WORLDWIDE SOFTWARE (EXPORTS), MUMBAI V. ITO 18(2)(3), MUMBAI

ITA 1933/MUM/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1718 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Assessee
• Bench Allotted: G
• Next Hearing Date: 24-10-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 29-03-2016
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Assessee Lawyers: NIKHIL TIWARIAR
• Keywords: Reopening of assessment; Gross profit estimation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Question of law; Non compliance; Assessment record; Benefit of exemption; Revised return
• Section: 143(3); 92A; 92E; 10AA; 133A; 234B; 10B; 12; 144; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G, MUMBAI BEFORE SHRI AMIT SHUKLA (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) I.T.A. NO.1933/MUM/2016 - A.Y. 2004-05 I.T.A. NO.1934/MUM/2016 - A.Y. 2005-06 I.T.A. NO.1935/MUM/2016 - A.Y. 2006-07 I.T.A. NO.1936/MUM/2016 - A.Y. 2007-08 I.T.A. NO.1937/MUM/2016 - A.Y. 2008-09 I.T.A. NO.1938/MUM/2016 - A.Y. 2009-10 WORLDWIDE SOFTWARE (EXPORTS) 73 A, AVENUE, MAKER MAXITY, BANDRA KURLA COMPLEX, BANDRA (E) MUMBAI 400 051 VS ITO,(18)(2)(3), MUMBAI PAN : AAAFW2773L (APPELLANT) (RESPONDENT) APPELLANT BY SHRI RAJAN VORA & NIKHIL TIWARI(AR) RESPONDENT BY SHRI PREMANAND J (DR) DATE OF HEARING : 24-10-2016 DATE OF PRONOUNCEMENT : 30 -11-2016 O R D E R PER ASHWANI TANEJA, AM: THESE APPEALS PERTAIN TO SAME ASSESSEE INVOLVING I DENTICAL ISSUES, THEREFORE THESE APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER. 2. FIRST WE SHALL TAKE UP APPEAL FOR A.Y. 2004-05 IN ITA NO.1933/MUM/2016 : THIS APPEAL HAS BEEN FILED AGAINST THE COMMON 2 I.T.A. NOS.1933 TO 1938/MUM/2016 ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APP EALS)-33, MUMBAI [HEREINAFTER CALLED CIT(A)] DATED 24-01-2012 FOR A. YS 2004-05 TO 2009-10 PASSED AGAINST THE ASSESSMENT ORDERS U/S 143(3) R.W .S. 254 OF THE ACT DATED 22-12-2011 . THE GROUNDS RAISED IN THIS APPE AL ARE AS FOLLOWS:- BASED ON THE FACTS, AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE APPELLANT RESPECTFULLY SUBMITS THAT THE LE ARNED COMMISSIONER OF INCOME TAX (APPEALS) ['CIT(A)'] HAS : GENERAL GROUND 1. ERRED IN CONFIRMING THE ACTION OF THE AO IN ASSE SSING THE TOTAL INCOME OF THE APPELLANT AT RS.5,54,700/- AS AGAINST NIL OFFERED BY THE APPELLANT IN THE RETURN OF INCOME; DISALLOWANCE OF CLAIM OF EXEMPTION UNDER SECTION 10 B OF THE ACT OF RS.5,54,694/- 2. ERRED IN CONFIRMING THE ACTION OF THE AO IN NOT GRANTING DEDUCTION UNDER SECTION 10B OF THE ACT OF RS. 5,54, 694, IN THE 5TH YEAR OF CLAIM (OUT OF BLOCK PERIOD OF 10 YEAR) ON T HE GROUND THAT CONDITIONS WITH REGARD TO FORMATION ETC. IS NOT BEI NG SATISFIED BY THE APPELLANT. 3. ERRED IN CONFIRMING THE ACTION OF THE AO IN DENY ING DEDUCTION UNDER SECTION 10B OF THE ACT, IN THE S' YEAR OF CLA IM (OUT OF BLOCK PERIOD OF 10 YEAR), ON THE PROFITS EARNED BY APPELL ANT ON EXPORT OF SOFTWARE TO ARROWEYE SOLUTIONS INC, WITHOUT APPR ECIATING THAT FIRM WAS FORMED IN THE AY 2000-01 AND DEDUCTION WAS ALLOWED BY AO IN EARLIER YEAR AFTER VERIFICATION OF FACTS A ND HENCE NOT JUSTIFIED FOR DENIAL OF DEDUCTION CLAIMED IN THE S' YEAR BY THE APPELLANT ON ACCOUNT OF NON FULFILMENT OF CONDITION S; 4. ERRED IN CONFIRMING THE ACTION OF THE AO IN HOLD ING THAT APPELLANT IS FORMED BY SPLITTING UP OR THE RECONSTR UCTION OF THE EXISTING BUSINESS I.E. WORLDWIDE SOFTWARE PVT. LTD. (WHICH IS ALREADY IN EXISTENCE), EVEN THOUGH APPELLANT WAS FO RMED IN AY 2000-01 AND THEREFORE NOT JUSTIFIED FOR DENIAL OF D EDUCTION CLAIMED IN THE 5TH YEAR BY THE APPELLANT; S. ERRED IN CONFIRMING THE ACTION OF THE AO IN HOLD ING THAT APPELLANT FIRM IS FORMED BY USING PLANT AND MACHINE RY AS WELL AS EMPLOYEES PREVIOUSLY USED BY SOME OTHER ENTITY I.E. WORLDWIDE SOFTWARE PVT. LTD., EVEN THOUGH APPELLANT WAS FORME D IN AY 2000-01 AND THEREFORE NOT JUSTIFIED FOR DENIAL OF D EDUCTION 3 I.T.A. NOS.1933 TO 1938/MUM/2016 CLAIMED IN THE S' YEAR BY THE APPELLANT; INVOKING P ROVISIONS OF SECTION 10B(7) RWS 80IA(10) OF THE ACT 6. ERRED IN UPHOLDING ORDER OF THE AO IN INVOKING P ROVISIONS OF SECTION 10B(7) R.W.S. 80IA(10) OF THE ACT BY HOLDIN G THAT APPELLANT HAS 'ARRANGED' ITS BUSINESS, WHERE MORE T HAN ORDINARY PROFIT IS SHOWN TO-CLAIM HIGHER DEDUCTION UNDER SEC TION 10B OF THE ACT; 7. ERRED IN CONFIRMING THE ACTION OF THE AO, WHEREI N THE AO ON WITHOUT PREJUDICE BASIS HELD THAT THE NET PROFIT RA TE OF 2.88% EARNED IN AY 2010-11 (I.E FIRST YEAR AFTER EXPIRY O F 10B DEDUCTION PERIOD) IS REASONABLE PROFIT AND THEREBY HELD THAT DEDUCTION IF ANY TO BE ALLOWED UNDER SECTION 10B OF THE ACT, THE SAME SHOULD BE RESTRICTED TO 2.88% OF THE TURNOVER AS AGAINST 1 4% CLAIMED BY THE APPELLANT; APPLICABILITY OF PROVISION OF SECTION 92E AND INITI ATION OF PENALTY UNDER SECTION 271 BA OF THE ACT 8. ERRED IN CONFIRMING THE ACTION OF THE AO, IN HOL DING THAT (EVEN THOUGH SOFTWARE EXPORTED BY THE APPELLANT TO NON AE AS DEFINED IN SECTION 92A OF THE ACT), PROVISIONS OF SECTION 9 2E WILL APPLY IN THE PRESENT CASE (I.E FOR OBTAINING REPORT FROM ACC OUNTANT), BY TREATING THE IMPUGNED TRANSACTION AS INTERNATIONAL TRANSACTION AND THEREBY INITIATING PENALTY PROCEEDING UNDER SEC TION 271 BA OF THE ACT; LEVY OF INTEREST UNDER SECTION 2348 OF THE ACT 9. ERRED IN CONFIRMING THE ACTION OF AO IN LEVY OF INTEREST UNDER SECTION 234B OF THE ACT; INITIATION OF PENALTY PROCEEDING U/S 271(1)(C) OF T HE ACT 10. ERRED IN CONFIRMING THE ACTION OF AO, FOR INITI ATION OF PENALTY PROCEEDING UNDER SECTION 271 (1 )(C) OF THE ACT; THE APPELLANT CRAVES LEAVE TO ADD, ALTER, MODIFY OR DELETE SUCH OTHER OBJECTIONS BEFORE OR DURING THE COURSE OF HEA RING BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL ('ITAT), SO AS TO ENABLE THE PANEL TO DECIDE ON THE OBJECTIONS RAISED BY THE APPELLANT, AS PER LAW. 3. THE FIRST GROUND DEALS WITH THE GRIEVANCE OF THE AS SESSEE FOR DENYING BENEFIT OF EXEMPTION CLAIMED BY THE ASSESSEE U/S 10 B AMOUNTING TO RS.5,54,694/-. 4 I.T.A. NOS.1933 TO 1938/MUM/2016 4. THE BRIEF FACTS AS CULLED OUT FROM THE ORDERS OF TH E LOWER AUTHORITIES ARE THAT THE ASSESSEE FIRM I.E. M/S WORLDWIDE SOFTW ARE EXPORTS (HEREAFTER REFERRED TO AS (WWSE OR THE 'ASSESSEE FIRM') WAS FO RMED IN THE F.Y.1999- 2000 RELEVANT TO AY.2000- 01 BY CLAIMING ITSELF 100 % EXPORT ORIENTED UNIT (EOU) ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE. IT CLAIMED THAT IT WAS ELIGIBLE FOR EXEMPTION U/S 10B OF THE I NCOME TAX ACT FOR 10 YEARS I.E. FROM A.Y. 2000-01 TO A.Y. 2009-10. THE A SSESSEE FIRM IS STATED TO BE REGISTERED WITH SOFTWARE TECHNOLOGY PARKS OF IND IA VIDE STPI APPROVAL DATED 25/03/2000 AS 100% EOU. IT FILED ITS ORIGINA L RETURN OF INCOME FOR THE A.Y. 2004-05 SHOWING TOTAL INCOME AT RS. 55,569 /- AFTER CLAIMING EXEMPTION U/S 10A AMOUNTING TO RS. 5,00,125/-. DURI NG THE ASSESSMENT PROCEEDINGS, A REVISED RETURN OF INCOME WAS FILED O N 08.12.2004 DECLARING TOTAL INCOME AT RS. NIL AFTER CLAIMING EXEMPTION U/ S 10B AT RS. 5,55,694/-. THE ASSESSMENT WAS COMPLETED U/S 144 VIDE ORDER DAT ED 26.12.2006 ASSESSING TOTAL INCOME OF RS. 5,66,4001/-. DURING T HE FIRST APPELLATE PROCEEDINGS THE CIT(A) VIDE ORDER DATED 05.08.2008 DISMISSED THE APPEAL OF THE ASSESSEE. THEREAFTER, AN APPEAL WAS FILED BE FORE THE TRIBUNAL. THE TRIBUNAL VIDE ORDER DATED 30.04.2010 REMITTED BACK THE ORDER TO THE FILE OF THE AO FOR FRAMING ASSESSMENT AFRESH AFTER ALLOWIN G A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. DURING THE ASSESSMENT PROCEEDINGS IN THE SECOND ROUND, THE AO FOUND THAT THE ASSESSMENT RECORDS INDICATED THAT THE ASSESSEE FIRM HAD NOT DE VELOPED ANY SOFTWARE ON ITS OWN AND UTILIZED THE ASSETS, MANPOWER AND BU SINESS CLIENTS OF ITS SISTER CONCERN NAMELY WORLD WIDE SOFTWARE PVT. LTD. ( IN SHORT WWSPL). FURTHER, IT WAS NOTED BY THE AO THAT THE ASSESSEE H AD SHOWN VERY LOW GP AS COMPARED TO OTHER YEARS WHEN IT WAS NOT ELIGIBLE FOR EXEMPTION IN COMPARED TO THE PROFIT DECLARED FOR ELIGIBLE YEARS. ACCORDINGLY, TO VERIFY 5 I.T.A. NOS.1933 TO 1938/MUM/2016 THE GENUINENESS OF THE CLAIM OF EXEMPTION U/S 10B O F THE ACT, A SURVEY ACTION U/S 133A WAS CARRIED OUT BY THE AO AT THE BU SINESS PREMISES OF THE ASSESSEE ON 27.01.2011. THUS, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AFTER PLACING RELIANCE ON THE STATEMEN TS RECORDED OF THE KEY EMPLOYEES, MR. ABHAY WAGHIMARE & MR. VIJAY KUMAR AN D DR. PADAM RAJ SINGHVI (PARTNER OF THE FIRM) AS WELL AS BASED ON T HE SOME EVIDENCES FOUND DURING TILE COURSE OF SURVEY OPERATION AND ANALYSIS OF THE SUBMISSIONS MADE DURING ASSESSMENT PROCEEDINGS, THE AO ARRIVED AT THE CONCLUSION THAT THE PARTNERS OF THE FIRM OWNED ANOTHER COMPANY WWSPL, WHOSE BUSINESS, FIXED ASSETS AS WELL AS EMPLOYEES WERE SH IFTED TO THE ASSESSEE FIRM AND THUS THE CONDITIONS PRESCRIBED U/S 10B OF THE INCOME TAX ACT WERE NOT FULFILLED. FURTHER, TO EXAMINE THE POSSI BILITY OF ARRANGEMENT OF BUSINESS TRANSACTIONS BETWEEN THE ASSESSEE AND M/S ARROWEYE SOLUTIONS INC (IN SHORT ASI) AND ALSO TO EXAMINE PRODUCTION OF MORE THAN ORDINARY PROFITS, THE AO ANALYSED FINANCIAL DETAILS I.E. TOT AL TURNOVER AND PROFIT OF THE BUSINESS IN ABSOLUTE TERMS AND ALSO WORKED OUT ITS RATIO FOR THE PERIODS FROM A.Y.2002-03 TO AY.2010-11 AND ARRIVED AT THE CONCLUSION THAT DURING THE 10 YEARS PERIOD FOR WHICH THE ASSESSEE W AS ELIGIBLE FOR EXEMPTION U/S.10B OF THE INCOME TAX ACT, THE PROFIT S WERE EXORBITANT AND IN THE VERY NEXT YEAR, AFTER THE EXPIRY OF THE SAID 10 YEAR'S I.E. AY. 2010-11, THE PROFIT RATIO WAS REDUCED TO 2.88%. THUS, THE AO CONCLUDED THAT IF AT ALL EXEMPTION U/S 10B OF THE INCOME TAX ACT IS TO BE AL LOWED, THE SAME SHOULD BE RESTRICTED TO 2.88% OF THE TURNOVER FOR T HE AFORESAID ASSESSMENT YEAR, WHICH ARRIVES AT RS.1,03, 118/- (2.88% OF T.O .) FOR A. Y.2004-0S. THE AO DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT R S.5,60,794/- FOR THE YEAR UNDER CONSIDERATION. 6 I.T.A. NOS.1933 TO 1938/MUM/2016 5. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE L D. CIT(A) AND MADE EXHAUSTIVE SUBMISSIONS TO DEMONSTRATE THAT THE ASSESSEE FIRM WAS FRESHLY CONSTITUTED AND IT WAS NOT FORMED AS A RESU LT OF SPLIT UP OR RECONSTRUCTION OF THE EARLIER BUSINESS AND THAT THE RE WAS NO TRANSFER OF ASSET NOR THE TRANSFER OF EMPLOYEES IN VIOLATION OF PROVISIONS OF LAW. IT WAS ALSO DEMONSTRATED THAT THE BUSINESS OF THE ASSE SSEE FIRM WAS DIFFERENT FROM THE EARLIER BUSINESS OF ITS SISTER C ONCERN, NAMELY WWSPL. VARIOUS DOCUMENTARY EVIDENCES WERE SUBMITTED TO SHO W THAT THE NATURE OF BUSINESS WAS DIFFERENT, COPIES OF AGREEMENT WERE SUBMITTED, COPIES OF AFFIDAVITS FROM THE PARTNERS AND EMPLOYEES WERE ALS O SUBMITTED, COPIES OF LEDGER ACCOUNTS, FINANCIAL STATEMENTS, ETC. WERE SU BMITTED, VARIOUS ADDITIONAL EVIDENCES WERE SUBMITTED IN SUPPORT OF T HE FACTS CLAIMED TO BE CORRECT BY THE ASSESSEE. THE LD. CIT(A) SENT THESE SUBMISSIONS AND ADDITIONAL EVIDENCES TO THE AO FOR THEIR EXAMINATIO N DURING THE REMAND PROCEEDINGS AND FOR SENDING REMAND REPORT. THE AO SENT THE REMAND REPORT WHICH WAS PROVIDED TO THE ASSESSEE. THE ASS ESSEE SUBMITTED ITS REPLY. LD.CIT(A) CONSIDERED ALL THE MATERIAL HELD ON RECORD I.E. ORDER OF THE AO, COPY OF REMAND REPORT, WRITTEN SUBMISSION OF TH E ASSESSEE, REPLY TO THE REMAND REPORT AND DOCUMENTARY EVIDENCES PLACED ON RECORD BY BOTH THE SIDES AND THEREAFTER UPHELD THE ACTION OF THE A O AND DENIED THE BENEFIT OF DEDUCTION U/S 10B. IT WAS INTER-ALIA HELD BY HIM THAT THE ASSESSEE FIRM WAS FORMED AS A RESULT OF RECONSTRUCT ION OR SPLITTING UP OF THE EXISTING BUSINESS CARRIED OUT BY THE SISTER CON CERN, VIZ. WWSPL. LD. CIT(A) ANALYSED THE STATEMENTS RECORDED DURING THE COURSE OF SURVEY OPERATIONS OF EMPLOYEES AND ALSO FINANCIAL STATEMEN TS OF THE TWO PARTIES AND CONCLUDED THAT ASSETS, MANPOWER AND BUSINESS WE RE SHIFTED FROM WWSPL TO THE ASSESSEE (WWSE) FROM A.Y. 2000-01, I.E . THE YEAR SINCE THE 7 I.T.A. NOS.1933 TO 1938/MUM/2016 ASSESSEE FIRM CAME INTO EXISTENCE. THUS, LD. CIT(A ) DISREGARDED THE CONTENTION OF THE ASSESSEE THAT THE ASSESSEE COMPAN Y WAS DOING SEPARATE BUSINESS IN VIEW OF THE FACT THAT THE FOREIGN PARTY , VIZ. YOURSOUL.COM, USA HAD MADE SEPARATE AGREEMENT WITH WWSPL AND WWSE FOR DEVELOPING SOFTWARE IN INDIA. AFTER ANALYSING THE FACTS OF TH E CASE, THE LD. CIT(A) CONCLUDED AS UNDER:- 25. FROM THE DETAILED ANALYSIS OF THE ISSUES IN HA ND IN THE INSTANT CASE, THE FOLLOWING CONCLUSIONS ARE DRAWN V IS-A-VIS GUIDELINES LAID DOWN BY THE HON'BLE APEX COURT IN T HE ABOVE CASE. 1. IT IS AN UNDISPUTED FACT THAT MR. AJAY SINGLWI, MAIN PERSON OF THE COMPANY WWSPL IS ALSO THE MAIN PERSON OF THE FIRM WWSE AND KEWALTECH TOO. AS NOTED DURING TH E SURVEY PROCEEDINGS, HE ALONG WITH HIS FATHER DR. PA DAM RAJ 8INGHVI, KEY EMPLOYEES MR. AJAY WAGHRNARE, MR. VIJA Y KUMAR G. AND MOHD. LOKHANDWAL, EX. EMPLOYEE & CONSULTANT HAVE CONTROLLED THE COMPANY, FIRM AND PROPRIETARY BUSINESS. BEINQ FOUNDER MEMBER OF M/S 4 YOURSOUL.COM/M/S ARROWEYE SOLUTIONS LNC., IT WAS VE RY ADVANTAGEOUS FOR MR. AJAY SINGHVI TO TAKE CONTROL O F THE WHOLE SET UP, CARRY ON THE SAME BUSINESS FROM COMPA NY TO FIRM AND THEREAFTER IN HIS PROPRIETARY BUSINESS. TH IS ESTABLISHES THAT THE SAME PERSONS HAVE CARRIED ON SUBSTANTIALLY THE SAME BUSINESS. 2. THERE IS FORMATION OF AN UNDERTAKING OUT OF THE EXISTING BUSINESS SINCE THAT HAS TAKEN PLACE WHEN THE ASSETS - COMPUTERS, MANPOWER ETC. OF THE OLD BUSINESS OF WWS PL ARE UTILISED SUBSTANTIALLY IN THE NEW UNDERTAKING W WSE AT THE TIME OF ITS FORMATION DURING F.Y. 1999-2000. AS DISCUSSED IN TILE PRECEDING PARAGRAPHS, NEITHER ANY COMPUTER NOR ANY SOFTWARE WAS PURCHASED BY WWSE TO START THE SOFTWARE EXPORT BUSINESS. 3. ON VERIFICATION OF THE BALANCE OF THE APPELLANT FIRM IT IS FOUND THAT DURING F.Y. 1999-2000, THE PARTNERS HAVE BROUGHT CAPITAL OF RS. 1 LAC ONLY. AGAINST WHICH UN DER THE HEAD FIXED ASSETS A COMPUTER OF RS. 48,000/- IS SHO WN AS THE ONLY ITEM. EVEN THIS COMPUTER HAS BEEN ESTABLIS HED AS 8 I.T.A. NOS.1933 TO 1938/MUM/2016 ONLY SPARE PARTS NOTHING ELSE. HENCE, THERE IS NO I NFUSION OF SUBSTANTIAL FRESH CAPITAL IN THE APPELLANT BUSINESS . 4. THERE IS NO EMPLOYMENT OF ANY PERSON DURING F.Y. 1999- 2000, AS THE ONLY PERSON SHOWN TO BE EMPLOYED WAS P AID ITS MEAGRE SALARY OF RS. 6670/- ONLY, THAT TOO, PAID IN THE MONTH OF MAY, 2000 I.E. IN THE NEXT F.Y. 5. WHEN THERE EXISTS NO COMPUTER HARDWARE OR SOFTWA RE AND THERE IS NO EVIDENCE OF ANY COMPUTER TRAINED PE RSON EMPLOYED BY THE APPELLATE FIRM THERE IS NO QUESTION OF MANUFACTURE OR PRODUCTION OF ANY SOFTWARE BY THE NE WLY ESTABLISHED UNDERTAKING DURING THE FIRST YEAR OF IT S FORMATION. 6. NO DOUBT THE APPELLANT FORM HAS SHOWN NET PROFIT OF RS. 7,95,945/- IN ITS BOOKS OF ACCOUNTS, BUT HOW MUCH T HAT PROFITS CLEARLY ATTRIBUTABLE TO THIS NEWLY ESTABLIS HED UNDERTAKING IS' DOUBTFUL WHEN THERE WAS NO MANUFACT URE OR PRODUCTION OF ANY SOFTWARE DURING THE FIRST YEAR OF ITS FORMATION, AS DISCUSSED IN THE PRECEDING PARAGRAPH. 7. IN VIEW OF THE ABOVE, ONE CAN ONLY CONCLUDE THAT THERE IS NO SEPARATE AND DISTINCT IDENTITY OF THE WWSE, SET UP AS NEW UNDERTAKING OTHER THAN WWSPL. 26. IN THE LIGHT OF DISCUSSION MADE IN THE AFORESAI D PARAGRAPHS, IT IS CONCLUDED THAT THE APPELLANT FIRM IS FORMED BY S PLITTING UP AND RECONSTRUCTION OF THE SOFTWARE BUSINESS OF THE COMP ANY WWSPL ALREADY IN EXISTENCE, AS CONTEMPLATED IN SUB PARA ( II) OF SEC. 10B(2) OF THE I.T. ACT. HENCE, THE CLAIM OF EXEMPTI ON U/S 10B OF THE I.T. ACT AS MADE BY THE APPELLANT FOR THE YEAR UNDER CONSIDERATION IS RIGHTLY REJECTED BY THE AO. 6. IN SUPPORT OF HIS JUSTIFICATION, THE LD. CIT((A) RE LIED UPON VARIOUS JUDGEMENTS. 7. THE LD. CIT(A) ALSO REJECTED THE SUBMISSION OF THE ASSESSEE THAT SINCE ASSESSEE FIRM WAS FORMED IN ASSESSMENT YEAR. 2000-0 1 AND EXEMPTION HAS BEEN GRANTED UPTO ASSESSMENT YEAR. 2003-04, THEREFO RE, NO DIFFERENT STAND COULD HAVE BEEN TAKEN AND THUS EXEMPTION U/S 10B COULD NOT HAVE BEEN DENIED IN A.Y. 2004-05 WITHOUT DISTURBING THE STATUS OF EXEMPTION FOR AY 2000-01. IT WAS, IN NUTSHELL, CONTENDED BY LD. CIT(A) THAT IT WAS FOR 9 I.T.A. NOS.1933 TO 1938/MUM/2016 THE FIRST TIME IN AY 2000-01 WHEN THE CLAIM OF THE ASSESSEE HAS BEEN EXAMINED ON ITS MERITS. FURTHER VARIOUS FACTS WERE REVEALED DURING THE COURSE OF SURVEY DUE TO WHICH IT CAME TO LIGHT THAT ASSESSEE FIRM WAS CONSTITUTED AS A RESULT OF SPLITTING UP AND RECONST RUCTION OF THE EXISTING BUSINESS. THUS, AFTER THE SURVEY, AY 2004-05 WAS T HE FIRST YEAR WHEREIN THE EXEMPTION HAS BEEN RIGHTLY DENIED. IT WAS ALSO HELD BY THE LD.CIT(A) THAT IN THE LIGHT OF EVIDENCES BROUGHT ON RECORD DU RING THE COURSE OF SURVEY, THE AO HAD RIGHTLY COME TO THE CONCLUSION T HAT PROVISIONS OF SECTION 10B R.W.S. 80IA(10) WERE FULLY APPLICABLE. IT WAS ALSO CONCLUDED BY HIM THAT THE AO HAD RIGHTLY ANALYSED THE FACTS AND THEREAFTER THE AO CORRECTLY TOOK PROFIT OF AY 2010-11 AS BENCHMARK YE AR FOR ESTIMATING PROFITS OF THE YEARS DURING WHICH 100% EXEMPTION U/ S 10B WAS CLAIMED. IT WAS ALSO HELD THAT AO HAD RIGHTLY INVOKED THE PROVI SIONS OF SECTION 92E AND RIGHTLY INITIATED PENALTY PROCEEDINGS U/S 271BA FOR NON COMPLIANCE OF PROVISIONS OF SECTION 92E BY THE ASSESSEE. 8. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE T RIBUNAL. DURING THE COURSE OF HEARING, EXHAUSTIVE SUBMISSIONS HAVE BEEN MADE BY THE LD. COUNSEL OF THE ASSESSEE TO MEET ADVERSE OBSERVATION S OF THE LOWER AUTHORITIES AND TO DEMONSTRATE THAT THERE WAS NO VI OLATION OF CONDITION IN SECTION 10B AND ALL THE CONDITIONS WERE DULY COMPLI ED WITH AND EXEMPTION U/S 10B HAS BEEN RIGHTLY CLAIMED BY THE ASSESSEE. LD. COUNSEL WAS REQUESTED TO SUMMARISE ALL HIS ARGUMENTS AND ACCORD INGLY, HE FILED A BRIEF NOTE WHEREIN ALL HIS PLEADINGS IN SUPPORT OF HIS CL AIM U/S 10B HAVE BEEN SUMMARISED, WHICH READS AS UNDER:- 3. THE ASSESSING OFFICER ('AO') AND THE COMMISSION ER OF INCOME TAX (APPEALS) ('CIT(A)') HAD HELD THAT THE A PPELLANT FIRM WORLDWIDE SOFTWARE (EXPORTS) WAS FORMED WITH A VIEW TO TAKE THE BENEFIT OF SECTION 10B OF THE ACT BY TRANSFERRI NG THE ASSETS 10 I.T.A. NOS.1933 TO 1938/MUM/2016 AND EMPLOYEES FROM WORLDWIDE SOFTWARE PRIVATE LIMIT ED ('WWSPL'), WHICH WAS OWNED BY THE PARTNERS OF APPEL LANT FIRM. THE CONTENTION OF THE AO WAS THAT THE APPELLANT FIR M WAS FORMED BY SPLITTING AND RECONSTRUCTION OF A BUSINES S ALREADY IN EXISTENCE AND HENCE WAS NOT ELIGIBLE TO CLAIM THE E XEMPTION UNDER SECTION 10B OF THE ACT. THE CIT(A) UPHELD THE ORDER OF THE AO . 4. DURING THE COURSE OF HEARING BEFORE YOUR HONOURS ON 24 OCTOBER 2016, THE FOLLOWING BRIEF PROPOSITIONS WERE MADE BY THE APPELLANT IN RESPECT OF ALLOWABILITY OF DEDUCTION U NDER SECTION 10B OF THE ACT CLAIMED BY THE APPELLANT: ELIGIBILITY TO BE TESTED IN THE INITIAL YEAR OF T HE CLAIM OF EXEMPTION AND EXEMPTION FOR THE FIRST TIME CANNOT B E WITHDRAWN IN SUBSEQUENT YEARS (REFER PAGE 877 TO 879 OF FACT SHEET) TRANSFER OF EMPLOYEES FROM WWSPL TO THE APPELLANT WAS WITHIN THE PRESCRIBED LIMIT AS PER THE CBDT CIRCULA R NO 14/2014. (REFER PAGE 886 TO 887 OF FACT SHEET) THERE ARE FACTUAL ERRORS IN THE STATEMENT OF THE EMPLOYEES AND HENCE ARE NOT RELIABLE (REFER PAGE 887 TO 890 OF FA CT SHEET) 5. THE HON'BLE MEMBERS DURING THE COURSE OF HEARING HAS ASKED THE APPELLANT TO SUPPORT ITS CONTENTIONS THAT THERE WAS NO SPLITTING AND RECONSTRUCTION OF EXISTING BUSINESS O F WWSPL TO FORM WWSE. THE APPELLANT WISHES TO SUBMIT THAT THE EXEMPTION UNDER SECTION 10B OF THE ACT CAN BE AVAILED IF FOLL OWING 3 CONDITIONS ARE SATISFIED: THIS SECTION APPLIES TO ANY UNDERTAKING WHICH FULFI LS ALL THE FOLLOWING CONDITIONS, NAMELY:- IT MANUFACTURES OR PRODUCES ANY ARTICLES OR THING S OR COMPUTER SOFTWARE; IT IS NOT 'FORMED' BY THE SPLITTING UP, OR THE RE CONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE: PROVIDED THAT THIS CONDITION SHALL NOT APPLY IN RES PECT OF ANY UNDERTAKING WHICH IS FORMED AS A RESULT OF THE RE-E STABLISHMENT, RECONSTRUCTION OR REVIVAL BY THE ASSESSEE OF THE BU SINESS OF ANY SUCH UNDERTAKING AS IS REFERRED TO IN SECTION 338, IN THE CIRCUMSTANCES AND WITHIN THE PERIOD SPECIFIED IN TH AT SECTION; IT IS NOT 'FORMED' BY THE TRANSFER TO A NEW BUSIN ESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. ' 11 I.T.A. NOS.1933 TO 1938/MUM/2016 A. MEANING OF THE TERM SPLITTING AND RECONSTRUCTION AS PER SECTION 10B OF THE ACT 6. THE TERMS 'SPLITTING UP' AND 'RECONSTRUCTION' HA VE NOT BEEN DEFINED IN THE ACT. HENCE, THESE TERMS HAVE TO BE I NTERPRETED IN THE LIGHT OF JUDICIAL PRECEDENTS EXISTING IN THIS C ONNECTION. IN THIS REGARD, RELIANCE IS PLACED ON THE FOLLOWING CASE LA WS WHEREIN THE INTERPRETATION OF THE TERM 'SPLITTING UP' AND 'RECO NSTRUCTION' IN REFERRED: TEXTILE MACHINERY CORPORATION LTD. (107 ITR 195) (SC) THE SUPREME COURT HELD THAT TO CONSTITUTE RECONSTRU CTION, THERE MUST BE FORMATION OF NEW UNIT BY TRANSFER OF ASSETS OF THE EXISTING BUSINESS TO THE NEW INDUSTRIAL UNDERTAKING . IN THE INSTANT CASE INDUSTRIAL UNDERTAKING IS FORMED BY SP LITTING UP OF THE EXISTING BUSINESS UNDERTAKING SINCE THAT CAN TA KE PLACE ONLY WHEN THE SUBSTANTIAL ASSETS OF THE OLD BUSINESS ARE TRANSFERRED TO THE NEW UNDERTAKING. THERE IS NO SUCH TRANSFER O F ASSETS IN THE TWO CASES WITH WHICH THIS CASE IS CONCERNED. RECONS TRUCTION OF BUSINESS INVOLVES THE IDEA OF SUBSTANTIALLY THE SAM E PERSONS CARRYING, ON SUBSTANTIALLY THE SAME BUSINESS . HINDUSTAN GENERAL INDUSTRIES LIMITED REPORTED IN (137 ITR 851) (DEL HC) THE HIGH COURT HELD THAT WHERE THE ASSESSEE SETS UP A NEW FACTORY AND ONLY AN INSIGNIFICANT PORTION OF PLANT AND MACHINERY FROM PREVIOUS BUSINESS IS UTILIZED AND THE INTEGRIT Y OF EARLIER UNIT IS NOT AFFECTED, THE NEW UNIT CANNOT BE SAID TO BE RECONSTRUCTION, SPLITTING UP OR TRANSFER OF ASSETS OF EXISTING BUSI NESS, HENCE ENTITLED TO DEDUCTION UNDER S. 84. THE MUMBAI TRIBUNAL HAS HELD THAT THE CONCEPT OF RE CONSTRUCTION OF BUSINESS WOULD NOT BE ATTRACTED WHEN A COMPANY W HICH IS ALREADY RUNNING ONE INDUSTRIAL UNIT SETS UP ANOTHER INDUSTRIAL UNIT. THE NEW INDUSTRIAL UNIT WOULD NOT LOSE ITS SE PARATE AND INDEPENDENT IDENTITY EVEN THOUGH IT HAS BEEN SET UP BY A COMPANY WHICH IS ALREADY RUNNING AN INDUSTRIAL UNIT BEFORE THE SETTING UP OF THE NEW UNIT. DCIT V. SHAMROCK (32 SOT 1) (MUMBAI TRIBUNAL) THE MUMBAI TRIBUNAL HAS HELD THAT THE CONCEPT OF RE CONSTRUCTION OF BUSINESS WOULD NO BE ATTRACTED WHEN A COMPANY WH ICH IS ALREADY RUNNING ONE INDUSTRIAL UNIT SETS UP ANOTHER INDUSTRIAL UNIT. THE NEW INDUSTRIAL UNIT WOULD NOT LOSE ITS SE PARATE AND 12 I.T.A. NOS.1933 TO 1938/MUM/2016 INDEPENDENT IDENTITY EVEN THOUGH IT HAS BEEN SET UP BY A COMPANY WHICH IS ALREADY RUNNING AN INDUSTRIAL UNIT BEFORE THE SETTING UP OF THE NEW UNIT. CIT V. SONATA SOFTWARE LTD. (343 ITR 397) (BORN H C) THE HIGH COURT HELD AS REGARDS THE SPLITTING UP OF A BUSINESS, THE RELEVANT TEST IS WHETHER AN UNDERTAKING IS FORMED B Y SPLITTING UP OF A BUSINESS ALREADY IN EXISTENCE. UNLESS THE FORM ATION OF THE UNDERTAKING TAKES PLACE BY THE SPLITTING UP OF A BU SINESS ALREADY IN EXISTENCE, THE NEGATIVE PROHIBITION WOULD NOT BE ATTRACTED. IN THE SONATAS CASE, THE ENTIRE BUSINESS OF THE SOFTW ARE UNDERTAKING WAS TRANSFERRED TO THE ASSESSEE. THE UN DERTAKING OF THE ASSESSEE WAS NOT FORMED BY THE SPLITTING UP OF THE BUSINESS. THE FIRST QUESTION OF LAW WOULD HAVE TO BE ANSWERED IN FAVOUR OF THE ASSESSEE. FURTHER RELYING ON THE JUDGMENT OF THE DIVISION BEN CH OF THIS COURT IN GAEKWAR FOAM (35 ITR 662) EXPLAINS THAT TH E CONCEPT OF A RECONSTRUCTION OF A BUSINESS IMPLIES THAT THE ORI GINAL BUSINESS IS NOT TO CEASE FUNCTIONING AND ITS IDENTITY IS NOT LOST. RECONSTRUCTION IS OF A BUSINESS ALREADY IN EXISTENC E AND THERE MUST BE A CONTINUATION OF THE ACTIVITIES AND BUSINE SS OF THE SAME INDUSTRIAL UNDERTAKING. WHERE THE OWNERSHIP OF A BU SINESS OR UNDERTAKING CHANGES HANDS THAT WOULD NOT BE REGARDE D AS RECONSTRUCTION ACIT VS HIMATSINGKA SEIDE LTD (31 CCH 487) (BANGA LORE TRIBUNAL) THE TRIBUNAL HELD THAT WHEN TWO DISTINCT INDUSTRIAL UNITS WERE FORMED, IT CANNOT BE CATEGORIZED AS RECONSTRUCTION BECAUSE OF COMMON OWNERSHIP, BECAUSE IT PRODUCED THE SAME COMM ODITIES AND DEAL WITH SAME CUSTOMERS. THEREFORE IT WAS A CA SE OF EXPANSION BUT NOT RECONSTRUCTION OR SPLITTING UP OF BUSINESS. 7. THE APPELLANT SUBMITS THAT WWSPL AND WWSE ARE TW O DISTINCT ENTITIES WHICH ARE INVOLVED IN DIFFERENT B USINESS I.E. SOFTWARE ARCHITECTURE AND SOFTWARE DEVELOPMENT RESP ECTIVELY AND BOTH WORK SIMULTANEOUSLY. IT IS NOT THE CASE OF CLOSURE OF UNDERTAKING BY WWSPL AND SAME BUSINESS IS TRANSFERR ED TO WWSE WITH ALL ASSETS, LIABILITIES AND EMPLOYEES. 8. THE APPELLANT SUBMITS THAT IT HAD ENTERED INTO A SOFTWARE DEVELOPMENT AGREEMENT WITH ARROWEYE SOLUTION INC. ( 'ASI') DATED 14 MARCH 2000 FOR THE DEVELOPMENT OF THE SOFT WARE. 13 I.T.A. NOS.1933 TO 1938/MUM/2016 (COPY OF AGREEMENT BETWEEN THE APPELLANT AND ASI IS ENCLOSED AT PAGE NO. 286 TO 299 OF PAPER BOOK). THE SOFTWARE APPLICATION HAD BEEN ARCHITECTED BY WWSPL. (COPY OF AGREEMENT B ETWEEN WWSPL AND ASI IS ENCLOSED AT PAGE NO. 286 TO 299 OF PAPER BOOK). THEREFORE, THE APPELLANT SUBMITS THAT THERE WERE TWO DIFFERENT CONTRACTS ENTERED BY THE APPELLANT AND WW SPL WITH ASI RESPECTIVELY AND THE BUSINESS STARTED AND CARRI ED ON BY THE FIRM WAS NOT CARRIED ON BY THE WWSPL, HENCE THERE I S NO QUESTION OF TRANSFER OF BUSINESS BY WWSPL TO APPELL ANT FIRM. 9. FURTHER THERE WAS NO TRANSFER OF ASSETS AND EMPL OYEES (WITHIN PERMISSIBLE LIMIT) LEADING TO SPLITTING AND RECONST RUCTION OF EXISTING BUSINESS. IT IS THEREFORE SUBMITTED THAT I T IS NOT A CASE OF RECONSTRUCTION OF EXISTING BUSINESS OR SPLITTING UP OF EXISTING BUSINESS FOR FORMATION OR SETTING UP OF NEW FIRM. TRANSFER OF EMPLOYEES FROM WWSPL TO THE APPELLANT 10. IN THE PRESENT CASE, THE FIRST CONDITION IS SAT ISFIED AS THE APPELLANT IS INVOLVED IN THE BUSINESS OF SOFTWARE D EVELOPMENT. FURTHER, AS SUBMITTED ABOVE THERE WAS NO SPLITTING OR RECONSTRUCTION OF BUSINESS ALREADY IN EXISTENCE AS THERE WAS TRANSFER OF EMPLOYEES (WITHIN PERMISSIBLE LIMIT) AN D NO TRANSFER OF ASSETS FROM WWSPL TO WWSE RESULTING INTO CLOSE D OWN OF WWSPL. FURTHER, IN FIRST YEAR OF OPERATIONS (WHICH WAS FOR 15 TO 20 DAYS) WERE STARTED BY PARTNERS WITH THE HELP OF 1 TECHNICAL PERSON AND WAS SUBSEQUENTLY EXPANDED. 11. THE APPELLANT FURTHER SUBMITS THAT A TOTAL OF 4 (TECHNICAL EMPLOYEES) OUT OF 12 TOTAL EMPLOYEES I.E. APPROX. 2 5% OF THE TOTAL EMPLOYEES OF WWSPL WERE TRANSFERRED FROM WWSP L TO THE APPELLANT FIRM IN AY 2001-02 (I.E. SECOND YEAR OF O PERATIONS) WHICH WAS WITHIN THE PRESCRIBED LIMIT AS HAS BEEN H ELD IN SEVERAL DECISIONS AND SUBSEQUENTLY ACCEPTED BY CIRCULAR ISS UED BY THE CBOT CIRCULAR NO.14/2014 DATES 8 OCTOBER 2014. (COP Y ENCLOSED AT PAGE NO. 871 OF THE LEGAL PAPERBOOK) 12. HENCE, THE APPELLANT SUBMITS THAT TRANSFER OF A FORESAID EMPLOYEES FROM WWSPL TO THE APPELLANT WAS WITHIN TH E LIMIT MENTIONED AS PER AFORESAID CBOT CIRCULAR AND HENCE SUCH TRANSFER OF EXISTING TECHNICAL MAN-POWER FROM AN WW SPL TO THE APPELLANT IN THE SECOND YEAR OF BUSINESS WILL NOT B E CONSTRUED AS SPITTING UP OR RECONSTRUCTION OF AN EXISTING BUSINE SS. THE APPELLANT IS NOT FORMED BY TRANSFER TO A NEW BU SINESS OF MACHINERY OR PLANT MACHINERY PREVIOUSLY USED FOR ANY PURPOSE 14 I.T.A. NOS.1933 TO 1938/MUM/2016 13. FURTHER, THERE WAS NO TRANSFER OF ASSETS FROM W WSPL TO WWSE INSTEAD THE APPELLANT HAD PURCHASED A NEW ASSE MBLED COMPUTER FOR THE BUSINESS OPERATIONS. REFER COPY OF THE LEDGER ACCOUNTS OF COMPUTERS FOR AY 2000-01 IN THE BOOKS O F WWSPL AND INVOICE FOR PURCHASE OF COMPUTER PARTS IN AY 20 00-01 AT PAGE NO 401 TO 402 AND 433 TO 434 OF THE PAPER-BOOK RESPECTIVELY. THE APPELLANT FIRM STARTED SOFTWARE B USINESS WITH ONE COMPUTER AND WAS EXPANDED YEAR ON YEAR AND IN A Y 2009- 10, IT WAS CARRYING ON BUSINESS WITH 45 COMPUTERS. 14. THEREFORE, THE APPELLANT SUBMITS THAT THE APPEL LANT FIRM WAS NOT FORMED BY SPLITTING OR RECONSTRUCTION OF THE EX ISTING COMPANY AND HENCE SATISFIES THE SECOND CONDITION FOR ELIGIB ILITY OF DEDUCTION UNDER SECTION 10B OF THE ACT. B. WHETHER EXPANSION IN EXISTING BUSINESS (WHERE TH ERE WAS NO DEDUCTION AVAILABLE UNDER SECTION 10B OF THE ACT) W OULD BE ELIGIBLE FOR DEDUCTION IN SECTION 10B OF THE ACT 15. THE APPELLANT WISHES TO PLACE RELIANCE ON THE P RESS RELEASE OF CBDT DATED 17 JANUARY 2013 WHEREIN IT HAS BEEN CLAR IFIED WHETHER SETTING UP OF NEW UNIT/UNDERTAKING IN A LOC ATION (COVERED BY SECTIONS 10A, 10AA OR 10B), WHERE AN ELIGIBLE UNIT IS ALREADY EXISTING, WOULD AMOUNT TO EXPANSION OF SUCH ALREADY EXISTING UNIT AND WOULD BE ELIGIBLE SUBJECT TO SATISFYING THE CONDITION OF SECTION 10B OF THE ACT. 16. WE WOULD LIKE TO PLACE RELIANCE ON SPECIAL BENC H DECISION OF MARAL OVERSEAS LTD. VS. ACIT (146 ITR 129) (INDORE TRIBUNAL) WHEREIN THE HON'BLE SPECIAL BENCH AFTER CONSIDERING THE FACT OF THE CASE HAS HELD THAT EXPANSION CARRIED OUT IN THE EXISTING UNIT WOULD BE ENTITLED FOR BENEFIT OF EXEMPTION UNDER SE CTION 10B OF THE ACT (IF ALL OTHER CONDITION OF SECTION 10B ARE SATISFIED). THE HON'BLE SPECIAL BENCH IN THE DETAILED DISCUSSION AF TER CONSIDERING ALL THE ARGUMENT OF ASSESSE I OR AND RELYING ON EAR LIER DECISION OF VARIOUS COURT INCLUDING SC HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. THEREFORE AN EXISTING UNIT CLAIMING DEDUC TION U/S 10B OF THE ACT WOULD BE ELIGIBLE FOR DEDUCTION FOR 10 Y EAR IN RESPECT OF SUBSTANTIAL EXPANSION CARRIED OUT IN EXISTING UN IT ON STANDALONE BASIS. 17. IN VIEW OF THE ABOVE IT IS SUBMITTED THAT EVEN IF NEW BUSINESS OF THE APPELLANT FIRM I.E. WWSE WOULD HAVE BEEN CAR RIED BY THE OLD COMPANY I.E. WWSPL, IT WOULD STILL HAVE BEEN EL IGIBLE FOR BENEFIT UNDER SECTION 10B OF THE ACT, SINCE IT WAS EXPANSION. 15 I.T.A. NOS.1933 TO 1938/MUM/2016 HENCE THERE IS NO LOSS TO THE DEPARTMENT, AS IN BOT H THE SITUATIONS, PROFIT ON EXPORT OF SOFTWARE WOULD NOT BE CHARGEABLE TO TAX AND IT IS NOT THAT THE CASE WHERE EXEMPTION IN NEW UNDERTAKING IS CLAIMED ON EXPIRY OF EXEMPTION IN OL D UNDERTAKING. 18. IN VIEW OF THE ABOVE, THE APPELLANT WISHES TO S UBMIT THAT IT WAS ELIGIBLE FOR CLAIMING EXEMPTION UNDER SECTION 1 0B OF THE ACT AND THE DISALLOWANCE MADE BY AO/CIT(A) SHOULD BE DE LETED. 9. PER CONTRA, THE LD. CIT-DR VEHEMENTLY OPPOSED ALL T HE ARGUMENTS OF THE ASSESSEE. IT WAS SUBMITTED THAT FIRST THREE YE ARS WENT UNNOTICED AS THE ASSESSMENT WAS DONE U/S 143(1). THOUGH IN A.Y. 2003-04 THE ISSUE WAS EXAMINED INITIALLY, BUT NO FACTS WERE AVAILABLE REGARDING SPLIT UP / RECONSTRUCTION OF THE EXISTING BUSINESS. THESE FAC TS CAME TO LIGHT AS A RESULT OF SURVEY CARRIED OUT ON THE ASSESSEE ON 27- 01-2011. DURING THE COURSE OF SURVEY PROCEEDINGS VARIOUS CRUCIAL FACTS WERE REVEALED WHICH WERE NOT AVAILABLE EARLIER AND SINCE AS PER THE TIM E LIMIT, REOPENING COULD HAVE BEEN DONE ONLY FOR AY. 2004-05.THUS UNDER THES E CIRCUMSTANCES, THE REOPENING WAS DONE FOR ALL THE YEARS BEGINNING FROM A.Y. 2004-05. THUS, IT NOWHERE INDICATES THAT THE REVENUE HAD ACCEPTED THE STAND OF THE ASSESSEE WITH REGARD TO THE EXEMPTION U/S 10B EVEN IF FULL FACTS WERE REVEALED. SINCE THE REOPENING OF ASSESSMENT FOR A. Y. 2003-04 WAS BEYOND THE TIME LIMIT OF 6 YEARS, THE SAME COULD NOT BE RE OPENED. IT WAS FURTHER SUBMITTED BY HIM THAT THE ASSESSEE WAS NOT ABLE TO PRODUCE PROOF OF PURCHASE OF COMPUTERS. BUT THE ASSESSEE HAD TAKEN OVER MAJOR EMPLOYEES OF THE SISTER CONCERN. THE PATENT OF US COMPANY WAS IN THE NAME OF SHRI AJAY SANGHAVI. IT WAS FURTHER SUBMITT ED THAT IT WAS SIMPLY A CASE OF CHANGEOVER OF BUSINESS FROM WWSPL TO WWSE W HICH CAN BE EVIDENT FROM THE FACT THAT THE AGREEMENT WAS MADE W ITH US COMPANY BY WWSPL ON 30-09-1999 WHEREAS THE AGREEMENT OF THE AS SESSEE WAS 16 I.T.A. NOS.1933 TO 1938/MUM/2016 ENTERED INTO ON 14-03-2000. THUS, IT IS AN APPAREN T CASE OF SHIFTING OF BUSINESS. IT WAS ALSO SUBMITTED THAT MAJOR EMPLOYE ES OF WWSPL WERE SHIFTED TO WWSE. IT WAS RE-EMPHASISED BY LD. DR TH AT THE AGREEMENTS ENTERED INTO WITH US COMPANY WAS THAT SIMILAR NATUR E OF BUSINESS IS DONE BY BOTH THE COMPANIES FROM INDIA AND THEREFORE, IT IS A CLEAR CASE OF TRANSFER OF BUSINESS AND THEREFORE, THE BENEFIT OF DEDUCTION HAS BEEN RIGHTLY DENIED. 10. IN RESPONSE, THE LD. COUNSEL OF THE ASSESSEE SUBMIT TED THAT THE LOWER AUTHORITIES ERRED IN NOT APPRECIATING THE FAC TS CORRECTLY. IT WAS SUBMITTED THAT DURING THE COURSE OF REMAND PROCEEDI NGS IT WAS SHOWN TO THE AO THAT THE NATURE OF BUSINESS MENTIONED IN THE RESPECTIVE AGREEMENT BY WWSPL AND WWSE WITH THE US COMPANY SHOW THAT THE NATURE OF BUSINESS WAS TOTALLY DIFFERENT. THIS FINE DISTINCT ION HAS BEEN IGNORED BY THE LOWER AUTHORITIES ALTHOUGH IT WAS EXPLAINED TO THE AO AND THE AO WAS SATISFIED AND MENTIONED IT SO IN THE REMAND REPORT, BUT LD. CIT(A) AS WELL AS THE CIT-DR OVERLOOKED THIS CRUCIAL FACT. IT WAS ALSO SUBMITTED THAT FACTS SHEET AVAILABLE IN THE RECORD WOULD SHOW THAT EMPLO YEES TRANSFERRED FROM WWSPL WERE LESS THAN 50% AND THUS WITHIN THE PERMIS SIBLE LIMIT AS PRESCRIBED BY THE CBDT IN ITS CIRCULAR. IT WAS ALS O SUBMITTED THAT IN THE COURSE OF REMAND PROCEEDINGS IT WAS EXPLAINED TO AO THAT DIFFERENT PARTS OF COMPUTERS WERE PURCHASED AND WITH THAT COMPUTERS WERE ASSEMBLED AND THIS CRUCIAL FACT HAS BEEN ACCEPTED BY THE AO I N THE REMAND PROCEEDINGS. IT WAS FINALLY SUBMITTED THAT WWSPL P ROVIDED THE SERVICES OF SOFTWARE ARCHITECTING WHEREAS THE ASSESSEE FIRM RENDERED SERVICES OF DEVELOPMENT OF SOFTWARE. THOUGH THE FINAL PRODUCT WAS SAME, BUT TWO DIFFERENT PROCESSES OF THE DEVELOPMENT OF THE PRODU CT WERE FOLLOWED BY THE TWO DIFFERENT ENTITIES. UNDER THESE CIRCUMSTAN CES, LD. CIT(A) GROSSLY 17 I.T.A. NOS.1933 TO 1938/MUM/2016 ERRED IN OBSERVING THAT WWSE HAD CARRIED OUT SAME B USINESS WHICH WAS EARLIER DONE BY WWSPL. IN SUPPORT OF HIS ARGUMENT, HE DREW OUR ATTENTION UPON THE CHART SHOWING TURNOVER OF BOTH T HE ENTITIES IN DIFFERENT YEARS. HE SUMMED UP HIS ARGUMENT BY SAYING THAT TH E LOWER AUTHORITIES WRONGLY CONCLUDED THAT THE BUSINESS OF THE ASSESSEE WAS CARRIED OUT AS A RESULT OF RECONSTRUCTION OF THE EXISTING BUSINESS A ND REQUESTED FOR GRANTING BENEFIT OF EXEMPTION. 11. WE HAVE GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS NOTED BY US THAT MUCH EMPHASIS HAS BEEN MADE BY THE LD. COUNSEL THAT SINCE THE CLAIM OF EXEMPTION U/S 10B HAS BEEN MADE FROM AY. 2000-01, WHICH HAS BEEN ALLOWED TILL AY 2003-04, IT CANNOT B E DISTURBED FOR THE FIRST TIME IN AY. 2004-05. THOUGH, WE PRINCIPALLY AGREE W ITH THE LD. COUNSEL ON THIS ASPECT SINCE THIS ISSUE IS WELL SETTLED NOW IN VIEW OF VARIOUS JUDGMENTS RELIED UPON BEFORE LD. CIT(A) AS WELL AS BEFORE US BY THE LD. COUNSEL DURING THE COURSE OF HEARING, BUT THE BENEFIT OF THESE JU DGEMENTS WOULD BE AVAILABLE IN THE NORMAL CIRCUMSTANCES WHERE THE FAC TS REMAIN SAME. BUT IN CASE, WHERE THE REVENUE DETECTS SOME FACTS WHICH MAY HAVE DIRECT BEARING ON THE ELIGIBILITY OF THE CLAIM MADE BY THE ASSESSEE, THEN IT WOULD NOT BE JUSTIFIED TO DISREGARD THOSE EVIDENCES AT TH E VERY OUTSET. THE CLAIM MAY ULTIMATELY BE HELD TO BE ALLOWABLE OR NOT, BUT WHATEVER EVIDENCES OR CRUCIAL FACTS ARE DISCOVERED BY THE REVENUE, THESE MUST BE EXAMINED INDEPENDENTLY AND IF IT IS FOUND THAT THE EXEMPTION HAS BEEN GRANTED WRONGLY BECAUSE TRUE FACTS WERE CONCEALED BY THE AS SESSEE, AND THESE FACTS WERE WITHIN THE KNOWLEDGE OF THE ASSESSEE AND THESE FACTS WERE SO MATERIAL OR CRUCIAL HAVING BEARING ON ALLOWABILITY OF CLAIM OF DEDUCTION, THEN IT WOULD NOT BE JUSTIFIED TO PERPETUATE THE WR ONG CLAIM OF DEDUCTION, MERELY FOR THE REASON THAT THE DEDUCTION HAS BEEN A LLOWED IN THE FIRST YEAR 18 I.T.A. NOS.1933 TO 1938/MUM/2016 IN ABSENCE OF DISCLOSURE OF PROPER FACTS BY THE ASS ESSEE. UNDER THESE CIRCUMSTANCES, WE FIND IT APPROPRIATE TO EXAMINE TH E AVERMENTS AND ALLEGATIONS MADE BY THE AO AS WELL AS BY LD. CIT(A) , INDEPENDENTLY ON MERITS, TO EXAMINE THEIR EFFECT ON THE CLAIM MADE U /S 10B BY THE ASSESSEE. 12. WITH A VIEW TO FIND OUT WHETHER THERE HAS BEEN SPLI TTING UP OR RECONSTRUCTION OF BUSINESS, THE FIRST STEP, IN OUR OPINION, WOULD BE TO ANALYSE THE NATURE OF BUSINESS CARRIED OUT BY BOTH THE CONCERNS. WITH THE ASSISTANCE OF BOTH THE PARTIES, WE HAVE GONE THROUG H THE AGREEMENT MADE BETWEEN WWSPL & 4YOURSOUL.COM (US) LLC (US FIRM) AN D BETWEEN WWSE (I.E. ASSESSEE) & 4YOURSOUL.COM (US) LLC (US FIRM). IT IS NOTED BY US THAT THE AGREEMENT ENTERED INTO BY WWSPL IS TITLED AS S OFTWARE ARCHITECTING AGREEMENT. THE SCOPE OF WORK CLEARLY SAYS THAT TH E CLIENT (I.E. 4YOURSOUL.COM (US) LLC RETAINED WWSPL TO ARCHITECT A SOFTWARE PLATFORM TO PROVIDE FOR THE ELECTRONIC TRANSMISSION OF GREEN CARDS TO BE USED FOR VARIOUS PURPOSES. IT HAS BEEN FURTHER PROVIDED THA T THE CLIENT HAS RETAINED WWSPL TO INTERACT WITH CLIENT SOFTWARE DEVELOPMENT TEAM TO ENSURE THAT THE SOFTWARE BEING DEVELOPED BY THE TEAM WAS IN ACC ORDANCE WITH THE ARCHITECTURE PROPOSED BY WWSPL. THIS AGREEMENT WAS ENTERED INTO ON 04-09-1999. VARIOUS OTHER TERMS OF THE AGREEMENT A ND THE WORK TO BE PERFORMED BY WWSPL WAS OUTLINED IN DETAIL IN SCHEDU LES ATTACHED TO THE AGREEMENT. ON THE OTHER HAND, THE AGREEMENT ENTERE D INTO BETWEEN WWSE (I.E. ASSESSEE) AND 4YOURSOUL.COM (US) LLC IS TITLED AS DEVELOPMENT AGREEMENT. THE SCOPE OF WORK CLEARLY STATES THAT THE ASSESSEE SHALL DESIGN AND DEVELOP AN UPDATED VERSIO N OF THE PROJECT AS DESCRIBED IN THE PROJECT DESCRIPTION CONTAINED IN S CHEDULE A ATTACHED THERETO. THEREAFTER, VARIOUS OTHER TERMS AND CONDI TIONS WERE NARRATED WITH REGARD TO THE TITLE, SCOPE OF WORK OF THE ASSE SSEE AND SCHEDULE (A) 19 I.T.A. NOS.1933 TO 1938/MUM/2016 CONTAINED DETAILED DESCRIPTION OF THE PROJECT AS WE LL AS BASIC LOGARITHM FOR THE APPLICATION WAS ALSO OUTLINED THEREIN. IT APPE ARS THAT BOTH THE LOWER AUTHORITIES GOT INFLUENCED BY THIS FACT THAT MOST O F THE TERMS USED IN BOTH THE AGREEMENTS LOOKED IDENTICAL. IT WAS QUITE APPA RENT WHEN THE ULTIMATE PRODUCT WAS SAME AND THE CUSTOMER, 4YOURSOUL.COM (U S) LLC (US FIRM) WAS ALSO SAME, THEN THE PATTERN AND WRITING OF THE AGREEMENT MAY ALSO BE IDENTICAL. BUT EVEN ON THE BASIS OF COMMON SENSE, A MAN OF ORDINARY PRUDENCE CAN MAKE DISTINCTION BETWEEN THE TWO JOBS. THE DEVELOPMENT OF SOFTWARE AND ARCHITECTING THE SOFTWARE ARE ALTOGETH ER TWO DIFFERENT ASPECTS. AN EXAMPLE OF TOTAL PROCESS REQUIRED FOR C ONSTRUCTION OF A BUILDING WAS QUOTED BEFORE US DURING THE COURSE OF HEARING TO EXPLAIN THE DISTINCTION. FOR CONSTRUCTION OF A BUILDING, FIRST OF ALL A LAY OUT PLAN IS DRAFTED, WHICH IS DONE BY A BUILDING ARCHITECT. THE REAFTER, BASED UPON THE LAY OUT PLAN, CONSTRUCTION OF BUILDING IS DONE BY A CIVIL CONTRACTOR. IN THIS EXAMPLE, THOUGH ULTIMATE PRODUCT I.E. BUILDING RE MAINS THE SAME, BUT DRAFTING OF A LAY-OUT PLAN AND CONSTRUCTION OF BUIL DING ARE TWO SEPARATE ACTIVITIES, AND DIFFERENT SET OF PROFESSIONALS/TECH NICIANS POSSESSING SKILL AND SPECIALISATION IN THEIR RESPECTIVE FIELDS ARE R EQUIRED FOR CARRYING OUT THESE ACTIVITIES. IN THE CASE OF ASSESSEE BEFORE US ALSO, SIMILAR DISTINCTION EXISTS. THIS DISTINCTION SHOULD NOT HAVE BEEN BLURR ED BY LOWER AUTHORITIES MERELY FOR THE SAKE OF REACHING ON TO THE CONCLUSIO N THAT SAME BUSINESS HAS BEEN CARRIED OUT BY BOTH THE ENTITIES. THE LIN E OF BUSINESS MAY APPEAR TO BE IDENTICAL BUT THE WORK TO BE CARRIED OUT IN B OTH THE AGREEMENTS IS DIFFERENT FROM EACH OTHER. IN OUR CONSIDERED OPINI ON, PERUSAL OF THE AGREEMENT SUGGESTS THAT DIFFERENT ACTIVITIES HAVE B EEN CARRIED OUT AND LOWER AUTHORITIES HAVE NOT PROPERLY UNDERSTOOD THE FACTS IN THIS REGARD. THUS, THIS ALLEGATION IS NOT SUSTAINABLE. 20 I.T.A. NOS.1933 TO 1938/MUM/2016 13. FURTHER, WITH REGARD TO THE ALLEGATION OF THE AO TH AT NO FRESH COMPUTERS WERE PURCHASED BY THE ASSESSEE, IT IS NOT ED THAT THE ASSESSEE PRESENTED BEFORE THE AO DURING THE COURSE OF REMAND PROCEEDINGS THE BILLS OF THE COMPUTERS SHOWING THAT SINCE ASSESSEE WAS IN THIS LINE OF BUSINESS IT WAS ECONOMICAL AND COMMERCIALLY EXPEDIE NT FOR THE ASSESSEE TO BUY PARTS OF COMPUTER AND THEN ASSEMBLE THEM FOR THEIR USAGE. THEREFORE, THE BILLS PRODUCED BY THE ASSESSEE WERE FOR PURCHASE OF PARTS OF COMPUTERS. OUR ATTENTION WAS ALSO DRAWN ON THE REMAND REPORT WHERE FOLLOWING OBSERVATIONS HAVE BEEN MADE BY THE AO: PAGE 96 GIVES LEDGER ACCOUNTS OF COMPUTERS FOR A.Y . 2000-01 IN THE BOOKS OF M/S WWSPL, THE ASSESSEE HAS SUBMITTED A FEW BILLS FROM ARIHANT COMPUTERS THAT SHOWS THAT THE ASSESSE E FIRM HAS PURCHASED COMPUTERS IN SUBSEQUENT YEARS AS THE ASSE SSEE FIRM GREW. 10. IN ADDITION, THIRD PARTY DOCUMENTARY EVIDENCE P ROVIDED BY THE ASSESSEE FIRM SHOWS AN INVOICE FOR AN ASSEMB LED COMPUTER AND A BANK STATEMENT SHOWING PAYMENT BY CH ECK OF THE SAME - WHICH ALSO PROVIDES EVIDENCE THAT A NEW ASSEMBLED COMPUTER WERE PURCHASED TO COMMENCE BUSINESS OPERAT IONS. EVEN MR AJAY SINGHVI HAS STATED IN THE STATEMENT RE CORDED DURING ASSESSMENT PROCEEDINGS THAT THEY HAVE A PRAC TICE OF USING ASSEMBLED COMPUTERS. THUS, FROM THE PERUSAL OF THE ABOVE, IT IS SEEN THA T ALL THESE EVIDENCES WERE SHOWN TO THE AO AND THESE WERE FOUND ACCEPTABL E BY THE AO. UNDER THESE CIRCUMSTANCES, IT WAS NOT APPROPRIATE O N THE PART OF THE CIT(A) TO DISREGARD THESE EVIDENCES. IN ADDITION T O THAT OUR ATTENTION WAS ALSO DRAWN ON PAGE 433 AND 435 OF THE PAPER BOOK, W HICH ARE INVOICE AND LEDGER ACCOUNT OF THE COMPUTERS SHOWING PURCHASE OF COMPUTERS ON 16 TH MARCH, 2000. THUS, THIS ALLEGATION IS ALSO NOT SUS TAINABLE. 14. WITH REGARD TO THE SHIFTING OF EMPLOYEES, OUR ATTEN TION WAS DRAWN TO THIS FACT THAT THERE WAS NO TRANSFER OF EMPLOYEES F ROM WWSPL TO THE 21 I.T.A. NOS.1933 TO 1938/MUM/2016 ASSESSEE COMPANY IN THE YEAR OF FORMATION / FIRST Y EAR OF CLAIM OF DEDUCTION U/S 10B. FURTHER IT WAS SUBMITTED THAT W HEN THE EMPLOYEES HAD JOINED M/S WWSPL, ALL THE DOMESTIC CLIENTS WERE LOST AND HENCE, THE ONLY WORK BEING AVAILED BY WWSPL WAS PERTAINING TO ARCHITECTURAL WORK OF M/S ARROWEYE SOLUTIONS INC (ASI, IN SHORT). SUBSEQ UENTLY, SHRI AJAY SANGHAVI FELT THAT EXCEPT CONSULTANT SHRI MOHD LOKH ANDWALA, ALL THE REST DID NOT HAVE THE EXPERTISE IN ARCHITECTURAL WORK WH ICH WAS BEING DONE BY WWSPL FOR M/S ASI. CONSEQUENTLY IN A.Y. 2001-02, 7 EMPLOYEES (I.E. 4 PROGRAMMERS, ONE ADMINISTRATIVE STAFF AND TWO PEONS ) OF WWSPL WERE TRANSFERRED TO THE ASSESSEE AND TOTAL EMPLOYEES IN THE ASSESSEE COMPANY WERE 15. THUS, LESS THAN 50% OF THE TOTAL EMPLOYEE S WERE SHIFTED FROM WWSPL TO THE ASSESSEE. ALL OTHER REMAINING EMPLOYE ES WERE RELIEVED OF FROM WWSPL . TOTAL TECHNICAL STAFF OF WWSE WAS 12, COMPLETE DETA ILS IN THIS REGARD WERE SUBMITTED BEFORE THE LOWER AUTHORI TIES GIVING NAME AND DESIGNATION OF THE EMPLOYEES. LD. COUNSEL HAS PLAC ED BEFORE US, COPY OF THE CIRCULAR OF CBDT DATED 08 TH OCTOBER, 2014 NO.14/2014 WHEREIN IT IS CLARIFIED THAT MERE TRANSFER OF REDEPLOYMENT OF EXI STING TECHNICAL MANPOWER FROM AN EXISTING UNIT TO A NEW SEZ UNIT IN THE FIRST YEAR OF COMMENCEMENT OF BUSINESS WILL NOT BE CONSTRUED AS SPLITTING UP OR RECONSTRUCTION OF AN EXISTING BUSINESS SO LONG AS N UMBER OF TECHNICAL MANPOWER SO TRANSFERRED DOES NOT EXCEED 50% OF THE TOTAL TECHNICAL MANPOWER ACTUALLY ENGAGED IN DEVELOPING SOFTWARE AT ANY POINT OF TIME IN THE GIVEN YEAR IN THE NEW UNIT. IT WAS DEMONSTRATE D THAT IN THE CASE OF THE ASSESSEE, THERE WAS TRANSFER OF ONLY 25% OF TECHNIC AL EMPLOYEES FROM WWSPL TO THE ASSESSEE COMPANY. THUS, UNDER THESE C IRCUMSTANCES, WE FIND FORCE IN THE ARGUMENT OF THE LD. COUNSEL THAT TRANSFER OF THE AFORESAID EMPLOYEES FROM WWSPL TO THE ASSESSEE WAS WITHIN THE LIMIT PRESCRIBED IN 22 I.T.A. NOS.1933 TO 1938/MUM/2016 THE CBDT CIRCULAR AND HENCE, SUCH TRANSFER OF EXIST ING TECHNICAL MANPOWER FROM WWSPL TO THE ASSESSEE IN THE FIRST YEAR OF COM MENCEMENT OF BUSINESS SHOULD NOT BE CONSTRUED AS SPLITTING UP OR RECONSTRUCTION OF AN EXISTING BUSINESS. THUS, THIS CONTENTION OF THE REV ENUE ALSO FAILS. 15. WE HAVE GONE THROUGH THE OTHER ALLEGATIONS MADE BY THE AO AS WELL AS THE LD. CIT(A). WE FIND THAT THESE ALLEGATIONS ARE MERELY UNSUBSTANTIATED DOUBTS AND, IN ANY CASE, DO NOT HAV E ANY MATERIAL BEARING ON THE ISSUE BEFORE US. UNDER THESE CIRCUMSTANCES, WE FIND THAT THE LOWER AUTHORITIES HAVE MIS-APPRECIATED THE FACTS AND HAVE NOT BEEN ABLE TO BRING ANY EVIDENCE ON RECORD ON THE BASIS OF WHICH THE EX EMPTION U/S 10B COULD BE DENIED TO THE ASSESSEE. THUS, AFTER TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT DEDUCTION U/ S 10B IS ALLOWABLE TO THE ASSESSEE AND, THEREFORE, THE SAME IS DIRECTED T O BE ALLOWED. THUS, GROUNDS 2 TO 5 ARE ALLOWED. 16. SINCE WE HAVE ALLOWED GROUND 2 TO 5, THE OTHER GROU NDS BECOME INFRUCTUOUS AND DO NOT FIND IT NECESSARY TO ADJUDIC ATE THEM. 17. IT WAS JOINTLY STATED BY BOTH THE PARTIES THAT THE ISSUE INVOLVED IS IDENTICAL IN ALL THE YEARS. THEREFORE, THE AO IS D IRECTED TO FOLLOW OUR ORDER FOR AY. 2004-05 AND ALLOW THE BENEFIT OF DEDUCTION U/S 10B IN ALL OTHER YEARS UNDER APPEAL. 17. AS A RESULT, THE APPEALS OF THE ASSESSEE FOR ALL TH E YEARS ARE PARTLY ALLOWED IN TERMS OF DIRECTIONS AS GIVEN ABOVE. ORDER PRONOUNCED IN THE COURT ON THIS 30 TH DAY OF NOVEMBER, 2016. SD/- SD/- (AMIT SHUKLA) (ASHWANI TANEJA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 30 TH NOVEMBER, 2016 23 I.T.A. NOS.1933 TO 1938/MUM/2016 PK/- COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE , G-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES