Income Tax Appellate Tribunal - Pune
Conexant System (Pb)Pvt. Ltd, Pune vs Assessee on 17 March, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL
Pune Bench B , Pune
Before Shri I.C. Sudhir (JM)
and Shri D. Karunakara Rao (AM)
ITA Nos. 12/PN/2007, 1805/PN/2005 & 1047/PN/2006
(Asstt. Years : 2001-02, 2002-03 & 2003-04)
Conexant Systems (PB) Pvt. Ltd. ..... Appellant
(formerly known as Paxonet
Communications (India) Private Limited)
Westend Center III, 4th Floor,
S.No. No. 169/1, Sector II, D.P. Road,
Aundh,
Pune 411 007
PAN : AABCC 3455 F
v.
Asstt CIT/ Dy CIT, Circle 4, ,Pune .... Respondent
ITA No. 552/PN/2008
(Asstt. Year : 2004-05)
Conexant Systems Private Limited ..... Appellant
(formerly known as Conexant Systems
(PB) Private Limited)
Westend Center Three, 4th Floor,
S.No. No. 169/1, Sector II, D.P. Road,
Aundh,
Pune 411 007
PAN : AABCC 3455 F
v.
Asstt CIT, Circle 4, ,Pune .... Respondent
Appellant by : S/Shri Kanchan Kaushal, Danesh Bafna &
A.
Deshmukh
Respondent by : Shri R. Kaushal & Ms. M. Madhusmita
ORDER
Per I.C. Sudhir JM In all these appeals, the assessee has questioned first appellate order mainly on the ground that the Ld CIT(A) has erred in upholding the disallowance of deduction made u/s. 10B of the Act. 2 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37
2. The Ld. A.R. preferred to address ITA No. 1805/PN/2005 i.e. for the A.Y. 2002-03 first. The assessee has questioned first appellate order on the following Grounds :
"1 Disallowance of Deduction under section 10B of the Act - Rs. 1,02,22,071 The CIT(A) has, based on the facts of the case and in law, erred in disallowing Your Appellant's claim for deduction under section 10B of the Act amounting to Rs.1,02,22,071 Your Appellant prays that the said claim in computing the Total Income of Your Appellant should be allowed.
2 Treatment of the Company's undertaking as 'formed' by the reconstruction of a business in existence The CIT(A) has, based on the facts of the case and in law, erred in holding that the Company is not a new undertaking but a reconstruction of another company.
On the basis of various contentions mentioned in the CIT(A)'s Order, none of which are correct, the CIT(A) has come to an erroneous inference that Your Appellant is a reconstruction of the business of CG-Corel Logic Systems Ltd.
Your Appellant prays that the Company's undertaking be considered as being eligible to the deduction under section 10B of the Act as it is not 'formed' by the reconstruction of a business already in existence.
3. Holding that the Company was set up as a colourable device to extend the period of deduction available to Core El Logic Systems Ltd 3 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 The CIT(A) has, based on the facts of the case and in law, erred in holding that the Company was set up as a colourable device to extend the period of deduction available to CG-Core El Logic Systems Ltd.
The CIT(A) ought to have appreciated that in view of the facts of the case and in law, Your Appellant could not be said to be set up as a colourable device to enhance the period of deduction available to CG-CoreEL Logic Systems Ltd.
The CIT(A) ought to have appreciated that there was no evidence on record to substantiate the abovementioned contention and that the said contention has been made only on the basis of surmises made by the AO which were mechanically confirmed by the CIT(A).
4 Initiation of penalty proceedings The CIT(A) has, based on the facts of the case and in law, erred in initiating penalty proceedings under section 271(1)(c ) of the Act."
3. Besides above, the assessee has moved application seeking permission to raise following additional Grounds of appeal :
"Ground No.6: "That the Appellant prays that the deduction be considered under section 10A of the Act rather that under section 10B of the Act.
Ground No.7: That the Bangalore unit and Pune unit are registered with separate STP authorities, have separate responsibilities towards earning foreign exchange, have separate employees and have operations at different locations and should be considered as separate undertaking for the purposes of section 10A of the Act."4 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37
4. In support of above application, the Ld. A.R. submitted that the deduction claimed be considered u/s. 10A rather than Section 10B of the Act for the units situated in Pune and Bangalore which are separately registered by the STPI authorities. He submitted that the A.O. in its assessment order itself observed that the deduction claimed u/s. 10B should be read as Section 10A and accordingly, he has made disallowance upheld by the Ld CIT(A). He submitted that provisions of both the Sections being very similar will not alter any amounts and stated positions. The assessee by way of the present application seeks to raise additional Grounds stating that Section 10A of the Act is correct Section in law for STPI registered units. On the admissibility of aforesaid additional Grounds, the Ld. A.R. placed reliance on the judgment of Hon'ble Supreme Court in the case of National Thermal Corporation Ltd. v/s. CIT, 229 ITR 383 (SC) wherein it is held that an appellate authority has all powers which the original authority had in deciding any question before it. He submitted further that the issue raised in the additional Grounds is purely legal in nature and all the facts in regard to the aforesaid additional Grounds are already on record and adjudication of these additional Grounds does not require any further investigation of facts.
5. The Ld. D.R., on the other hand, opposed the application with the submission that such issue was not raised before the authorities below and even before the Tribunal the assessee has raised the issue in the additional Grounds at a very belated stage that too without assigning any reason for delay.
5 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37
6. Considering the above submission especially the issue raised in the above additional Ground is legal in nature and for adjudication of which, no fresh material outside the record is required to be considered, We, allow the above stated additional Grounds for our adjudication. We, will however decide the issue raised in the additional Grounds consequently while disposing of the main Grounds in the appeal as the issue raised in the additional Grounds is connected with the main Grounds.
7. We have heard and considered the arguments advanced by the parties in view of the orders of the authorities below, material available on record and the decisions relied upon. Ground No. 1, 2 & 3
8. The relevant facts in brief are that the appellant assessee, a 100% export oriented software technology park unit claimed deduction u/s. 10B of the Act of Rs. 1,02,22,071/- in its return of income for the year. It claimed that it has fulfilled all the conditions laid down u/s. 10B of the Act to be eligible for the deduction under the said Section. As per the audit report, the assessee is in the business of design and development centre for computer hardware and computer software. It was submitted that assessee had exercised its option for the entitlement to claim deduction u/s. 10B from the A.Y. 2001-02 as prior to that, there was no profit. Assessee company started in F.Y. 1999- 2000. It was submitted that assessee was earlier known by the name Core EL Labs Pvt. Ltd. On 21st December 2000, assessee changed its name to Paxonet Communication (India) Pvt. Ltd. (in short 'P'). Now 6 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 its known as Conexant Systems (PB) Pvt. Ltd. The A.O disallowed the claimed deduction u/s. 10B of the Act at Rs.1,02,22,071/- on the ground that the assessee is formed by reconstruction of the business of C.G. Core EL Logic Systems Ltd by holding that -
(a) the business of the appellant is the same as that of CGCLS
(b) the undertaking of the appellant was formed with five employees of CGCLS and even as on 31-3-2000 a majority of appellant's employees were employed by CGCLS.
(c) the directors of the p and CGCLS are common.
(d) The turnover of CGCLS has drastically gone down since the beginning of appellant's business.
(e) the appellant is using assets purchased from CGCLS
9. Before Ld CIT(A), the assessee tried to explain the above objections raised by the A.O regarding its eligibility for the claimed deduction. The Ld CIT(A) did not agree and upheld the action of the A.O in rejecting the claimed deduction. For ready reference, para No. 2.3 and 2.4 of the first appellate order is being reproduced hereunder :
"2.3 I have carefully considered the submissions of the appellant and perused the material on record. A perusal of records shows that CG Core EL Logic Systems Ltd. was owned by Crompton Greaves Ltd. and Chetan Sanghvi, both having 50% share in this company. The conclusion of the Assessing Officer is that the appellant company is not an independently established undertaking, but has been formed as a result of reconstruction of the earlier company CG Core EL Labs Pvt. Ltd. and now known as Paxonet Communications (India) Pvt. Ltd., which is 100% subsidiary of Core El Microsystems Inc., USA, which is owned equally by Crompton Greaves Ltd. & Chetan Sanghvi. Thus, in effect the ultimate ownership of the company remains with the same persons of both the companies. However, it is a fact that CG Core EL Logic Systems Ltd was directly owned by Crompton Greaves Ltd. and Chetan Sanghvi having shares of 50% each, whereas the appellant company is 100% subsidiary of Core El Microsystems Inc., USA (now known as Paxonet Communications 7 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Inc.). Core El Microsystems Inc., USA in turn owned by Crompton Greaves Ltd. & Chetan Sanghvi, both having 50% shares each. Thus, it is a fact that the ultimate ownership of the appellant company as well as CG Core EL Logic Systems Ltd. continues to be with Crompton Greaves Ltd. and Chetan Sanghvi.
As regards submission of the appellant company that it is a product company, whereas CG Core EL Logic Systems Ltd. was a service company and, therefore, the nature of business of the two companies is different, it may be mentioned that this submission of the appellant is found to be wrong on facts. A perusal of the first annual report for the Financial Year 1999- 2000 in case of the appellant company containing Schedule-12, which deals with note on accounts at Sr.No 9 shows the following decription at Subserial No.V:-
"Generic names of Principal Products, Services (Item code) of Company Design of Integrated Circuits N.A."
The annual report for the Financial Year 2001-2002, which is relevant for the Assessment Year under consideration, contains Schedule-13 dealing with notes on accounts and therein item No. 10(subitem-V) shows generic names of Principal Products, Services of the company and in the relevant column, the description is given as design of integrated circuits as is the case in annual report for the year 1999-2000. It may be mentioned that the assessment record of CG Corel EL Logic Systems Ltd. for the Assessment Year 2000-01 show annual accounts for the Companies Act and Schedule-16 of this accounts, which deals with notes on accounts, shows at item No. 10(V) generic names of principal producers/services of the company, which is described as 'design or integrated circuits'. This clearly shows that the product of CG Core EL Logic Systems Ltd. and the appellant company bears the same generic names. 8 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 It may also be mentioned that even during the course of hearing of the appeal, it was the submission of the appellant that earlier the company was carrying out the business as a service company. It may further be mentioned that a look at the object & ancillary object of both the companies shows that the business of both the companies is the same. A perusals of the assessment records of the appellant company shows that it has submitted nature of business of the two companies vide letter dated 17-3-2005, which was received in the Assessing Officer's office on 18-3-2005. The operative portion of this letter is reproduced as under :-
"1. CG Core El Logic Systems Ltd. (CGCLSL) was the joint venture in India between Crompton Greaves Ltd. and Mr. Chetan Sanghvi. Either of them held 50% of the Equity in CGCLSO. CGCLSL was working on development of products for telecom applications. It was also in training and distribution of FPGAs.
2. Core EL Microsystems Inc.(CMS) was a company registered in the U.S.A. It, too, was a joint venture between Crompton Greaves Ltd. and Mr. Chetan Sanghvi. Either of them 50% of the Equity in CMS.
3. In 1999, the promoters, Crompton Greaves Ltd. and0 Mr.Chetan Sanghvi, decided that the focus be shifted to development of IP Cores and development of semiconductor chips for telecom applications and also to seek venture finding for the same. As a result, Core El Labs was incorporated in the U.S. This was followed by incorporation of CoreEl Labs Pvt Ltd in India as a wholly owned subsidiary of CoreEl Labs Inc.The name of the parent company as also the Indian subsidiry was respectively changed to Paxonet Communications Inc. and Paxonet Communications Pvt. Ltd. in 2000. Almost all employees of CGCLSL resigned in 1999/2000 and joined CoreEl Labs Pvt Ltd."9 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 The discussion in para-1 and para-3 of the aforesaid letter shows that the products of both the companies were in respect of telecom applications. Thus, the description of the business as contained in appellant's letter and also as contained in the annual accounts of both the companies make it absolutely clear that the business of CG Corel EL Logic Systems Ltd. and the appellant company is the same.
During the course of appellate proceedings, it was submitted by the appellant that the earlier company, viz. CG Core EL Logic Systems Ltd., was a service company whereas the appellant is a product company. In this regard, it may be mentioned that the appellant is engaged into semantics by saying that the business of the two companies is different. In fact, CG Core EL Logic Systems Ltd. was making the same product on or on behalf of third parties, whereas the appellant company is producing similar items of product on its own and marketing the same to different customers. This shift in focus from captive customers to customers at large, in my considered view, does not change the nature of business of the appellant company because the product of the company remains the same.
2.4 It is a fact that the appellant company has taken over the entire assets of CG Core EL Logic Systems Ltd. except the following assets :-
(a) Electrical Installations.
(b) Furniture & Fixtures
(c) Part of vehicles.
A perusal of the records shows that all plant & machinery & computer softwares of CG Core EL Logic Systems Ltd. Were transferred to the appellant company on WDV as per Companies Act. This transfer, it is claimed, has taken place in June, following the Financial Year 1998-99 where the appellant company came into existence. The appellant company made 10 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 only one sale in March 2000. Thus, in fact, the business of the company has started only in the Financial Year 2000-01, though technically one sale has taken place in March 2000. Therefore, the business of the appellant company in technical terms started in the Financial Year 1999-2000. It is trite law that the revenue authorities are entitled to look into the surrounding circumstances of the issue involved. What has been done in the present case amounts to planning the things in such a way that the provisions relating to splitting or reconstruction is made inapplicable by taking premeditated steps in case of two companies where the control remains in the same hands. As mentioned earlier, in substance & in effect, the appellant company as well as the earlier company, CC Core EL Logic Systems Ltd. were owned by Crompton Greaves Ltd. and Mr. Chetan Sanghvi, Because exemption in case of CG Core EL Logic Systems Ltd was coming to an end after expiry of five years period, the appellant company has been established. On given facts, I have no hesitation in holding that taking into account the nature of the business, transfer of assets and other relevant facts & circumstances of the case as also taking into account the judicial pronouncements relevant on the issue and also for reasons given by the Assessing Officer, it is a case where the company, which the appellant company, has been brought into existence by splitting up or reconstructing the business of CG Core EL Logic Systems Ltd. Therefore, it is held that the appellant is not entitled for deduction under section 10B of the Income Tax Act 1961 and the Assessing Officer has rightly disallowed the same."
10. The Ld. A.R. before us tried to meet out the objections raised by the authorities below regarding the eligibility of the assessee for the claimed deduction. He first submitted about the background of Core EL Micro Stamps Inc and emergence of other concerns including the assessee. In this regard, the Ld. A.R has also furnished brief note with 11 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 copy to the other side. We reproduced hereunder those brief background and facts of the case as per the said brief note :
"A. Brief background and facts of the case
1. Background of CMS
1. CoreEL Microsystems Inc, ('CMS'), a US company is a 100% holding Company of the Appellant. The name of CMS was subsequently changed from CoreEL Microsystems Inc to Paxonet Communication Inc., in 2001. Prior to 1999, CMS was involved in the business of design services of semi-conductors.
2. During the period from 1996 to 1999 CMS derived its revenue approx. as follows:
Ø From Xilinx Inc (design service and distribution revenue)-
45% Ø Design service & intellectual property business from OKI Semiconductor and Exar Corporation - 26% Ø Local consulting - 10% Ø Other intellectual property, distribution & design service business - 19%
3. CMS performed certain services and used to outsource some of its activities to CG Core EL Logic Systems Ltd. (CGCLS or "LOGIC') Tasks outsourced involved FPGA (field programmable gate array) design, VLSI design verification, assistance in verifying intellectual property design and assistance in supporting FPGA customers in India, whereas CMS itself performed intellectual property architecture and key technology critical design.
4. In 1999, major changes occurred in the business activity of CMS due to the following:12 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Ø Its main customer Xilinx Inc which accounted for 45% of the revenue discontinued its business with CMS. Ø CMS's major customer, OKI Semiconductor decided to close its development subsidiary in USA in 1999. In addition the project of other major customer Exar Corporation was completed in 1999.
Ø Design agreements with other major customers were either terminated or came to an end as more and more customers incorporated CMS IP blocks in their own semi conductors.
5. As evident from above, in 1999 there was drastic set back in the business of CMS. At this point CMS had no third party jobs to outsource to LOGIC. This consequently effected the business executed by CGCLS for CMS.
6. Due to above, CMS had only two options, it could either close its operations or start afresh by raising additional funding and recruit a new engineering team. CMS was able to raise a small round of funding from venture capitalists on the condition that it would not be dependent on Logic (which was not owned by CMS) and get out of all IP and design service business in which it was engaged during the period 1996 to 1999, and focus on developing its own product.
Therefore, CMS took steps to become an optical semiconductor company. Consequently target customers of CMS changed from existing set of customers.
(ii) Background of C Labs or the Appellant
7. CGCLS was a company registered in India,with its registered offices in Pune. CGCLS was not a research & development arm of CMS at any point of time. It simply performed point to point tasks assigned to them based on very specific requirement of the customers of CMS. Tasks performed by CGCLS specifically involved. Ø Tasks under contract from CMS - which involved design, verification and preparing test criteria.
Ø Tasks under contract from Cromptom Greaves Ltd. 13 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Ø Tasks under contract from third parties in India - which involved hardware design services and consulting and FPGA designs. Ø It was involved in the development of certain telephony intellectual properly targeted for the Indian market. After 1999, LOGIC over the years has build on this business and continues to be in operation today employing close to 35 employees.
(iii) Background of C Labs or the Appellant
8. In 1999, in light of the facts stated in Para 4 & 5 above, CMS decided to do designing and development of its own products (i.e. own semiconductors as marketable products) which is clearly distinct from the business of rendering design services to other companies), and for that purpose a new company was incorporated in India on December 1, 1999 as CoreEl Labs P. Ltd ('C Labs') i.e. the Appellant.
9. Appellant was formed specifically to engage in the research and development for the design and development of semi-conductor state-of-art Optical Networking IC (Integrated Circuits) to be commercially marketed and supporting hardware and software products, particularly for communications industry.
10. Appellant has two STPI undertakings one in Pune (approved by STPI on May20, 2000)
11. In the year of formation Appellant had a capital base of Rs 2 crore and had made an investment of approx. 1.23 crores in Plant & Machinery, fixed assets etc.
12. During the years under consideration, the Appellant had claimed deduction under section 10A (inadvertently mentioned as 10B) of the Income-tax Act, 1961 ('the Act') on the profits derived from the STPI units. However, in the first year of operation of the Appellant i.e. 1999-00 in view of losses no deduction under section 10A of the Act was claimed with respect to Pune unit.
14 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Details of undertaking wise deduction claimed u/s 10A of the Act by the Company is as below :
Assessment Total Pune unit Bangalore Remarks Year Deduction unit 2001- 33,288,367 25,999,879 7,288,489 Original return of 02(Revised income was filed Return) along with consolidated Form 56G. Later on revised return was filed along with Form 56F claiming 10A deduction separatey for Pune and Bangalore unit.
2002- 10,222,071 9,528,607 789.911 Original return of
03(Original income was filed
Return alongwith
consolidated
Form 56G
2003-04 15,115,116 15,0,44,086 71,030 Original return of
(Revised income was filed
Return) along with
consolidated
Form 56G.Later
on revised return
was filed along
with Form 56F
claiming 10A
deduction
separately for
Pune and
Bangalore unit.
2004- 18,016,525 18,016,525 (1,012,289) Original return of
05(Revised income was filed
Return) along with
consolidated
Form 56G. Later
on revised return
was filed along
with Form 56F
claiming 10A
deduction
separately for
Pune and
Bangalore unit.
Date of January 7, May
STPI 2000 20,2000
Approvals
15 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008
Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37
11. The Ld. A.R. also made detailed submissions as to how the assessee is entitled for claimed deduction. He tried to meet out the objections raised by the authorities below, against the claimed deduction. We reproduce hereunder the submissions of the Ld. A.R. regarding the entitlement of claimed deduction.
"C. Submissions At the outset, it is respectfully submitted that the Appellant is not formed as a reconstruction of CGCLS as the words used in section 10A/10B (which is pari materia with erstwhile section 80J, section 80- IA, etc) i.e. "splitting up" or "reconstruction" of the business already in existence necessarily suggests the splitting up or reconstruction of the existing business of the assessee. The words "of the assessee" have necessarily to be read into the sub-section. In the instant case, the Appellant and CGCLS are two distinct entities and cannot be termed to be formed as a result of splitting up or reconstruction of the existing business of the assessee. In support of the above proposition, reliance is placed on the following decisions :
Sr.No. Particulars Citations
1. Electronics Corporation of India 151 ITR 381 (A.P.) Ltd Vs CIT
2. CIT Vs Suessin Textile Bearing 135 ITR 443(Guj) Ltd.
Further, the AO / CIT(A) disallowed the appellant's claim for deduction under section 10A of the Act and held that the Appellant is not a new undertaking but a reconstruction of another company, CGCLS on the following grounds.
(i) that the ultimate shareholders of both the companies were same In this rgard, it is submitted that in the year of formation the Appellant had a capital base of Rs. 2 crore which was brought in by way of remittance of funds from its holding company. Whereas CGCLS had a capital base of only 1.05 crores in the fifth year of its operations.16 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Further, it is respectfully submitted that the ultimate shareholders of both the Companies were not same at the time of incorportion of Appellant and subsequent period thereto. Please refer to the duly certified statement issued by the corporate counsel filed along with the application for admitting the additional evidence stating the exact number and percentage of shares held by the shareholders in CMS which would duly substantiate the fact that in the very year of formation of the Appellant itself the ultimate shareholding of CGCLS and that of CMS was different. It should also be noted that a significant percentage of holding in CMS was by individuals or companies that were not citizens of India, or person's of Indian origin, or had any previous affiliations with Indian companies. The shareholding pattern of both the Companies in AY 2000-01 (first year of operations of the Appellant) was as under (Please refer paper book of A.Y. 2002-03 Page 37):
Shareholders In CMS (%) In CGCLS (%) In Appellant (%) Chetan 29.8 50 .1% Sanghavi Crompton 28.9 50 Greaves Others 41.3 -
CMS NA - 99.8%
T A Ramaswamy .1%
Total 100 100 100
Without prejudice, it is respectfully submitted that the fact that the
owners/management of the newly formed undertaking / company are the same as the old undertaking / company cannot be the basis for denying the benefit of Section 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence.17 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Sr.No. Particulars Citations
3. CIT vs. Premier Cotton Mills Ltd 240 ITR 434 (Mad)
4. CIT vs. Hindustan Mallables & 191 ITR 70 (Pat) Forgins Ltd.
5. CIT vs Mahesh Chand Gupta 279 ITR 396 (All)
6. CIT v Electric Construction & 104 ITR 101 (Cal) Equipment Co. Ltd
7. CIT vs. Indian Aluminium 108 ITR 367(SC) Co.Ltd.
8. CIT vs. Metropolitan Springs 191 ITR 288 (Bom) (P)Ltd.
9. CIT vs. Gedore Tools India Pvt. 126 ITR 673(Del) Ltd.
10. CIT vs Ambur Coop. Sugar Mills 127 ITR 495 (Mad) 11. ITO vs. DSM Soft (P) Ltd. 115 TTJ 469 (Chennai)
12. International Instruments (P.) 123 ITR 11 (Kar) Ltd. Vs CIT
13. Commissioner of Income-tax vs 120 ITR 110 (Cal HC) Rohtas Industries Ltd.
14. Mahindra Sintered Products Ltd. R 111 (Bom HC) vs Commissioner of Income-tax
(ii) that the Directors of both companies were the same It is respectfully submitted that the directors of both the Companies were not same (Please refer Paper Book for A.Y. 2002-
03 Page No. 33 & 55). The list of directors as on 31st March 2000 of both the Companies was as under:
CGCLS Appellant
K.K. Kohri T.A. Ramaswamy
B.M. Suri S. Jayaram
Mr.Chetan V. Sanghavi Mrs. Champa V. Sanghavi
V.M. Sanghavi
18 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008
Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Without prejudice to the same it is hereby submitted that the fact that the unit has common directors of existing business is not relevant for denying the benefit of Section 10A on the alleged ground that the new undertaking is mere colourable device adopted to exceed the deduction u/s 10B (to be read as 10A) of the Act for a prolonged period which was getting over in AY 2001-02.
Sr. No. Particulars Citations
4. CIT vs. Hindustan Malleables & 191 ITR 70 (Pat) Forgings Ltd.
9. International Instruments vs. 123 ITR 11 (Kar) CIT
(iii) that the business/product of the Appellant is same It is respectfully submitted that the business/product of the Appellant is absolutely different than CGCLS. CGCLS was a design service company. It used to accept designing work (typically referred as job work in the software industry) from CMS which in turn used to do designing work for Xilinx Inc. and Nexgen Inc. (USA based companies). In contract Appellant designed & develops products complete semi-conductor products (Chips) for CMS. The Appellant was a product development company, while CGCLS was a service company. The difference in the aforesaid business activity is similar to difference in the business activity of Intel & Wipro. Intel and Wipro are involved in the designing work, however, Intel designs for its own products whereas Wipro designs for third parties that control what kind of design Wipro makes. In Intel's case all the intellectual property belongs to Intel, while in Wipro's case the intellectual property belongs to the customer.
The Appellant was research and development arm of CMS and was tasked to develop a complete semiconductor product starting from concept architecture to delivering the product with all the required application support. The Appellant performed the research and development activity only for CMS, while LOGIC performed design service for various third parties apart from CMC, and also developed 19 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 certain telephony intellectual property that CMS did not have any right to.
Difference between Appellant's business and business of CGCLS:-
The specific tasks undertaken by the Appellant can be broken down as :
(l) Products requirements study (II) System level architecture (III) Detailed IC architecture (IV) Detailed IC design broken into multiple semi independent block (V) Block level RTL design (VI) Block level RTL test bench (VII) Block level RTL simulation and validation (VIII)Block level synthesis (IX) Block level pre-layout and timing validation (X) System level test bench (XI) Full chip simulation and validation (XII) Full chip level synthesis (XIII) Scan chain design and fault coverage vector generation (XIV) Functional vector generation (XV) Full schip placement (XVI) Hierarchical chip routing (XVII)Timing closure and fixing various race conditions (XVIII)Formal netlist validationwith RTL (XIX) Design rule checking (XX) Metal migration, antennas and other crosstalk checks (XXI) Metal fill and final back end GDS2 database generation (XXII)Interface with foundry for prototype run 20 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 (XXIII)Package design and electrical interface validation (XXIV) Development of system level validation test board and associated software (XXV) Prototype testing for fault coverage (tester program development) (XXVI) System level validation (XXVII) Application note and engineering.
Out of the above listed 27 steps CGCLS performed only 6 steps (5,6,7,8,10,11) considered mostly labour intensive compared to the other tasks that required in-depth semiconductor design knowledge and experience. On the other hand Appellant was involved in all 27 design and development steps.
The second point to note is the complexity of the designs involved. The complexity of designs undertaken by CGCLs varied from 200 thousand to 800 thousand gates and the technology was typically implemented using FPGA, while the complexity of designs of the Appellant ranged from 3 million to 10 million gates and implemented on cutom 130nm silicon (over 10 fold increase in complexity and use of state-of-art process technology.
Further the Appellant was not involved in routine FPGA design, FPGA support, design consulting for any Indian customers or design of any computer telephone or voice product like CGCLS. Thus, the reason for the lower authorities to disallow the Appellants claim of deduction u/s 10A of the Act by only relying on the generic names being same does not imply that the activities and products are same. Telecom industry is huge and there are different products which are made but which may have same generic names. Further, the very press release referred to by the AO /CIT(A) talks about the new products development by the Appellant in the area supporting Optical networking and internet bandwidth, which is very different than the conventional telephony that LOGIC was involved in. 21 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 In view of the above, it is respectfully submitted that the activity of CGCLS and Appellant cannot be considered to be same and no concrete reasons is given by the department for holding that the products are same.
Without prejudice, it is respectfully submitted that the fact that:
Ø the newly formed undertaking dealt with the same or similar product; or Ø carried on similar business activities as of the old undertaking CAN NOT be the basis for denying the benefit of Section 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence.
Sr.No. Particulars Citations
1. ITO vs. Servion Global 308 ITR 375 (Chennai)
Solutions Ltd.
2. CIT vs. Premier Cotton Mills Ltd 240 ITR 434 (Mad)
3. CIT v Electric Construction & 104 ITR 101(Cal) Equipment Co.Ltd.
(iv) that CGCLS has transferred its entire P&M and computer software to the Appellant It is respectfully submitted that AO has wrongly observed that CGCLS has transferred its entire assets to the Appellant, where the fact is that CGCLS has not transferred its entire Plant and Machinery and computer software to the Appellant infact certain additions were made to the fixed assets. (Reference may be made to the Financials of CGCLS as on 31st March 2001). Further there was no transfer from CGCLS in the year of formation i.e. in AY 2000-01 and the limit of 20% should be seen in the year of formation i.e. the first year of operation. Further in the year of formation Pune unit has purchased plant and machinery amouonting to Rs.43,17,918 and there was capital work-in-progress of Rs.6,533,628.
22 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Further, in AY 2001-02 though CGCLS transferred its fixed assets to Appellant, however, such additions constituted less than 20% of total additions of the fixed assets by Appellant. Without prejudice to the above, even if limit of 20% is to be seen every year then also the Appellant have met this criteria year over year. Same is evident from the details of the additions made under the head plant and machinery / computers as below (derived from submission filed before the Assessing Officer.
Particulars Opening Transferred New Closing Ratio(%)
Gross from Addition Gross
Block CGCLS Block
A.Y.2000-01 - - 4,317,918 4,317,918
AY 2001-02 4.317,918 6,151,871 22,388,788 32,858,567 19:81
AY 2002-03 32,858,567 - 3,508,287 36,366,854
AY 2003-04 36,366,854 - 4,404,748 40,771,602
AY 2004-05 40,771,602 - 1,244,811 42,016,413
Without prejudice, it is respectfully submitted that the assets transferred from CGCLS are less than 20% of total assets of Appellant and therefore the benefit if S. 10A cannot be denied to the Appellant. In support of the above proposition, reliance is placed on the following decisions :
Sr.No. Particulars Citations 11. Bajaj Tempo Ltd v CIT 196 ITR 188(SC) 5. CIT vs Mahesh Chand Gupta 279 ITR 396 (All) 12. CIT v Mahaan Foods Ltd. 216 CTR 148 (Del) 6. CIT vs Electric Construction & 104 ITR 101 (Cal) Equipment Co. Ltd.
(v) that 58% of the employees of the Appellant were from CGCLS 23 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 It is respectfully submitted that there is no legal requirement for claiming deduction u/s 10A/B that undertaking should not employ persons previously employed by any other person. The AO has alleged that there is no employment of new manpower in the Appellant Company as in AY 2000-01 there were five employees only with the Appellant who were earlier working with CGCLS and 58% of the employees employed in AY 2001-02 were earlier working CGCLS. It is respectfully submitted that the employees who were earlier working with CGCLS, resigned from their jobs and took up new employment with Appellant Company. CGCLS never seconded or deputed their employees to Appellant. If there is requirement of experienced personnel, obviously the personnel would have worked somewhere before. Further certain employees of CGCLS decided to quit instead of taking up new employment with the Appellant and joined other multi-nationals in India. Hence, it was not a case of transfer of employees from one company to another, rather the employees were given complete choice either to join the Appellant, or to leave the organisation, due to acute business conditions where the business of CGCLS was facing downturn. Further it is respectfully submitted that in subsequent years over 400 employees were employed by the Appellant who had no affiliation with Logic.
Without prejudice, it is respectfully submitted that the mere fact that some of the employees of the new undertaking are from the old undertaking cannot be the basis for denial of benefit u/s 10A on the alleged ground that the new undertaking are from the old undertaking cannot be the basis for denial of benefit u/s 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence.
Sr.No. Particulars Citations
7. CIT vs. Metropolitan Springs (P) Ltd. 191 ITR 288 (Bom)
10. ITO vs. Servion Global Solutions Ltd. R 375 (Chennai)
(vi) Press noted dated April 28, 2000 24 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 As per the press note dated April 28, 2000 which stated that "CoreEL MicroSystems Inc., a Delaware company headquartered in Fremont, CA, USA, has formed its wholly owned subsidiary in Pune, India: CoreEL Labs Pvt. Ltd. CoreEL Labs will be the Research & Development arm of CoreEL MicroSystems Inc. Earlier, CG-CoreEL Logic Systems Ltd. performed some of these design tasks. CG-CoreEL logic Systems will refocus its activities to develop next-generation computer telephone and voice over IP communication systems................. CoreEL Labs has undertaken all the R&D activity of the parent company at its facilities in Pune and Bangalore".
The AO has presumed that the word 'parent' referred to in the press note refers to CGCLS as CMS did not have any facilities in Pune and Bangalore :
It is respectfully submitted that the AO has totally misunderstood the Press Note and held that CGCLS is the parent of the Appellant. Please refer to Paper Book for A.Y 2002-03 Page No. 97 clearly evidencing that CMS is the parent of the Appellant and not CGCLS.
(vii) that STPI Approval is in the name of CMS The AO observed that the approval issued by Ministry of Industry No. STP PER : 89 (1999)/EOP/97/1999 dated 17 January 2000 was in the name of CMS and not in the name of the Appellant: It is respectfully submitted that the approval was in the name of the Appellant only (Please refer to Paper Book for A.Y 2002-03 Page Nbos. 2, 4 & 9)
(viii) The AO observed that the sales of CGCLS have drastically gone down 25 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 It is respectfully submitted that prior to 1999, CMS was its major client and due to loss of main client served by CMS viz., Xilinx Inc and Nextgen Inc, sales of CGCLS had gone down. Reduction in sales of CGCLS cannot be a ground to deny benefit u/s 10A of the Act. In this regard kindly refer para A(i) - 4 (Backgroud of CMS) above.
It may be noted that CGCLS is still an up and running business, and performing the function for which it was originally founded with capital asset worth 1.2 crores (approx.) during AY 2005-
06. As per annual report of 2005-06, CGCLS has bagged orders worth 98 lacs and has been elected as an agency for development of Remote Surveillance system by Military college of Electrical and Mechanical engineering Hyderabad. Further, CGCLS has established "CG Logic Employee stock option trust"
on February 20,2001.
(ix) that it is a device to extend period of deduction:
As self evident from the above facts, there is no device as alleged by the AO.
Without prejudice it is respectfully submitted that an Act otherwise valid in law cannot be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the notional interest.
Sr.No. Particulars Citations
A. Union of India v. Azadi Bachao Andolan 263 ITR 706
& Anr. (SC)
B. Banyan & Berry v. CIT 222 ITR
831(Guj)
C. CIT v. Mrs.Sarita P. Shirke & Anr. 280 ITR
325(Bom)
D. Industrial Development Corporation of 268 ITR 130(Ori)
Orissa Ltd. CIT
E. CIT v. George Williamson (Assam) Ltd. 265 ITR 626
(Gau)
26 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008
Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37
(x) that in substance the Appellant was formed in AY 2001-02 The AO observed that in substance the Appellant was formed in AY 2001-02 as in AY 2000-01, there was only one sale by the assessee in the month of March 2000 (refer para 18.3 of the assessment order for AY 2003-04):
It is respectfully submitted that the Appellant was incorporated on December 1, 1999 and commenced its operations on obtaining the STPI approval in respect of Pune unit on January 17, 2000. The Appellant had capital base of 2 crores and invested 1.23 crores in plant and machinery in the first year itself. Further the Appellant had also made export to CMS in very first year i.e. AY 1999-2000.
Without prejudice to the above it is respectfully submitted that even if eligibility for deduction under section 10A of the Act is to be seen every year, the Appellant have met the criteria laid down in section 10A of the Act and transfer of plant and machinery from CGCLS to the Appellant is within the parameters laid down under the Act.
(xi) that undertaking in Bangalore is not a separate unit The AO observed that Bangalore unit is not a separate undertaking for the purpose of deduction u/s 10A of the Act as the Appellant is not maintaining separate books of accounts, there is only one fixed assets register and PF of all the employees is paid in Maharashtra. Further, the claim is admittedly not been made in the original return of income and it had also not been claimed along with the proper form.
However, CIT(A) for AY 2004-05 has allowed the claim for Bangalore unit on the following basis:
Ø Bangalore unit is separately registered as STP unit vide registration no. EIG/CoreEL Labs/GEN/1961 dated May 20, 2000. The certificate was granted on the basis of a separate net foreign exchange commitment for the stand alone unit.27 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Ø Unit was created out of fresh in flow of funds resulting in parchase of mew assets.
Ø Business of Bangalore unit did not effect the business of any other unit.
Ø Though these two units belong to the same company. Hence, there was one serial for invoices raised and accounting / payroll was centralized. Further there is no such stipulation to avail deduction under section 10A/10B as these are compliances under other statues and not under the Act. Ø Bangalore unit didn't suffer from the purported defects pointed out for Pune Unit Ø The Form 56F was filed with the revised ROI. The revised ROI for AY 2004-05 was filed within the prescribed time limit. Section 10A(5) of the Act no where requires to file Form 56F before the expiry of the time for filing original ROI, instead it requires to file it along with the ROI. Since the forms were filed along with the revised ROI within time therefore, the Form 56F submitted along with the revised ROI is admissible. Ø The descriptions of activities have been broadly classified as "Design of Integrated circuits" under which numerous activities may be conducted by the units. Describing the activities of both the units, it was held that the activities are different and only a broad category is assigned to the activities. Hence, even in principle the Bangalore unit should be regarded as a separate unit.
Hence, it is respectfully submitted that the claim of Bangalore unit to be considered as separate undertaking for the purposes of deduction u/s 10A of the Act as the Appellant has fulfilled all the conditions for claiming the deduction u/s. 10A of the Act. Further there is no stipulation under the Act, wherein different books of accounts for different undertakings are required to be kept or invoice raised and accounting / payroll cannot be centralized to claim the deduction under section 10A of the Act.
Without prejudice, it is respectfully submitted that deduction u/s. 10A for separate units cannot be denied even if no separate books of accounts are maintained.28 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Sr.No. Particulars Citations
13. Mahindra Sintered Products Ltd. vs 177 ITR 111 (Bom) Commissioner of Income-tax
14. Commissioner of Income-tax vs Rohtas 120 ITR 110(Cal Industries Ltd.
HC)
15. DCIT vs. Arabian Exports Ltd. 109 TTJ 440(Bom)
12. The Ld. D.R., on the other hand, reiterated the observations of the authorities below that assessee is not a new undertaking but a re- construction of another company i.e. CGCLS. In this regard, he referred assessment order and first appellate order. He placed reliance on the following decisions :
1) Textile Machinery Corporation Ltd. v/s. CIT, 107 ITR 195
2) CIT v/s. Gaekwar Form & Rubber Co. Ltd., 35 ITR 662 (Bom)
3) Khode Industries Pvt. Ltd., 163 ITR 646
4) Chembra Peak Estates Ltd. v/s. CIT, 85 ITR 401 (Ker.)
5) Canara Wire and Wire Products Ltd. v/s. CIT, 196 ITR 426
13. Ld. D.R. also referred CBDT Circular No. 1/2005 dt. January 1, 2005.
14. Considering the above submissions, we find that the A.O has denied the claimed deduction merely on the basis that the assessee is not a new undertaking but a re-construction of another company CGCLS. He arrived at on this conclusion on the basis that the ultimate shareholders of both the companies were same; the directors of both the companies were the same; the business/product of the assessee is the same; CGCLS has transferred its 29 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 entire plant and machinery and computer software to the assessee in A.Y. 2001-02 i.e. second year of operation of the assessee; and that in the first year of formation, all the 5 employers of the assessee were earlier working with CGCLS; and 58% of the employees of the assessee were from CGCLS in A.Y. 2001-02 i.e. second year of operation of the assessee. The other observations/objections of the A.O for denial of the claim remained that as per the Press Note dt. April 20, 2000, which stated that "Core EL Labs has undertaken all of the research, development and application engineering functions of the appellant company as its facilities in Pune and Bangalore; the approved issued by Ministry of Industry No. STP PER :
89(1999)/pop/97/1999 DT. 17th January 2000 was in the name of CMS and not in the name of the assessee; the sales of CGCLS has gone down; it is device to extend period of deduction; in substance the assessee was formed in A.Y. 2001-02 as in A.Y. 2000-01, there was only one sale by assessee in the month of Marchy 2000; undertaking in Bangalore, is not a separate unit as assessee is not maintaining separate books of account; there is only one fixed asset registered and PF of all employees is paid in Maharashtra; the claim has admittedly not been made in the original return of income nor has it been claimed along with the proper form. The Ld CIT(A) has upheld the action of the A.O. on similar basis.
15. After having gone through the above submissions, we find that before us, the Ld. A.R. has tried to meet out the above stated objections raised by the authorities below while denying the claimed deduction u/s. 10B of the Act. The Ld. A.R. supporting the additional Ground has also submitted that the assessee is actually eligible for the deduction u/s. 10A of the Act, but, has mistakenly claimed deduction u/s. 10B of the Act. We, prima facie, find substance in the above submission of the Ld. A.R. in support of the claimed 30 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 deduction. At the same time, we are of the view that the related facts regarding the fulfilment of the claimed deduction as submitted by the Ld. A.R hereinabove in detail needs fresh verification to test the entitlement of assessee to claimed deduction in question. We thus in the interest of justice set aside the matter to the file of the Ld CIT(A) for fresh consideration and adjudiction of the issue after affording reasonable opportunity of being heard to the parties and considering the material already available on record. Ground Nos. 1, 2 & 3 are thus allowed for statistical purposes.
16. So far as issue raised in additional Ground as to whether the assessee is entitled to claim deduction u/s. 10B or 10A of the Section is concerned, we are of the view that entitlement of deduction under the proper provisions of law is examined by the A.O. as per the established proposition of law and it does not matter under which provision assessee has claimed deduction. Even in those cases where assessee has failed to claim relief for which it is legally entitled to within the provisions of the Income Tax Act 1961, it is the duty of the A.O to consider those relief while making the assessment. The requirement of law is for making just and proper assessment by the A.O. We set aside this issue for consideration of the Ld CIT(A) in view of his finding on the issue raised in Ground Nos. 1, 2 and 3 hereinabove. The additional Grounds are thus allowed for statistical purposes. Ground No. 4
17. In this Ground, the assessee has questioned first appellate order upholding the initiation of penalty u/s. 271(1)(c ) of the Act by the A.O. Having gone through the first appellate order in this regard, we find that similar Ground raised before the ld. CIT(A) has been rejected by the ld 31 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 CIT(A) on the basis that the Ground is pre-mature as there is no provision for filing appeals against mere initiation of penalty proceedings. We fully agree with this action of the Ld CIT(A). The same is upheld. The Ground No. 4 is, accordingly, rejected.
18. In the result, appeal is partly allowed.
ITA No. 12/PN/2007 (Asstt.Year 2001-02)
19. Besides other Grounds raised in the A.Y. 2001-02, the assessee has also questioned validity of notice issued u/s. 148 of the Act vide Ground No. 5 of the Memo of the Appeal. The Ld. A.R. submitted that change of opinion cannot be basis for re-opening of assessment u/s 148 of the Act. Mere change of opinion does not confirm jurisdiction to re-open a completed assessment on the interpretation of a particular provision earlier adopted by the A.O. The scope of Sec. 148 of the Act does not extend to reviewing its earlier orders suo motto irrespective of there being any material to come to a different conclusion apart from just having second thought about the inference drawn earlier. The claim of the assessee was looked into by the A.O during the course of original assessment proceedings and the A.O had confirmed an opinion on the issue and had allowed the claim of the assessee. The Ld. A.R. submitted further that the re-assessment is to be confined to points of re-assessment and not to the whole assessment. A.O. asked for the details vide notice dt. October 21st, 2005 along with the reasons for re- opening the assessment u/s. 147 of the Act. The details called for in the notice are not related to the reasons for re-opening of assessment and hence, a notice is not valid as the A.O is not empowered to do the assessment all over again. He submitted that re-assessment based on the order of the subsequent Assessment Year is not valid as no new facts have 32 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 come into picture and A.O is not competent to make fishing enquiries on concluded matters. Ld. A.R. placed reliance on the following decisions :
Sr.No. Case Citation 1. CIT v. Kelvinator of India Ltd. 2010-TIOL-06-SC-IT- LB 2. CIT v. Kelvinator of India Ltd. 256 ITR 1(Del)(FB) 3. Asian Paints Limited v.DCIT and Anr. 308 ITR 195 (Bom.) 4. Asteroids Trading & Investments 308 ITR 190 (Bom) vs.DCIT 5. CIT v Eicher Ltd 294 ITR 310(Del)
20. The Ld. A.R. submitted further that Ld CIT(A) has also erred in not taking any action on the revised return on the basis that the same was revised after the prescribed time limit. He has erred in not taking into consideration the revision of the return filed pursuant to notice u/s. 148 of the Act as the revised return replaces the original return.
21. The Ld. D.R., on the other hand, tried to justify the orders of the authorities below on the issue. He also referred the provisions of Sections 139, 147 and 148 of the Act prevailing during the year.
22. Having considered the arguments advanced by the parties, we do not find substance in the above contentions of the Ld. A.R. As per Explanation 2 (c ) to Sec. 147 as amended w.e.f. 1.4.1989, the excessive loss or depreciation allowance or any other allowance under the Act, for the purpose of Sec. 147 shall also be deemed to be cases where income chargeable to tax has escaped assessment. It could be realized during the assessment proceedings for the A.Y . 2002-03 in the case of the present assessee. Thus, there was sufficient material to form reasons to believe that income 33 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 chargeable to tax has escaped assessment. Thus, it cannot be said that there was no material before the A.O to form reasons to belive that income chargeable to tax has escaped assessment during the year. Under the amended provisions of Section 147 of the Act, the A.O is empowered to assess other escaped income as well which comes to his noltice during the course of re-assessment proceedings, besides the income i.e. subject matter of the re-opening. So far as the grievnce of the Ld. A.R. that Ld CIT(A) should have taken into consideration the revised return filed in response to notice u/s. 148 of the Act is concerned, we do not find substance therein as it was not a simple case that the return of income was filed in response to a notice issued u/s. 148 of the Act. It appears from the assessment order that notice u/s. 148 for the re-opening of the assessment for A.Y. 2001-02 was issued on 21.10.2005 and as per the first appellate order, it was served upon the assessee on 24.10.2005. In the said notice u/s. 148, the assessee was asked to file return within 30 days. The assessee, however, filed return on 28.11.2005 i.e. beyond the prescribed time limit of 30 days. In the return of income filed on 28.11.2005, the assessee had declared total income of Rs. 34,470/-. A return of income declaring same income was again filed on 31st March 2006, on which, the A.O did not take any action treating the same as beyond time limit. Under these circumstances, we fully agree with the finding of the Ld CIT(A) holding that as per amended provisions of Section 148, by Finance Act 2006 with retrospective effect from 1.10.1991, provisions of Section 139 would be applicable where a return has been filed u/s. 148 in so far as may be applicable. Undisputedly, there is no provision to file revised return u/s. 148 of the Act. However, as per provisions of Section 139(5), a return can be revised only where the assessee has furnished a return under Sub-section (1) of Section 139 or in pursuance of a notice u/s. 142(1). Thus, even if it is treated that return of 34 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 income filed in response to notice u/s. 148 is as if return filed u/s. 139(1) of the Act, the same benefit is not available in the case of assessee since the assessee had not filed return of income under the prescribed time limit in response to notice issued u/s. 148 of the Act. Thus, the assessee was not in a position to avail the benefit of provisions of Section 139(5) of the Act in the present case. We are thus of the view that the A.O was right in not entertaining the return of income filed on 31st March 2006. We, however, in view of our above finding on the issue raised in additional Ground No. 6 in A.Y. 2002-03 (ITA No. 1805/PN/2005) reiterate that it does not matter whether the assessee has claimed deduction u/s. 10A or Section 10B of the Act. The A.O is always required to make just and proper assessment. If on the basis of facts and circumstances of the case the A.O was of the view that the assessee should have claimed deduction u/s. 10A of the Act instead of 10B of the Act, the A.O should have allowed proper deduction for which assessee was legally entiteld to. The Ground No. 5 is accordingly rejected.
23. The issue raised in Ground Nos. 1 to 4 is identical as that raised in Ground Nos. 1 to 3 and additional Ground Nos. 6 & 7 raised in the A.Y. 2003- 04, we following the decision taken therein, direct the Ld CIT(A) to decide the issue afresh accordingly. The Ground Nos. 1 to 4 of the appeal are thus allowed for statistical purposes. ITA No. 12/PN/2007 is thus partly allowed. ITA No. 1407/PN/2006 ( A.Y. 2003-04)
24. Ground Nos. 1 to 3 are on the issue of eligibility of deduction claimed u/s. 10A of the Act. We following our decision on an identical issue in the A.Y. 2002-03, set aside the matter to the file of the Ld CIT(A) to decide the issue afresh as directed herein-above by us in the A.Y. 2002-03. 35 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 Ground No. 4
25. In this Ground, the grievance of the assessee is that the ld CIT(A) has erred in holding that the unit in Bangalore is a part of unit in Pune only for the reason that the claim was not made in the original return of income. An alternative plea has also been raised in this Ground that the Ld CIT(A) ought to have considered the fact that the unit in Bangalore does not suffer from the purported defects pointed out for unit in Pune. We find that the Ld CIT(A) has dealt with the issue in para No. 2.3 of the first appellate order as under :
"2.3 I have gone through the facts of the case. The Assessing Officer had disallowed the deduction on the basis that no separate books of account were maintained, no separate serial number for invoices raised from Bangalore were followed. The PF of the employees based in Bangalore was paid in Maharashtra and there was only one asset register. The claim is admittedly not been made in the original return of income. It had also not been claimed along with the proper form. The unit wise financial statements now being produced have never been produced before the Assessing Officer and no reasons; whatsoever, have been given for not filing such details even when specifically asked to submit the unit wise working as per notice u/s. 142, it is not possible to admit such belated claim of the appellant. The grounds of appeal no.1, 2 and 3 are, therefore, dismissed."
The contention of the Ld. A.R. remained that in the A.Y. 2004-05, the Ld. CIT(A) has allowed the claim of Bangalore unit. We thus remand the matter to the file of Ld. CIT(A) to consider the issue afresh after affording opportunity of being heard to the parties in view of the finding of first appellate authority in this regard in A.Y. 2004-05. The Ground No. 4 is thus allowed for statistical purpose.
26. In Ground No.5, the assessee has questioned first appellate order whereby, the Ld CIT(A) has upheld initiation of penalty proceedings u/s. 36 ITA Nos. 1047/PN/2006, 1805/PN/2005,
12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 271(1)(c ) of the Act. The Ld CIT(A) has rejected the Ground treating the same as premature since assessee will have opportunity to question the penalty in appeal when it is levied by the A.O. We fully agree with the view of the Ld CIT(A) that issue is premature. The same is upheld. Ground No. 5 is, accordingly, rejected.
27. In result, ITA No. 1047/PN/2006 is partly allowed. ITA No. 552/PN/2008 (A.Y. 2004-05)
28. In Ground Nos. 1 and 1.1 of the appeal, the issue raised is regarding the eligibility of the assessee to claim deduction u/s. 10A of the Act. We have already decided an identical issue hereinabove in Ground Nos. 1 to 3 hereinabove for the A.Y. 2002-03. Following the decision taken therein, we set aside the matter to the file of Ld CIT(A) for fresh consideration as directed therein in the A.Y. 2002-03. These Grounds are thus allowed for statistical purposes.
Ground No.2, 2.1 and 2.3
29. The grievance of the assessee is that deduction u/s. 10A should have been separarately considered for Bangalore unit and Pune unit. The contention of the Ld. A.R. in this regard remained that the Ld CIT(A) has failed to appreciate that deduction u/s. 10A in respect of both the units has been claimed as per the revised return along with the revised Chartered Accountant's report in Form 56F separately disclosing the amount of deduction allowable in respect of the Pune and Bangalore as TP units. Having gone through the orders of the authorities below, we find that the Ld CIT(A) has already directed the A.O on the issue to verify the deduction u/s. 10A allowable to the Bangalore unit on the ground of overlap of receipts and 37 ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008 Conexant Systems (PB) Pvt,Ltd. etc..
A.Y.2001-02 & 2002-03,2003-04 &2004-05 Page of 37 expenditure in the Pune and Bangalore units. We, however, are of the view that instead of setting aside the matter to the file of the A.O, the Ld CIT(A) should have decided the issue himself on verification of the relevant facts by the A.O. The issue is thus restored to the file of the Ld CIT(A) to decide the same himself after affording opportunity of being heard to the parties. These Grounds are thus allowed for statistical purposes.
30. In result, ITA No. 552/PN/2008 is allowed for statistical purposes.
31. To sum up the results, ITA No. 1805/PN/2005, 1047/PN/2006 and ITA No. 12/PN/2007 are partly allowed and remaining appeal ITA No. 552/PN/2008 is allowed for statistical purposes.
The order is pronounced in the open Court on 9th February 2011.
Sd/- Sd/-
(D. KARUNAKARA RAO) (I.C. SUDHIR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, dated the 09th February, 2011
US
Copy of the order is forwarded to :
1. The Appellant
2. The Respondent
3. The CIT -II, Pune
4. The CIT(A)-II, Pune
5. The D.R. "B" Bench, Pune
6. Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Pune