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Income Tax Appellate Tribunal, DELHI BENCH: “A”, NEW DELHI
Before: SHRI H.S. SIDHU & SHRI O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the Revenue is directed against order dated 06/08/2014 passed by the Ld. Commissioner of Income-tax (Appeals)-XXIV, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2011-12, raising following grounds:
Allowing the deduction of Rs.1,17,48,757/- u/s 10A of the I.T. Act, 1961 by holding that the CBDT’s circular No. 1/2005 dated 06.01.2005 with reference to Section 10B is equally applicable to Section 10A of the I.T. Act, 1961.
Holding that there was no reconstruction of business. 3. The appellant craves the right to add, alter or demand any ground of appeal.
2. Briefly stated facts of the case are that the assessee was engaged in the business of ticketing; travel related activities using software(s) supplied by its principal by undertaking such activities of tickets etc. in/from India. The assessee was carrying out its operations from its premises located at C-108, Lajpat Nagar-I, New Delhi. During the year under consideration, the assessee shifted its business premises to Software Technology Park of India (STPI) located at Gurgaon and began its operation w.e.f. 14/09/2010. The assessee filed return of income for the year under consideration on 29/09/2011, declaring total income of Rs.13,66,091/- after claiming deduction under section 10A of Income-tax Act, 1961 (in short ‘the Act’) amounting to Rs.1,17,48,757/-in respect of the profit earned from the STPI unit. The case was selected for scrutiny and notice under section 143(2) of the Act was issued and complied with. Before the Assessing Officer, the assessee claimed that in view of Notification SO-890(E) (i.e. Notification No. 11521) dated 26/09/2000, it was a travel BPO and hence entitled for deduction under section 10A of the Act. The Assessing Officer, however, rejected this contention on the ground that travel related activities or services are not included in the said notification. According to him, the assessee is not exporting any software but by using a system oriented software, it has rendered travel related services of booking tickets, hotel accommodation etc. for the employees of the bestseller A/c and, thus, it cannot be equated with the concern, who develops and export software. The Assessing Officer also highlighted that FIRC (Foreign Inward Remittance Certificate) mentioned that the amount charged by the assessee was toward IT enabled services required as per the provisions of the Act as well as the Notification (supra). The Assessing Officer also rejected the claim of deduction under section 10A on the ground that the assessee has violated the clauses (ii) and (iii) of section 10A(2) of the Act, which stipulates that eligible business should not be formed by splitting up or by transfer of plant and machinery to new business, which was previously used by an assessee. The Assessing Officer pointed out that the STP unit is nothing but a continuation and transfer of existing business to an eligible unit and such undertaking is not eligible for the benefit as per section 10A(2) of the Act. In view of the observations made, the Assessing Officer disallowed the deduction claimed of Rs.1,17,48,757/- under section 10A of the Act. 2.1 Aggrieved, the assessee filed appeal before the Ld. CIT(A) and made detailed submissions supporting its claim of eligibility of deduction under section 10A of the Act. The assessee made detailed explanation as how the assessee qualifies the expression “computer software” appearing in section 10A(1) and defined in Explanation 2(ii) below the said section. According to the assessee, any customized electronic data or any product or service of similar nature as may be notified by the Board qualifies for computer software. It was argued that first part of the above Explanation pertain to any “customized electronic data” and the second part to any “product” or “service” of similar nature as may be notified by the Board. The assessee submitted that the Board has notified 15 Information Technology enabled products of services, which includes back-office operations, call centres and support centres. According to the assessee, it is in the business of back-office travel management for corporate. It was also explained that it is service oriented unit which is servicing its clients by providing support and services in the form of backward operations and thus it is engaged in support service. The assessee provided a detailed flowchart of its business process before the Ld. CIT(A), which has been reproduced on page 9 and 10 of the impugned order. It is claimed by the assessee that it offers end to end travel BPO services, consulting and advisory services, application development and maintenance, specifically designed for travel management companies. On the basis of the submissions, the assessee claimed that it is squarely covered under categories of back-office operations or support centres. Regarding the violation of clauses (ii) and (iii) of section 10A(2) of the Act, the assessee explained that in the CBDT circular No. 1/2005 dated 06/01/2005 it has been clarified that an undertaking setup in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufacturer produced by it, which is subsequently converted into export-oriented unit, shall be eligible for deduction under section 10B of the Act on getting approval as hundred percent export oriented undertaking. The assessee claimed that aforesaid circular is equally applicable in respect of Section 10A of the Act as held by the Hon’ble High Court of Karnataka in the case of CIT Vs. Export Outsource Private Limited, (2011) 358 ITR 518. According to the assessee, there is neither reconstruction of the firm nor setting up of by splitting up of an earlier firm. After considering the submission of the assessee the Ld. CIT(A) allowed the claim of the assessee of deduction under section 10A of the Act observing as under:
“5. I have carefully considered the submission made by the A.R. of the appellant and assessment order. It is noted that the appellant firm was incorporated on 18.12.2008. The appellant firm was carrying out the business providing services relating to ticketing and travelling. Subsequently, it became an approved 100% export oriented unit operating under software technology park scheme (STPI) vide approval no. STPIN/APP/5262010/201340 dated 26.05.2010 and letter of permission was granted to it on 12.08.2010. The unit commenced manufacturing or production in terms of Section 10A(1A) w.e.f. 14.09.2010. Thereafter, the appellant claimed deduction u/s 10A for the relevant assessment year 2011- 12 i.e. the year in which it has got approval as 100% export oriented undertaking for the period 15.09.2010 to 31.03.2011. It is further noted that the Assessing Officer has disallowed the claim of deduction of the appellant u/s 10A on two grounds. The Assessing Officer was of the view that the appellant firm has been reconstructed as 100% export oriented unit for the purposes of claiming deduction u/s 10A and secondly, the appellant is carrying on the business of travel BPO (Business Process Outsourcing) and therefore it is not entitled for deduction/exemption u/s 10A. It is observed that the Assessing Officer has not given any reason for treating the appellant firm as reconstructed. Admittedly the appellant firm was engaged in the business of travel related services in the domestic tariff area before 14.09.2010 i.e between the period 18.12.2008 to 14.09.2010. During the aforesaid period, the appellant has not claimed any deduction u/s 10A. After 14.09.2010 the firm got the approval of STPI unit from the Director Software Technology Park of India and relocated in a Software Technology Park. Incircular No. 1/2005 dated 06.01.2005 the CBDT has clarified that an undertaking set up in domestic tariff area (DTA) and deriving profits from exports of articles or things or computer software or manufactured or produced by it, which is subsequently converted into a export oriented unit, shall be eligible for deduction u/s 10B of the I T Act on getting approval as 100% export oriented undertaking. The aforesaid circular is equally applicable in respect of Section 10A of the I T Act as held by the Hon’ble High Court of Karnataka in the case of CIT vs. Expert Outsource Pvt. Ltd. (Supra) and ITO vs. Maxim India Integrated Circuit Design Pvt. Ltd. (Supra). In this case, the appellant has merely transferred its business from the domestic tariff area to the Software Technology Park. This fact has also been admitted by the Assessing Officer in her order. There is neither re-construction of the firm nor the setting up by splitting up of any earlier firm. Therefore, conditions as mentioned in Section 10A(2)(ii) & (iii) are not violated as there is neither splitting up nor the reconstruction of the business already in existence because conversion and splitting up or the reconstruction are completely different terms. Reliance in this regard is placed on the decision of Hon’ble ITAT Delhi in the case of Cadtrium Engineering Solutions Pvt. Ltd. (Supra). Otherwise also, once the approval of STPI DTA Unit to a STP Unit, the conditions stipulated u/s 10A(2) of the Income Tax Act would stand complied with. The Assessing Officer has erred in her finding that the appellant firm has been reconstructed. On the contrary, it is noted that the appellant firm has only shifted its unit from the DTA to STP Area. Hence, in my opinion, the appellant firm is entitled for deduction/exemption u/s 10A of the IT Act.
It is further noted that during the relevant assessment year the appellant had total turnover of Rs.3,77,38,067.53/-. However, from 14.09.2010 to 31.03.2011, the appellant had the turnover of Rs.2,59,12, 583.52/- and on the aforesaid export from the Software Technology Park, net profit of Rs.1,12,08,368.14/- was earned and claimed to be exempt u/s 10A. It is worthwhile to mention that during the relevant assessment year, the total profit derived from business on the turnover of Rs. 3, 77, 38, 067.53/- was Rs. 1, 25, 01, 686.41/- out of which the appellant firm has shown export turnover of Rs. 2, 59, 12, 583/- and have shown profit of Rs. 1, 12, 08, 368.14/-. The Assessing Officer has disallowed the aforesaid claim of deduction only on the ground that the travel related activities or services are not included in the list of approved IT enabled services by the CBDT in notification no. SO-890(E) dated 26.09.2000. I do not agree with the aforesaid view of the Assessing Officer. The Assessing Officer has not controverted the claim of the appellant that its case is covered as the IT enabled service provider as BPO or the back office services. It is noted that the appellant has provided travel related services to only one concern namely Best Seller A/S Denmark and the aforesaid services has been provided with the help of computers. Further, computer software means any customised electronic data or any product or service of similar nature for the purposes of back office operations, call centers, website services. These services are duly covered in notification no. SO-890(E) dated 26.09.2000 issued by the CBDT. The CBDT has not excluded the travel BPO in the aforesaid notification. Therefore, I am of the considered opinion that the appellant was engaged in the business of providing IT enabled services in the form of a BPO or as a back office service provider and entitled for deduction u/s 10A. Hence, the Assessing Officer is directed to allow the impugned deduction claimed by the appellant u/s 10A of the I T Act.”
2.2 Thus, the Ld. CIT(A) has rejected both the finding of the Assessing Officer that the assessee was not engaged in manufacturing or export of the computer software and violation of clauses (ii) and (iii) of section 10A of the Act.
2.3 Aggrieved with the above finding of the Ld. CIT(A), the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.
Before us, the Ld. DR relied on the order of the Ld. Assessing Officer and submitted that the assessee does not qualify for the deduction under section 10A of the Act. He submitted that assessee was engaged in providing services of ticketing, hotel reservation and other associated services to its sole client and those services cannot be termed as back-office operations or support centres. He further submitted that no documentary evidences have been submitted by the assessee before the Ld. CIT(A) in support of its detailed explanation of the business process and Ld. CIT(A) without providing any opportunity to the Assessing Officer for rebutting those claims and has decided the issue in dispute in violation of the principle of natural Justice. He also submitted that apparently the assets of the old existing unit have been transferred to the new unit at STPI, and thus claim of no reconstruction of the firm or forming of new unit by way of the splitting of the old unit need verification by the Assessing Officer. He further submitted that in view of section 10A(7B) of the Act the undertaking which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any special economic zone, the assessee is not eligible for deduction under section 10A of the Act.
On the contrary, Ld. counsel of the assessee filed a paperbook containing pages 1 to 25 and submitted that it has satisfied all the conditions required for claiming deduction under 10A of the Act. The Ld. counsel relied on the detailed submission filed before the Ld. CIT(A) and also the case laws relied upon by the Ld. CIT(A) for allowing the deduction to the assessee. The Ld. counsel submitted that provisions of section 10A(7B) are with reference to section 2(zc) of the SEZ Act only i.e. unit set up under Special economic zone(SEZ) on or after 1st April, 2006 as w.e.f. the said date special provisions in respect of newly established units in any special economic zone section 10AA has been introduced. According to the Ld. counsel, therefore, section 10A of the Act continues to apply on STPI undertaking.
We have heard the rival submissions and perused the relevant material on record. The undisputed facts of the case are that the assessee firm was incorporated on 18/12/2008 and has been engaged in the providing services of ticketing, hotel booking etc since then. The assessee became an approved 100% Export Oriented Unit (EOU) operating under Software Technology Parks Scheme vide approval of even number dated 20/06/2010. The unit commenced its activity from the STP unit w.e.f. 14/09/2010. The dispute is in respect two issues :
1. 1. whether the activity carried out at the STPI unit are eligible business under section 10A of the Act; and 2. whether there is any violation of clause (ii) and (iii) of section 10A(2) of the Act.
6. The Assessing Officer disallowed the deduction holding that the assessee has not exported any software but using a system oriented software and it has rendered travel related services of booking tickets, hotel accommodation etc for the employees of its sole client. The Assessing Officer also held the assessee for (ii) and (iii) of section 10A(2) of the Act. We find that before the Ld. CIT(A) the assessee has made detailed representation about the business process to canvass its claim that activities carried out at STPI units are eligible for deduction under section 10A of the Act. The detailed submission filed by the assessee are reproduced by the Ld. CIT(A) in the impugned order from pages 4 to 19 of the impugned order. In para 4.1 to 4.1.1 of the impugned order, the Ld. CIT(A) has reproduced the explanation of the assessee that conversion of the existing DTA into a STP unit was not in violation of clause (ii) and(iii) of section 10A(2) of the Act and it was nothing but continuation and transfer of existing business to an eligible unit. In para 4.2 of the impugned order, the Ld. CIT(A) has reproduced contention of the assessee regarding eligibility of computer software manufacturing and export. The Ld. CIT(A) has reproduced the entire business process explained by the assessee claiming that it was in the nature of back-office operations or support centres as notified by the CBDT for the purpose of meaning of computer software. The Ld. CIT(A) has nowhere mentioned about any documents submitted by the assessee in support of the claim of the entire business process of the assessee. Thus, it is evident that the Ld. CIT(A) in this regard has relied mainly on the submission of the assessee. Now, let us examine the eligibility of the assessee for the deduction under section 10A of the Act. The section 10A applies to undertakings established in free-trade zone, software technology Park and special economic zone. The section 10A(1) which prescribes requirement of export of articles or things or computer software for claim of deduction is reproduced as under for ready reference:
Special provision in respect of newly established undertakings in free trade zone, etc. 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking 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 :
Thus, for eligibility of the deduction under section 10A, the assessee is required not only to manufacture or produce but also essentially required to export those articles, things or computer software. For the purpose of this section, the word “computer software” has been defined in Explanation 2(i) as under: “(9A) [Omitted by the Finance Act, 2003, w.e.f. 1-4-2004.] Explanation 1.—[Omitted by the Finance Act, 2003, w.e.f.1-4-2004.] Explanation 2.—For the purposes of this section,— (i) "computer software" means— (a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means;”
The assessee has claimed its eligibility under clause (b) of the explanation. According to the assessee, it falls under any product or service of similar nature as may be notified by the Board. The assessee has submitted that the Central Board of Direct Taxes (CBDT) has notified by way of notification (supra) following services for the purpose of meaning of “computer software”: “In exercise of the powers conferred by clause (b) of item (i) of Explanation 2 of section 10A, clause (b) of item (i) of Explanation 2 of section 10B and clause (b) of Explanation to section 80HHE of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the Information Technology enabled products or services, as the case may be, for the purpose of said clauses, namely : (i) Back-office Operations; (ii) Call Centres; (iii) Content Development or Animation; (iv) Data Processing; (v) Engineering and Design; (vi) Geographic Information System Services; (vii) Human Resource Services; (viii) Insurance Claim Processing; (ix) Legal Databases; (x) Medical Transcription; (xi) Payroll; (xii) Remote Maintenance; (xiii) Revenue Accounting; (xiv) Support Centres; and (xv) Web-site Services. [F. No. 142/49/2000-TPL] 9. The claim of the assessee before us is that it was engaged in providing back-office operations or support Centre provided in the above list at Serial No. (i) and Serial No. (xiv). 10. Thus, when we read the section 10A(1) along with the Explanation 2(i), we find that the assessee was required to manufacture or produce and export the services of back-office operations or support Centre. But, according to the Assessing Officer, the assessee has sold flight tickets and hotel reservations and other amenities to its sole client. The Ld. Assessing Officer FIRC certificates to support his stand that proceeds were received from tour and travel activity. According to the assessee, it has provided only back-office operations or support Centre.
From the facts submitted before us, it is not clear whether the proceeds received include the cost of the airfreight or hotel accommodation, which in itself cannot be termed as proceed of export of back-office operation or support Centre. It is also not clear how much part of the services rendered would amount to manufacture and export of computer software. Both these issue are crucial for adjudicating the issue in dispute regarding eligibility of the business of the assessee for deduction under section 10A of the Act. Before us, the Ld. DR has submitted that no documentary evidence in support of entire business process explained before the Ld. CIT(A) has been filed either before the Assessing Officer or before the Ld. CIT(A). We also note that an agreement between the sole client of the assessee i.e. M/s bestseller A/s was filed before the Ld. CIT(A). It is not clear whether the said agreement was filed before the Assessing Officer or not. In view of the above facts and circumstances of the case, we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding afresh with the direction to the assessee to produce all the documentary evidence in support of its claim that its activities falls under the services of back-office operation or support Centre as listed out in the notification (supra) of the CBDT. The assessee shall be provided adequate opportunity of being heard.
As far as the issue of violation of clauses (ii) and (iii) of section 10A(2) of the Act is concerned, the relevant provisions for ready reference , are reproduced as under: “Special provision in respect of newly established undertakings in free trade zone, etc. 10A. (1) ……………………………………………………………………………………. (2) This section applies to any undertaking which fulfils all the following conditions, namely :— (i) ……………………………………………………………………………………. (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.—The provisions of Explanation 1 and Explanation 2 to sub- section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (ii) of that sub-section.”
On the issue of violation of clause (ii) and (iii), The Ld. CIT(A) has relied on the Circular No.1/2005 of the CBDT dated 06/01/2005 and decision of the Hon’ble High Court of Karnataka in the case of CIT Vs. Expert outsourced private limited (supra) and held that there is no splitting up or reconstruction of a business already in existence. In the said circular, it has been clarified that an undertaking setup in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufacturer or produce it, which is subsequently converted into export-oriented unit, shall be eligible for deduction under section 10B of the Act on getting approval as hundred percent export oriented undertaking. The Hon’ble High Court of Karnataka in the case of M/s Expert Outsourced Private Limited (supra) has held that aforesaid circular is equally applicable in respect of section 10A of the Act. In view of the above, we do not find any error in the order of the Ld. CIT(A) as far as the conditions of clause (ii) of section 10A is concerned, but the conditions of clause (iii) of section 10A(2), whether any machinery or plant previously used for any purpose has been transferred to the STP unit is not clear from the facts available on record. Since we have already restored the issue of eligibility of the business of the assessee to the file of the Ld. Assessing Officer, we feel it appropriate to restore this issue also to the file of the Assessing Officer for verifying and then decide in accordance with law. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard 14. As far as argument of the Ld. DR that, the assessee is not qualified for deduction in view of section 10A(7B) of the Act, is concerned, the said sub-section is reproduced as under :
Section 10A(7B): The provisions of this section shall not apply to any undertaking, being a Unit referred to in clause (zc) of section 2 of the Special Economic Zones Act, 2005, which has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone.
We find from section 10A(2)(i) that the section 10A applies to undertakings which began or commenced manufacturing in free trade zone, software technology Park or special economic zone. The relevant part of the section 10A(2)(i) is reproduced as under:
10A(2) This section applies to any undertaking which fulfils all the following conditions, namely :— (i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year— (a) commencing on or after the 1st day of April, 1981, in any free trade zone; or (b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; (c) commencing on or after the 1st day of April, 2001 in any special economic zone;
Since the section 10A(7B) is with reference to undertakings in special economic zone, the same cannot be applied over the units in Software Technology Park. Accordingly, we reject this contention of the Ld. DR.
Accordingly, the ground of the appeal of the Revenue is allowed for statistical purposes. 18. In the result, the appeal of the Revenue is allowed for statistical purposes. Order pronounced in the open court on 14th March, 2019.