The DCIT Circle -3(3), Hyderabad V. M/s. Virtusa (India) Pvt, Ltd, Hyderabad

ITA 482/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66171 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 27-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 24-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C R PATHI; GNANA PRAKASH CITSDR
• Assessee Lawyers: DIVYA SANTHANAM; RAJAN VORA SRI NAVEN AGARWAL
• Keywords: Business income; Benefit of exemption
• Section: 43B; 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER AND SRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.268/HYD/2011 : ASSESSMENT YEAR 2006- 07 M/S. VIRTUSA (I) P LTD, HYDERABAD. (PAN - AABCV 4077 E ) (APPELLANT) V/S DY. COMMISSIONER OF INCOME - TAX CIRCLE 3(3), HYDERABAD (RESPONDENT) ITA NO.482/HYD/2011 : ASSESSMENT YEAR 2006- 07 ASSTT . COMMISSIONER OF INCOME - TAX CIRCLE 3(3), HYDERABAD (APPELLANT) V/S M/S. V I RTUSA (I) P LTD , HYDERABAD . , (PAN - AABCV 4077 E ) (RESPONDENT) APPELLANT BY : S/ S H RI C R PATHI AND GNANA PRAKASH CITS-DR RESPONDENT BY : SRI RAJAN VORA, SRI NAVEN AGARWAL AND MS DIVYA SANTHANAM DATE OF HEARING 5.7.2012 DATE OF PRONOUNCEMENT 24.8.2012 O R D E R PER D.KARUNAKARA RAO, ACCOUNTANT MEMBER: THESE ARE CROSS APPEALS -ONE EACH FILED BY THE AS SESSEE AND THE REVENUE- AGAINST THE ORDER OF THE COMMISSIONER OF INCOME- TAX(APPEALS) IV, HYDERABAD DATED 30.12.2010 FOR THE ASSESSMENT YEAR 2006-07. SINCE COMMON ISSUES ARE INVOLVED, THESE A PPEALS ARE DISPOSED OFF WITH THIS COMMON ORDER FOR THE SAKE OF CONVENIE NCE. 2. BRIEFLY FACTS OF THE CASE LEADING TO THE FILI NG OF THE PRESENT CROSS-APPEALS BEFORE US, ARE THAT THAT THE ASSESSEE (IN SHORT VIPL) IS ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 2 ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVEL OPMENT SERVICES AND REGISTERED UNDER STPI SCHEME. IT HAS TWO UNITS NAME LY HYDERABAD UNIT APPROVED BY STPI ON 20.10.2000 AND THIS IS THE 6 TH YEAR OF OPERATION AND SECOND ONE IS CHENNAI UNIT APPROVED BY STPI ON 26.12.2003 AND THEREFORE, THIS IS THE 3 RD YEAR OF OPERATION. ASSESSEE FILED THE RETURN OF INCOME DECLARING THE TOTAL INCOME OF RS 23,65,024/- . THE SAME WAS SCRUTINIZED U/S 143(3) AFTER MAKING TP REFERENCE U/ S 92CA(1) OF THE ACT. ASSESSMENT WAS COMPLETED DETERMINING THE ASSESSED I NCOME AT RS.6,35,08,666/-. REASONS FOR THE SAID INCREASE IS DUE TO (I) DENIAL OF DEDUCTION OF RS 4.14 CR (ROUNDED OFF) IN RESPECT OF THE CHENNAI UNIT ON THE GROUND THAT IT IS FORMED OUT OF SPLIT OR RECONS TRUCTION OF THE EXISTING UNIT AT HYDERABAD; (II) EXCLUSION ADJUSTMENT TO THE EXPORT TURNOVER ON ACCOUNT OF COMMUNICATION CHARGES AMOUNTING TO RS 2. 39-CR (ROUNDED OFF) AND INSURANCE OF RS 16.80 LAKHS (ROUNDED OFF) AND R EIMBURSEMENT OF EXPENSE OF RS 33.96 LAKHS (ROUNDED OFF); (III) ADJ USTMENTS OF RS 6.81 CRORES (ROUNDED OFF) TO THE TOTAL TURNOVER; AND FIN ALLY, THE ADJUSTMENTS TO THE PROFITS OF THE UNDERTAKING INVOKING THE PROVISI ONS OF SECTIONS 40A(7) AND 43B OF THE ACT. FOR DENIAL OF EXEMPTION U/S 10A OF THE ACT, THE ASSESSING OFFICER MENTIONED VARIOUS REASONS AND TH EY INCLUDE THAT BOTH HYDERABAD AND CHENNAI UNITS RENDER SERVICES TO THE SAME CLIENTS; TOTAL SALES ARE MADE TO THE GROUP/RELATED COMPANIES, COMM ONNESS OF THE SERVICES AND SERVICE AGREEMENTS BY BOTH THE UNITS W ITH HOLDING AND SUBSIDIARY COMPANIES ETC; THE ASSESSEE FAILED TO PR OVE CORRECTNESS OF THE PROFITS OF BOTH THE UNITS SEPARATELY AND FAILED TO FURNISH SEPARATE FINANCIAL STATEMENTS AND AUDIT REPORTS AS REQUIRED U/S 44AB O F THE ACT; DIVERSION OF EMPLOYEES OF THE HYDERABAD UNIT FOR SOFTWARE MAN UFACTURED IN CHENNAI UNIT; THE ASSESSEE CLAIMED EXEMPTION U/S 10A FOR TH E FIRST TIME IN THIS YEAR, DESPITE THE FACT THAT IT IS THIRD YEAR OF RE GISTRATION UNDER STPI SCHEME, AND IT MAY BE DUE TO INCURRING OF LOSSES IN THE PRECEDING TWO YEARS I.E. ASSESSMENT YEARS 2004-05 & 2005-06. AG GRIEVED WITH THE ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 3 ABOVE ADDITIONS AND REASONS, THE ASSESSEE FILED THE APPEAL BEFORE THE CIT(A). 3. THE COMMISSIONER OF INCOME-TAX(APPEALS) CONCUR RED WITH THE ASSESSING OFFICER IN HOLDING THAT THE CHENNAI UNIT IS SEPARATE ONLY IN FORM, BUT IT IS SAME IN SUBSTANCE. REASONS OF ADVANTAGES TO THE ASSESSEE VIDE AVAILABILITY OF CONCESSIONS TO THE ASSESSEE IN MAT TERS OF LOCATION OF CLIENTS, RESOURCES, MANPOWER, SHOULD NOT INFLUENCE DECISION IN MATTERS OF CASES OF SPLIT AND RECONSTRUCTION. MERE INVESTMEN T IN ASSETS IN CHENNAI UNIT ALONE IS NOT A DETERMINING AND CONCLUSIVE FACT OR AND SUCH INVESTMENT CANNOT BE EQUATED WITH THE ONE IN PLANT AND MACHINE RY OF ANY REGULAR MANUFACTURING UNITS. FURTHER, THE CIT(A) HOLDS THAT THE ASSESSEE FAILED TO DEMONSTRATE THE BUSINESS NECESSITIES OF STARTING AN UNIT AT CHENNAI. FURTHER, CIT(A) IS OF THE VIEW THAT MERE ACQUIRING OF LICENCE UNDER THE STPI PROVISIONS IS NOT ADEQUATE TO PROVE THAT THE C HENNAI UNIT IS AIMED AT THE PRODUCTION OF DIFFERENT PRODUCT AND SET UP. 4. REGARDING THE OTHER ADDITIONS, THE REASONS OF THE CIT(A) INCLUDE THE FOLLOWING: THE CHENNAI UNIT IS SET UP BY SPLITTING UP THE BUSI NESS OF THE ODL UNIT AT HYDERABAD AND IS NOT ELIGIBLE TO CLAIM DEDU CTION UNDER SECTION 10A OF THE ACT. THE COMMUNICATION AND INSURANCE CHARGES ARE ATTRIBU TABLE TO THE DELIVERY OF SOFTWARE OUTSIDE INDIA. HOWEVER, THE S AME HAS TO BE REDUCED FROM BOTH THE EXPORT TURNOVER AND TOTAL TUR NOVER. THE REIMBURSEMENT OF EXPENSES TO ASSOCIATED ENTERPR ISES HAS TO BE EXCLUDED FROM THE EXPORT TURNOVER AS THE APPELLANT HAS NOT BEEN ABLE TO PROVE THAT THE EXPENSES DO NOT FORM PART OF OTHER EXPENSES INCURRED FOR RENDERING TECHNICAL SERVICES OUTSIDE INDIA. ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 4 HOWEVER, THE SAME HAS TO BE REDUCED FROM BOTH EXPOR T TURNOVER AND TOTAL TURNOVER. THE REIMBURSEMENT OF EXPENSES FROM ASSOCIATED ENTER PRISES SHOULD NOT BE ADDED TOTAL TURNOVER, AND THE AMOUNT OF STATUTORY DISALLOWANCES SHOULD BE CON SIDERED AS BUSINESS PROFITS ELIGIBLE FOR DEDUCTION UNDER S.10A OF THE ACT. THUS, THE CIT(A) GRANTED RELIEFS TO THE ASSESSEE O N SOME COUNTS, AND THUS PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. 5. AGGRIEVED WITH THE ABOVE ORDER OF THE CIT(A), BOTH THE REVENUE AS WELL AS THE ASSESSEE HAVE PREFERRED THE PRESENT CROSS-APPEALS BEFORE US. WE SHALL TAKE UP THE ASSESSEES APPEAL FIRST FOR ADJUDICATION. ASSESSEES APPEAL: ITA NO.268/HYD/2011 6. THE EFFECTIVE GROUNDS OF THE ASSESSEE READ AS F OLLOWS- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) IV, HYDERABAD ( CIT(A)) 1. ERRED IN LAW AND ON FACTS IN DISALLOWING THE DEDUCT ION UNDER S.10A OF THE INCOME-TAX ACT, 1961(THE ACT ) FOR THE CHENNA I UNIT BY UPHOLDING THAT THE CHENNAI UNIT IS ESTABLISHED BY S PLITTING UP/RECONSTRUCTION OF THE HYDERABAD UNIT OF THE APPELLANT. 2. ERRED IN LAW AND ON FACTS IN DISALLOWING THE DEDUCT ION UNDER SECTION 10A OF THE ACT FOR THE CHENNAI UNIT ON THE GROUND T HAT THE APPELLANT HAS NOT DEMONSTRATED THE BUSINESS NECESSITY OF SPLITTING UP OF A NEW UNIT IN CHENNAI. 3. HAVING HELD AT PARA 8 OF THE ORDER THAT DEDUCTION U NDER SECTION 10A OF THE ACT CANNOT BE DENIED ON ACCOUNT OF NON-MAINTENA NCE OF SEPARATE BOOKS OF ACCOUNT, ERRED IN DISMISSING THE GROUND NO .4 RAISED BY THE APPELLANT ON REQUIREMENT OF MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS FOR EACH OF THE STPI UNDERTAKINGS FOR CLAI MING DEDUCTION UNDER SECTION 10A OF THE ACT. 4. FAILED TO ADJUDICATE ON GROUND NO.3 RAISED BY THE A PPELLANT IN RELATION TO DISALLOWANCE OF DEDUCTION UNDER SECTION 10A OF T HE ACT FOR THE CHENNAI UNIT ON THE GROUND THAT THE APPELLANT HAS N OT FURNISHED TAX ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 5 AUDIT REPORT UNDER SECTION 44AB OF THE ACT FOR EACH OF THE STPI UNDERTAKINGS SEPARATELY. 5. WITHOUT PREJUDICE TO GROUND 1 TO 4 ABOVE, ERRED IN LAW AND ON FACTS IN NOT ALLOWING THE DEDUCTION UNDER SECTION 10A OF THE ACT ON THE COMBINED PROFITS OF BOTH THE UNITS BY CONSIDERING THAT THE CHENNAI UNIT IS AN EXTENSION OF THE HYDERABAD UNIT OF THE A PPELLANT. 6. WITHOUT PREJUDICE TO GROUND 1 TO 4 ABOVE, HAVING HE LD THAT THE CHENNAI UNIT IS FORMED BY RECONSTRUCTION/SPLITTING UP OF THE EXISTING HYDERABAD UNIT OF THE APPELLANT, OUGHT TO HAVE DIRE CTED THE LEARNED ASSESSING OFFICER TO COMPUTE THE DEDUCTION UNDER SE CTION 10-A OF THE ACT BY CONSIDERING THE COMBINED EXPORT TURNOVER OF BOTH THE UNITS IN ACCORDANCE WITH CLAUSE (IV) OF EXPLANATION 2 TO SEC TION 10A OF THE ACT. 7. ERRED IN LAW AND ON FACTS IN CONSIDERING THE COMMUN ICATION CHARGES AND INSURANCE CHARGES INCURRED BY THE APPELLANT AS ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND ACC ORDINGLY UPHELD THE ACTION OF THE LEARNED ASSESSING OFFICER IN REDU CTION OF THE SAME FROM THE EXPORT TURNOVER FOR THE COMPUTATION OF DED UCTION UNDER SECTION 10A OF THE ACT FOR THE HYDERABAD UNIT. 8. ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER TO REDUCE THE AMOUNT OF REIMBURSE M ENT OF EXPENSES TO VIRTUSA CORPORATION USA OF R.33,96,032 FROM THE EXPORT TURNOVER FOR THE COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. 9. ERRED IN LAW IN CONFIRMING THE LEVY OF INTEREST UND ER SECTION 234B OF THE ACT BY COMPLETELY DISREGARDING THE PROVISIONS O F THE ACT AND THE JUDICIAL PRECEDENTS. THUS, THE MAIN ISSUE DISCUSSED IN GROUNDS NO.1 TO 4 RELATES TO THE DENIAL OF DEDUCTION U/S. 10A OF THE ACT. GROUNDS 5 AND 6 R ELATES TO AN ALTERNATE CLAIM OF DEDUCTION UNDER S.10A ON THE COMBINED PROF ITS OF BOTH THE UNITS. THE ISSUES RAISED IN GROUNDS NO.7 AND 8 ARE INDEPEN DENT ISSUES. FINALLY GROUND 9 IS GENERAL AND CONSEQUENTIAL IN NATURE AND IT DOES NOT CALL FOR SPECIFIC ADJUDICATION. ISSUEWISE ADJUDICATION IS G IVEN IN THE SUCCEEDING PARAGRAPHS. 7. THE FIRST ISSUE IN THIS APPEAL, COVERED BY GRO UNDS NO.1 TO 6 ABOVE, RELATES TO DENIAL OF EXEMPTION UNDER S.10A O F THE ACT TO THE ASSESSEE. DURING THE PROCEEDINGS BEFORE US, THE LEA RNED COUNSEL BROUGHT TO OUR NOTICE THE FACTUAL AS WELL AS THE LE GAL PERMUTATIONS, WHICH ARE NARRATED IN THE SUCCEEDING PARAS. SO FAR AS TH E FACTUAL SUBMISSIONS ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 6 ARE CONCERNED, THE LEARNED COUNSEL MENTIONED THAT R EGISTRATIONS OF BOTH THE UNITS UNDER STPI ARE SEPARATE AND DISTINCTLY MA DE BOTH IN RESPECT OF JURISDICTION AND THE STPI AS WELL AS CUSTOMS AD BON DING AUTHORITIES. ASSESSEE INVESTED ON FIXED ASSETS OF CHENNAI UNIT T O THE TUNE OF RS.5.19 CRORES AS ON MARCH, 2006. EMPLOYEES IN CHENNAI UNIT GREW FROM 44 IN MARCH, 2004 TO 1035 IN MARCH, 2008, AS AGAINST GROW TH OF EMPLOYEE STRENGTH AT HYDERABAD UNIT FROM 1048 IN MARCH 2004 TO 1637 IN MARCH, 2008. THE BUSINESS PROCESSES OF CHENNAI UNIT AND H YDERABAD UNIT ARE DIFFERENT. WHILE HYDERABAD UNIT DEALS WITH THE PROJECTS REQUI RING BUSINESS PROCESS MANAGEMENT(BPM) AND ENTERPRISE PRO CESS MANAGEMENT(EPM) SERVICES, THE CHENNAI UNIT SERVICES THE PROJECTS REQUIRING DATA WAREHOUSE SERVICES. AS MENTIONED IN THE WRITTEN SUBMISSIONS OF THE ASSESSEE, IN BOTH THE UNITS, THE BOOKS ARE MAINTAINED SEPARATELY AND FILED FORMS NO.56F SEPARATELY. REGAR DING THE BUSINESS TURNOVER OF BOTH THE UNITS THE LEARNED COUNSEL BROU GHT TO OUR NOTICE THAT THE TURNOVER OF THE CHENNAI UNIT GREW FROM RS.1.92 CRORES (MARCH, 2005 ) TO RS.16.02 CRORES(MARCH, 2009), AS AGAINST TURNOV ER GROWTH OF THE HYDERABAD UNIT FROM RS. 62.07 CRORES(MARCH, 2004) T O RS.166.79 CRORES(MARCH, 2009). 8. ON THE TECHNICAL/LEGAL SUBMISSIONS FRONT, THE L EARNED COUNSEL TOOK US THROUGH THE PROVISIONS OF S.10A OF THE ACT AND MENTIONED THAT THE ASSESSEES ENTITLEMENT TO THE DEDUCTION PROVISI ONS SHOULD BE AT THE UNDERTAKING LEVEL OF ITS OPERATIONS. REFERRING TO T HE CONDITIONS OF S.10A IN GENERAL AND WITH SPECIFIC REFERENCE TO THE EXPRESSI ON SPLITTING OR RECONSTRUCTION, LEARNED COUNSEL MENTIONED THAT THE DEDUCTIONS ARE AVAILABLE THROUGH AN INDUSTRIAL UNDERTAKING AND N OT TO AN UNDERTAKING, WHICH IS FORMED BY WAY OF SPLITTING OR RECONSTRUCTI ON. THE EXPRESSION SPLITTING IMPLIES SEVERANCE OF ONE PART OF BUSIN ESS FROM THE OTHER, WHICH INVOLVES BREAKING UP OF THE INTEGRITY OF THE BUSINE SS, WHICH IS NOT THE CASE HERE. REFERRING TO THE EXPRESSION RECONSTRUCTION , LEARNED COUNSEL ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 7 MENTIONED THAT THE SAID EXPRESSION MEANS AN ACT OF CONSTRUCTING AGAIN OR TO FORM AGAIN OR TO RESTORE AGAIN AS AN ENTIT Y OR DESTROY. RELYING ON THE APEX COURT DECISION IN THE CASE OF TEXTILE MACHINERY CORPORATION LTD. V/S. CIT(107 ITR 195) AND CIT V/S INDIAN ALUMI NUM CO. LTD. (108 ITR 367), LEARNED COUNSEL MENTIONED THAT THE FOLL OWING PRINCIPLES ARE RELEVANT FOR DECIDING A CASE OF SPLIT OR RECONST RUCTION- - RECONSTRUCTION IS THE REJUVENATION OR REHABILITATION OF AN EXITING UNDERTAKING. - IN ORDER THAT THE NEW UNDERTAKING CAN BE SAID TO BE NOT FORMED OUT OF THE ALREADY EXISTING BUSINESS, THERE MUST BE A NEW EMERGENCE OF A PHYSICALLY SEPARATE INDUSTRIAL UNIT WHICH MAY EXIST ON ITS OWN AS A VIABLE UNIT. - ONCE THE NEW UNDERTAKINGS WERE SEPARATE AND INDEPENDENT PRODUCTION UNITS IN THE SENSE THAT THE COMMODITIES PRODUCED WERE COMMERCIALLY TANGIBLE PRODUCTS AND THE UNDERTAKINGS COULD BE SET UP SEPARATELY WITHOUT COMPLETE ABSORPTION AND LOSS OF IDENTITY WITH THE OLD BUSINESS, THEY WERE NOT TO BE TREATED AS BEING FORMED BY RECONSTRUCTION OF THE EXISTING BUSINESS. - EVEN WHEN THERE IS SUBSTANTIAL EXPANSION OF BUSINESS, BUT WITH ESTABLISHMENT OF NEW UNIT, NEW CAPITAL THE SAME CANNOT BE SAID TO BE RECONSTRUCTIO N OF THE OLD BUSINESS, MERELY BECAUSE THE NEW UNIT IS PRODUCING THE SAME COMMODITY AS PRODUCED BY THE OLD UNIT. - MANUFACTURE OR PRODUCTION OF ARTICLES YIELDING ADDITIONAL PROFIT ATTRIBUTABLE TO THE NEW OUTLAY OF ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 8 CAPITAL IN A SEPARATE AND DISTINCT UNIT IS THE CRUX OF THE MATTER TO GET EXEMPTION. FURTHER, THE LEARNED COUNSEL MENTIONED THAT THERE I S A NEED FOR MATERIAL TO DEMONSTRATE THAT EITHER SOME ASSETS OF EXISTING BUSINESS ARE DIVERTED OR THAT BOTH THE BUSINESSES ARE THE SAME, AND THE N EW UNIT IS INTEGRAL PART OF EARLIER ONE (DSM SOFT PVT. LTD. (115 ITD 1) -ITAT (CHENNAI). RELYING ON ANOTHER DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF SERVION GLOBAL SOLUTIONS LTD. (115 ITD 95), LEARNED COUNSEL MENTIONED THAT EXEMPTION CANNOT BE DENIED, EVEN WHE N THERE IS COMMONNESS IN THE PRODUCT BETWEEN THE OLD ONE AND THE NEW ONE OR THERE ARE SOME OLD EMPLOYEES OR COMMON CUSTOMERS WO RKING IN THE NEW UNIT. IN THIS REGARD, LEARNED COUNSEL RELIED ON TH E DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CEMENT COMPANIES LTD. (118 TR 406); AND ABBAS NABI SHAIKH V/S. ACIT( ITA NO.1496 & 2586/AHD/2007), FOR THE PROPOSITION THAT CARRYING ON THE SAME BUSINESS IN THE NEW UNIT OR STOPPAGE OF BUSINESS OF OLD BUSI NESS CANNOT BE THE CRITERIA TO HOLD THAT IT IS A CASE OF RECONSTRUCTIO N OF BUSINESS ALREADY IN EXISTENCE. FURTHER, THE LEARNED AUTHORISED REPRESE NTATIVE RELIED ON THE MUMBAI BENCH DECISION OF THE TRIBUNAL IN THE CASE O F DCIT V/S. CLASSIC DIAMONDS (I) LTD. (ITA 5120/MUM/2007) FOR THE PROPO SITION THAT THERE IS NO CASE OF RECONSTRUCTION OR SPLIT OF EXISTING UNIT MERELY BECAUSE A NEW UNIT IS OPENED AT DIFFERENT LOCATION WITH INSTALLAT ION OF NEW PLANT AND MACHINERY AFTER OBTAINING NECESSARY APPROVALS OF VA RIOUS GOVERNMENT DEPARTMENTS AND MAINTAINING SEPARATE BOOKS OF ACCOU NT. 9. IN THE LIGHT OF THE ABOVE TECHNICAL AS WELL AS FACTUAL MATRIX OF THE INSTANT CASE, THE LEARNED COUNSEL ARGUED VEHEME NTLY STATING THAT THE CHENNAI UNIT IS A SEPARATE AND INDEPENDENT UNDERTAK ING AND NOT EXTENSION OF THE EXISTING HYDERABAD UNIT AND SUMMED UP HIS SUBMISSIONS, VIDE PARA 27 OF THE WRITTEN SUBMISSION S, AS FOLLOWS- ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 9 27. IN VIEW OF THE ABOVE FACTS AND JUDICIAL PRECED ENTS, THE TERM SPLITTING UP, RECONSTRUCTION AND TRANSFER HAS NO APPLICATION TO THE FORMATION OF THE CHENNAI UNIT OF THE APPELLANT. HE NCE, THE CHENNAI UNIT IS A NEW AND SEPARATE INDEPENDENT UNDERTAKING AND N OT AN EXTENSION OF THE EXITING HYDERABAD UNIT WHICH IS EVIDENT FROM TH E FOLLOWING FACTS- THE CHENNAI UNIT HAS BEEN FORMED BY FRESH RECRUITME NT OF EMPLOYEES. FURTHER, THERE IS A SUBSTANTIAL INCREAS E IN THE NUMBER OF PERSONNEL EMPLOYED BY THE APPELLANT BOTH IN THE HYDERABAD AND THE CHENNAI UNITS ON INDEPENDENT BASIS; THE CHENNAI UNIT WAS SET-UP WITH ITS SOWN ASSETS AN D THE APPELLANT HAD INVESTED SIGNIFICANT SUM OF MONEY FOR SETTING UP THE BUSINESS IN CHENNAI SETTING UP OF CHENNAI UNIT HAS NOT IN ANY WAY REDUC ED THE SCALE OF OPERATIONS OF THE HYDERABAD UNIT IN THE SUBSEQUENT YEARS; THE HYDERABAD UNIT HAD NOT CEASED FUNCTIONING AFTER THE DEVELOPM ENT OF THE CHENNAI UNIT THE CHENNAI UNIT IS AN INDEPENDENT UNIT AND CAN EXI ST EVEN AFTER CESSATION/CLOSURE OF HYDERABAD UNIT OF THE APPELLAN T; AND BROADLY, BOTH THE UNITS RENDERS SOFTWARE DEVELOPMEN T ACTIVITIES. HOWEVER, THE HYDERABAD UNIT SERVICES THE PROJECTS R EQUIRING BUSINESS PROCESS MANAGEMENT AND ENTERPRISE PROCESS MANAGEMENT SERVICES AND THE CHENNAI UNIT SERVICES T HE PROJECTS REQUIRING DATA WARE HOUSE SERVICES. 10. FURTHER, THE LEARNED COUNSEL ALSO HAS GIVEN A DETAILED WRITE UP AGAINST EACH OF THE OBJECTIONS OF THE ASSESSING OFFICER AS WELL AS THE CIT(A), MEETING THE CRITICISM MADE BY THEM, WHILE D ENYING THE CLAIM OF THE ASSESSEE FOR EXEMPTION UNDER S.10A OF THE ACT. THE LEARNED COUNSEL SUMMED UP BY STATING THAT IT IS ENOUGH IF THE INTE NTION OF THE ASSESSEE WAS TO SET UP A NEW UNIT AT CHENNAI TO CLAIM THE EX TENDED TAX HOLIDAY FOR ADDITIONAL YEAR. THE SAID SETTING UP OF CHENNAI UNI T IS DRIVEN BY THE BUSINESS AND COMMERCIAL CONSIDERATIONS AND NOT MERE LY TO CLAIM THE TAX HOLIDAY AS ALLEGED BY THE REVENUE AUTHORITIES. THE REFORE, THE LEARNED COUNSEL WAS CRITICAL OF THE INFERENCE DRAWN BY THE LOWER AUTHORITIES THAT THE CHENNAI UNIT IS FORMED BY SPLIT UP AND RECONSTR UCTION OF THE HYDERABAD UNIT ONLY FOR AVAILING RELIEF UNDER S.10A OF THE ACT. ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 10 11. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE FOR THE REVENUE RELIED ON THE ORDERS OF THE REVENUE AUTHORI TIES AND MAINTAINED THAT THE CUSTOMERS OF BOTH THE UNITS ARE ONE AND TH E SAME, AND SOME OF THE EMPLOYEES WHO ARE WORKING IN THE CHENNAI UNIT W ERE EARLIER WORKING IN THE HYDERABAD UNIT OF THE ASSESSEE. CONSIDERING THE SIMILARITY OF SERVICES RENDERED BY THE EMPLOYEES OF BOTH THE UNIT S OF THE ASSESSEE TO THE COMMON CUSTOMERS ABROAD, ASSESSEES CASE FALLS WITHIN THE MEANING OF SPLIT OR RECONSTRUCTION OF THE EXISTING BUSI NESS. THEREFORE, THE REVENUE AUTHORITIES HAVE RIGHTLY DENIED THE BENEFIT OF S.10A TO THE ASSESSEE. 12. WE HEARD BOTH THE PARTIES AND PERUSED THE ORD ERS OF THE REVENUE AND THE INFORMATION FILED BEFORE US. THE P RIME QUESTION TO BE DECIDED REVOLVES AROUND THE ISSUE WHETHER THE ASSES SEES CASE FALLS WITHIN THE MISCHIEF OF SPLITTING UP, OR THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE WITHIN THE MEANING OF EXPRESSION USED IN S.10A OF THE ACT. REVENUE IS UNDER THE BELIEF THAT CONSIDERI NG THE COMMON SERVICES AGREEMENT, AND COMMON CLIENTELE, ASSESSEE IS NOT ENTITLED FOR EXEMPTION UNDER S.10A OF THE ACT. IN THE PROCESS, THE ASSESSING OFFICER PREFERRED TO IGNORE THE FACT THAT CHENNAI UNIT OBTA INED SEPARATE AND INDEPENDENT APPROVALS AND LICENCES OF THE GOVERNM ENT AUTHORITIES UNDER STPI RELATED RULES FOR SETTING UP OF A SEPARATE BUS INESS AT CHENNAI. ASSESSEE INVESTED HUGE AMOUNTS OF CAPITAL IN ACQUI RING SEPARATE INFRASTRUCTURE AND PLANT AND MACHINERY FOR CHENNAI UNIT. HE ALSO IGNORED THE FACT THAT THE ASSESSEE IS STILL ENTITLED TO EXE MPTION, EVEN IF THE BUSINESS OF BOTH THE UNITS IS ONE AND THE SAME. ON THE OTHER HAND, THE CASE OF THE ASSESSEE IS THAT WHEN THE ASSESSEE INV ESTED CAPITAL SEPARATELY AND DISTINCTLY FOR CREATING INFRASTRUCTU RE FOR CHENNAI UNIT, AND WHEN IT HAS BUILT UP SEPARATE INFRASTRUCTURE, SUCH AS BUILDING, FURNITURE, COMPUTERS AND OTHER INFRASTRUCTURE, LIKE EMPLOYEES ETC. AND WHEN THE ASSESSEE HAS SEPARATELY COMPLIED WITH ALL THE LEGAL AS WELL AS ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 11 ADMINISTRATIVE REQUIREMENTS FOR STARTING A SEPARATE BUSINESS UNIT AT CHENNAI, IN VIEW OF PLETHORA OF DECISIONS WHICH SUP PORT THE CASE OF THE ASSESSEE, THE DENIAL OF EXEMPTION UNDER S.10A OF TH E ACT IS ILLEGAL AND UNJUSTIFIED. 15. WE UNDERSTOOD THE DIVERGENCE IN THE OPINIONS OF BOTH THE PARTIES TO THE LITIGATION. IT IS AN UNDISPUTED FACT THAT DISTINCT CAPITAL WAS INVESTED IN CREATING A NEW UNIT AT CHENNAI, WITHOUT COMPRISING THE EMPLOYEES STRENGTH OF THE HYDERABAD UNIT, CHENNAI U NIT ALSO STARTED RAISING ITS EMPLOYEES FROM 44 IN NUMBER IN MARCH, 2 004 TO 1035 IN MARCH 2008, AND THUS THE GROWTH OF NUMBER OF EMPLOYEES IS PHENOMENAL BY THE END OF MARCH, 2008. THERE IS NO RELOCATION OF TRAN SFER OF PLANT AND MACHINERY IN ANY FORM FROM HYDERABAD UNIT TO CHENN AI UNIT. SO, THIS BEING THE STRENGTH OF THE NEW UNIT, SO FAR AS THE I NFRASTRUCTURAL MATTERS ARE CONCERNED, WE ALSO EXAMINED THE OTHER AREAS OF BUSINESS ACTIVITY OF THE ASSESSEE, TO FIND OUT IF THE CHENNAI UNIT CUT I NTO THE BUSINESS OF THE HYDERABAD UNIT. IN THIS REGARD, WE HAVE PERUSED TH E BUSINESS ACTIVITIES OF THE ASSESSEE BOTH OF CHENNAI UNIT AND HYDERABAD UNIT AND FIND THAT THE NATURE OF SERVICES RENDERED BY THE ASSESSEE THR OUGH BOTH THESE UNITS ARE CLASSIFIED INTO THREE CATEGORIES, (1) BPM, (2)E CM AND (3) DATA WAREHOUSING. SO FAR AS THE DATA WAREHOUSING/BUSINE SS INTELLIGENCE IS CONCERNED, THE CHENNAI UNIT ALONE RENDERS THIS SERV ICE. THIS DATA WAREHOUSING/INTELLIGENCE PROVIDES AN ECO SYSTEM TO TRANSFORM RAW DATA INTO ACTIONABLE INFORMATION, THUS FACILITATING ST RATEGIC AND TECHNOLOGICAL AND OPERATIONAL DECISION MAKING. THE CHENNAI UNIT ADDRESSES TO THESE CHALLENGES BY OFFERING HOLISTIC, BUSINESS AND RESUL T ORIENTED APPROACH OF THE CUSTOMER. THESE HYPER SPECIALISED SERVICES OF THE CHENNAI UNIT WERE NOT PROPERLY APPRECIATED BY THE REVENUE AUTHORITIES , WHO WERE MERELY CARRIED AWAY BY THE COMMON SERVICE AGREEMENT FOR C OMING TO THE CONCLUSION THAT THE BUSINESS OF BOTH THE UNITS ARE SAME. BUT, THE FACT IS THAT THE SERVICES OF BOTH THE UNITS ARE DISTINCT AN D SEPARABLE. THEREFORE, ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 12 FROM THE INFRASTRUCTURE POINT OF VIEW WHICH INVOLVE S LAND AND BUILDING, PLANT AND MACHINERY AND EMPLOYEES, ETC., AS WELL AS FROM THE BUSINESS PROCESSES/ACTIVITIES POINT OF VIEW, BOTH THE UNITS ARE SEPARATE AND DISTINCT WITH DIFFERENT OBJECTS AND CHALLENGES OF THE CLIENT S. THUS, COMMONNESS OF THE PROJECTS/SERVICES SHOULD NOT BE THE BASIS OF RE JECTION OF CLAIM OF EXEMPTION IN PRINCIPLE. AS SUCH, THE SERVICES OF B OTH THE UNITS ARE DIFFERENT, FOR DIFFERENT PURPOSES AND THUS, THE CON CLUSIONS OF THE ASSESSING OFFICER AND CIT(A) ARE NOT AS PER THE LAW IN FORCE. RELEVANT DECISIONS ARE DISCUSSED IN THE PRECEDING PARAGRAPHS. IN OUR OPINI ON, THE REVENUE HAS STEPPED INTO WRONG DECISION MAKING AREA, WHILE DENY ING EXEMPTION UNDER S.10A OF THE ACT IN RESPECT OF THE PROJECTS OF CHEN NAI UNIT. FURTHER, WE ALSO EXAMINED THE AVAILABLE JUDICIAL PRONOUNCEMENT ON THE SUBJECT. IT IS A SETTLED ISSUE THAT EXISTENCE OF SOME OLD EMPLOYEE S IN THE NEW UNDERTAKING IS NOT A DISQUALIFICATION FOR GRANTING EXEMPTION BENEFIT TO THE ASSESSEE UNDER S.10A OF THE ACT AS LONG AS LARGER CHUNCK OF HR DEPARTMENT HAS NOT MOVED TO THE NEW UNIT FROM THE O LD ONE. SO LONG AS BOTH THE UNITS ARE EXISTING AND DOING THE DECLARED BUSINESS AND ARE NTO FORMED OUT OF THE EXISTING BUSINESS, THE ASSESSEE M UST NOT BE DENIED THE BENEFITS OF S.10A OF THE ACT. IT IS ALSO SETTLED POSITION THAT THE OLD AS WELL AS NEW UNIT ENGAGED IN THE SAME BUSINESS WITH IDENTICAL PRODUCT SHALL NOT CONTRIBUTE TO THE DENIAL OF THE BENEFICIA L EXEMPTION TO THE ASSESSEE. 16. THEREFORE, THE REVENUE/S OBJECTIONS THAT SIMI LAR AGREEMENTS, COMMON SERVICES, INDUCTION OR MIGRATION OF FEW EMPL OYEES OF THE HYDERABAD UNIT INTO THE CHENNAI UNIT, ARE NOT ADEQU ATE ENOUGH TO DENY THE EXEMPTION BENEFITS TO ASSESSEE IN VIEW OF THE C ASE-LAWS RELIED UPON AND DISCUSSED IN THE PRECEDING PARAGRAPHS OF THIS O RDER. 17. IN PRINCIPLE, THE UNDERTAKING IS NOT ENTITLED TO THE BENEFITS OF THE PROVISIONS OF SECTION 10A OF THE ACT IF THE SAM E IS FORMED BY THE ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 13 SPLITTING UP OR THE RECONSTRUCTION OF BUSINESS ALRE ADY IN EXISTENCE AND WHEN THE SAME IS NOT FORMED BY THE TRANSFER OF PLAN T OR MACHINERY PREVIOUSLY USED FOR ANY PURPOSE TO A NEW BUSINESS. THERE IS NO ISSUE ABOUT THE TRANSFER OF THE PLANT OR MACHINERY FROM H YDERABAD TO CHENNAI UNIT AND THEREFORE, THIS LIMB OF THE PROVISIONS IS UNQUESTIONED BY THE REVENUE. THE OBJECTIONS OF THE REVENUE REVOLVE AROU ND EXISTENCE OF SIMILAR AGREEMENTS/SIMILAR SERVICES AND MIGRATION O F SOME OF THE EMPLOYEES TO THE CHENNAI UNIT. THESE ISSUES HAVE BE EN ALREADY ATTENDED TO BY US IN THE PRECEDING PARAGRAPHS AND DESCRIBED HOW THESE OBJECTIONS IN THIS CASE ARE NOT SUSTAINABLE BY US. IT IS NOT T HE CASE OF THE REVENUE THAT THE DATABASE WAREHOUSING RELATED SERVICES REND ERED BY THE ASSESSEE TO THE PRINCIPLE/CLIENTS ARE NOT DIFFERENT FROM THO SE SERVICES RENDERED BY THE HYDERABAD UNIT. IN THE LIGHT OF THE ABOVE DISCU SSION, WE HOLD THAT THE REVENUE AUTHORITIES ARE NOT JUSTIFIED IN DENYING TH E BENEFIT UNDER S.10A OF THE ACT TO THE ASSESSEE, TREATING THE CHENNAI UN IT AS HAVING BEEN CREATED MERELY BY SPLITTING UP, OR RECONSTRUCTION O F THE HYDERABAD UNIT OF THE ASSESSEE. ACCORDINGLY, GROUNDS NO.1 TO 4 OF THE ASSESSEE IN THIS APPEAL ARE ALLOWED. 18. IN VIEW OF OUR DECISION ON GROUNDS NO.1 TO 4 OF THE ASSESSEE, GROUND NO.5 AND 6, WHICH ONLY MAKES AN ALTERNATIVE CLAIM, ARE RENDERED ACADEMIC. AS SUCH, THEY ARE DISMISSED. 19. GROUND NO.7 IN ASSESSEES APPEAL RELATES TO T REATMENT TO BE GIVEN TO THE COMMUNICATION CHARGES AND INSURANCE CH ARGES INCURRED BY THE ASSESSEE, WHILE COMPUTING THE RELIEF UNDER S.10 A OF THE ACT. SIMILARLY, GROUND NO.8 RELATES TO EXCLUSION OF THE AMOUNT OF REIMBURSEMENT OF EXPENSES TO VIRTUSA CORPORATION , USA OF RS.33,96,032 FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTA TION OF DEDUCTION UNDER S.10A OF THE ACT FOR THE HYDERABAD UNIT. IN THIS REGARD, THE ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 14 ASSESSEE INFORMED THAT AN IDENTICAL ISSUES ARE ADJU DICATED BY THE TRIBUNAL FOR THE ASSESSMENT YEAR 2003-04. 20. LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSE SSEE DEVELOPS COMPUTER SOFTWARE IN SYNCHRONIZATION WITH OTHER DEV ELOPMENT TEAMS ACROSS THE GLOBE AND REQUIRES TO BE NETWORKED WITH THE OTHER TEAMS ON A CONTINUOUS BASIS. FURTHER, THE ASSESSEE HAS OBTAIN ED THE DATA LINK SERVICES FROM SERVICE PROVIDERS. THE COMMUNICATION CHARGES ARE LARGELY INCURRED FOR INTER OFFICE AND INTRA OFFICE COMMUNIC ATION (I.E. SINCE THE NATURE OF THE BUSINESS OF THE ASSESSEE IS SUCH THAT IT REQUIRES SUBSTANTIAL INTERACTION BETWEEN THE PERSONNEL OF THE ASSESSEE A ND PERSONNEL OF OTHER ENTITIES ACROSS THE GLOBE) IN ADDITION TO BEING MAR GINALLY INCURRED FOR EXPORT/DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. IT IS FURTHER PLEADED THAT THE ASSESSEE IS REMUNERATED ON A COST PLUS BAS IS OF THE EXPORT OF COMPUTER SOFTWARE AND DOES NOT RECOVER THE COMMUNIC ATION CHARGES AND INSURANCE CHARGES SEPARATELY AND THERE IS NO SEPARA TE DISCLOSURE OF THE SAID EXPENDITURE UNDER THE SERVICE AGREEMENTS OR IN THE INVOICE/SOFTEX FORM. THE COMMUNICATION AND SERVICES CHARGES ARE ME RELY ONE OF THE COMPONENTS OF THE ENTIRE COST, WHICH IS BEING USED TO ARRIVE AT THE REVENUE FIGURE AND THE COST PLUS MODEL IS ONLY A ME CHANISM TO ARRIVE AT THE REVENUE. THE CIT(A) HELD THAT THE EXPENSES SH OULD BE REDUCED FROM THE EXPORT TURNOVER SINCE THE COMMUNICATION CHARGES AND INSURANCE CHARGES WERE INCURRED FOR EXPORT/DELIVERY OF COMPUT ER SOFTWARE OUTSIDE INDIA. OF COURSE, HE REDUCED HE REDUCED THE SAID EX PENSES BOTH FROM THE TOTAL TURNOVER, HAVING HELD THAT THE SAME HAVE TO B E REDUCED FROM THE EXPORT TURNOVER ON PRINCIPLE OF PARITY . 21. ON THE SAME ANALOGY, IT IS ALSO SUBMITTED THAT DURING THE YEAR UNDER APPEAL, VIRTUSA CORPORATION USA HAS INCURRED CERTAIN EXPENSES LIKE TRAVEL, ETC. AMOUNTING TO RS.33,96,032 ON BEHALF OF THE ASSESSEE AND THESE EXPENSES WERE RECHARGED TO THE ASSESSEE AT AC TUAL COST WITHOUT ANY ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 15 MARK UP. THESE TRANSACTIONS WERE REVIEWED AND ASSES SED BY THE ASSESSING OFFICER TO BE WITHIN THE ARMS LENGTH, WH EREAS THE CIT(A) HELD THAT THE REIMBURSEMENT OF EXPENSES TO ASSOCIATED EN TERPRISES HAS TO BE EXCLUDE FROM EXPORT TURNOVER, AS THE ASSESSEE HAS N OT BEEN ABLE TO PROVE THAT THE EXPENSE DO NOT FORM PART OF OTHER EXPENSE S INCURRED FOR RENDERING T4ECHNCIAL SERVICES OUTSIDE INDIA. HOWEV ER, IT IS CLAIMED THAT AS THESE EXPENSES ARE IN THE NATURE OF REIMBURSEMEN T, NO PROFIT ELEMENT IS EMBEDDED THEREIN AND HENCE, THE REIMBURSEMENT OF EXPENSES HAS TO BE REDUCED FROM THE EXPORT TURNOVER AND TOTAL TU RNOVER. WHILE DISPUTING THE ACTION OF THE CIT(A) IN UPHOLDING RED UCTION OF THE CHARGES IN QUESTION FROM THE EXPORT TURNOVER, HE SUPPORTED THE CIT(A) IN DIRECTING THE REDUCTION OF THE SAME FROM TOTAL TURNOVER AS WE LL ON PRINCIPLES OF PARITY. 22. IN SUPPORT OF THE ABOVE SUBMISSIONS ON THE DIS PUTES INVOLVED IN THESE TWO GROUNDS, THE LEARNED COUNSEL FOR THE A SSESSEE TOOK US THROUGH THE DEFINITION OF THE TERM EXPORT TURNOVER IN CLAUSE (IV) OF EXPLANATION 2 TO S.10A. IT IS SUBMITTED ON THE BAS IS OF THE SAID DEFINITION THAT THE ITEMS SOUGHT TO BE COVERED WITHIN THE EXCL USION ARE THOSE ITEMS WHICH ARE INCIDENTAL EXPENSES RECOVERED BY THE EXPO RTER AND WHICH DO NOT HAVE A PROFIT ELEMENT THEREIN. IN THIS BEHALF, REFERENCE IS ALSO INVITED TO THE PROVISIONS RELATING TO INCENTIVES UNDER S.80 HHC AND 80HHE OF THE ACT AND REFERENCE IS ALSO MADE TO THE DECISIONS OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V/S. SUDARSHAN CHEMICALS INDUSTR IES LTD. (245 ITR 769).; CALCUTTA HIGH COURT DECISION IN THE CASE OF CIT V/S. CHLORIDE INDIA LTD. (256 ITR 625(CAL); AS WELL AS THE KARNATAKA HI GH COURT IN THE CASE OF CIT V/S. BHARAT EARTH MOVERS LTD. (268 ITR 232), AND IT IS SUBMITTED THAT THE PRINCIPLE WHICH EMERGES FROM THE ABOVE DEC ISIONS IS THAT TO CONSTITUTE EXPORT TURNOVER THE CONSIDERATION SHOULD HAVE A NEXUS WITH THE SALE PROCEEDS FROM EXPORT OF GOODS OR COMPUTER SOFT WARE AND THAT THERE SHOULD BE AN ELEMENT OF PROFIT IN SUCH CONSIDERATI ON. REFERENCE IN THIS ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 16 BEHALF IS ALSO MADE TO THE DECISION OF THE HYDERABA D BENCH OF THE TRIBUNAL IN THE CASE OF PATNI TELECOM (P) LTD V/S. ITO(129 ITD 105). FURTHER REFERENCE, MORE SPECIFICALLY IN RELATION TO TREATMENT IN RESPECT OF REIMBURSEMENT OF EXPENSES DISPUTED, IS ALSO INVITED TO THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF CALIFO RNIA SOFTWARE CO. LTD. V/S. ACIT(118 TTJ 842). 23. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND, WHILE SUPPORTING THE IMPUGNED ORDER OF THE CIT(A) I NSOFAR AS EXCLUSION OF THE SPECIFIC ITEMS FROM THE EXPORT TURNOVER, SUBMIT TED THAT HE IS NOT JUSTIFIED IN DIRECTING THEIR EXCLUSION FROM THE FIG URE OF TOTAL TURNOVER AS WELL, IN THE ABSENCE OF ANY SPECIFIC STATUTORY PROV ISION IN THAT BEHALF. 24. WE HERD BOTH THE SIDES AND PERUSED THE IMPUGNE D ORDERS OF THE LOWER AUTHORITIES. WE ALSO HAVE GONE THROUGH T HE ELABORATE WRITTEN SUBMISSIONS OF THE ASESSEE AND OTHER MATERIAL BROUG HT ON RECORD BY THE PARTIES. CONSIDERING TOTALITY OF FACTS AND CIRCUMS TANCES OF THE CASE, WE ARE OF THE VIEW THAT IMPUGNED ORDER OF THE CIT(A) H AS TO BE SET ASIDE AND THE MATTER IN RELATION TO THE DISPUTES INVOLVED IN BOTH GROUNDS NO.7 AND 8 SHOULD BE SET ASIDE TO THE FILE OF THE ASSESSING OF FICER FOR FRESH CONSIDERATION IN THE LIGHT OF THE HYDERABAD BENCH D ECISION OF THE TRIBUNAL IN PATNI TELECOM P. LTD. (SUPRA); OF THE MADRAS BEN CH OF THE TRIBUNAL IN THE CASE OF CALIFORNIA SOTWARE CO. LTD. V/S. ACIT ( SUPRA) AND OTHER CASE LAW ON THE POINTS, WHICH MAY BE BROUGHT TO HIS NOTI CE DURING THE COURSE OF FURTHER PROCEEDINGS BEFORE HIM. THE ASSESSING O FFICER SHALL RECONSIDER THE ENTIRE ISSUE IN ACCORDANCE WITH LAW, DULY BEARI NG IN MIND THE PRINCIPLE OF PARITY, AFTER GIVING REASONABLE OPPORTUNITY OF H EARING TO THE ASSESSEE, BY PASSING A SPEAKING ORDER ON ALL THE ASPECTS RELE VANT TO THE POINTS IN DISPUTE. THESE GROUNDS ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 25. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALL OWED. ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 17 REVENUES APPEAL : ITA 482/HYD/2011: 26. EFFECTIVE GROUNDS OF THE REVENUE IN THIS APPEA L ARE AS FOLLOWS- (I) .. (II) THE CIT(A) HAS ERRED IN HOLDING THAT IF THE (I ) COMMUNICATION CHARGES OF RS.2,39,47,853/ AND (II)INSURANCE CHARGES OF RS.16,80,632/- WERE EXCLUD ED FROM THE EXPORT TURNOVER, THE SAME HAVE TO BE EXCLU DED FROM THE TOTAL TURNOVER ALSO, WHEN SUCH AN ADJUSTM ENT TO THE TOTAL TURNOVER IS NOT CONTEMPLATED IN THE PRO VISIONS LAID DOWN BELOW SEC.10A. (III) THE CIT(A) ERRED IN HOLDING THAT HAVING NOT C ONSIDERED THE (I) REIMBURSEMENT OF EXPENSES AT RS.33,96,032/- AND (II) REIMBURSEMENT OF EXPENDITURE BY VIRTUSA CORPN. USA (RS.3,81,47,701/-), VIRTUSA UK(P)LTD. (RS.42,88,632 /-) AND VIRTUSA (P)LTD., COLOMBO(RS.2,57,09,133/-), AGGREGA TING TO RS.6,81,45,466/- AS PART OF THE EXPORT TURNOVER, TH E SAME IS ALSO NOT INCLUDIBLE IN THE TOTAL TURNOVER. (III) THE CIT(A) HAS ERRED IN DIRECTING TO CONSIDER RS.31,44,491/- REPRESENTING STATUTORY DISALLOWANCES U/S. 40A(3), U /S. 40A(7) AND U/S. 43B IN THE ELIGIBLE BUSINESS PROFIT S FOR COMPUTATION OF DEDUCTION U/S. 10A, SINCE THE PROVIS IONS OF SEC.10A(1) PROVIDES THAT THE INCOME SHOULD HAVE BEE N DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. (IV) .... 26. WE HEARD BOTH SIDES AND PERUSED THE IMPUGNED O RDERS OF THE LOWER AUTHORITIES AND OTHER MATERIAL AVAILABLE ON R ECORD. AS FOR GROUNDS NO.(II) REGARDING EXCLUSION OF COMMUNICATION CHARGE S AND INSURANCE FROM TOTAL TURNOVER, THE SAME HAVING BEEN EXCLUDED FROM THE EXPORT TURNOVER, IN VIEW OF OUR FINDINGS ON THESE ASPECTS WHILE DEAL ING WITH THE GROUNDS OF THE ASSESSEE IN RELATION TO THESE VERY ITEMS, FOR THE REASONS DISCUSSED IN THAT CONTEXT, THESE GROUNDS OF THE REVENUE ALSO STA ND ALLOWED FOR STATISTICAL PURPOSES FOR BEING DECIDED AFRESH BY TH E ASSESSING OFFICER, WHILE REDECIDING THE SAME IN ACCORDANCE WITH OUR DI RECTIONS IN THE CONTEXT OF THE ASSESSEES APPEAL ON THE CORRESPONDING GROUN DS OF THE ASSESSEE. ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 18 27. AS FOR GROUND (IV) RELATING TO THE GRIEVANCE O F THE REVENUE ON ACCOUNT OF CIT(A)S DIRECTION TO CONSIDER RS.31,44, 491 REPRESENTING STATUTORY DISALLOWANCES U/S. 40A(3), 40A(7) AND 43B AS ELIGIBLE BUSINESS PROFITS FOR COMPUTATION OF DEDUCTION UNDER S.10A, W E FIND THAT THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE IS IN CO NSONANCE WITH THE CONSISTENT VIEW TAKEN BY THE TRIBUNAL IN SIMILAR MA TTERS, AS IN PLANET ON- LINE (P)LTD. IN ITA NO.1016/HYD/07 AND ZAWATA INDIA P. LTD. IN ITA NO.1100/HYD/.2009. IN THE ABSENCE OF ANY DECISION T O THE CONTRARY BROUGHT TO OUR NOTICE, FOLLOWING THE CONSISTENT VIE W TAKEN BY THE TRIBUNAL IN THE CASES REFERRED TO ABOVE, WE FIND NO INFIRMIT Y IN THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE ALSO. THE SAME IS ACCO RDINGLY CONFIRMED AND THIS GROUND OF THE REVENUE IS ALSO DISMISSED. 28. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 29. TO SUM UP, WHILE THE APPEAL OF THE ASSESSEE, BEING ITA NO.268/HYD/2011 IS PARTLY ALLOWED, REVENUES APPEAL , BEING ITA NO.482/HYD/2011 IS PARTLY ALLOWED FOR STATISTICAL P URPOSES. ORDER PRONOUNCED IN THE COURT ON 24TH AUGUST 201 2. SD/- SD/- (SAKTIJIT DEY) (D.KARUNAKARA RAO) JUDIC IAL MEMBER. ACCOUNTANT MEMBER. DT/- 24 TH AUGUST, 2012 COPY FORWARDED TO: 1. M/S. VIRTUSA (I) P LTD, 6 - 3 - 1192 3 RD FLOOR, MY HOMETYCOON KUNDNBAGH, BEGUMPET, HYDERABAD. 2. 3. ASST./DY. COMMISSIONER OF INCOME-TAX CIRCLE 3(3), HYDERABAD COMMISSIONER OF INCOME-TAX(APPEALS)-I V, HYDERABAD ITA NO.268 & 482/HYD/2011 M/S. VIRTUSA (I) P LTD, HYDERABAD. 19 4. COMMISSIONER OF INCOME-TAX III, HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE ITAT, HYDERABAD B.V.S.