Asstt.CIT, Cir.-4, Pune, V. Persistant Systems Pvt. Ltd.,

ITA 290/PUN/2009

• Counselvise Citation: 29024514 RSA 2009
• Duration Of Justice: 3 year(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 24-01-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 25-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: S E DASTUR SHRI NIRAJ SHETH; NITESH MEHTA
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI I.C. SUDHIR JUDICIAL MEMBER AND SHRI G.S. PANNU ACCOUNTANT MEMBER ITA NO. 290/PN/2009 (ASSTT. YEAR : 2003-04 ) ASSTT. COMMISSIONER OF INCOME TAX ... APPELLANT CIRCLE -4, PUNE V. PERSISTANT SYSTEMS PVT. LTD. RESPONDENT BHAGEERATH, 402, SENAPATI BAPAT ROAD, PUNE 411 012 PAN : NOT AVAILABLE ITA NO. 33/PN/2009 (ASSTT. YEAR : 2003-04 ) PERSISTANT SYSTEMS PVT. LTD. APPELLANT BHAGEERATH, 402, SENAPATI BAPAT ROAD, PUNE 411 012 PAN : NOT AVAILABLE V. JT. CIT, CIRCLE 4, PUNE RESPONDENT ASSESSEE BY : SHRI S.E. DASTUR, SHRI NIRAJ SH ETH & NITESH MEHTA DEPARTMENT BY : SHRI. S.K. SINGH DATE OF HEARING : 24/1/12 DATE OF PRONOUNCEMENT : -3-12 ORDER PER I.C. SUDHIR, JM THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDER O N THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALL OWANCE FOR EXEMPTION U/S 10A TO THE TURNOVER OF OLD UNIT, RELA TING TO CONTRACTS ENTERED INTO AND EXECUTED BY OLD UNIT, WHILE ACCEPT ING THAT THE NEW UNIT WAS FORMED BY RECONSTRUCTION OF THE OLD UNIT AND INCOME OF OLD UNIT WAS NOT ELIGIBLE FOR EXEMPTION U/S 10A PERTAINING TO THE CONTRACTS TAKEN BY THE ASSESSEE UPTO THE DATE ON W HICH THE NEW ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 2 UNIT WAS ESTABLISHED WHEN HE HAS ACCEPTED THAT THE NEW UNIT WAS ESTABLISHED BY WAY OF RECONSTRUCTION OF THE OLD U NIT THE INCOME OF WHICH BECOME TAXABLE FROM THE F.Y. 1998-99. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) HAS ERRED IN APPRECIATING THE PROVIS IONS OF LAW THAT IN ORDER TO BE ELIGIBLE FOR EXEMPTION U/S 10A, THE UNDERTAKING SHOULD NOT BE ESTABLISHED BY SPLITTING UP / RECONS TRUCTION OF THE EXISTING BUSINESS OF THE ASSESSEE. 2. THE RELEVANT UNDISPUTED FACTS NARRATED BY THE L D CIT(A) IN PARA NOS. 2.1 TO 2.4 OF THE FIRST APPELLATE ORDER ARE B EING REPRODUCED HEREUNDER : 2.1 THE FACTS OF THE CASE AS DISCUSSED IN THE ASSE SSMENT ORDER ARE THAT PERSISTENT SYSTEMS PVT. LTD. (PERSISTENT) COMMENCED ITS OPERATIONS DURING MARCH, 1991 FROM THE SOFTWARE TECHNOLOGY PAR K LOCATED AT ELECTRONIC SADAN, MIDC BHOSARI, PUNE. THE APPELLA NT CLAIMED THAT DURING THE YEAR 2000, IT HAD SET UP A NEW UNDERTAK ING CALLED A STP UNIT- 2. IN THE CURRENT YEAR, THE APPELLANT CLAIMED THA T UNIT-1 WAS DISCONTINUED AND ALL ACTIVITY IS CARRIED OUT ONLY F ROM UNIT. IN THIS CONTEXT, THE ASSESSING OFFICER REFERRED TO THE STP REGISTRATIONS OVER THE YEARS AND NOTED THAT THE FIRST YEAR OF THE APPELLAN T WAS F.Y. 1990-91 RELEVANT TO THE ASSESSMENT YEAR 1991-92 AND THEREAF TER THE ACTIVITY WAS CARRIED OUT FROM SEVERAL LOCATIONS. THE APPELLANT HAD TREATED ALL THESE LOCATIONS AS EXTENSION OR MODIFICATION TO THE FIRST STP UNIT. THE APPELLANT CLAIMED THAT IT HAD STARTED SECOND STP UNIT AT CORP ORATE PLAZA BUILDING IN MAY, 2000. FROM THE DETAILS FILED, THE ASSESSING O FFICER NOTICED THAT UP TO THE YEAR 1999-2000, THE APPELLANT CARRIED ON THE BUSINESS FROM VARIOUS PREMISES WHICH WERE RENTED OR OWNED. THERE WAS INCREASE IN THE ACTIVITIES AS ALSO THE CUSTOMERS, WHICH THE AP PELLANT TREATED AS PART ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 3 OF THE SAME FIRST STP UNIT. THE ASSESSING OFFICER NOTED THAT THE APPELLANT STARTED ITS BUSINESS FROM ELECTRONIC SADAN, BHOSARI IN MARCH, 1991. THE APPELLANT OBTAINED REGISTRATION AS 10A UNIT BY REGI STERING IT WITH STPI. THIS UNIT WAS IN RENTED PREMISES. THE BUSINESS WA S SHIFTED TO APPELLANTS OWN PREMISES, NAMELY, KAPILVASTU, SENAPATI BAPAT RO AD, PUNE IN THE F.Y. 1994-95 AND CONTINUED TO OPERATE THERE TILL F.Y. 19 99-2000. THIS PREMISES IS STILL OWNED BY THE APPELLANT AND IS USE D BY SUBSIDIARY COMPANY, NAME, PERSISTENT E-BUSINESS SOLUTIONS PVT. LTD., AS ADMINISTRATIVE OFFICE AND TRAINING INSTITUTE OF THE APPELLANT. THE ASSESSING OFFICER FOUND THAT IN F.Y. 1995-96 THE AP PELLANT TOOK ON RENT AN OFFICE PREMISES AT SHREENIDHI CHAMBERS, PUNE WHICH WAS GIVEN UP WHEN A NEW AND LARGER PREMISES WAS TAKEN ON RENT AT PHOENI X AT SENAPATI BAPAT ROAD, PUNE IN THE F.Y. 1996-97. THIS PREMISES WAS USED IN THE F.YS. 1996-97 & 1997-98. THEREAFTER, THE OPERATION OF THE APPELLANT WAS SHIFTED TO ITS OWN NEW PREMISES, NAMELY, PANINI AT SENAPATI BAPAT ROAD, PUNE, WHICH IS CONTINUED TO USED TILL DATE. THUS, THE ASSESSING OFFICER OBSERVED THAT ALL THESE YEARS, THE APPELLANT TREATE D ITS SHIFTING TO NEW PREMISES AND EXPANSION OF THE BUSINESS AS PART OF T HE SAME BUSINESS AND SAME UNIT STP UNIT-1. THE ASSESSING OFFICER NOTED THAT AS PER THE PROVISIONS OF SECTION 10A AT THE RELEVANT POINT OF TIME, THE APPELLANT OPTED FOR 5 YEARS OF EXEMPTION IN A PERIOD OF 8 Y EARS COMMENCING FROM F.Y. 1992-93 TILL F.Y. 1996-97. THEREAFTER, ITS EN TIRE INCOME WAS OFFERED FOR TAXATION UP TO THE F.Y. 1999-2000 CLAIMING DEDU CTION UNDER SECTION 80HHE OF THE ACT. IN MAY, 2000 THE APPELLANT MADE FRESH APPLICATION TO THE STPI FOR REGISTRATION OF A NEW UNIT TO CATER TO THE SUBSTANTIAL INCREASE IN THE CUSTOMERS FOR WHICH NEW BUILDING, NAMELY BHA GEERATH WAS PURCHASED, WHERE THE OPERATION WAS STARTED IN THE A SSESSMENT YEAR 2001-02. THE APPELLANT ALSO TOOK A NEW BUILDING ON RENT, NAMELY ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 4 CORPORATE PLAZA, INCOME WHEREFROM WAS SHOWN TO BE P ERTAINING TO THE EXISTING UNIT AND OFFERED FOR TAXATION, EXCEPT TRE ATING A SMALL PART OF THE INCOME FOR THE F.YS. 2000-01 & 2001-02 AS PART OF T HE NEW UNIT AND EXEMPTION WAS CLAIMED ON THE SAME. 2.2. THE APPELLANT FILED AN INTIMATION TO STPI STAT ING THAT IT WAS CLOSING ITS FIRST UNIT VIDE LETTER DATED 26-3-2002, TO CLAI M THAT THE ENTIRE INCOME FOR THE F.Y. 2002-03 WAS ONLY INCOME FROM THE 2 ND UNIT OPERATING FROM BHAGIRATH BUILDING AS EXEMPT UNDER SECTION 10A OF THE ACT. ACCORDING TO THE ASSESSING OFFICER, THE APPELLANT MADE THE SA ID APPLICATION TO STPI TO TREAT THE EXISTING PANINI BUILDING OF UNIT-1 AS PART OF NEW UNIT 2. THE ASSESSING OFFICER NOTED THAT AS THE NEW UNIT STARTE D IN F.Y. 2000-01, THE INCOME WAS TREATED AS ARISING FROM THE 1 ST UNIT AND FROM 2 ND UNIT FOR THE F.YS. 2000-01 & 2001-02 AND THE APPELLANT CLAIMED T HAT BOTH THE UNITS WERE IN OPERATION. IN THIS CONTEXT, REFERRING TO D ETAILS OF TURNOVER OF UNIT-1 & UNIT-2 AND PROFITS THEREON FRO THE A.YS.20 00-01 TO 2003-04 ON PAGE-7 OF THE ASSESSMENT ORDER, THE ASSESSING OFFIC ER NOTED THAT WHILE UNIT-1 HAD TURNOVER OF RS.15.61 CRORES IN A.Y. 2000 -01 WHICH WENT UP TO RS. 27.45 CRORES IN THE NEXT YEAR, THE APPELLANT SH OWED HUGE DECLINE IN TURNOVER OF THIS UNIT AND FINALLY IN A.Y. 2003-04 CLAIMED THAT UNIT-1 HAD CLOSED DOWN AND ALL ACTIVITIES WERE CARRIED OUT FR OM UNIT-2, THE FACT REMAINED THAT THE PREMISES AT PANINI CONTINUES TO EXIST AND SO DO THE CUSTOMERS. THE ASSESSING OFFICER REMARKED WITH REF ERENCE TO THE AUTHORIZED REPRESENTATIVES STATEMENT THAT THE BUI LDING PANINI WAS USED FOR PART OF THE F.Y. 2002-03 AFTER RENOVATION THAT IN FACT, DURING F.Y. 2002-03, PANINI BUILDING WAS RENOVATED AND THEREAFT ER THE APPELLANT OBTAINED PERMISSION FOR THE STPI FOR TREATING PANIN I BUILDING AS EXTENSION OF NEW UNIT AT BHAGEERATH. HAVING REGARD TO THE AB OVE FACTS, ACCORDING ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 5 TO THE ASSESSING OFFICER, THE ISSUE THAT AROSE FOR CONSIDERATION WAS WHETHER THE APPELLANT HAD ACTUALLY STARTED A NEW UN IT OR IT IS AN EXTENSION AND RECONSTRUCTION OF THE OLD UNIT OR IN THE ALTE RNATIVE, A PART OF THE EXISTING OPERATION GOT SUBSUMED IN THE NEW UNIT FRO M THE F.YS. 2002-03 RELEVANT TO THE ASSESSMENT YEAR 2003-04. THE FACTS PERTAINING TO THE ASSESSMENT YEAR 2001-02 AS PER THE CLAIM OF THE APP ELLANT WERE THAT THE APPELLANT GOT REGISTRATION FOR STPI UNIT IN MAY, 20 00 AND STARTED OPERATION IN JULY, 2000 FROM RENTED PREMISES, NAMEL Y, CORPORATE PLANZA, WHICH WAS SHIFTED TO OWN BUILDING AT BHAGEERATH, WH ILE STP UNIT-2 STARTED OPERATION FROM BHAGEERATH IN F.Y. 2001-02. SUBSEQ UENTLY PANINI BUILDING, WHICH WAS USED BY UNIT-1 WAS REMOVED AND UNIT-2 STARTED USING IT. 2.3 THE ASSESSING OFFICER FURTHER NOTED THAT OUT OF THE 25 EMPLOYEES IN THE UNIT-2, 11 EMPLOYEES WERE WORKING IN THE UNIT-1 OPERATING FROM PANINI AND KAPILVASTU BUILDINGS, WHICH WAS STARTED IN MAY, 2000, SUGGESTING THAT 44% OF THE EMPLOYEES OF THE NEW UNI T WAS PERTAINING TO THE EARLIER UNIT. THE ASSESSING OFFICER HAS NOT DO UBTED THAT IN SOFTWARE BUSINESS MANPOWER IS THE REAL ASSET. THE ASSESSING OFFICER ASKED THE APPELLANT TO PRODUCE DETAILS OF ASSETS OF THE SO-CA LLED NEW AS WELL AS THE OLD STP UNITS. THE APPELLANT HAD NOT KEPT SEPARATE ASSET REGISTER TO THESE UNITS. THE ASSESSING OFFICER NOTED THAT THE APPELLANT HAD TRANSFERRED SUBSTANTIAL ASSETS OF OLD UNIT TO THE NEW UNIT AS NOTED IN ORDER SHEET ENTRY DATED 8-2-2006, WHERE AROUND 284 ITEMS IN THE FORM OF COMPUTERS, UPS PURCHASED FOR OLD UNIT IN F.Y. 1 999-2000 AND AS APPEARING IN THE ASSET REGISTER AS ON 31-3-2003 OF THE NEW UNIT HAVE BEEN MENTIONED. THE ASSESSING OFFICER HAS ALSO GIV EN A CHART ON PAGES-9 & 10 OF THE ASSESSMENT ORDER SHOWING DETAILS OF ASS ETS TRANSFERRED FROM ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 6 OLD UNIT TO NEW UNIT AS PER DETAILED SUBMITTED BY T HE APPELLANT. ACCORDING TO THE ASSESSING OFFICER, THE MOST IMPOR TANT THING WAS THAT THE APPELLANT STARTED UNIT-1 IN F.Y. 2000-2001 FROM RENTED BUILDINGS, NAMELY PANINI & CORPORATE PLAZA AND OWN BUILDING KA PILVASTU AND STARTED UNIT-2 IN PANINI BUILDING AFTER ITS RENOVATION IN F.Y. 2002-03, THE OPERATIONS IN RENTED BUILDING CORPORATE PLAZA HAD BEEN STOPPED AND THUS, THE ENTIRE PREMISES OF THE OLD UNIT WERE USED FOR THE NEW UNIT STARTED IN THE F.Y. 2002-03. THE ASSESSING OFFIC ER ALSO REFERRED TO THE CUMULATIVE POSITION OF THE ASSETS TRANSFERRED AS O N 31-3-2003 AS SUBMITTED BY THE APPELLANT ON PAGE-11 OF THE ASSESS MENT ORDER, WHERE THE ASSESSING OFFICER NOTED THAT OUT OF THE VALUE O F NET BLOCK OF RS.34,72,53,703/-, VALUE OF ASSETS TRANSFERRED WAS RS.3,31,80,557/-, SUGGESTING THAT THE RATIO OF VALUE TRANSFERRED FROM OLD UNIT TO NEW UNIT WAS 9.5%. THE ASSESSING OFFICER OBSERVED FROM TH E LIST OF CUSTOMERS FOR THE A.Y. 2001-02 OF THE UNIT-1 AND UNIT-2 THAT INFORMIX AND TEAMON WERE COMMON CUSTOMERS OF THE APPELLANT IN SO FAR AS SALES TO INFORMIX IN UNIT-1 WERE RS.47,02,908/- AND TEAMON WERE RS.2,30, 81,935/- AS WELL AS SALES OF RS.19,54,320/- AND RS.39,05,800/- RESP ECTIVELY IN UNIT-2 ARE CONCERNED OUT OF THE TOTAL SALES OF RS.27,45,78,876 /- AND RS.1,49,08,078/- RESPECTIVELY, EXCEPT SALES OF RS. 58,91,598/- AND RS.31,56,360/- FOR CHANNEL WAVE AND NEWMOON-QE IN U NIT. THUS, THOUGH THERE WAS ALLEGED CREATION OF A NEW STP UNIT IN MAY, 2000, THE CUSTOMERS OF THE APPELLANT WERE ALMOST THE SAME. T HE ASSESSING OFFICER NOTED THAT THE APPELLANT HAD DEVELOPED A PRODUCT C ALLED ENQUIRE, ENSURE, UNLIST UNDER THREE VERSONS CALLED AS 0.1,0.2, 0.3 A S AGAINST THE EARLIER VERSIONS CALLED 0.1, 0.2 DEVELOPED BY THE OLD UNIT, WHICH SHOWED CONTINUITY OF THE BUSINESS ACTIVITY OF THE APPELLAN T. IN ADDITION TO THE ABOVE FEATURES, THE MANAGEMENT OF BOTH THE UNITS WA S ALWAYS THE SAME. ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 7 THE ASSESSING OFFICER ALSO QUOTED THE RELEVANT PORT ION OF THE APPLICATION MADE BY THE APPELLANT TO STPI REGARDING TRANSFER O F ASSETS, WHICH READS REST OF ALL IN BOND GOODS ARE PERMANENTLY SHIFTED A ND TRANSFERRED BY US TO OUR STP UNIT II VIZ WAREHOUSE LOCATED AT BHAGIRATH 402E, SENAPATI BAPAT ROAD, PUNE-411 016. APPROPRIATE VALUE OF IMPORTED GOODS MAY KINDLY BE DEBITED TO OUR SANCTIONED LIMIT OF CAPITAL GOODS FO R STP UNIT II UNDER INTIMATION TO US. 2.4 THE ASSESSING OFFICER OBSERVED WHEN THE APPELLA NT WAS ASKED TO GIVE UNIT WISE BREAK UP OF SALES OF RS.49,58,50,772 /- IN THE ASSESSMENT YEAR 2003-04, IT WAS STATED THAT THERE WAS ONLY ONE STP UNIT, WHICH WAS THE NEW STP UNIT. THE APPELLANT HAD ALSO STATED TH AT ALL THE EMPLOYEES WERE WORKING IN THE SAID UNIT AND THE ENTIRE SALES WERE PERTAINING TO THE SAID UNIT, THEREBY CATEGORICALLY DENYING THAT THERE WAS ANY SALES WHICH WERE PERTAINING TO THE OLD STP UNIT. THE ASSESSI NG OFFICER ALSO NOTED THAT AS PER APPELLANTS SUBMISSION, THERE WERE AROU ND 570 EMPLOYEES DURING THE ASSESSMENT YEAR 2003-04 OF WHICH 143 EMP LOYEES HAD JOINED PRIOR TO MAY, 2000, SUGGESTING THAT 143 EMPLOYEES W HO WERE OF THE EARLIER UNIT WERE SHIFTED TO THE NEW UNIT ON CONSID ERATION OF THE IMPORTANCE OF MANPOWER IN SOFTWARE BUSINESS. THE A SSESSING OFFICER OBSERVED THAT THE PANINI BUILDING WAS ALSO USED BY THE NEW UNIT BESIDES OTHER ASSETS WHICH WERE BELONGING TO THE EARLIER UN IT IN THE PROPORTION OF 9.5% OF THE TOTAL ASSETS. 3. THE LD CIT(A) HAS GIVEN PART RELIEF BY RESTRICTI NG THE DISALLOWANCE U/S. 10A IN RESPECT OF TURNOVER OF RS.4,62,95,445/- INSTEAD OF RS.9,87,88,632/-AS HELD BY THE A.O. THE REVENUE H AS QUESTIONED THE RELIEF GIVEN BY THE LD CIT(A) ON THE ABOVE GROUNDS OF THE PRESENT APPEAL ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 8 WHEREAS THE ASSESSEE HAS QUESTIONED THE FIRST APPEL LATE ORDER WHEREBY THE LD CIT(A) HAS SUSTAINED THE DISALLOWANCE U/S. 10A IN RESPECT OF TURNOVER OF RS.4,62,95,445/- VIDE GROUNDS OF THE AP PEAL FILED BY IT (ITA NO. 33/PN/2009). THUS, THE ISSUE INVOLVED IN THE G ROUNDS OF THE APPEALS PREFERRED BY THE PARTY IS AS TO WHETHER A.O WAS JU STIFIED IN DISALLOWING THE DEDUCTION CLAIMED U/S. 10A IN RESPECT OF RS.9, 87,88,632/-. 4. IN SUPPORT OF THE GROUNDS OF THE APPEAL PREFERRE D BY THE REVENUE, THE LD. D.R. HAS BASICALLY PLACED RELIANCE ON THE A SSESSMENT ORDER. HIS MAIN ARGUMENT REMAINED THAT THERE IS A LINK BETWEEN THE OLD UNIT AND NEW UNIT BY WAY OF CONTINUATION OF OLD BUILDING, 44 % OF THE EMPLOYEES FROM THE OLD UNITS WORKING IN THE NEW UNIT, TRANSFE R OF CERTAIN OLD PLANT AND MACHINERY IN THE NEW UNDERTAKING WHEN THE ASSES SEE HAD NO SEPARATE ASSET REGISTERED AND 244 ITEMS WERE TRANSF ERRED, THE TURNOVER OF THE OLDER UNIT INCREASING FROM 15.61 CRORES IN A.Y . 2000-01 TO RS. 27.45 CRORES IN A.Y. 2001-02 WHICH DECLINED AND THEN WAS ULTIMATELY CLOSED IN 2002. THE OLD CUSTOMERS WERE BEING SERVICED FROM T HE NEW UNIT TO CLAIM DEDUCTION U/S. 10A OF THE INCOME TAX ACT WITH RESPE CT TO SALES OF RS.1,86,88,632/- AS THOSE CONTRACTS WERE ENTERED PR IOR TO MAY 2000. THUS, THE A.O WAS JUSTIFIED IN HOLDING THAT THESE S ALES PERTAINED TO THE OLD UNIT AS THE NEW UNIT WAS NOT IN EXISTENCE AT THE TI ME THAT CONTRACTS WITH THESE CUSTOMERS WERE ENTERED INTO. THE LD. D.R. S UBMITTED THAT WITHOUT APPRECIATING THESE MATERIAL FACTS, THE LD CIT(A) HA S GIVEN PART RELIEF TO THE ASSESSEE WITH THIS FINDING THAT TURNOVER OF RS. 4,62,95,445/- ONLY PERTAINED TO THE CONTRACT IN RESPECT OF OLD UNITS A ND DEDUCTION U/S. 10A WAS DISALLOWED IN RESPECT OF THOSE TURNOVER ONLY. ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 9 5. THE LD. A.R. ON THE OTHER HAND SUBMITTED THAT T HE ASSESSEE IS VERY MUCH ENTITLED TO CLAIM DEDUCTION U/S. 10A OF THE AC T IN RESPECT OF THE ENTIRE TURNOVER OF RS.9,87,88,632/-. HE SUBMITTED THAT THE ASSESSEE COMMENCED ITS OPERATION DURING MARCH 1990-91 FROM THE SOFTWARE TECHNOLOGY PARK LOCATED AT ELECTRONIC SADAN, MIDC, BHOSARI, PUNE. DURING THE YEAR 2000, IT HAD SET UP A NEW UNDERTAKI NG CALLED AS STP UNIT- 2. IN THE CURRENT YEAR THE ASSESSEE CLAIMED THAT U NIT 1 WAS DISCONTINUED AND ALL ACTIVITIES ARE CARRIED OUT ONLY FROM UNIT-2 . IN UNIT-1, THE DEDUCTION WAS CLAIMED FOR 5 YEARS I.E. FOR F.Y. 199 2-93 TO F.Y. 1996-97 AND DURING F.Y. 1998-99 TO F.Y. 1999-00 AND 2000-01 , NO CLAIM FOR DEDUCTION U/S. 10A WAS MADE ON THIS UNIT. IN RESPE CT OF UNIT-2, WHICH STARTED FUNCTIONING FROM JULY 2000, THE DEDUCTION U/S. 10A WAS CLAIMED IN THE A.Y. 2001-02. THE RETURN OF INCOME WAS PRO CESSED U/S. 143(1) AND THE CLAIMED DEDUCTION WAS ACCEPTED. 6. THE ASSESSEE FILED AN INTIMATION TO STPI STATIN G THAT IT WAS CLOSING ITS FIRST UNIT VIDE LETTER DATED 26.3.2002 TO CLAIM THAT THE ENTIRE INCOME FOR THE F.Y. 2002-03 WAS ONLY INCOME FROM THE SECO ND UNIT OPERATING FROM BHAGEERATHI BUILDING AS EXEMPT U/S. 10A OF THE ACT. THE LD. A.R. REFERRED PARA NO. 11.2 TO 11.5 OF THE ASSESSMENT OR DER WITH THIS SUBMISSION THAT THE A.O HAS REDUCED THE CLAIMED DED UCTION ON THE BASIS THAT ASSESSEE HAS ARRANGED ITS AFFAIRS IN A MANNER TO EXTEND THE EXEMPTION U/S. 10A OF THE ACT AS SIGNIFICANT PART OF THE INCOME CLAIMED AS PART OF THE NEW UNIT AT BHAGEERATH IS NOTHING BU T THE INCOME FROM SAME CUSTOMERS THAT ARE IN THE SAME DOMAIN OF WORK THAT WAS BEING CARRIED OUT AT PANINI. HE WORKED OUT A SALES OF RS .9.87 CRORES AS IN RESPECT OF THE EARLIER UNIT AND THE EARLIER BUSINES S. HE HAS ACCORDINGLY DISALLOWED CLAIMED DEDUCTION U/S. 10A OF THE ACT ON THE SALES OF ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 10 RS.9,87,88,632/-. THE LD CIT(A) HAS RESTRICTED THE DISALLOWANCE OF THE DEDUCTION UPTO SALES TURNOVER OF RS.4,62,95,445/- . WHILE DOING SO, THE AUTHORITIES BELOW HAD FAILED TO APPRECIATE THAT FO R CONSIDERATION OF DEDUCTION U/S. 10A OF THE ACT, THE TEST WAS AS TO W HICH UNIT HAD EXECUTED THE WORK UNDER THE CONTRACT. HE SUBMITTED THAT CON TRACT IS RECEIVED BY ASSESSEE AND NOT BY UNIT-1 OR UNIT-2 AS THE CUSTOM ER DOES NOT KNOW UNIT-1 OR UNIT-2. THE EXECUTION OF WORK BY THE EL IGIBLE UNIT IS IMPORTANT IGNORING THE OLD CONTRACT/OLD CUSTOMERS. THE LD. A.R. ASSERTED THAT THE ASSESSEE HAD NOT CLAIMED DEDUCTION U/S. 10A ON THE WORK EXECUTED BY OLD UNIT AS NOT ELIGIBLE DUE TO LAPSE OF TIME. IN THE A.Y. 2003-04, ONY UNIT NO.2 WAS IN EXISTENCE. 7. HAVING GONE THROUGH THE CONTENTS OF PROVISIONS L AID DOWN U/S. 10A, WE FIND SUBSTANCE IN THE ABOVE CONTENTION OF LD. A .R. THAT DEDUCTION U/S. 10A IS AVAILABLE ON THE PROFITS AND GAINS DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOF TWARE FOR A PERIOD OF 10 CONSECUTIVE ASSESSMENT YEARS. FOR A READY REFERENCE , THE RELEVANT EXTRACT OF SECTION 10A(1) OF THE ACT IS BEING REPRO DUCED HEREUNDER : 10A. (1)SUBJECT TO THE PROVISIONS OF THIS SECTION, A DED UCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTA KING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE ASS ESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAK ING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE: IN THE COURSE OF BUSINESS, CONTRACT IS ALWAYS RECEI VED BY AN ASSESSEE AND NOT BY ITS UNIT-1 OR UNIT-2, AS CUSTOMER IS NOT AWA RE ABOUT THE UNIT-1 OR UNIT-2 OF THE ASSESSEE AND THIER ONLY CONCERN IS T HAT ASSESSEE PERFORMS ITS PART OF THE CONTRACT. THE WORDINGS DERIVED BY AN UNDERTAKING FROM ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 11 THE EXPORT .. USED IN THE PROVISIONS LAID DOWN U/S. 10A MAKES IT CLEAR THAT FOR ALLOWING DEDUCTION U/S. 10A THE IMMEDIATE SOURCE OF PROFIT BY SUCH UNDERTAKING IS TO BE SEEN. THUS, WE CONCUR WITH THE SUBMISSION OF THE LD. A.R. THAT THE TEST FOR ALLOW ING DEDUCTION U/S. 10A ON THE CLAIMED PROFIT IS TO VERIFY AS TO WHETHER T HAT PROFIT IS RESULT OF EXECUTION OF WORK OF GOODS EXPORTED BY THE UNDERTAK ING. THE ONLY REASON FOR DISALLOWANCE OF THE CLAIMED DEDUCTION OR REDUC ING THE SAME UPTO THE SALES TURNOVER BY THE AUTHORITIES BELOW WAS BASED U PON THE CONTRACT OF WORK RECEIVED BY OLD UNIT OR CUSTOMERS OF THE OLD U NIT. THEY DID NOT CONSIDER THE CLAIMED DEDUCTION ON THE BASIS OF WORK EXECUTED BY THE NEW UNIT. IT IS ALSO NOT IN DISPUTE THAT THE CLAIMED D EDUCTION U/S. 10A BY THE ASSESSEE WAS BASED UPON THE WORK EXECUTED BY THE NE W UNIT I.E. UNIT NO. 2. THE ONLY OBJECTION OF THE AUTHORITIES BELOW, FO R INTERFERING WITH THE CLAIMED DEDUCTION REMAINED THAT THE ASSESSEE IS NOT ENTITLED TO THE CLAIMED DEDUCTION ON THE SALES WHICH WERE BASED U PON THE CONTRACT RECEIVED BY THE OLD UNIT OR THE CUSTOMERS OF THE OL D UNIT. UNDER THESE CIRCUMSTANCES, WE WHILE SETTING ASIDE THE ORDERS OF THE AUTHORITIES BELOW, DIRECT THE A.O TO ALLOW THE CLAIMED DEDUCTI ON ON THE TURNOVER OF SALES OF THE GOODS/WORKS EXECUTED BY THE NEW UNIT . THE ISSUE IS THUS DECIDED IN FAVOUR OF THE ASSESSEE. GROUND NOS. 1 & 2 OF THE APPEAL PREFERRED BY THE REVENUE ARE THUS REJECTED AND THUS GROUND NOS. 1 & 2 OF THE APPEAL PREFERRED BY THE ASSESSEE ARE ALLOWED. 8. IN RESULT, APPEAL IS DISMISSED. ITA NO. 33/PN/2009 9. THE ASSESSEE QUESTIONED FIRST APPELLATE ORDER ON THE FOLLOWING GROUNDS : ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 12 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFI CER IN DENYING THE CLAIM UNDER SECTION 10 A IN RESPECT OF REVENUES OF RS.4,62,95,445/- ON THE GROUND THAT THE CONTRACTS WITH THE CUSTOMERS FROM WHOM THESE REVENUES WERE EARNED WERE ENTERED IN TO PRIOR TO THE COMMENCEMENT OF THE NEW UNIT. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE CONTRACTS ENTERED INTO WERE ONL Y MASTER SERVICES AGREEMENTS CONTAINING THE BROAD TERMS OF E NGAGEMENT, AND THE ACTUAL WORK FROM WHICH THE REVENUE OF RS.4, 62,95,445/- WAS EARNED WAS EXECUTED FROM THE NEW UNIT. 10. THE ISSUE INVOLVED IN THESE GROUNDS HAS ALREADY BEEN ADJUDICATED HEREINABOVE IN ITA NO. 290/PN/2009. FOLLOWING THE DECISION TAKEN THEREIN, THESE GROUNDS ARE ALLOWED. 11. BESIDES, THE FOLLOWING ADDITIONAL GROUNDS HAVE BEEN RAISED BY THE ASSESSEE WITH REQUEST TO ALLOW THE SAME ADJUDICATI ON OF THE BENCH : THAT THE LEARNED ASSESSING OFFICER HAS ERRED IN L AW AND FACTS IN NOT CONSIDERING INTEREST INCOME AS ELIGIBLE FOR DEDUCTI ON UNDER SECTION 10A OF THE INCOME TAX ACT 1961. WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSEE SUBMI TS THAT LEARNED CIT(A) HAS ERRED IN UPHOLDING THE LEARNED ASSESSING OFFICERS ACTION OF CONSIDERING THE GROSS AMOUNT OF INTEREST OF RS. 10,90,243 AS INCOME FROM OTHER SOURCES, WITHOUT ALLOWING DEDUC TION FOR INTEREST EXPENSE OF RS.6,17,433. 12. THE LD. A.R. SUBMITTED THAT THE AFORESAID ADDI TIONAL GROUNDS INVOLVE PURELY LEGAL ISSUE, FORMS PART OF ASSESSMEN T ORDER AND ADJUDICATION OF THE SAME DOES NOT REQUIRE CONSIDERA TION OF FRESH MATERIAL OUTSIDE THE RECORD. IN SUPPORT, HE PLACED RELIANCE ON THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERM AL POWER CO. LTD. VS. ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 13 CIT, 229 ITR 383 (SC) AND CIT VS. VARAS INTERNATION AL (P.) LTD., 284 ITR 80 (SC). 13. THE LD. D.R. OPPOSED THE ABOVE APPLICATION. 14. CONSIDERING THE ABOVE SUBMISSION, WE FIND THAT THE AUTHORITIES BELOW HAVE ALREADY DEALT WITH THE ISSUE RAISED IN T HE ABOVE ADDITIONAL GROUNDS WHICH ARE LEGAL IN NATURE AND FOR ADJUDICAT ION OF THE ISSUE RAISED IN THESE ADDITIONAL GROUND, NO FRESH MATERIAL OUTS IDE THE RECORD IS REQUIRED TO BE CONSIDERED. WE THUS ALLOW THESE ADD ITIONAL GROUNDS FOR ADJUDICATION OF THE BENCH. 15. THE LD. A.R. SUBMITTED THAT THE AUTHORITIES BEL OW HAVE NOT CONSIDERED THE INTEREST INCOME WHILE VERIFYING THE CLAIMED DEDUCTION U/S. 10A ON THE PROFIT EARNED ON UNIT-2, NOR HAVE THEY CONSIDERED THE CLAIMED DEDUCTION FOR INTEREST EXPENSES OF RS.6,17,433. 16. THE LD. D.R., ON THE OTHER HAND, PLACED RELIANC E ON THE ORDERS OF THE AUTHORITIES BELOW. 17. THE RELEVANT FACTS ARE THAT DURING THE YEAR, I N ITS SCHEDULE 12 OF THE PROFIT & LOSS ACCOUNT HAD SHOWN RECEIPT OF FOLL OWING INCOME : (I) INTEREST ON SHORT TERM DEPOSITS WITH SCHEDULED BANKS RS.10,90,243/- (II ) DIVIDEND RS. 7,574/- (III) MISCELLANEOUS INCOME RS. 2,92,555/- (IV) EXCHANGE GAIN RS. 4,532/- THE A.O. HELD THAT THE INTEREST OF RS. 10,90,243/- WAS NOT INCOME DERIVED FROM THE UNDERTAKING OF THE ASSESSEE OF SOFTWARE EX PORT AND HAVING ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 14 NOTHING TO DO WITH THE EXPORT BUSINESS OF THE ASSES SEE, HE TREATED THE INTEREST INCOME OTHER SOURCES AND EXCLUDED THE SAM E FROM THE PURVIEW OF SEC. 10A. THE ASSESSEE CONTENDED THAT WHILE MAK ING THE EXCLUSION, ONE MUST EXCLUDE INCOME AND NOT GROSS RECEIPTS. I T WAS SUBMITTED THAT THE ASSESSEE HAD KEPT INVESTMENT OF ITS SURPLUS FUN DS IN DEPOSITS ON WHICH IT EARNED INTEREST OF RS.10,90,243/- BUT AT T HE SAME TIME, IT HAD PAID INTEREST TO THE EXTENT OF RS.6,17,433/-. IT W AS CONTENDED THAT HAD THE SURPLUS FUNDS NOT BEEN KEPT BY THE ASSESSEE IN INTEREST BEARING DEPOSITS, THEN THEY WOULD HAVE UNDOUBTEDLY BEEN UTI LIZED TO REDUCE THE INTEREST BURDEN. THEY TRIED TO SUBMIT THAT GROSS I NTEREST OF RS.10,90,243/- HAS GOT NEXUS WITH INTEREST PAID A T RS. 6,17,433/- SUGGESTING THAT THE INTEREST RECEIVED NEEDS TO BE N ETTED WHILE COMPUTING THE DEDUCTION AVAILABLE U/S. 10A OF THE ACT. THE A UTHORITIES BELOW DID NOT AGREE WITH THE SUBMISSION OF THE ASSESSEE. 18. WE HAVE CONSIDERED THE ARGUMENTS ADVANCED BY TH E PARTIES AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BEL OW. UNDISPUTEDLY, EARNING INTEREST IS NOT THE BUSINESS OF THE ASSESSE E, HENCE INTEREST EARNED ON THE DEPOSITS CANNOT BE HELD AS INCOME EA RNED FROM THE EXPORT BUSINESS OF THE UNDERTAKING. THE AUTHORITIES BELOW WERE THUS JUSTIFIED IN EXCLUDING THIS AMOUNT FROM THE PURVIEW OF DEDUCTION CLAIMED U/S. 10A OF THE ACT. SO FAR AS NETTING OF THIS AMOUNT WITH THE INTEREST PAID IS CONCERNED, THE AUTHORITIES BELOW HAVE DENIED THE SA ME WITH THIS FINDING THAT THE INTEREST PAID HAS NO NEXUS OR CONNECTION W ITH EARNING OF INTEREST ON SURPLUS FUNDS. EVEN BEFORE THE TRIBUNAL, THE AS SESSEE COULD NOT IMPROVE ITS CASE. WE ARE THUS NOT INCLINED TO INT ERFERE WITH THE FIRST APPELLATE ORDER IN THIS REGARD. THE SAME IS UPHELD . THE ADDITIONAL GROUNDS ARE ACCORDINGLY REJECTED. ITA . NOS.290 & 33//PN/2009 PERSISTENT SYSTEMS PVT. LTD., A.YS. 2003-04 PAGE OF 15 15 19. THE APPEAL IS ACCORDINGLY PARTLY ALLOWED. 20. IN SUMMARY, ITA NO. 290/PN/2009 IS DISMISSED AN D ITA NO. 33/PN/2009 IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 12TH MARCH 2012. SD/- SD/- ( G.S. PANNU ) ACCOUNTANT MEMBER ( I.C. SUDHIR ) JUDICIAL MEMBER PUNE, DATED THE 12TH MARCH, 2012 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT II, PUNE 4. THE CIT(A)-II, PUNE 4. THE D.R. B BENCH, PUNE 5. GUARD FILE /-TRUE COPY-/ BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE