HCL TECHNOLOGIES LIMITED Vs. ASSISTANT COMMISSIONER OF INCOME TAX
LAWS(IT)-2014-5-97
INCOME TAX APPELLATE TRIBUNAL
Decided on May 30,2014

HCL TECHNOLOGIES LIMITED Appellant
VERSUS
ASSISTANT COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

DIVA SINGH,JM. - (1.) THIS is an appeal filed by the assessee against the order dated 28.10.2010 passed by the TO u/s 143(3) r.w.s 144C (13)of the Income Tax Act, 1961 pertaining to 2005 -06 assessment year on the following grounds: - 1.That the Assessing Officer erred on facts and in law in completing the impugned assessment under Section 143 (3) of the Income Tax Act, 1961 ("the Act") read with Section 144C (13) of the Act at an income ofRs.56,53,95,072 asagainst the income of Rs.1,17,48,138 returned by the appellant. 2. That the Assessing Officer erred on facts and in law in completing the impugned assessment proceedings on the basis of original return of income by arbitrarily ignoring the revised return filed by the appellant. 3. That the Assessing Officer erred on facts and in law in arbitrarily denying deduction claimed in the revised return of income under Section 10A of the Act inrespect of the profits derived from the various undertakings owned by the appellant in the complete disregard of actual facts and circumstances 3.1. That the Assessing Officer erred on facts and in law in drawing an adverse inference regarding the eligibility of the various undertakings owned by the appellant, for the purpose of claiming deduction under Section 10A of the Act without considering all the documentary evidence placed on record in support of the claim. 3.2. That the Assessing Officer erred on facts and in law in denying deduction under Section 10A of the Act in respect of the profits derived from the various undertakings owned by the appellant alleging that (a) the original 13 undertakings (as per the original return of income) were split into 31 undertakings by the appellant in the revised return of income (b) no separate license was obtained by theappellantfromSTPIAuthorities in respect of these undertakings (c) that deduction in respect of these undertakings was deliberately not claimed by the appellant in the initial years and (d) no books of account have been produced by the appellant. 3.3. That the Assessing Officer erred on facts and in law in drawing an adverse inference regarding the independent and separate nature of the undertakings owned by the appellant not appreciating that each of such undertaking of the appellant is an independent viable unit registered with STPI Authorities and were eligible for deduction under section 10A of the Act. 3.4. That the Assessing Officer erred on facts and in law in arbitrarily concluding that the ratio of the decision of the Hon'ble apex court in the case of Textile Machinery Corporation Ltd. vs. CIT [107 ITR 195] (SC) is not applicable in the case of the appellant without considering the actual facts and circumstances and also overlooking the necessary evidence filed by the appellant in the course of impugned assessment proceedings in support of new and independent nature of undertakings owned by the appellant. 3.5. That the Assessing Officer erred on facts and in law in not appreciating that Section 10A of the Act is a complete code in itself and only those conditions which are prescribed by Section 10A of the Act are liable to be fulfilled by an undertaking for being eligible for the purpose of deduction under Section 10A of the Act. 3.6. That the Assessing Officer erred on facts and in law in arbitrarily concluding that the different undertakings covered under a single STPI License represent a single undertaking with multiple locations in the complete disregard of the certificate issued by the Chennai STPI Authorities upon the request made by the appellant to the said authorities. 3.7. That the Assessing Officer erred on facts and in law in observing, without appreciating the contention of the appellant, that if one is to go by the contention of the assessee that each and every location should be treated as a separate undertaking then the number of undertakings eligible for deduction under Section 10A would have more than 31 number of undertakings as claimed by the appellant in the revised return of income. 3.8. That the Assessing Officer erred on facts and in law in concluding that it was not possible for him to verify whether all the undertakings were set -up with substantial new investment despite the fact that he himself has observed that therewas no dispute regarding the setting up of each undertaking with substantial new investment. 3.9. That the Assessing Officer erred on facts and in law in drawing an adverse inference regarding the fulfillment of condition of setting up of each undertaking with substantial new investment without considering the details of capital investment made by each undertaking and the necessary evidence in support thereof fledbytheappellantinthe course of impugned assessment proceedings. 3.10. That the Assessing Officer erred on facts and in law in concluding that the undertakings owned by the appellant do not represent new undertakings despite the fact that these undertakings have separate identifiable work force. 3.11. That the Assessing Officer erred on facts and in law in concluding that the undertakings owned by the appellant do not represent new undertakings despite the fact that these undertakings were clearly engaged in newer and different technology areas. 3.12. That the Assessing Officer erred on facts and in law in drawing an adverse inference regarding the newer nature of the projects executed by each undertaking in the complete disregard of facts and circumstances and even without considering the evidence filed by the appellant in the course of impugned assessment proceedings. 3.18. That the Assessing Officer erred on facts and in law in discharging his statutory obligation to rebut all the judicial pronouncements relied upon in support of claiming of deduction under Section 10A of the Act. 3.19. That the Hon'ble Dispute Resolution Panel ("DRP") erred on facts and also in law in arbitrarily upholding the proposed action of the assessing officer ofdrawing adverse inference regarding the eligibility of the some of the undertakings to separately claim deduction under Section 10A of the Act even without considering all the facts and evidence on record. 4. That the Assessing Officer erred on facts and in law in arbitrarily concluding that 60% of the aggregate amount of expenses incurred by the appellant in the convertible foreign exchange during the year under consideration was incurred in connection with technical services rendered by the appellant. 4.1. That the assessing officer erred on facts and in law in making the reduction of expenses incurred by the appellant in the convertible foreign exchange from "export turnover" following the assessment order for assessment year 2004 -05, without appreciating that the said issue has already been decided by the Hon'ble ITA T in favor of the appellant for the Assessment Year 2004 -05 and even the departmental appeal against the said order of the ITAT has been rejected by the Hon'ble Delhi High Court. 4.2. Without prejudice and in the alternative, the assessing officer erred in not excluding the expenses incurred by the appellant in the convertible foreign exchange from 'total turnover' while reducing these from 'export turnover' for calculation of deduction u/s 10A leading to absurd results. 4.3. That the Hon'ble DRP erred on facts and in law in upholding the proposed action of the learned AO of reduction of expenses incurred by the appellant from"export turnover" for computing deduction under section 1 OA of the Act by merely observing that the said issue is under litigation. 5. That the assessing officer erred on facts and in law in reducing link charges attributable to delivery of computer software outside India from "the export turnover" in terms of clause (iv) of Explanation 2 of Section 10A of the Act, without making the similar adjustment from" the total turnover" resulting into absurd and unintended results. 5.1. That the assessing officer erred on facts and in law in making the reduction of link charges incurred by the appellant from "export turnover" without making the corresponding adjustment from "total turnover" following the assessment order for assessment year 2004 -05, without appreciating that the said issue has already been decided by the Hon'ble ITAT in favor of the appellant for theAssessmentYear2004 - 05 and even the departmental appeal against the said order of the ITAT has been rejected by the Hon'ble Delhi High Court. 5.2. That the Hon'ble DRP erred on facts and in law in upholding the proposed action of the learned AO of reduction of expenses incurred by the appellant from "export turnover" for computing deduction under section 10A of the Act without making the corresponding adjustment from the "total turnover" by merely observing that the said issue is under litigation. 6. That the assessing officer erred on facts and in law in enhancing the expenditure disallowable under section 14A of the Act to Rs.l,05,07,741 from Rs,44,55,082 disallowed by the assessee in respect of exempt income applying rule 80 of the Income -tax Rules. 6.1. Without prejudice that the Assessing Officer erred on facts and in law in that Rule 80 does not have retrospective application and could not be applied during the relevant previous year. 6.2. That the Hon'ble DRP erred on facts and in law in upholding the proposed action of the learned AO of disallowing further amount u/s 14A r/w Rule 8D. 7. That the Assessing Officer erred on facts and in law in disallowing depreciation to the extent of Rs.5,84,704 on electrical installation holding the sameto be eligible for depreciation @ 15% as opposed to 25% applicable to plant and machinery. 7.1. That the Hon'ble DRP erred on facts and in law in upholding the proposed action of the learned AO of disallowing the depreciation on electric installation 8. That the Assessing Officer erred on facts and in law in not allowing deduction of Rs.620,012 being expenses incurred wholly and exclusively for earning the income included under the head "Income from other sources", (claimed in the revised return of income), in terms of section 58(iii) of the Act, disregarding the direction issued by the Hon'ble DRP. 9. That the Assessing Officer erred on facts and in law in charging interest under section 234B and 2340 of the Income Tax Act, 1961. The appellant craves leave to add, to alter, to amend or vary from the aforesaid grounds of appeal at or before the time of hearing."
(2.) THE relevant facts of the case are that the assessee by way of a return dated 31.10.2005 declared an income of Rs.18,95,23,990/ -. Subsequently a revised return was filed on 30.03.2007 declaring an income of Rs.1,17,48,138/ -. The assessee in the year under consideration as in earlier year was engaged in the business of development and export of computer software and rendering technical services. The case was taken up for scrutiny by way of issuance of notice u/s 143(2) alongwith questionnaire etc. 2.1. A perusal of the assessment order dated 26.12.2008 shows that in the original return filed the assessee had shown gross income from business at Rs.258,17,15,909/ - and claimed deduction u/s 10A of the Income Tax Act of Rs.257,24,87,070/ - and business income had been shown at Rs.92,28,838/ -. In the revised return it was observed by the AO that whereas gross income from business and profession remained the same however deduction u/s 10A had been claimed at Rs.275,57,24,990/ - and loss from business and profession had been shown at Rs.16,79,29,000/ -. Taking into consideration the fact that both the claims u/s 10A in the original return and also in the revised return were supported by 13 and 31 separate Forms 56F respectively duly certified by a Chartered Accountant, he was of the view that in the said background the basic question which arose for consideration was whether the units for whom separate Form 56F had been filed in the revised return could be treated as a separate unit for the purposes of section 10A or not. 2.2. Referring to the fact that till the filing of the revised return, the assessee had all along claimed benefit u/s 10A on the basis of license which were now sought to be changed, he was of the view that the additional units had been formed after the splitting up of the existing 13 units into different units for which fresh and new Form -56F were being filed. The position was summarized by way of a chart by the AO in para 4.3 in the following manner: - Name of the Unit (as per the Original Return) No. of units split into Chennai 1 8 Chennai 2 5 Chennai 3 4 Chennai 4 Not Split Noida 1 6 Noida 2 Not in the Revised Return Noida 3 Not Split Noida 4 Not Split Kolkata Not in the Revised Return Bangalore 2 PSO 1 Not Split PSO 2 Not Split PSO 3 Not Split 2.3. Considering the documentation and making a comparison of the Form 56F filed alongwith the original and the revised return, he observed that in majority of the cases the original units had been split up into different units and a separate Form -56F had been filed for each and every split unit thereby treating each split unit as a separate unit for the purposes of claiming the benefit u/s 10A. As an illustration, he considered that in the original return a single Form -56F had been filed for a unit called STP 1 Chennai with its address as "J -16, Anna Nagar, Chennai" however in the revised return different addresses had been mentioned for the 8 units. This position was found to exist in all the other split units. 2.4. He also found that when the two returns filed, namely original return and the revised return there were differences in the dates of Registration and dates of commencement of the Single Unit as mentioned in the Form 56 filed along with the Original Return and the dates of the Split Units as mentioned in the Form 56 filed along with the Revised Return. For example the AO quotes that in the case of STP I, Chennai (the same unit as above), the date of registration and the date of commencement (as mentioned in the Form 56 filed along with the Original Return) were as follows: - Registration :26/12/94 Commencement:01/04/95 2.5. In the revised return the 8 units which were formed by splitting STP 1 Chennai the dates were found to be different for registration and commencement of the units. As a result of this difference, he was of the view the time period for which the benefit u/s 10A available was extended. This position he notes is specially visible in the case of STP Chennai -I, Noida -1 and PSO, Noida all of which were in their 10th (last) year of claiming the benefit as per the original Return but now have different years of claim in the split units. 2.6. The resultant position with respect to the 8 units formed by splitting STP Chennai -1 as per the Revised Return was summarized in the following manner: - Address OF THE Split Unit Year of claim u/s 10A 5th 168, Arcot Road, Vadapalani, Chennai 26; 49 -50 Nelson Manickam Road, Chennai 29; 8th 8 Chennai 4th 602,TidelPark,4CanalbankRoad, 113 D 12 and 12B, SIDCO industrial Estate, 7th Ambattur, Chennai -58 10th J -16, Anna Nagar, Chennai -102 No. -50 -53, Greams Road, Chennai 6 9thth 9 PM Towers, No. -37, Greams Road, hennai -6 5th 5 Chennai - 5th SapnaTradeCentre,110P.H.Road, 84. 2.7. The AO held that this action not only impacted the result by extending the benefit of the tax holiday, but also impacted the amount of claim. It was observed that the amount of claim under the original return was Rs.257.25 crores odd which went up to Rs.275.57 crores odd. This increase was found to be mainly on account of the split up of the units. He took note of the fact that as a result of splitting the units the losses of the individual units were ignored and this accounted for an increase of deduction claimed of Rs.16.75 crores odd. 2.8. The AO further observed that those units which were in their last year of the tax holiday period, were the ones, which earned the maximum profits for the assessee as out of the total claim made by the assessee under section 10A, 65% belonged to the units which were in the last year of their tax holiday period. The claim u/s 10A of Chenani -1 and Noida -1 which added up to Rs.170.20 crores the AO found totaled to 65% of the total claim. The AO was of the view that this was the reason why the assessee had split up the units as the intention was to extend the period of claim u/s10A. Carrying on the comparison further the AO observed that the profits before the claim of deduction u/s 10A by the revised return underwent a change when compared with the corresponding figures mentioned in the original return. The difference in respect of the units was brought out by him by way of a chart in para 4.9 of his order which is extracted hereunder: - Name of the Unit (as per Profitsasperthe Original Profitsasper the Original Return) Return theRevised Return Chennai 1 87.43 106.47 Chennai 2 58.58 40.76 Chennai 3 50.80 42.61 Chennai 4 0.50 (2.92) Noida 1 32.32 61.84 Noida 2 (0.02) NA Noida 3 29.40 17.61 Noida 4 0.64 (4.70) Kolkata (0.11) NA Bangalore 2.14 0.07 PSO 1 (3.48) (2.20) PSO 2 (0.57) (0.60) PSO 3 0.54 (0.18) 2.9. He further observed that the profit figures as per the revised return had been worked out by summing up of the split units corresponding to the single units mentioned in the original return. 2.10. In the light of these observations and discrepancies noted by the AO as per para 4.10 of his order detailed questionnaire on 15.09.2008 was issued to the assessee requiring him to explain why the claim u/s 10A in respect of the split units should not be rejected.The assessee was further required to provide whatevermaterial it had on record to substantiate its claim that each of the 31 units was separate and distinct and was not formed by splitting up of the existing units. 2.11. Considering the reply of the assessee, the AO was of the view that in order to avail the tax holiday as per sub -section (2) of section 10A of the Income Tax Act, 1961, the undertaking is required to fulfill the following conditions: - a)"The unit must begin manufacture or production ofcomputer software in STP in the previous year relevant to AY 1994 -95 or thereafter and should be set up in a STP. b) The unit should not be formed by splittingup/reconstruction of a business already in existence. c) The unit should not be formed by transfer to a new business of machinery or plant previously used for any purpose. d) The assessee must furnish a report of an accountant in the prescribed format certifying that the exemption has beenproperly claimed. This report should be submitted alongwith the return of income." 2.12. Considering the case law relied upon by the assessee in its reply submitted the AO relying on the judgment of the Karnataka High Court in Nippon Electronics (India) Pvt. Ltd. (181 ITR 518) (KAR.) was of the view that the Court had examined therein the argument whether the requirement of formation had to be seen in the year of set -up or, could it be seen even in subsequent years also and on examining the said question it had been held that the term "formed" has been interpreted to imply 'which needs to be seen at the initial year of tax holiday and not during subsequent years'. Reliance was also placed on the decision of the Madras High Court in case of L.G. Balakrishnan and Bros Ltd. (151 ITR 270) wherein the High Court examined as to whether transfer of machinery took place before formation. He also took note of the fact that in some of the judgements namely CIT v. Gopal Plastics (P) Limited (1995) 215 ITR 136 (Mad.) CIT v. Seeyan Plywoods (1991) 190 ITR 564 (ker.), the High Courts have also held that this condition would be applicable on a year -to -year basis. Accordingly, he was of the view that compliancewith the condition may have to be assessed even subsequent to the formation of the units, however, even those judgments it was clear that the conditions have to be met in the initial year and accordingly must be verified in the initial year also. 2.13. In the above legal position, considering the facts of the assessee's case,he held that the assessee has not subjected itself to any scrutiny with respect to the conditions in the initial year since till the current year the assessee had never claimed that the extensions were separate units. Accordingly based on the decisions considered he was of the view that there is no reason as to why the claim of the assessee with respect to the additional units be entertained in the current year when the initial year of all the additional units had already passed without any scrutiny. He was of the view that this clearly shows that the assessee has deliberately and intentionally not subjected itself to scrutiny in the initial years. In the circumstances where no compliance has been demonstrated by the assessee in the initial years, which is the basic requirement he restricted the claim under section 10A with respect to the amount as computed under the Original Return of income and ignored the claim made under the Revised Return of Income. The time period for the claim under section 10A accordingly he was of the view was to be computed as per the Form 56F submitted along with the Original Return only.
(3.) HAVING come to the above conclusion the AO proceeded to further examine the claim of the assessee on merits with respect to the conditions mentioned in Section 10 A in para 6 to 6.18 of his order. 3.1. The first condition he held which was required to be met was that the unit should be engaged in the business of manufacture or production of software and should be set up in STP. Considering the fact that the term industrial undertaking which has not been defined in the Section he referred to the definition in section 3(d) of the Industrial Development and Regulation Act, 1951 as which defined industrial undertaking as "any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government." 3.2.Further considering the definition prescribed in Section 33 B of the Income Tax Act, the various dictionary and law lexicon meanings of the said term and relying on I -Gate Global Solutions Ltd. vs ACIT (2007) 112 TTJ (BANG.) 1002; Videsh Sanchar Nigam Ltd. vs. CIT, City -I, Mumbai [2008] 111 ITD 190 (MUM.) (SB)/[2007] 110 TTJ 948 he was of the view that the following legal position emerged which was summed up by him in the following manner: - "6.10.In all those decisions, certain distinguishing features are apparent. An existing unit may start new units; the new units may produce the same articles produced by the old unit; the items produced by the new units may be consumed by the existing unit; there is no quarrel on these factual aspects. But apart from the above common features, the Courts have also held that the new units set up by the existing businesshouses should be independentunitsengaged in a distinguishable commercial activity and capable of surviving independent of the existing business. The above features apparent in all the judicial pronouncements endorse the principal view of an "undertaking" as construed in commercial and business circles.An undertaking is not an abstract piece of idea.It is not a concept as such, it can have its own physical identity by land, building, plant and machinery; it can have its own technology but still the new units may very much form part of the existing unit. These are all matters of different permutations and combinations that emerge out of business dynamics in given set of circumstances. But above all, the distinguishing feature of an undertaking eligible for deductions provided under the Income Tax Act is its basic character of independence of function and ability to survive independent of the old units.All the cases conclude that a new -undertaking whether integrated in the existing business or not, has to have an independent functional identity which makes it a separate operational and profit centre. 6.11. Hence it is clear from the judicial precedents cited above that the undertaking to be able to claim the benefits of a tax holiday should be an independent and separate unit which is capable of conducting business in an independent manner and should not be linked to the other units of the assessee for doing its business." 3.3.The AO further proceeded to examine the position from the point of view ofSTP scheme and other related regulations as under: - "6.14. In order to be set up and considered as a separate unit, eligible for relief under section 10A, the unit has to be compulsorily situated within and registeredwith a Software Technology Park. The STP is governed by the STP Scheme issued by the Government of India vide Notification No. SO 243(E) dated 22nd March, 1994. Hence each unit has to comply with the requirements laid down by the Scheme to be called a separate unit. As per the scheme, each unit has to be granted a license after which it can commence operations within the STP. Further, a unit registered under the STP has a number of obligations." 3.4.Referring to the information available in the public domain disclosed on the website of STP Hyderabad he observed that there are certain obligations of the Units and question No. 17 of the FAQ on the said website lists the do's and don'ts. The same are extracted from the order hereunder for ready reference: - "1.The development/production of the unit under the scheme shall be carried on in a customs bonded area. 2. Commencement of production within the gestation period allowed under the scheme and starting exports. Intimate STPI of the date of commencement of commercial production within 30 days. If commercial production and exports are not commenced within a period of 3 years from the issue of the letter of approval (LOP) given for the establishment of the unit under the Scheme, the LOPLAPSES automatically after the expiry of the said 3 years. 3. The nit shall be a net foreign exchange (NFE) earner and NFE should be positive over the period of 5 years. 4. The unit shall realize the amounts due for the exports made within 180 days from the date of export, or the due date under the contract, whichever is earlier. 5. If the unit fails to fulfill the export and other obligations under the scheme, it will be liable to pay the customs duty and excise duty on the goods procured and such other penalties and liquidated damages as may be decided by the Government. 6. In case external commercial borrowings are resorted to, necessary permission from Ministry of finance to be obtained. 7. In case of import of US controlled items, please comply with the relevant provision vide S.No.9 of the standard condition attached to the letter of approval fro 100% EOU. 8. Maintain separate accounts for the operation under the scheme. 9. Maintain prescribed records and document. 10. Apply to STPI for clearance in the following cases: For any change of address, change of name or constitution of the unit. For extension of premises for carrying out the operation. For shifting of equipment from the bonded warehouse for repairs, temporary transfer, permanent transfer, inter unit transfer, disposal, etc. For exporting the imported equipment for repairs/replacement. For re -export of equipment imported on loan basis. For enhancing the limit of capital goods to be imported. For debonding of the equipment/ debonding of the unit. For reimbursement of CST. For sale of imported capital goods and materials. For disposal of obsolete equipment. For donation of obsolete equipment. 11. Pay the dues to STPI on time. 12. Submit the Quarterly/ Annual performance reports in the prescribed form on time." ( Bold texted for Emphasis) 3.5. Considering the STP Regulations he further observed that the regulations also permit an undertaking to expand its premises for carrying out its operations. Since expansion of an existing unit does not lead to the formation of a new undertaking and infact the STPI Regulations refer to and permit the extension of the premises and further for carrying out its operations a single undertaking can have multiple locations within the STPI the AO concluded that the assessee has not been issued separate license but has merely been permitted to expand extension certificate. He further found support for his conclusion on considering the specific provisions in the Import/Export policy and procedures, the Foreign Trade Regulation Act, Customs and Central Excise Regulation which were also applicable to a STP unit with which also the assessee had to comply. He summed up some of the key regulations/ filings which a unit has to comply with namely were banking regulation; customs bonding; certain other filing requirements etc. The same are extracted from the assessment order here under: - "6.18 Some of the key regulations / filings which the unit has to comply are identified in the paragraphs below: 7. Banking: Each STP unit is required to maintain separate bank accounts for its operations. The unit may maintain as many bank accounts as it desires but shall have to designate a single branch of a bank through which all export documents are required to be submitted. In other words the work of handling of all shipping documents and realization of export proceeds ought to be entrusted to this designated bank branch. The proof of this bank account has to be submitted along with the application for registration under the STP Scheme. 8.Customs Bonding: The premises of STP unit have to be mandatory Custom Bonded, irrespective of whether such unit avails the benefit of customs duty/ excise duty exemption. The custom bonding is to be renewed on a yearly basis for STP units which in the normal course expire on 31st December each year. 9. Certain filing requirements 9.1. "Softex Declaration form As per current regulation a Software Export Declaration (Softex) form is to be filed with STPI authorities within six months of the invoice date. This is a mandatory requirement under the Exchange Control Regulations issued by the Reserve Bank of India. This is filed for declaration of Software Exports through data -communication links and receipt of Royalty on the Software Packages/Products exported. 9.2. Periodical Returns Monthly progress report has to be submitted in Form 14 and should be submittedby the 10th of the next month. Quarterly Progress report has to be submitted in Form 15 to the DesignatedOfficer and to the Ministry of Information and Technology explaining theprogress of the unit. Annual performance reports have to be given to STPI 111 Form 17 by 15th April. 10. Further if one goes by the condition or separate books of accounts for each unit it implies that each STP unit is required to maintain separate annual balance sheets and profit and loss accounts, Generally speaking for maintaining separate accounts the following books/documentation arc required to be maintained : a) Maintenance of cash book. b) Maintenance of Bank book. c) Maintenance of separate cash and bank vouchers. d) Maintenance of sale invoices. One copy of the export invoice is required to be endorsed by the Banker's and kept in record. e) Maintenance of party -wise ledger for both debtors and creditors. f) Maintenance of fixed asset register. g) Maintenanceof"ForeignInwardRemittanceCertificates(FIRC's)"file where the original FIRC's are kept. h) Maintenance or "Bank Realization Certificates (BRCs)" file where the original BRCs are kept. i)Maintenance of purchase order file where copies of all purchase order issued arekept. The purchase orders should be numbered to avoid confusion. j)Maintenance of contract file, where copies of contracts received from buyers are maintained. k) Preparation of monthly trial balance. l)Preparation of yearly balance sheet for the unit which would ultimately become apart of the balance sheet of the company. 11. Hence for a unit to be treated as a separate and distinct undertaking under the STP Scheme, to which the benefits of section 10A can be conferred, the unit has to be complying with a lot of regulations. 12. Application of the above principles in the case of the assesse Based on the above definition of the term undertaking and the judicial precedents in this regard, the case of the assessee was examined. 12.1.Compliance with STPI Regulations The assessee in his abovementioned reply has contended that each and every location with a single license is a separate undertaking and as proof of the same has submitted that there are separate lease deeds for each premise, separate STPI approval documents, and separate Customs Bond certificates. Further, the assessee has contended that he has maintained separate books of accounts. 12.2. Expansion and Not New Undertakings As mentioned in the STPI regulations above, a unit to be registered under anapproved STPI has to be granted a license by the respective STPL After having granted a license, the unit gets registered and is permitted to commence operations, Thereafter, the unit is permitted to expand its area of operation by seeking permission for expansion, At the time of seeking the permission for expansion,itislogicalthattheassessee will have to execute lease deeds for separate premises and will also have to approach the customs authorities for bonding certificate. Hence the mere existence of these documents does not establish that each expansion is a new undertaking. 3.6.Further considering the reliance placed by the assessee on letter dated 24th October 2008 of STP, Chennai -I he was further of the view that it did not help the assessee. We extract the relevant portion from the assessment order itself : - 12.3.The assessee, as an example has furnished a letter from STP Chennai authorities dated 24th October 2008 in respect of the Chennai I STP wherein it has been stated that the company is eligible to expand its operations by setting up new undertakings. However, it is surprising that the same STPI authorities have actually not issued separate licenses but have merely treated the new premises as mere extensions. Hence it is not possible to treat the letter of the STPI Chennai I authorities as conclusive evidence that the assessee has set up new undertakings. The only interference which can be drawn from this letter is that the assessee is operating in multiple locations under a single license.Hence it is a single undertaking with multiple locations. 12.4. This fact is reinforced by a letter written by STPI Chennai dated 28th January 2005 produced by the assessee in Volume I of the detailed submission referred to above. In this letter, the STPI has mentioned that the assessee has three STP units in Chennai with multiple locations. 12.5. Further, if one is to go by the contention or the assessee that each and every location should be treated as a separate undertaking then from the submissions made by the assessee it is observed that Chennai -I consists of 23 location which have been clubbed into 8 separate undertakings, Chennai -II consists of 11 locations which have been clubbed into 5 undertakings and Chennaiconsistsof6locationswhichhavebeenclubbed into 4 undertakings. These submissions have been made on pages 38 and 39 of the submission dated 24/l1/2008. 3.7. Examining further the claim of the assessee on facts he further was of the view that the claim was not maintainable on the following reasoning: - 13. New Investment: The assessee has contented that each of the units have been set up with substantial new investments. This however has never been disputed. In support of the above claim, the assessee has submitted sketchy details of purchase of fixed assets. The issue was never the correctness of the purchase of fixed assets. Even if the units were not treated as separate and distinct, the assessee would surely have had all the documents with respect to purchase of fixedassets.Theissueofinvestment is to be decided by the presence of books of accounts which clearly show the investment made and the return earned by the undertaking. The assessee despite repeated oral requests has not been able to produce books of accounts of any of the units. In the absence of the present of books of accounts it becomes difficult to verify the claim of the assessee that each and every unit has been set up with substantial new investment. 14. Separate Work Force: -The assessee has contended that each and every unit has a separate identified work force and in support of the same has presented sample, attendance sheets. This information is not a deciding factor in the debate over a separate undertaking and hence is being considered as being irrelevant. 15. New Technology: -The assessee has further contended that each of these undertaking are addressing newer and different technology areas. This is difficult to verify and further the Mumbai Tribunal in the case of VSNL referred to above has held that the mere fact that new unit has been added by adopting contemporary and appropriate technology will not qualify the new unit as a separate undertaking for tax holiday purposes. 16. Separate Customers: -The assessee has further contended that each and every unit is executing independent computer software projects. On a test check basis it was found that the units at 49 -50, Nelson Manickam Chennai and at 158 Arcot Road, Chennai both registered under the Chennai -I STP were servicing the customer CISCO. Further, in a number of cases it was observed that the ultimate customer of the assessee is a group company situated outside the country. Hence not only is the contention of the assessee difficult to verify but is also factually incorrect. 17. Separate bank Account : -Each STP unit is required to maintain separate bank accounts for its operations. The unit may maintain as many bank accounts as it desires but shall have to designate a single branch of a bank through which all export documents are required to be submitted. The assessee was requested to furnish a list of bank accounts for each and every unit right from the initial year. The assessee has placed no evidence on record to prove that each and every unit has a separate bank. 18. Softex Forms: The softex form is a specific requirement under the RBI Regulations. It has ot be filed client wise and unit wise. The assessee hasproduced a few softex forms on a test check basis. However, even if it is assumed that the softex forms exist, it is not sufficient to prove that the unit is an independent unit. 19. Separate Books of Accounts: The assessee has not produced separate books of accounts for any of the units. In fact the profit figures of claim under section 10A in the original return adds up top Rs.257.24 crores and in the revised return this claim has gone up to Rs.275.57 crores. One of the reasons for this claim going up is because as the number of units was increased, some of the units were running into losses and their losses were not considered. Hence the claim went up by Rs.16.75 crores. This fact clearly points out that the assessee has not been maintaining separate books of accounts and also points out to the fact that in the earlier years the claim under section 10A may also be misstated. 19.1. Further, the assessee has not been able to reproduce any separate books of account on a unit wise basis. Hence it can be reasonably concluded that the profit figures as computed under the revised returns have not flown from any books of accounts but are derived from some calculations." 3.8. Considering the fact that only 13 separate licenses were available to the assessee which had been issued by STP authority on the basis of which the assessee had acted over the years and claimed deduction u/s10A it was held that the deduction claimed in the Revised Return was not maintainable as the original 13 units were further split into 31 units were not supported by separate licenses. The list of licenses available with the assessee were summed up in para 20 of the assessment order in the following manner: - STP License License No. and Date Chennai 1 STPI/IMSC/94/2111 26 Dec 1994 Chennai 2 STPIC/MSC/1999 -2000/2589& 2590 07 Mar 2000 Chennai 3 STPIC/IMSC/2002 -2003 1287 and 1288 13 Mar 2003 Chennai 4 Noida 1 5(4)/94/57 2796 26 Dec 1994 Noida 2 PCMG/PSE/05/025/STPIN/5524 14 Mar 2000 Noida 3 STPIN/APP/8282003/200228/18766 28 August 2003 Banglore 1 EIG/HCL -Technologies/GEN/19225& 26 30 October 2003 PSO -Chennai 1 STPB/IMSC/93/6 PSO -Chennai 2 STPIC/IMSC/93/66 PSO -Noida March 16, 1995 PSO -Kolkata EIC:90:96 -97:071 7 June 1996 3.9. Carrying on the examination further he also found that even the second condition that the unit should not be formed by the splitting up of an already existing business was also not fulfilled. 3.10. Further considering the fact that there was no direct judicial precedent for Section 10A and taking cognizance of the fact that the Courts have interpreted similar provision in cases dealing with Section 80IA and 80J of the Income Tax Act 1961 and Section 15C of the Income Tax Act 1922 and the judgment of the Apex Court in the case of Textile Machinery Corporation Ltd. vs. CIT (107 ITR 195) (SC) wherein the Hon'ble Court was dealing with Section 15C of Income Tax Act 1922 he was of the view that the following points emerged therefrom: - "21.2.Applying the above principles to the facts of the assessee, the followingpoints emerge: There has been no emergence of a fresh new undertaking and no fresh investments have been made. The profits and capital of the 31 units have been carved out from the original 13 units. The assessee has not been able to produce any documentary evidence to show that in the years in which the units were formed, there was a separate capital investment: No record of profits has been shown by the assessee from the year of inception thus clearly showing tht the so called separate units did not exist prior to the current Assessment Year. No evidence has been provided that the new units were engaged in executing jobs which were distinct from the original units. Hence it is reasonable to assume that the so called new units were carrying out the same jobs as the original units." 21.3. The above decision was considered by different High Courts in variouscases where the facts were determined to be similar to the above case. 22. Third Condition 22.1. The third conditions state that the unit should not be formed by transfer to anew business of machinery or plant previously used for any purpose. This isa factual condition. 22.2. This condition needs to be verified in the first year of the unit being set up. Since there was no verification of the units in the first year, it is difficult to conclude whether the additional units satisfy this condition. 23. Fourth Condition 23.1. The fourth conditions states that the assessee must furnish a report of an accountant in the prescribed format certifying that the exemption has been properly claimed. This report should be submitted along with the return of income. 23.2. Even the mandatory filing of Form 56F has not been complied for in the previous years. This is the first year in which the assessee has actually submitted a separate Form 56 for each of the 31 units. Till the assessment year 2003 -04, the assessee was maintaining that it had only 13 different units for which the benefits u/s10A were being claimed. It is only in the current assessment year that the assessee has carved out 31 separate units after splitting the erstwhile 13 units. The assessee has no explanation as to why this mandatory condition has not been followed in the earlier years. Hence going by this condition it is clear that the assessee has not been meeting the fourth condition as stated in Section 10A. 24. Conclusion: Based on the above analysis the following conclusions are reached: I restrict the claim u/s 10A with respect to the amount as computed under the Original Return of income and ignore the claim made under the Revised Return of Income: and The time period for the claim u/s 10A will be computed as per the Form 56F submitted along with the original Return only. Consequently this is the last year of tax holiday for the following units including their extensions and these units will not be eligible for claim of benefit u/s10A from the subsequent AY" Chennai_1; Noida -1; and PSO Noida 3.11. Thus a perusal of the above extract from the assessment order shows that considering the third condition which the assessee was required to meet namely that the unit should not be formed by transfer to a new business of machinery or plant previously used for any purpose the AO was of the view that it was a factual condition which was to be verified in the first year and since there was no verification of the units in the first year, he held that it is difficult to conclude whether the additional units satisfied this condition or not. 3.12. Similarly examining the fourth condition, namely the claim to be supported by Form 56F. Considering that fact that this is the first year in which the assessee had actually submitted separate From 56 for each of the 31 units because till 2003 -04 A. Year, the assessee was maintaining that it had only 13 different units for which the benefits under section 10A had been claimed and it is only in the current assessment year that the assessee had carved out 31 separate units after splitting the erstwhile 13 units he concluded that it was clear that the assessee had not met the fourth condition as stated in Section 10A. 3.13. On the basis of the above reasoning the claim of the assessee was restricted to the claim made in the original return. Aggrieved by this, the assessee went in appeal before the DRP who summedup the objections of the assessee in the following manner : - "A.Corporate Issues. 1. Objections regarding deduction u/s 10A of the Act. (a) The assessee has claimed that it had 31 separate software development centers and each software development centre represents a separate undertaking for the purpose of deduction u/s 10A of the Income Tax Act. This claim of the assessee was based on the submission that though the assessee was running all these 31 software development centres under 13 licenses issued by the STPI authorities, but there were 31 undertakings registered with the STPI and custom authorities and that each of the 31 undertakings was set up as an independent stand alone undertaking for production of computer software. It was the contention of the assessee that although, the 31 undertakings were operating only under 13 licenses granted by the STPI authorities but these were operating in separate premises with separate addresses also in most of the cases. The AO however, did not accept this contention of the assessee. The AO treated the group of all the development centres operating under one license granted by the STI authorities as one undertaking for the purpose of granting deduction u/s 10A of the I.T.Act." 4.1. Considering the same, the DRP came to the following conclusion: - "We have given a careful consideration to the claim of the assessee and various arguments advance by the Ld. ARs in support of the claim. We, however find that the claim of the assessee cannot be accepted. The registration granted to the separate software development centres by the STPIs and by the Custom Authorities in no way satisfies the condition that each software developmentcentre is a separate undertaking. These registrations are granted for different purposes. The registration granted by the STPI, is only a certificate that the entire production of that software development centre will be exported. Similarly, the registration granted by the custom authority is also for this purpose and for the additional purpose that the said software development centre will be held as bonded premises for removal of the software manufactured in the premises. That is the only reason for getting these registrations wherever a new development centre is added to the existing development centre running under a license already granted. The software development center added under each license is only an extension of the original undertaking set off under the license granted by the STPI authorities. Therefore the development centers, added subsequent to opening of the centres under the original license is only an expansion of the original undertaking and in no way can be treated as a separate undertaking for the purpose of deduction u/s 10A of the I.T.Act. The AO's observations in this regard in the assessment order are important. The AO has mentioned that the examination of Form No -56F filed by the assessee reveals that the majority of the cases of original centre have been split up into different centres and the separate form 56F has been filed for each and every split centre, thereby claiming deduction u/s 10A for each centre. The AO has given example of such splitting up of the units in the assessment order. It is also noteworthy that in the original return the assessee itself has claimed deduction u/s 10A as if, it had only 13 undertakings. It is only by way of revised return that the deduction u/s 10A have been claimed showing that the assessee had separate 31 undertakings. Up to A.Y.2004 -05 and till even filing of there original return the assessee has been claiming deduction u/s 10A on the basis that all the development centres operating under one license is one undertaking for the purpose of deduction u/s 10A. In this regard, the reference to the principle of statusquo laid down by various judgement of Hon'ble Supreme Court and various High Court that the position which is settle for a long time will not be unsettled unless there is material change in the facts and circumstances of the case." 4.2. Pursuant to this order the present assessment order which is under challenged has been passed u/s 143(3) read with Section 144 (13) of the Income Tax Act 1961. ;


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