case relates to mere quantification of deduction under section 1 0A of the Act as distinct from the case of Navin Bharat Industries Ltd. (supra) where the issue was to work out the total income of the assessee. In the present case, the issue is whether loss of a 10A eligible Unit is liable to be set off against income of another 1 0A eligible Unit so as to compute the eligible deduction of the latter Unit. The precise question has been the subject matter of consideration by the Cochin Bench in the case of M/s F.C.I Technology Services Ltd. (supra) and in so far as the decision in the case of Navin Bharat Industries Ltd (supra) is concerned, the same is rendered on a different footing. The relevant portion of the order of the Tribunal in the case of M/s F.C.I Technology Services Ltd. (supra) is as under:

“4.2 In the present case, while the assessee claims deduction qua its only profit earning s. 10A unit by considering it as it’s only source of income, the Revenue seeks to adjust the said income against losses from the other two units, one of which is an eligible (u/s 10A) unit, for computing the deduction u/s 10A. The issue of set off or adjustment of sec. 10A income against non-section 10A income stands answered by the Tribunal pr its Special Bench decision in the case of Scientific Atlanta India Technology P. Ltd. (supra), which is even otherwise binding on us, so that the same must be considered as resolved, at least as far as the Tribunal is concerned; the Revenue not bringing any decision to the contrary by an higher authority to our notice. The second aspect of the matter, i.e. aggregation of the income from two (or more) eligible (u/s 10A) undertakings and, consequently, the set off of the two, where one of them is in loss, as in the present case, remains for being answered. As this issue was not considered or addressed at the time of hearing, the matter was posted for hearing again, to allow the parties an opportunity of hearing on this aspect of the matter. The ld AR drew our attention to the different paragraphs of the same decision, where, while discussing the matter with reference to the precedents in the matter, it stands emphasized that deduction u/s 10A is qua an ‘undertaking’. Nowhere the word ‘undertakings’, is used. The same, it was argued, thus, cannot be considered as plural, and where more than one unit qualifies for benefit u/s  10A, the same has to be worked out independently for each such Unit. The ld DR, on the other hand, would submit that the same goes against the grain of the decision by the Special Bench; it, adjudicating the issue of set off of loss (from a non-eligible unit) against the profit from an eligible undertaking, for the purpose of computation of deduction u/s 10A, clearly holds the same as not permissible; the two incomes falling under different Chapters of the Act. That being the premises of its decision, it follows that where the loss is also from an eligible undertaking (source), it would warrant being set off or adjusted prior to the grant of deduction u/s 10A. the Tribunal indicates so in no uncertain terms when it states, at para 27 of its order, of the position being different where the loss– which is to be set off– is from an eligible undertaking, and that its decision (regarding the non-set off of loss of an non-eligible unit) shall have no application in such a case; the relevant part of its order reading as:

“27. Having held that Of course, if there are more than one undertaking which is eligible for deduction u/s 10A and if some of the units have profit and other units have loss, it would be an entirely different case which is before us. Hence, the decision rendered in this appeal would not be applicable to such cases where there are more than one eligible undertaking claiming deduction under section 10A. In this case there is only one eligible undertaking claiming deduction u/s 10A and hence, the loss from the non-eligible unit cannot be set off against the profits of the eligible unit while determining the deductions u/s 10A”

4.3 We have given our anxious consideration to the matter, and for the reasons that follow, are not moved in favour of the Revenue’s stand. That the deduction u/ss. 10A and 10B, as also as those u/s 80HH, 80HHA, 80I, 80IA, et. Al. are unit-specific, in contradistinction to being assessee-specific, is well-settled, and not in dispute, and for which reference may be made to the decision in the case of Scientific Atlanta India Technology Pvt. Ltd. (supra) itself, wherein this aspect stands emphasized in sufficient detail. That being the basic position in respect of the deduction, the next question in the matter would be with regard to its quantification, i.e. the qualifying amount of profit and gains on which the same is to be allowed or worked at. Against, the deduction being unit-specific and, further, not forming part of GTI, it is not subject to either aggregation or adjustment and, consequently, to the restrictive influence of ss. 80A(2) and 80AB of Chapter VI-A. Also, there is nothing in the section that suggests aggregation of profits from two or more eligible undertakings, so that the profit derived from each is to be considered separately, i.e. as if it were the only income of the assessee, for the purpose of computation of deduction there under. In other words, the qualifying amount an, consequently, the deduction in its respect is to be worked on a stand-alone basis, independently for each eligible unit. In this respect, ss. 10A and 10B are a separate code in themselves. The treatment of the unabsorbed loss or depreciation, as the case may be, that may arise for any of the years, whether inside or outside the tax holiday period, stands, again, provided there under. Of course, once the tax holiday period expires, there is no question of the undertaking being an eligible one, and income therefrom, subject to any limitation provided n its rewspect under the provision itself, would fail to be considered as only from a non-eligible source. The question here is not of the singular or plural sense in which the word ‘undertaking’ is used in the section, or is capable of being read, but whether there is any positive relationship between the incomes derived from two eligible sources. The provision is completely silent in the matter, so that the only conclusion is an emphatic no, and the same are to be considered de hors each other. The issue before the Special Bench was the admissibility of the set off of loss of an non-eligible unit against the profit from an eligible one, for the purpose of computation of deduction u/s 10A. It is well settled that a decision is an authority on what it actually decides. It’s observations at para 27 of its order, therefore, are to be read in the context of the issue that was before it and, further, limited to that. When it states that its decision would have no application to a case where the loss (to be set off) is from an eligible unit, the same has to be read as just that, i.e. that it has not expressed any opinion in the matter, so that the issue is at large, and cannot be construed as a positive statement by it, as contended by the Revenue.

4.4 In view of the foregoing, we may sum up our findings, as under:

(a). the deduction u/s 10A in respect of the ISR Center, Bangalore, is to be computed only qua its profits, i.e., without any adjustment or set off of any loss from any other source, either eligible or non-eligible (u/s 10A). The allocation of preliminary expenses u/s 35D for the purpose could either on some reasonable basis, as turnover, or better still, set off against the specific income(s) of the Unit(s) in relation to the setting up or expansion of which the same stood incurred in the first place.

(b). the income that obtains after the deduction u/s 10A, or the unabsorbed claim u/s 10A, as the Tribunal describes it in the case of Scientific Atlanta India Technology Pvt. Ltd. (supra) would stand to be taxed as such, i.e., shall not be set off against any other loss or be carried forward.”

25. Following the aforesaid precedent, which has been rendered in similar circumstances, we hold that the Assessing Officer was not justified in rejecting the assessee’s claim of computing deduction under section 10A of the Act for the profits of Unit-A without deducting loss pertaining to Unit-B. As a result, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to recompute the deduction pertaining to Unit-A accordingly. Thus on this Ground, assessee succeeds.

26. Ground No. 2 reads as follows:

Treatment of telecommunication charges in computing deduction u/s 10A.

The ld CIT(A) erred in holding that 80% of telecommunication charges are attributable to the delivery of software outside India and hence is required to be reduced from export turnover.

Your appellant prays that telecommunication charges attributable to delivery of software outside India estimated to be not more than 5 to 10% be accepted.”

At the time of hearing before us, the learned Counsel for the assessee did not press this Ground, in view of the smallness of the quantum involved. Accordingly, we dismiss this Ground as not pressed.

27. Ground No. 3 reads as under:

“Expenses reduced from ‘Export turnover’ only Without prejudice to Ground No. 2 above, the ld CIT(A) erred in upholding the action of the AO that following expenses are required to be reduced only from ‘Export turnover’ without a corresponding adjustment in ‘Total Turnover” while computing deduction under section 10A.

Telecommunication charges – Rs 15,040,083

Expenses incurred in foreign currency – Rs 16,608,519

Your appellant prays that deduction from ‘Total Turnover’ be made for any corresponding deduction from ‘Export Turnover’.

28. During the course of assessment proceedings, the Assessing Officer adjusted Telecommunication charges and Expenses incurred in foreign currency only from the figure of ‘Export Turnover’ without a corresponding reduction from the figure of ‘Total Turnover’. Before the Commissioner of Income-tax (Appeals), assessee pleaded that the Assessing Officer be directed to reduce ‘Telecommunication Charges’ and ‘Expenses incurred in foreign currency’ also from ‘Total Turnover’ for the purpose of computing deduction under section 1 0A of the Act. In this context, assessee relied upon following decisions:

i) Tata Elxsi Ltd. vide ITA No. 315(Bang)/2006; and,

ii) M/s Sak Soft Ltd, vide ITSA Nos 691 & 1953/Mds/2007.

After considering the submissions of the assessee, the Commissioner of Income-tax (Appeals) affirmed the decision of the Assessing Officer by holding as under:

“Coming to the issue at hand, it is seen that out of the terms ‘export turnover’ and ‘total turnover’ only the term ‘export turnover’ has specifically been defined in section 10A and no specific definition has been given fo the term ‘total turnover’. In such a situation, the term ‘total turnover’ has to be understood as per the common understanding. It needs to be appreciated that although the term ‘total turnover’ has been defined in section 80HHE, the meaning as per section 80HHE remains restricted to section 80HHE only. The legislature, in all its wisdom, has refrained itself from specifically defining the term ‘total turnover’ in section 10A and it shall be presumptuous to consider the act of no defining the term ‘total turnover’ in section 10A as a lapse on the part of the legislature. Rather, such omission indicates the intention of the legislature that the term ‘total turnover’ in section 10A is to be understood as it is understood in common parlance. Therefore, to my mind, it shall not be correct to import the meaning of the term ‘total turnover’ from section 80HHE to section 10A. Accordingly, this ground of appeal fails.”

Being aggrieved with the decision of the Commissioner of Income-tax (Appeals), assessee is in further appeal before us.

29. Before us, learned Counsel for the assessee submitted that the lower authorities have erred in law while adjusting the impugned expenses only from ‘Export turnover’ without a corresponding reduction from the figure of ‘Total turnover’. The main reason advanced is that the adjustments are merited from the figure of ‘Total turnover’ also on the principle of parity for the purpose of computing the eligible deduction under section 1 0A of the Act. In this connection, reliance has been placed on the following decisions:

(i) ITO v Sak Soft Ltd. 121 TTJ 865 (Chennai) (SB)

(ii) CIT v. Gem Plus Jewellery India Ltd 233 CTR 248 (Bom)

30. On the other hand, the learned Departmental Representative, appearing for the Revenue, contended that the Commissioner of Income-tax (Appeals) made no mistake in dis-agreeing with the assessee inasmuch as the expression ‘Export turnover’ has been specifically defined in section 1 0A and for that reason the impugned expenses have been adjusted, whereas no specific definition is laid down for the expression ‘Total turnover’ in the section and, therefore, its meaning has to be based on its common understanding. Therefore, the aforesaid amounts need not be reduced from the figure of ‘Total turnover’ for the purpose of computing deduction u/s 1 0A of the Act.

31. We have carefully considered the rival stands and find that the issue is liable to be decided in the light of the reasoning propounded by the Hon’ble High Court of Bombay in the case of Gem Plus Jewellery India Ltd. (supra). In the case before the Hon’ble High Court, the issue related to the exclusion of freight and insurance charges from the figure of ‘Total turnover’ for the purposes of computing deduction under section 10A of the Act. In that case, the Assessing Officer while computing deduction under section 10A of the Act reduced the element of freight and insurance charges from the figure of ‘export turnover’, but did not make similar adjustment from the figure of ‘total turnover’. The Revenue sought to justify this action on the plea that in terms of the definition of the expression ‘export turnover’ in Explanation 2 (iv) to section 1 0A the legislature has made a specific exclusion of freight and insurance charges, whereas, no such prescription was available in the section for the purposes of the ‘Total turnover’. The Hon’ble High Court negated the aforesaid argument and held that the expression ‘Export turnover’ cannot have a different meaning when it forms a constituent part of the ‘Total turnover’ for the purposes of the application of the formula contained in section 10A(4) of the Act. The following discussion contained in para 7 of the judgment is worthy of notice:

“7. The submission which has been urged on behalf of the Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the  Revenue, however, misses the point that the expression ‘total turnover’ has not been defined at all by Parliament for the purposes of s. 10A. However, the expression ‘export turnover’ has been defined. The definition of ‘export turnover’ excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression ‘export turnover’ cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision ha ing been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. ‘export turnover’ would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from ‘export turnover’ for the purposes of the numerator would be brought in as part of the ‘export turnover’ when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided.”

32. Applying the aforesaid reasoning laid down by the Hon’ble jurisdictional High Court to the present case, we hold that the impugned two items, namely, Telecommunication charges– Rs 1,50,40,083/- and Expenses incurred in Foreign currency– Rs 1,60,08,51 9/- are liable to be excluded from the figure of ‘Total turnover’ also for the purposes of computing deduction under section 10A of the Act. As a result, assessee succeeds on this Ground.

33. In the result, whereas the appeal of the Revenue is dismissed, that of the assessee is partly allowed.

Decision pronounced in the open Court on 30th this Day of November, 2011.

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