Income Tax Appellate Tribunal - Hyderabad
Infotech Enterprises Ltd. vs Joint Commissioner Of Income Tax on 31 May, 2002
Equivalent citations: [2003]85ITD325(HYD), (2003)80TTJ(HYD)589
ORDER
M.V.R. Prasad, A.M.
1. These appeals were heard together and disposed of by this common order for the sake of convenience.
2. The assessee is a software company. It has exports sales and also domestic sales. The issues raised in these appeals mainly relate to the exemptions and deductions allowable to it under Sections 10A and 10B of the Act and under Sections 80HHE and 80-I of the Act. There are also some other subsidiary issues.
ITA No. 610/Hyd/2000The grounds taken up by the assessee read as under:
"1. The order of the CIT(A) is erroneous insofar as it is opposed to provisions of law and facts on record.
2. (a) The CIT(A) erred in holding that benefit of Section 10B cannot be allowed in respect of income from new STP unit set up at Nagarjuna Hills, Punjagutta as it was not approved by the Board appointed by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 and Rules made thereunder.
(b) The learned CIT(A) ought to have accepted the submission of the assessee that the Central Government has conferred authority on the Department of Electronics, to grant approval under Section 14 of the Industries (Development and Regulation) Act, 1951 and Rules made thereunder pursuant to which the approval was given to the Nagarjuna Hills unit and as such benefit of exemption under Section 10B in respect of the income therefrom was available to the assessee. He ought to have given an opportunity to the assessee to produce necessary evidence in this behalf.
(c) The CIT(A) ought to have held that the benefit of exemption from tax in respect of income from STP unit at Nagarjuna Hills was available to it under Section 10A by virtue of the fact that under letter dt. 26th June, 1995, of the Department of Electronics, the said unit was approved as its initial plant at Maithrivanam Complex which was approved as 100 per cent Export Oriented Unit under letter dt. 26th June, 1991, of the said Department.
(d) The CIT(A) erred in holding that the benefit of Section 10A cannot be extended to the income at Nagarjuna Hills unit under Section 10A as the work at Maithrivanam started before 1st April, 1994, ignoring the Circular No. 694, dt. 23rd Nov., 1994, of CBDT which directly supports the assessee's claim.
3. The CIT(A) erred in rejecting the assessee's claim for relief, under Section 80-I in respect of its income from domestic operations on the ground that computer programmes do not come within the definition of manufacture or production for the purpose of the said section.
4. (a) The CIT(A) was not justified in confirming the disallowance of expenditure of Rs. 58,175 and Rs. 7,92,601 on foreign travel and training fees of Sri B.G.V. Krishna, son of managing director of the assessee-company.
(b) The CIT(A) failed to appreciate that the said expenditure was claimed as perquisite in the hands of Sri BVR Mohan Reddy and got taxed and as such it would be an allowable deduction as business expenditure for the assessee-company.
(c) The CIT(A) was not justified in confirming the said disallowance on the ground that the case of Sri B.G.V. Krishna was an isolated case and there was no guarantee that he would complete the course and after completion serve the assessee-company.
5. For these and any other ground/s that may be urged at the time of hearing, it is prayed that the aforesaid disallowance/addition in the assessment confirmed by the CIT(A) is deleted."
The assessee has filed a return claiming refund of Rs. 22,16,424 and the computation given by the assessee reads as under:
Computation of taxable income Profit as per P&L a/c 2,44,95,763 Less : Profit from private STP at Nagarjuna Hills exempt under s. 10B (working sheet enclosed) 41,18,367 Net Profit as per P&L a/c 2,03,77,396 Add: Inadmissible expenses/allowances to be considered separately :
1. Depreciation as per books of account 37,60,507
2. Provision for Bonus 5,82,000 Less : paid before filing of income-tax return 4,87,339 94,661
3. Entertainment Rs.
1,65,727 allowed.
Upto Rs. 10,000-100% Balance-1,55,727-50% 77,864
4. Travel Exp.
disallowed under r. 6D as per Annexure-I 11,045 2,761 39,35,793 Gross Income before depreciation 2,43,13,189 Less : Depreciation as per IT Rules 36,85,244 Gross total income before deduction under Chapter VI- A 2,06,27,944
1. Under s. 80-HHE Total Turnover Domestic 6.64% 38,99,544 6.64 Exports 93.36% 5,48,67,492 93.36 5,87,67,036 Deduction under s. 80HHE 93.36% 1,92,58,249 Gross Total income after 80HHE 13,69,096
2. Under s. 80-IA @ 30% of 13,69,696 4,10,909 Taxable income 9,58,787 Tax @ 43% 4,12,278 Less: TDS/ Advance/Self asst, tax/tax 26,28,702 payable/refund
- 22.16,414"
It separately computed the minimum alternative tax (MAT) at Rs. 26,28,700 as follows :
"MAT working Profit as per P&L a/c 2,44,95,763 Less: Profit from private STP at Nagarjuna Hills exempt under s. 10B 41,18,367 (working sheet enclosed) 2,03,77,396 Taxable book profits (30%) 61,13,220 Tax under M.A.T. 43% 26,28,700 Less : TDS/ Advance tax paid 20,93,142 Tax payable 5,35,558 Rounded off to 5,35,560 Less: paid under s.
140A on 28-11-1997 5,35,560"
The assessee gave a separate computation of the claim for exemption of the profit from the operations at Nagarjuna Hills under Section 10B of the Act which reads as under :
"Computation of Taxable Income Net profit as per P&L a/c 41,18,367 Add:
Inadmissible exp. /allowances to be considered separately :
1.
Depreciation as per books of account 84.131
2. Provision for Bonus 0 Less:
paid before filing Income-tax return 0
3. Entertainment allowed upto Rs. 10,000-100% 0 Balance Rs.
04. Travel Expenses disallowed under r. 6D-As per Annexure-I 0 84131 Gross Income before depreciation 4202498 Less :
Depreciation as per IT Rules 1327381 Gross total income before deduction under Chapter VI-A 2875117 Income exempt under s. 10B 2875117"
It may be observed that in the above computations, the assessee has claimed exemption under Section 10B only for the profit of the unit at Nagarjuna Hills, Hyderabad. In other words, the claim under Section 10B is limited to Rs. 41,18,367. It has separately claimed deductions under Section 80HHE and under Section 80-I in respect of the balance of the profits of the assessee. This was the computation which was considered by both the AO and the CIT(A).
3. It has, however, been mentioned before us that the assessee has filed before the AO a revised computation of income claiming deduction under Sections 10A and 10B of the Act and the said revised computation allegedly filed reads as under:
"Revised computation of taxable income Profit as per P&L a/c Rs.
2,44,95,763 Add: Inadmissible Exp./allowanoes to be considered separately
1. Depreciation as per books of account 38,44,638
2. Provision for bonus 5,82,000 Less :
Paid before filing of Income-tax return 4,87,339 94,661
3. Entertainment allowed upto Rs. 10.000-100% 1,65,727 Balance Rs. 158679-50% 79,340
4. Travel Exp. disallowed under r. 6D-
As per Annexure-I 11,045 2,761 40.21,400 Gross income before depreciation 2,85,17,163 Less:
Depreciation as per IT Rules 39,12,920 Gross Total income 2,46,04,243 Taxable income Tax @ 43 % Nil"
It may be observed that in the above revised computation, the entire profit was claimed as exempt and there is also the main difference that no book profit taxable under Section 115J was offered to tax apparently on the ground that, when once the entire profit was exempted under Section 10A/10B of the Act, the provisions of Section 115J were not attracted.
4. The AO considered only the claims made by the assessee in the original computation. Even in the grounds taken before the CIT(A) by the assessee, there is no reference to the claims made in the revised computation allegedly filed before the AO. The same is the position even in respect of the grounds filed before us. It may be observed that in the grounds filed before us, the grievance of the assessee was only that the income of Nagarjuna Hills unit was not exempted under Section 10A/10B of the IT Act and the grievance was not that as the entire income was not exempted under Section 10A/10B of IT Act. This position has, however, been given up in the course of the hearing before us as we shall mention presently and the claim for exemption is extended to the entire income of the assessee.
5. The assessee came into existence as an unit under the Software Technology Park scheme (STP Scheme) at Maithrivanam, Hyderabad vide approval granted to the assessee by the Department of Electronics, Software Development Division, New Delhi vide its letter dt. 26th Sept., 1991, which reads as under :
"Sub : Application for setting up your operation under Software Technology Park Scheme, for development and 100 per cent export of software, using data communication channels, in the Software Technology Park, Hyderabad sponsored by the Department of Electronics.
Dear Sir, This has reference to your above application for setting up your operation in the Software Technology Park, Hyderabad sponsored by the Department of Electronics, under the software Technology Park Scheme for the development and 100 per cent export of Software using data communication channels.
I am directed to inform you, that your case has been considered by the Inter-Ministerial Standing Committee of Department of Electronics on Mini computer/Micro processor based items and Computer Software in its meeting held on 24th Sept., 1991, and the committee has approved the same under the Software Technology Park Scheme subject to the enclosed terms and conditions as applicable.
Yours faithfully, Sd/= (S.C. Dey) Sr. Scientific Officer"
Encl: As above It may be mentioned that the above approval is accompanied by a copy of the terms, and conditions for establishment of units under STP scheme. The relevant terms and conditions of STP scheme read as under:
"1. The party shall undertake to export the entire production (100 per cent) for a period of 10 years. For this purpose, the party will furnish the requisite legal agreement/bank guarantee.
2. The technology parks will be utilised only for the development and 100 percent export of software through the medium of satellite earth station connected to computers/computer based equipment/computer related equipment linked through approved satellites.
16. All the imports made by the units set-up under the 'software technology park scheme' will be treated at par with the imports made into any 100 per cent EOU.
17. All the transactions between the mother unit (promoter of the technology park) and the subsidiary units as well as between subsidiary units shall be treated as per the standard norms of import and export transaction, between two 100 per cent export-oriented undertakings."
Subsequently, the assessee expanded its operations to Nagarjuna Hills, Hyderabad and the approval granted to such extension by the Software Technology Parks of India vide its letter dt. 26th June, 1995 reads as. under :
"Sub : Expansion of STP Operations to private premises Ref. Your letter dt. 17th June, 1995.
Sirs, With reference to, your, above letter regarding acquisition of space outside the STO complex on lease basis at Plot No. 42, Nagarjuna Hills, Hyderabad-500 034 as per the 'lease agreement' dt. 1st Feb., 1995, this office has no objection in according permission to expand your export operations under the STP scheme to the said premises. You are advised to get the above premises included in your private bonded warehouse licence in accordance with the Central Excise procedures.
This letter shall be produced along with the original letter of approval No. 17(40)/91-SDA dt. 26th Sept., 1991.
Yours faithfully, Sd/= (J.A. Chowdary) Director"
It may be observed that it was only in the year 1995, the assessee expanded its operations to a separate complex situated at Nagarjuna Hills, Hyderabad and this expansion was not in the nature of setting up of a new unit. At any rate, it has not been claimed by the assessee before us that the expansion of operations to a new complex at Nagarjuna Hills, Hyderabad constituted the setting up of a new unit. This claim, though apparently made before the AO and the CIT(A), has been specifically given up before us. It is in the context of these two letters i.e., letter dt. 26th Sept., 1991 of Department of Electronics and the letter dt. 26th June, 1995 of Software Technology Parks of India that the assessee's claim for exemption under Sections 10A and 10B, has to be considered. As already mentioned, before the AO there was no claim for the exemption of the entire income of the assessee under Section 10A/10B of the Act and the claim of exemption was limited to the income from the operations at Nagarjuna Hills, Hyderabad. The AO denied the claim of the assessee for exemption under Section 10A on the ground that the exemption under Section 10A(2)(1)(b) is available only to an industrial undertaking which has begun its manufacture of articles or things during the previous year relevant to the assessment year commencing on or after 1st April, 1994, in any STP scheme and the assessee commenced its manufacturing operations at Maithrivanam as early as in 1991 as evidenced by the letter of Department of Electronics dt. 26th Sept., 1991, which we extracted hereinabove. It was also held that the assessee was not eligible for exemption of the income from operations even at Nagarjuna Hills, Hyderabad as it was not a new unit. In other words, he held that the operations at Nagarjuna Hills were only an expansion of original operations at Maithrivanam started by the assessee in the year 1991 and so, according to the AO, the assessee was not entitled for exemption of income from operations at Nagarjuna Hills. He also held that the assessee was not entitled for exemption of this income under Section 10B of the Act as the assessee was not a 100 per cent export-oriented undertaking within the meaning of Section 10B of the Act. Clause (i) of Explanation to Section 10B reads as under:
"(i) hundred per cent export-oriented 'undertaking' means an undertaking which has been approved as a hundred per cent export- oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under the Act."
In other words, the case of the AO was that the assessee was not approved by the concerned statutory Board as an EOU as required by the terms of the above Explanation to Section 10B of the Act and so the assessee was not entitled for the exemption of this income under Section 10B.
5.1 The CIT(A) upheld that findings of the AO. Before us, the learned counsel for the assessee strenuously contended that the entire income of the assessee is eligible for deduction under Sections 10A and 10B of the Act and not simply its income from the operations at Nagarjuna Hills. As already mentioned, the grounds taken by the assessee before us speak of the CIT(A) having erred in holding that benefits of Sections 10A and 10B of the Act cannot be extended to the income attributable to its operations at Nagarjuna Hills, Hyderabad. In the course of hearing, the learned counsel for the assessee gave up its claim for exemption of the income of operations from Nagarjuna Hills, Hyderabad and claimed that its entire income is entitled for exemption under Sections 10A and 10B of the Act, but did not file any revised grounds of appeal before us. Normally, we would not have allowed the assessee to take up pleas which were not taken up before the CIT(A), but as no investigation into fresh facts is required, we have allowed the assessee to take up the pleas mentioned and we have proceeded to consider, the pleas taken in the course of the hearing as grounds taken before us. In other words, we proceed to dispose of the appeal on the basis that the main ground taken up before us is that the entire income is exempt either under Section 10A or under Section 10B of the Act.
6. We shall first consider the claim of the assessee for exemption under Section 10A of the Act. In support of this plea, the learned counsel for the assessee relied upon Circular No. 694 of CBDT dt. 23rd Nov., 1994, [211 ITR (St) 26) which reads as under :
"Subject : Tax holiday under Sections 10A and 10B for units producing computer software in Export Processing Zones (EPZs), Software Technology Parks (STPs) or 100 per cent export oriented units (EOUs)--Certain clarification thereon.
Sec. 10A of the IT Act provides for a five-year total tax holiday to industrial undertakings which manufacture or produce any article or thing and are set up in notified free Trade Zones (FTZs). This provision was introduced by the Finance Act, 1981.
2. Similarly, Section 10B of the IT Act allows a five-year tax holiday to approved 100 per cent Export Oriented Undertakings (EOUs), which manufacture or produce any article or thing. This provision was introduced by the Finance Act, 1988.
3. Finance Act, 1993 extended the tax holiday under Section 10A to industrial units in approved Electronic Hardware Technology Parks (EHTPs) or Software Technology Parks (STPs). This provision is applicable to undertakings that begin production in a previous year relevant to the asst. yr. 1994-95 or after. By the same Finance Act, an Explanation of the term "produce" was inserted to state that "produce" includes production of computer programmes.
4. Certain issues arising from the abovementioned provisions are causing disputes between the IT Department and the software export sector and, therefore, need to be clarified.
Development of programmes on site.
5. ............... omitted
6. ............... -do-
7................ -do-
Software exporting units in EPZs/EOUs commencing production before 1st April, 1994.
8. Unlike STPs which have come into existence only recently, EPZs are operating from 1981 and EOUs from 1988, Several software exporting units have been operating in EPZs or as EOUs even before STPs were created. Being units in EPZs/EOUs, they were being allowed the tax holiday under Section 10A/10B. It has been brought to the notice of the Board that, in several cases, such units are now being denied the tax holiday for earlier years and are being allowed the benefit only for the asst. yr. 1994-95 onwards. AOs are often taking the, view that, since the explanation of the term "produce"--to include production of computer programmes--has been inserted only w.e.f. asst. yr. 1994-95, the existing EPZ/EOU units exporting software would get the benefit only from asst. yr. 1994-95 and not for earlier assessment years.
9. Such a view is not in consonance with the intention of the Government. Finance Act, 1993, extended the scope of the tax holiday to units in STPs but did not curtail the scope in respect of existing software exporting units in EPZs/EOUs, already availing of the incentive. The explanation of the term "produce" is clarificatory in nature and was inserted in 1993 primarily because in that year, the tax holiday was extended to units in STPs--which produce only computer software.
10. Accordingly, it is clarified that units in EPZs/EOUs which export software are as much eligible for availing of the five-year tax holiday under Sections 10A and 10B as any other units in EPZ/EOU, even for the period prior to the previous year relevant to the asst. yr. 1994-95. The conditions stipulated in the provisions have, of course, to be fulfilled. The insertion of the Explanation of the term "produce" in 1993 should not be taken as a ground for denying the tax holiday to such units for earlier years.
(Sd) K.M. Sultan Director (TPL-II)"
In the light of the above circular, it is contended that though the assessee came into existence as a unit set up under STP scheme vide letter dt. 26th Sept., 1991, by the Department of Electronics, Software Development Division extracted above, by virtue of above circular of CBDT, units set up before 1994 also became eligible for exemption of income under Section 10A of the Act. Finally, it has been pleaded that a 100 per cent export-oriented unit set up under the STP scheme can also be a 100 percent EOU and vice versa. So it is claimed that there is no reason to withhold the benefits of Section 10B from the assessee.
7. The learned Departmental Representative, on the other hand, mentioned that Section 10A granted exemption initially only for the units set up in free trade zone and such free, trade zone has been defined in Clause (i) of Explanation to Section 10A of the Act. The assessee admittedly has not been set up in any free trade zone and its claim for exemption under Section 10A depended only, upon the extension of the benefit to the units set up in any electronic hardware technology park or as the case may be, software technology park, mentioned in Clause (i)(b) of Sub-section (2) of Section 10A of the Act by virtue of the amendment brought about by Finance Act w.e.f. 1st day of April, 1994. He pleaded that this amendment specifically mentioned that the benefit of Section 10A was extended only to, the units set up under any electronic hardware technology park or software technology park and commenced operations in any previous year relevant for the assessment year ending on or after the 1st day of April, 1994. As the assessee commenced its operations in the year 1991 and not in the previous year relevant to the asst. yr. 1994-95, he pleaded that the assessee was not entitled for exemption under Section 10A of the Act. He also pleaded that the above circular of CBDT referred to by the learned counsel for the assessee had been quoted out of context and it did not extend the benefit of exemption under Section 10A to the units set up under STP scheme in the years prior to financial year 1993-94.
8. We find merit in the contention of the learned Departmental Representative. The exemption under Section 10A has been extended only to specified units falling under STP scheme as mentioned in Clause (i)(b) of Sub-section (2) of Section 10A and the relevant portion of Section 10A reads as under :
"10A (1) Subject to the provisions of this section any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :
(i) it has begun or begins to manufacture or produce articles or things 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."
The Explanation to Section 10A reads as under : "For the purposes of this section --
(i) "free trade zone" means the Kandla Free Trade Zone and the Santa Cruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section;
(ii) "relevant assessment years" means the ten consecutive assessment years referred to in Sub-section (3);
(iii) "manufacture" includes any--
(a) process, or
(b) assembling, or
(c) recording of programmes on any disc, tape, perforated media or other information storage device;
(iv) "electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) scheme notified by the Government of India in the Ministry of Commerce;
(v) "Software Technology Park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce.
(vi) "produce", in relation to articles or things referred to in Clause (i) of Sub-section (2) includes production of computer programmes."
Clauses (iv) to (vi) of the Explanation which includes the definition of the term "produce" had been inserted by Finance Act, 1993 w.e.f. 1st April, 1994.
9. Because the definition of the word 'produce' as including the production of software programmes was inserted only w.e.f. 1st April, 1994, some AOs took the view that STP units, even if they were under free trade zones within the meaning of Section 10A of the Act and even software units qualifying as EOUs mentioned in Section 10B, were not eligible for the benefit of Section 10A or 10B, as the case may be, of the Act for the assessment years falling before the asst. yr. 1994-95. It was in this context that the Board explained that the definition of "produce" inserted w.e.f. 1st April, 1994, was only clarificatory in nature and software units otherwise eligible for exemption under Sections 10A and 10B of the Act did not cease to be eligible for exemption for earlier years under Sections 10A and 10B simply because of insertion of definition of "produce" w.e.f. 1st April, 1994. We are of the view that the said circular of CBDT does not overrule the specific language of Section 10A which extends the benefit of exemption under Section 10A to the units set up under STP Scheme only in the previous year relevant to the asst. yr. 1994-95 and thereafter. We agree with the view of the learned Departmental Representative that the interpretation sought to be placed by the learned counsel for the assessee on the Board's circular dt. 23rd Nov., 1994, is out of context. So, we agree with the stand of the Revenue that as the assessee had not set up its unit in the year of account relevant for the asst. yr. 1994-95, even though it was admittedly a STP unit, the benefit of Clause (i)(b) of Sub-section (2) of Section 10A of the Act cannot be extended to it and, therefore, the assessee is not eligible for exemption under Section 10A of the Act. We do not have to consider separately the issue whether the income from operations at Nagarjuna Hills can be exempted under Clause (i)(b) of Sub-section (2) of Section 10A, as no separate claim in respect of the unit at Nagarjuna Hills has been made before us and as already mentioned, the learned counsel for the assessee has given up the claim that the operations at Nagarjuna Hills constituted a separate unit.
10. Now, we shall consider the plea of the learned counsel for the assessee for the exemption of income of the assessee under Section 10B of the Act. The learned counsel for the assessee pleaded before us that the assessee is an EOU within the definition of EOU given in Clause (i) of Explanation to Section 10B of the Act which we have already reproduced hereinabove. It is mentioned that if the income from the operations at Maithrivanam is eligible for exemption under Section 10B, the income from operations at Nagarjuna Hills also automatically becomes eligible for exemption under Section 10B of the Act as the latter unit is only an extension of the former. So, what is required to be seen is whether the operations in Maithrivanam are eligible for exemption under Section 10B and whether the said unit under Maithrivanam can qualify as 100 per cent export-oriented undertaking within the meaning of Section 10B of the Act. It may be observed that the definition of "100 per cent export-oriented undertaking" given in Clause (i) of Explanation to Section 10B of the Act refers to an undertaking which has been approved as such by the Board appointed in this behalf by the Central Government in exercise of its powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 and the rules made under that Act. Section 14 of IDR Act, 1951 reads as under :
"Procedure for the grant of licence or permission-- .
14. Before granting any licence or permission under Section 11, Section 11A, Section 13 or Section 29B, the Central Government may require such officer or authority as it may appoint for the purpose, to make a full and complete investigations in respect of applications received in this behalf, and report to it the result of such investigation and in making any such investigation, the officer or authority shall follow such procedure as may be prescribed."
Sections 11, 11A and 13 relate to the licensing of new industrial undertaking and licensing for producing or manufacturing new articles in licensed or registered undertakings. Section 29B relates to the power of the Central Government to exempt some small scale undertakings from the licensing procedures. Registration and Licensing of Industrial Undertaking Rules, 1952 (RLIU Rules) were framed under IDR Act and Rule 7 of the said Rules stipulates that an application for licence or permission for the establishment of a new industrial undertaking or any substantial expansion or the production or manufacture of any new article in an industrial undertaking shall be made before taking any steps like raising from the public any part of the capital required for the undertaking or expansion or the production or manufacture of the new article. Rule 10 which is relevant for our purposes reads as under:
"10. (1) The Ministry of Industrial Development shall refer the application to a Committee appointed under Sub-rule (2):
Provided that where an application relates to the extension of the period of validity of an industrial licence or to the issue of a carry-on-business licence or to diversification within the exiting licensed capacity in respect of such scheduled industries as may, from time to time be decided by the Central Government having regard to the maximisation of production, better utilisation of existing plant and machinery and other factors, the Ministries concerned may dispose of such application without reference to the committee.
(2) The Ministry of Industrial Development may, by notification in the Official Gazette, appoint one or more Committees, consisting of such number of members as it may think fit to represent-
(a) the Ministries of the Central Government dealing with
(i) the industries specified in the First Schedule to the Act;
(ii) Finance;
(iii) Company affairs; and
(iv) the Planning Commission (3) A Committee appointed under Sub-rule (2) may co-opt one or more representatives of other Ministries of the Central Government or of any State Government concerned, wherever it is necessary."
It may be observed that under the above rule, various committees can be appointed for the purpose of examining the licences to be granted under this Act. The paper books filed by the learned counsel for the assessee which contains the Registration and Licensing of Industrial Undertaking Rules, 1952 itself refers to the various committees appointed under Rule 10 of Rules, 1952 and they are the following :
(i) Project Approval Board
(ii) Licensing/MRT Committee
(iii) Licensing Committee
(iv) Special Committee and Fertilizer Projects
(v) Board of approval--100 per cent Export Oriented Undertakings
(vi) Special Approval Committee (MRI) The above committees consist of high level functionaries and most of the officers are of and above the level of Joint Secretaries drawn from various Ministries like Department of Industrial Development, Department of Company Affairs, Planning Commission, Ministry of Finance, Ministry of Commerce, Department of Science and Technology, Technical Development, DGTD and administrative ministry concerned or its nominee, etc. As we are mainly concerned with the Board of Approval for 100 per cent export oriented undertaking, its composition and functions and powers, etc., which are relevant for our purpose are reproduced hereunder from paper book of the assessee :
"Board of Approval for hundred per cent export-oriented undertaking Chairman (1) Secretary, Ministry of Commerce Members (2) Secretary, Department of Industrial Development, or his nominee (3) Secretary, Department of Company Affairs, or his nominee (4) Secretary, Planning Commission, or his nominee (5) Secretary, Ministry of Finance, Department of Economic Affairs, or his nominee (6) Secretary, Department of Science and Technology, or his nominee (7) Secretary, Technical Development, Directorate General of Technical Development, or his nominee (8) Chairman, Central Board of Excise and Customs, or his nominee (9) Development Commissioner, Small Scale Industries, or his nominee (10) Chief Controller of Imports and Exports, or his nominee (11) Secretary of the administrative ministry concerned, or his nominee Member-Secretary (12) Joint Secretary in-charge of Secretariat for Industrial Approvals.
Functions of the-Board of approval for hundred per cent export-oriented undertakings
1. The Board shall consider all applications for industrial licence approvals including approval of proposals for foreign collaboration and import of capital goods, other than those for Kandla Free Trade Zone and Santa Cruz Electronics Export Processing Zone, under the scheme of special facilities for setting up hundred per cent export-oriented units framed under the Government of India, Ministry of Commerce, Department of Commerce, Resolution No. 8(15)/78-E.P., dt. 31st Dec., 1980, published in the Gazette of India, Extraordinary, 1980, Part 1. Section 1, dt. the 31st Dec., 1980.
2. The Board shall review the progress of implementation of letters of intent and industrial licences granted under the said scheme upto the stage of actual commissioning of capacity.
3. The Board shall consider policy questions arising from applications received under the said scheme or from the implementation of individual proposals thereunder and resolve them in accordance with the policy laid down by the Central Government from time to time.
4. The Board may refer any matter in its discretion for the consideration and decision of the appropriate authority in respect of matters falling within its competence.
5. The Board shall exercise the powers of the Licensing Committee appointed under Sub-rule (2) of Rule 10 of the Registration and Licensing of Industrial Undertaking Rules, 1952, in respect of industrial undertaking registered or registrable under the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) and report to the Central Government in regard to notices of applications under Sections 21 and 22 of the said Act."
The scheme relating to the setting up of 100 per cent export-oriented units is given in Annexure to RLIU Rules, 1952 and the said annexure reads as under:
ANNEX "100 per cent export-oriented units In order to bridge the increasing deficit in the balance of trade and running down of exchange reserves, it has become necessary to step up the growth of our exports. Accordingly, the Government have decided to implement a scheme to facilitate the setting up of 100 per cent export-oriented units. It has been decided to give such units certain concessions to enable them to meet rigours of foreign demand in terms of pricing, quality precision, etc.
2. A 100 per cent export-oriented unit would imply an industrial unit offering for exports its entire production excluding permitted levels of rejects. An agreed time-phasing for achieving 100 per cent export will be permissible on merits of each case. Such a unit would belong to an industry in respect of which the export potential and export targets have been considered by the relevant Export Promotion Council. The product concerned should not be subject to export control quota ceilings which can be reached by existing units in the industry. The intention is that capacity should be created which should result in additionally of exports and not mere substitution.
3. Minimum value added content of 20 per cent or more will be necessary for production of such a unit. Domestically procured raw materials shall be treated as imports for computation by value added.
4. While approving such, a unit the additional employment which would be generated by the proposed unit would also be taken into consideration.
5. An illustrative list of industries which may be considered under the scheme is annexed.
6. All the units intending to set up industries under the scheme shall make applications to the Secretariat for Industrial Approvals, Ministry of Industry, Department of Industrial Development, Udyog Bhavan, New Delhi in the relevant IL/FC forms superimposed with the words '100 per cent considered by a Board industry'. These applications will be considered by a Board headed by the Commerce Secretary.
7. A unit approved by the Board shall be governed broadly by the following terms and conditions :
(i) The unit shall undertake to manufacture in bond and to export its entire production for a period of 10 years ordinarily and 5 years in the case of products having high degree of technological change. The customs authorities shall provide bond facilities to such units wherever located.
(ii) Import of capital goods, components and raw materials shall be exempt from import duty. Finished products shall also be exempt from excise and other central levies.
(iii) No export benefits like cash assistance, replenishment licences would be admissible on these exports.
(iv) Import of capital goods, components, raw materials and consumables, as required will be permitted.
(v) Imports of necessary capital goods shall be allowed against free foreign exchange or bilateral credits in such a way that the cost of unit is not unduly raised.
(vi) Foreign collaboration may be permitted on merits of each case.
(vii) The conditions for dilution of foreign equity as stipulated in the Department of Economic Affairs Press Note of 19th Feb., 1972, will not be enforced in 100 per cent export-oriented cases,
(viii) So as to keep rates of return on export production competitive, exporting units including large houses/MRTP units may be permitted to borrow from financial institutions at normal debt/ equity ratio.
(ix) Indigenously available capital goods, components and raw materials will be allowed without payment of Central Excise Duty.
(x) Rejects upto 5 per cent or such percentage as may be fixed by the Board may be allowed to be sold in the domestic tariff area on payment of customs duty on imported inputs and Central Excise Duty on the indigenous inputs and also Central Excise Duty on the rejects for an amount equal to the aggregate of such duties.
(xi) Time-phasing for achieving 100 per cent exports may be considered on merits. However, in such cases exports shall have to be at least three-fourths or more of the production.
(xii) The gestation period for achieving export targets shall not be more than two years and the period of export obligation in terms of the approval shall commence after the gestation period.
(xiii) The condition of export obligation shall be subject to review by the Board and the question whether the unit can be allowed to be debonded after completion of export obligation period and thereafter allowed to produce for domestic market shall be decided in the light of industrial policy in force at that time, equity participation, indigenous capacity and production to small scale industry.
(xiv) On debonding after the period of export, duties shall be leviable as follows :
(a) customs duty on capital goods on the depreciated value but at rates prevalent at the time of import;
(b) customs duty on unused imported raw materials and components on value at the time of import and rates in force at the time of clearance; and
(c) in respect of excisable goods, excise duty to be levied without depreciation and at rate attracted at the time of clearance.
(xv) An application made for industrial licence to the Secretariat for Industrial Approvals shall be treated as an application under the MRTP Act, 1969 and simultaneous action shall be taken to process the same to that a single point clearance is given by the Board.
(xvi) If any unit approved under this scheme is unable for any reasons to fulfil its export or other obligations under this scheme, the Board will review the circumstances of that unit and recommend the future course of action to be taken in regard to that unit.
(xvii) The units which are approved for these special facilities would have to execute bond/legal undertaking with the CCI&E and in case of failure to fulfil their obligations, they would be liable to penalty in terms of such bond/legal undertaking besides the penalty, if any, under the Import Trade Control Regulations.
Illustrative list of products which would be eligible for special facilities on the ground of 100 per cent exports :
1. Engineering goods 1.1 Engineering goods (excluding prime and non-ferrous metals) 1.2 Electronic products including electronic software 2. Chemicals, plastics and allied products, namely :
(a) Inorganic chemicals, organic chemicals and miscellaneous chemicals
(b) Drugs and drug intermediates, including crude drugs
(c) Dyes and dye intermediates
(d) Toiletries and perfumeries (excluding processed talc)
(e) Paints and allied products
(f) Safety matches, fireworks, explosives and detonators
(s) Ceramic products
(h) Glass and glassware
(i) Wood products and processed wood
(j) Asbestos cement, including clinkers and cement products
(k) Rubber manufacturers
(l) Paper, paper products and stationery
(m) Pesticides and preservatives
(n) Agarbattis 2.2 Culinary oleo resins 2.3 Refractories 2.4 Plastic and linoleum products
3. Furniture
4. Leather and sports goods 4.1 Finished leather and leather manufactures, including footwear and paint brushes 4.2 Sports goods
5. Food, agriculture and forest products 5.1 Canned and frozen marine products 5.2 Processed foods, fruits, vegetables and alcoholic and soft beverages 5.3 Meat and allied products 5.4 Packaged tea, i.e., tea packed in consumer packs of a size up to 1 kg. and instant tea 5.5 Instant and packaged ground coffee 5.6 Tobacco manufacturers 5.7 Deoiled rice bran and cotton seed cakes, sal seed fats and animal foods 5.8 Mango kernel extraction and mango kernel oil
6. Textiles
1. Carpets
2. Readymade garments, knitwear, made-up articles.
Annex
3. Rubberised coir and curled coir
4. Khadi
5. Natural silk fabrics, garments and made-up articles
6. Hosiery
7. Handloom fabrics, made-up articles and garments
7. Miscellaneous
1. Handicrafts
2. Silver and gold jewellery
3. Fabricated mica."
We have reproduced the entire annexure because the main claim of the assessee before us has been that it is a 100 per cent EOU whithin the definition of EOU given in Clause (i) of Section 10B of the Act and the above annexure gives the details of the EOU scheme and so it is relevant to examine the validity of the claim of the assessee for exemption under Section 10B of the Act.
11. The learned counsel for the assessee invited our attention to the letter of the Department of Electronics dt. 26th Sept., 1991, extracted by us hereinabove, approving the setting up of the assessee as a 100 per cent EOU under STP scheme and pleaded that the assessee could obtain the said approval only on the condition that it undertook the 100 per cent export of its production for a period of 10 years. In this context, he invited our attention to the terms and conditions for establishment of units under the STP Scheme which accompanied the said letter of the Department of Electronics dt. 26th Sept.. 1991 and we have already extracted hereinabove the relevant portion of the terms and conditions. On the basis of the said letter and the said terms and conditions, the learned counsel for the assessee argued that the assessee is a 100 per cent EOU and so it is not fair on the part of the Department to reject the claim for exemption under Section 10B on the short ground that the assessee was not approved by the Board constituted under Industries (Development and Regulation) Act, 1951 referred to in Clause (1) of Explanation to Section 10B of the Act.
12. The learned counsel for the assessee further pleaded that an Inter-Ministerial Standing Committee (IMSC) was originally constituted by Gazette Notification No. 294, dt. 30th Aug., 1991, to consider the licences under STP scheme. In this context, he invited our attention to the STP scheme notified on 22nd March, 1994, reported in 209 ITR (St) at pp. 48 to 50, the relevant portion of which reads as under :
"Software Technology Parks (STP) Scheme--Notification No. S.O. 243(E), dt. 22nd March, 1994.
In exercise of the powers conferred by Sub-section (1) of Section 3 of the Foreign Trade (Development and Regulation) Act, 1992 the Central Government hereby notifies the following scheme, which is a sequel to resolution No. 17(38)/Comp./ 84(Part), dt. 18th Dec., 1986, of the Department of Electronics announcing the policy on computer software, software development and training and also resolution No. 17(38)/Cornp./93 dt. 22nd Feb., 1993, the Department of Electronics for Software Exports.
2.0 Software Technology Park (STP) Scheme 2.1 The Software Technology Park (STP) Scheme is a 100 per cent export-oriented scheme for undertaking of software development for export using data communication link or in the form of physical exports including export of professional services.
2.2 A Software Technology Park (STP) may be set up by the Central Government, State Government, public or private sector undertaking or any combination thereof. An STP may be an individual unit by itself or it may be one of such units located in an area designated as STP complex by the Department of Electronics.
2.3 The Scheme is administered by the Department of Electronics, Government of India through Directors of respective Software Technology Parks which form part of the Software Technology Parks of India, a society established by the Department of Electronics, Government of India and registered under the Societies Registration Act, 1860. An application in the prescribed format for establishing a Software Technology Park unit is to be submitted to the Chief Executive of Software Technology Park Complex along with the details of the Software project. Such application will be considered by an Inter-Ministerial Standing Committee (IMSC) constituted under the Chairmanship of Secretary, Department of Electronics, Government of India notified vide Gazette No. 294 G.S.R. No. 526(E) dt. 13th Aug., 1991, published in Sub-section 3 of Part II of the Extraordinary Gazette of India and reconstituted by the Notification of Ministry of Industries, vide Gazette Notification No. S.O. 117(E), dt. 22nd Feb., 1993, published in Part II, Section 3, Sub-section (ii) of the Extraordinary Gazette of India.
2.4 An STP unit may import free of duty all types of goods including capital goods. The duty exemption shall also apply to goods imported by the Software Technology Parks of India Society for creating the central facility for use by software development units in the STP complex. The capital goods imported on loan from their client for specified period executing the specific project shall also be allowed to the STP units .
2.5 An STP will be a duty-free and bonded area under Section 25 of the Customs Act, 1962. The customs duty exemption will be applicable as per Custom Notification Nos. 138, 139, 140 and 141 Customs/91, dt. 22nd Oct., 1991 and as amended from time to time.
2.6 The entire software developed by STP unit shall be exported except the sales in the Domestic Tariff Area (DTA). The sales in the DTA shall be permissible upto 25 per cent of the production in value terms made by the STP unit.
2.7.........
2.7.1.........
2.7.2.........
2.7.3. .........
2.7.4. .........
2.8.... .........
2.8.1 .........
2.8.2. .........
2.9.... .........
2.10 The provisions of paras 111 to 117 of Chapter IX of the Export and Import Policy (1992--97) applicable to export oriented units (EOUs) and units in Export Processing Zones (EPZs) shall also apply mutatis mutandis to STP Scheme subject to the following modifications:
(a) The words "Development Commissioner" wherever they occur, shall be substituted by the words "Chief Executive of STP Society".
(b) The letter "BOA" wherever they occur, shall be substituted by the letters "IMSC".
2.11 Export obligation on the STP unit on net foreign exchange terms in US dollar value will be as follows :
Export obligation = 1.5 x CIF value of the hardware imported + 1.5 x wage bill Notes:
(i) The obligation on the hardware part will be fulfilled over a period of four years.
(ii) The obligation on wage bill will be on annual basis
(iii) Net foreign exchange for this purpose will be defined as below :
"Net foreign exchange earned for this purpose is defined as foreign exchange inflow as a result of software export less foreign exchange outflows on account of all expenditure whatsoever other than initial hardware"
2.12 Use of computer system in STP for training purpose is also allowed subject to the condition that no computer terminal will be installed outside the STP for this purpose.
3.0 This Scheme is separate from the EOU/EPZ Scheme incorporated in Chapter IX of the Export and Import Policy (1992-97). The provisions of STP scheme contained in this notification shall not be applicable to the software units established in accordance with the EHTP scheme notified vide Notification No. 42 (N-8) 1992--97, dt. 14th Sept., 1992, and software units established in an EPZ or as an EOU.
This issued in public interest"
(Emphasis, italicised in print, supplied) We have provided the emphasis on those points which have been taken up by the learned counsel, for the assessee and the learned Departmental Representative in the course of their arguments. The learned counsel for the assessee also invited our attention to the copy of the Notification dt. 22nd Feb., 1993, issued by the Ministry of Industry, Department of Industrial Development which reads as under;
"Ministry of Industry (Department of Industrial Development) New Delhi, the 22nd Feb., 1993 Notification S.O. No. 117(E)--In exercise of the powers conferred by Section 14 of Industries (Development and Regulation) Act, 1951 (65 of 1951), r/w Sub-rule (2) of Rule 10 of the Registration and Licensing of Industrial undertakings Rules, 1952 the Ministry of Industry, Department of Industrial Development, hereby appoints the following committee which shall perform the functions specified :
Inter-Ministerial Standing Committee for units in the Electronic Hardware Technology Parks (EHTP) and Software Technology Parks (STP) Chairman
1. Secretary, Department of Electronics, or his nominee
2. Secretary, Department of Industrial Development, or his nominee
3. Secretary, Department of Science and Technology, or his nominee
4. Secretary, Ministry of Commerce, or his nominee
5. Chairman, Central Board of Excise and Customs, or his nominee
6. Secretary, Deptt. of Economic Affairs, Ministry of Finance, or his nominee
7. Secretary, Planning Commission, or his nominee
8. Economic Adviser, Department of Electronics
9. Secretary, Department of Small Scale Industries and Agro and Rural Industries or his nominee
10. Joint Secretary, Department of Electronics, Member-Secretary.
Functions of the Inter-Ministerial Standing Committee :
(i) The Committee shall consider all applications for setting up of units in the Electronic Hardware Technology Parks (EHTP) under the scheme of special facility (hereinafter referred to as the said scheme framed under the Government of India, Ministry of Commerce, Notification No. 42 (N-8)/1992-97 dt. the 14th Sept., 1992). The Committee shall also consider all applications for setting up of units under Software Technology Park scheme operated under Customs Notification Nos. 138 and 140 dt. 22nd Oct., 1991. The Committee shall consider proposals for industrial licence, foreign technical collaboration agreements and import of capital goods. The Committee shall not consider applications involving foreign equity with or without any other industrial approvals.
(ii) The Committee shall review the progress of implementation of letters of intent and industrial licences granted under the said scheme upto the stage of actual commissioning of capacity.
(iii) The Committee shall consider and make a report on policy questions arising from applications received under the said scheme or from the implementation of individual proposals thereunder in accordance with the policy laid down by the Central Government from time to time.
(iv) The Committee may refer any matter in its discretion for the consideration and decision of the Central Government in respect of matters falling within its competence".
(S. Behura) Joint Secretary to the Govt. of India"
In the light of above Notification dt. 22nd Feb., 1993 and the subsequent Notification dt. 22nd Feb., 1994, detailing the STP scheme, the learned counsel for the assessee argued that Inter-Ministerial Standing Committee was originally constituted on 13th Aug., 1991 and it was reconstituted on 22nd Feb., 1993. It is also claimed that the said Inter-Ministerial Standing Committee was constituted by the Ministry of Industry and the approval letter dt. 26th Sept., 1991, under which the unit at Maithrivanam was approved as a 100 per cent EOU under the STP scheme, was granted by the said Inter-Ministerial Standing Committee constituted under Section 14 of IDR Act, 1951 by the Ministry of Commerce. It is also pleaded that the above notification relating to the STP scheme has specifically mentioned at para 2.10(b) that the letters 'BOA' shall be substituted by the letters "IMSC" and that 'BOA' stood for 'Board of approval' constituted under Rule 10 of RLIU Rules r/w Section 14 of IDR Act, 1951 and that 'IMSC' stood for Inter-Ministerial Standing Committee and so it must be regarded that the assessee was approved as 100 per cent export oriented unit by the Board referred to in Clause (i) of Explanation to Section 10B of the Act. In other words, the contention of the learned counsel is that, as the unit of the assessee at Maithrivanam was approved as a 100 per cent export-oriented unit under the STP scheme, it must be held that it was so approved as a 100 per cent EOU by the Board referred to in Clause (i) of Explanation to Section 10B of the Act.
13. The learned counsel for the assessee has also filed before us the Computer Policy, 1984 given as Appendix 24.11 at p. 517 of the Manual for Foreign Collaboration and Investment in India which contains the following :
"A. Manufacture
1. All regulatory measures concerning manufacture like scrutiny of applications for letters of Intent, Industrial Licences, Foreign Collaboration, Phased Manufacturing Programmes (PMP) and CG & Raw material imports, will be exercised by the existing Inter-Ministerial Standing Committee (IMSC) under the Department of Electronics (DOE) which has been designated for this extended purpose. The Computer, Computer-communication and Instrumentation (CCI) Wing of the Department of Electronics will continue to be the Secretariat for this committee. All applications should also be made directly to the CCI Wing of DOE."
In the light of the above, it is contended that Inter-Ministerial Standing Committee under the Department of Electronics is authorised to consider all licences relating to computer or software units and so it is claimed that the approval by the Inter-Ministerial Standing Committee tantamounts to approval by Board under Clause (i) of Explanation to Section 10B of the Act.
14. The learned counsel for the assessee also filed before us a copy of Resolution dt. 18th Dec., 1986, in the Gazette of India, 27th Dec., 1986, at p. 809, in which it was mentioned as under:
"XII. Procedures
1. The Inter-Ministerial Standing Committee (IMSC) of the Department of Electronics will function as an effective instrument for single point clearance and for coordination of action of all cases of software development and software export.
2. For software export project, the entrepreneur will apply to CCI Wing of DOE in the form prescribed in Appendix II-C of Handbook of Import and Export Procedures, 1985-88. The proposal will be considered in IMSC and the decision will be conveyed directly by IMSC to the applicant within a period of six weeks. For cases under Exim Bank Scheme applications should be directly submitted to the Exim Bank.
3. All applications for import licence/custom clearance permit in format prescribed by CCI&E will be sent directly to CCI Wing of DOE. The import licence/custom clearance permit for import of the computer/computer based systems will be issued by JCCI & E at Headquarters who will be..... For cases under Exim Bank Scheme applications.... of IMSC. He will be a member of IMSC.
4. In the case involving foreign collaboration and foreign investment, IMSC will examine and recommend the case direct to Chairman, FIB, for necessary approval.
5. Software exports will be eligible to all direct tax benefits as available to the other types of exports.
6.. An empowered representative of the Department of Tele-communications will be a member of IMSC. Clearance of the proposal by the IMSC' will entitle the applicant to a telephone/telex connection and facilities for satellite link-up and data communication including Modem connection on priority allocation.
7. DOE will register the software development organizations engaged in software development for export purposes.
8. A legal bond/undertaking will be executed by the software exporter With Government of India for export obligation."
(Emphasis, italicised in print, supplied) In the light of the above resolution, it is claimed that it is the policy of the Government that software exports were eligible all for direct tax benefits which are available to others and, therefore, the assessee is entitled for exemption under Section 10B of the Act in its status as a 100 per cent export-oriented unit like any other EOU approved by the Board referred to in Clause (i) of Explanation to Section 10B of the Act.
15. Adverting to another observation of the AO that local sales exceeded the permissible limit of 25 per cent of the turnover stipulated in Clause (ib) of Sub-section (2) of Section 10B, it is mentioned that this restriction applies only to the undertakings which began to manufacture or producing article or thing on or after 1994 and as the undertaking of the assessee was started in 1991 at Maithrivanam the said clause does not apply. Further, its local sales were only 6.64 per cent of the aggregate turnover of both the units i.e., unit at Maithrivanam and unit at Nagarjuna Hills and as such were much less than the stipulated percentage of 25 per cent.
16. The learned Departmental Representative, on the other hand, pleaded that a unit under the STP scheme is totally different from an EOU unit. Units set up under the STP scheme or the Export Processing Zone or a free trade zone or as EOUs are all separate categories and they are covered under separate incentive schemes. It is mentioned that the assessee was clearly a unit under the STP scheme and not an EOU unit and so it is stumbling between two stools. It is not eligible for exemption under Section 10A of the Act because it was not established in free trade zone as required under Section 10A. The exemption under Section 10A of the Act was extended, as already mentioned, to the units' under STP scheme only from 1st April, 1994, and this exemption is not available to units like that of the assessee which were established in earlier years. As it is a unit set up under the STP scheme and not a 100 per cent export-oriented unit within the meaning of Clause (i) of Explanation to Section 10B of the Act, it is not eligible for exemption even under Section 10B.
The Inter-Ministerial Standing Committee (IMSC) even if appointed under RLIU Rules, 1952 r/w Section 14 of IDAR Act, 1951, is separate from the Board which was specifically meant for granting licences to 100 per cent export oriented units which is a scheme quite separate from the STP scheme. Admittedly, the assessee did not have specific approval of the Board constituted under RLIU Rules, 1952 r/w Section 14 of the IDAR Act. The learned Departmental Representative pointed out that the learned counsel for the assessee was referring to bits and pieces of various notifications/resolutions of Government of India relating to software units and. was relying on such bits and pieces to state that the assessee qualified as a 100 per cent EOU whereas the requirement of the section is that it must have a specific approval of the Board constituted under RLIU Rules, 1952, which was missing. In the absence of compliance with the requirements of the statute, it is claimed that the assessee is not eligible for exemption under Section 10B of the Act. Adverting to the reliance placed by the assessee on the Notification No. 33/(RE)/92-97 dt. 22nd March, 1994, issued by the Ministry of Commerce, New Delhi, he pointed out that even the said notification clarified towards end in para 3 that the scheme covered by the said notification was totally different from EOU/EPZ scheme incorporated in Chapter IX of the Export and Import Policy (1992-93). It is also mentioned that the reliance placed by the learned counsel for the assessee on the substitution of "Board of Approval" by "Inter-Ministerial Standing Committee" as per Clause (b) of para 2.10 of the said notification is quite misleading because the so-called substitution was only for the purpose of certain paras of Chapter IX of the Export and Import Policy (1992-97) and not for the purpose of statutory discharge of duty of licensing under RLIU Rules, 1952.
17. We are in agreement with the learned Departmental Representative on the issue of exemption of the income of the assessee under Section 10B of the Act. Admittedly, there is no specific approval of the assessee as a 100 per cent EOU by the Board referred to in Clause (i) of Explanation to Section 10B of the Act. It is equally evident that the assessee started a 100 per cent EOU under STP scheme vide approval granted by the Department of Electronics dt. 26th Sept., 1991. We hasten to add that this does not mean that the assessee is a 100 per cent EOU within the meaning of Section 10B of IT Act. For the purpose of 10B of the Act, 100 per cent EOU is only that which is so approved by the Board appointed by Central Government in exercise of powers conferred under Section 14 of IDAR Act, 1951, 100 per cent EOU under the STP scheme cannot, to our mind, be equated with 100 per cent EOU approved by the Board under Section 14 of the IDAR Act. The conditionalities that govern units set up under STP scheme are different from those that govern the units set up as 100 per cent EOUs and so approved by the Board. Some of the conditionalities are common and overlapping but other conditionalities like the satisfaction of employment criteria, foreign exchange, etc., are apparently different. It may be that the Inter-Ministerial Standing Committee set up for granting licences under STP scheme is also appointed by the Central Government in exercise of powers conferred under, Section 14 of IDAR Act but that does not mean that the Board that has been appointed for granting licences and approval for 100 per cent EOUs has been replaced. The plea taken by the learned counsel for the assessee that the Inter-Ministerial Standing Committee has been replaced by the Board on the basis of the contents of para 2 of the notification of the Ministry of Commerce dt. 22nd March, 1994, which we have extracted hereinbefore, to our mind, is misconceived. The said notification states that for the purpose of paras 111 to 117 of Chapter IX of the Export and Import Policy (1992-97), Board of approval shall be substituted by the Inter-Ministerial Standing Committee. It is worthwhile to see the paras 111 to 117 of Chapter-DC of Export and Import Policy (1992-97) and they read as under :--
"Sub-Can tracing
111. The EOU/EPZ units may be permitted to sub-contract part of their production for job work to units in the DTA on a case to case basis. Requests in this regard will be considered by the concerned Customs authorities on the basis of factors such as feasibility of bonding, fixation of input and output norms, and furnishing of undertaking/bonds by the concerned units.
Sale of imported materials
112. In case an EOU/EPZ unit is unable, for valid reasons, to utilise the imported goods, it may re-export them with the permission of the Development Commissioner, subject to clearance from Customs with reference to valuation, etc., such goods may also be transferred to an Actual User in the DTA with the permission of the Development CIT on payment of applicable duties.
113. Imported machinery/capital goods that have become obsolete may be disposed of, subject to payment of customs duties on the depreciated value thereof.
Disposal of scrap
114. The Development Commissioner may, subject to guidelines laid down by the BOA in this behalf, permit sale or their disposal in any other manner in the DTA of scrap/waste/remnants arising out of production process on payment of applicable duties and taxes. Percentage of such scrap/waste/remnants shall be fixed by the Board keeping in view the norms specified by a Public Notice issued in this behalf by the Director General of Foreign Trade.
Private bonded warehouses
115. Private bonded warehouses may be permitted to be set up in EPZs for stock and sale of duty-free raw materials, components, etc. to EOU and EPZ units subject to the following conditions :
(a) The private bonded warehouses shall be located within the EPZ;
(b) Imports for such private bonded warehouses shall be made only against specific licences. No licence shall be given to import items which are not required by the consuming units; and
(c) The items imported by the private bonded warehouses shall not be permitted to be sold in the DTA.
Period or bonding
116. The bonding period for units under the EOU scheme shall be 10 years. The period may be reduced to 5 years by the BOA in case of products liable to rapid technological change. On completion of the bonding period, it shall be open to the unit to continue under the scheme or opt out of the scheme. Such debonding shall, however, be subject to the industrial policy in force at the time the option is exercised.
Debonding
117. Subject to the approval of BOA, EOU/EPZ units may be debonded on their inability to achieve export obligation, value addition or other requirements. Such debonding shall be subject to such penalty as may be imposed and levy of the following duties :
(a) Customs duty on capital goods at depreciated value but at rates prevalent on the dates of import;
(b) Customs duty on unused raw materials and components on the value on the dates of import and at rates in force on the dates of clearance."
It is apparent that the Notification in question dt. 22nd March, 1994 extended some incentives given to the EOUs to the units set up under the STP scheme. Some of the above paras like 114 talk of permission to be granted by the Development Commissioner subject to guidelines laid down by the "BOA" that is, Board. Para 117 refers to the approval by the Board and para 116 refers to bonding period under EOU scheme. It is quite relevant that the EOU scheme was very much in operation and under this scheme, units had to be approved by the Board. It is only that, by the said Notification dt. 22nd March, 1994, some of the facilities available to EOUs vide paras 111 to 117 of the Export & Import Policy (1992-97) have been extended to the units under the STP scheme. The said notification only clarified that wherever the Board was mentioned in the Export and Import Policy in its paras, it was substituted by the Inter-Ministerial Standing Committee as STP units were under the control of IMSC and EOUs were under the control of the Board.
18. To our mind, it is very clear that for availing exemption from tax, the statutory requirements have necessarily to be satisfied. As mentioned above, the statutory approval by the Board as 100 per cent EOU has to be obtained for availing exemption under Section 10B which is missing. It is not a question whether the Inter-Ministerial Standing Committee constituted under Section 14 of IDAR Act, 1951 is of a higher standing or a lower standing than the Board constituted under the same section. It is not a question of relative status of the two bodies and it is simply a question of the designated authority performing the prescribed duties and assessee approaching the body stipulated under the Act for approval for purpose of availing exemption under Section 10B of the Act. Obviously, the assessee has not approached the Board for approval as EOU or it has failed in its attempts and did not disclose before us the correct situation. To our mind, it is quite clear that the Board has not been replaced by the Inter-Ministerial Standing Committee, for the purpose of granting approval as 100 per cent EOU within the meaning of Clause (i) of Explanation to Section 10B of the Act. If there is any change as claimed by the assessee, there would have been a reference to the Inter-Ministerial Standing Committee atleast under Clause (4) of Explanation of the amended provisions of Section 10B inserted w.e.f. 1st April, 2001, which exactly reproduces the definition of 100 per cent EOU as given in Clause (i) of Explanation to the pre-amended provisions of Section 10B which we have reproduced hereinabove. It cannot be assumed that the legislature is unaware of such replacement as claimed by the assessee before us.
19. Further, para 93 of Chapter IX of EOUs and units in export processing Zones (Export and Import Policy 1992-97) reads as under :
"Eligibility
93. Units undertaking to export their entire production of goods (except the sales in the Domestic Tariff Area (DTA)) as may be permissible under the policy may be set up under the Export-Oriented Unit (EOU) Scheme or Export Processing Zone (EPZ) Scheme, such units may be engaged in manufacture, production of software, agriculture, acquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry and sericulture. Units engaged in service activities may also be considered on merits."
It is evident from the above that the various schemes like EOU/EPZ & STP are different from each other. Para 9.1 of Export and Import Policy-1997-2002 clarified the matter further as under :
"Chapter 9 Export oriented units (EOUs), units in Export Processing Zones (EPZ), Electronic Hardware Technology Park units (EHTP) and Software Technology Park units (STP).
9.1 Eligibility--Units undertaking to export their entire production of goods and services may be set up under the Export Oriented Unit (EOU) Scheme, Export Processing Zone (EPZ) Scheme, Electronic Hardware Technology Park (EHTP). Such units may be engaged in manufacture, production of software, agriculture, acquaculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture. Units engaged in service activities will also be considered on merits.
Commensurate with the policy to give a special thrust to export of computer software, such units would be encouraged to be set up under any of the aforementioned export-oriented schemes software units may undertake exports using data communication links or in the form of physical exports (which may be through courier service also), including export of professional services."
It may be observed from the above paras that while the policy of the Government was to encourage exports and specially software exports and computers and software units were encouraged to be set up under the EOU, EPZ, EHTP and STP scheme, the very fact that different schemes were allowed to continue means that there must be differences between the schemes and they cannot be equated with one and another.
20. The matter may be approached from a different angle. Section 10A extends the exemption to the units set up under STP scheme which commence manufacture or production of articles or things during the previous year relevant to the assessment year commencing on or after 1st April, 1994. If the plea of the learned counsel for the assessee that an STP unit being 100 per cent EOU is eligible for exemption under Section 10B of the Act is accepted, the amendment brought about by the Finance Act, 1993 extending the benefit under Section 10A of the Act to the STPs from 1st April, 1994, becomes redundant or superfluous. If a STP unit is otherwise eligible for exemption under Section 10B of the Act on the ground of its being 100 per cent EOU, there was possibly no reason for the legislature to bring about an amendment extending the benefits of Section 10A to the units under STP scheme and, further, restrict the benefits to those commencing their operations in the year of account relevant to the asst. yr. 1994-95. If the plea of the learned counsel for the assessee is accepted, the restriction on the exemption of income to the units that commence operations in the year of account relevant to the asst. yr. 1994-95 gets automatically defeated because STPs which had commenced their operations on or before the stipulated date as mentioned above, become in any case eligible for exemption under Section 10B of the Act. We do not find any reason to attribute such a self-defeating exercise to the legislature.
21. Regarding the plea of the learned counsel for the assessee that an STP unit may also be an EOU and vice versa, it may be so. But it requires compliance with the rules of both the schemes and in the absence of compliance with both the schemes, an STP unit cannot automatically be regarded as a 100 per cent EOU. In other words, registration under the STP and EOU schemes are not automatically interchangeable.
22. For these reasons, we are of the view that the assessee is not entitled for exemption under Section 10B of the Act also. Perhaps, the assessee was aware of this position, that is how, it did not claim exemption under Sections 10A and 10B in the original computation filed by it, Such a claim was not advanced in any of the earlier years. The new unit at Nagarjuna Hills was set up in the year of account relevant for asst. yr. 1997-98 and it was only from 1997-98 onwards that a claim under Section 10A or 10B of the Act was made at some stage or other. The AO has granted exemption under Section 80HHE for 1997-98 and 1998-99 and there is no dispute about the allowability of deduction under Section 80HHE. So far as the exemption under Sections 10A and 10B of the Act is concerned, for the reasons mentioned hereinabove, the assessee, according to us, is not entitled for the same.
23. Before we close this part of the discussion, we want to reiterate that the grounds taken before us in the Form No. 36 are different from those taken in the course of hearing. We have considered the grounds taken in the course of hearing. Even otherwise, we mention that income from the operations from Nagarjuna Hills unit are not entitled for exemption under Sections 10A and 10B of the Act because it was only an extension to the old unit of Maithrivanam and the benefit of exemption of income to STP units under Clause (i)(b) of Sub-section (2) of Section 10A of the Act was available only for those which commence operations in the year of account relevant to the asst. yr. 1994-95 and thereafter. As the assessee-company has commenced its operations in the year 1991 and the unit of Nagarjuna Hills is only an extension of the unit at Maithrivanam, we are of the view that the benefit of exemption under Section 10A cannot be extended to the unit at Nagarjuna Hills, Hyderabad, As already mentioned, this was not the ground taken before us in the course of hearing. We have given our finding only because it figures among the grounds accompanying the Form No. 36.
24. The next effective ground is that the CIT(A) erred in rejecting the assessee's claim for relief under Section 80-I in respect of its income from domestic operations. It has been clarified that the concerned section has wrongly been mentioned as Section 80-I in the grounds taken before us and also in the order of CIT(A) and also by the AO. It is claimed that the assessee is entitled for the deduction in respect of this income from domestic sales in terms of Section 80-IA(2)(iv)(a) which reads as under:
"(iv)(a) in the case of an industrial undertaking not specified in Sub-clause (b) or Sub-clause (c), it begins to manufacture or produce articles or things or to operate such plant or plants, at any time during the period beginning on the 1st day of April, 1991 and ending on the 21st day of March, 1995, or such further period as the Central Government may, by notification in the official Gazette, specify with reference to any particular industrial undertaking;"
25. The CIT(A) denied the claim for deduction under Section 80-I with the following observations :
"I have considered the submissions but I am not persuaded to accept the same. One of the prerequisites for getting deduction under Section 80-I is that the industrial undertaking should manufacture or produce article or thing. In the present case, appellant develops software. The same cannot be termed as manufacture or production of an article or thing. It will be relevant to point out here that Explanation to Section 10A/10B specifically defines manufacture and produce to include computer programmes. The aforesaid clarificatory definition is not there in Section 80-I. Accordingly, the appellant will not be entitled to deduction under Section 80-I in respect of domestic sales."
Normally, we would have set aside the orders of Revenue authorities on this issue as the claim of the assessee has been considered under Section 80-I of the Act and not under Section 80-IA(2)(iv)(a), but we do not find it necessary to set aside the same as what is involved is only a question of law and no enquiry into fresh facts in this regard is required.
26. The first question that is to be decided is whether the production of software qualifies as 'manufacture' or 'production' of article or thing within the meaning of Section 80-IA(2)(iv)(a) of the Act. It may be observed that both the words 'manufacture' and 'produce' figure in Sections 10A and 10B of the Act and the latter word has been specifically defined in both these sections by virtue of insertion effected by Finance Act, 1993 w.e.f. 1st April, 1994. A plea has been taken by the learned counsel for the assessee that the said definition of 'produce' should be imported into other sections of the Act and in this context, reliance is placed upon the decision of Hon'ble jurisdictional High Court in the case of CIT v. Dredging Corporation of India (1988) 174 ITR 682 (AP) wherein it has been held that definition of an expression should prevail for all provisions in the Act unless the context requires otherwise. The AO rejected this proposition on the ground that the definition 'produce' given in Sections 10A and 10B of the Act is limited for purposes of those two sections and it cannot be extended to other sections of the Act like 80-I and 80-IA(2)(iv)(a) of the Act. There is some merit in the contention of the learned Departmental Representative that the word 'produce' given in Sections 10A and 10B of the Act is limited to those sections only and the ratio of the decision of jurisdictional High Court in the case of Dredging Corporation of India (supra) is of no help to the assessee because in that case the Hon'ble High Court was considering the definition of the expression 'person' occurring in Section 2(31) of the Act, which expression is meant for all purposes of the Act and is not restricted to any section. Therefore, this decision of Jurisdictional High Court is not applicable in the instant case. However, it may be observed that the CBDT Circular No. 694, dt. 23rd Nov., 1994, which we have quoted hereinabove has clearly mentioned that the definition of 'produce' given in Sections 10A and 10B of the Act is only clarificatory and that EOUs and software units were eligible for availing exemption under Sections 10A and 10B of the Act even for the period prior to the insertion of this expression into the section. According to the view of the Board, a software company produces an article or thing within the meaning of Section 10A or 10B of the Act even before the insertion of the definition of 'produce' w.e.f. 1st April, 1994. So, it must be held that a software company produces an article or thing within the meaning of Section 80-IA, as this section also uses the expression 'produce an article or thing' which is the same as that figuring in Sections 10A and 10B. In other words, even without any resort to the inclusive definition of 'produce' given in Sections 10A and 10B of the Act, software company is entitled for exemption under Sections 10A and 10B of the Act even prior to asst. yr. 1994-95 and so, by analogous reasoning, it is also entitled for exemption under Section 80-IA(2)(iv)(a) of the Act. In view of the above, there is no reason to deny the exemption under Section 80-IA(2)(iv)(a) of the Act to the assessee.
Further, we may mention here that there is no merit in the observations of the AO that the assessee cannot be granted deduction under Section 80-IA because it is granted deduction under Section 80HHE of the Act. The two sections operate in different spheres. Section 80HHE operates in respect of export income and 80-IA(2)(iv) in respect of income from domestic sales. Even if no separate books of account are maintained for export and domestic sales, when export profits are excluded as done by the AO, what remains is the income from domestic sales. Accordingly, we hold that the assessee is entitled for deduction under Section 80-IA(2)(iv)(a) of the Act and it may be granted.
27. The next ground is that the CIT(A) was not justified in confirming the disallowance of expenditure of Rs. 58,175 and Rs. 7,92,601 on foreign travel and training fees of Sri BGV Krishna, son of managing director of the assessee-company. The AO added back these two amounts with the following observations :
"Scrutiny of the books reveals that during the year Sri BGV Krishna the son of the MD had undertaken tours to USA in connection with his studies abroad. The assessee was asked to explain as to why this expenditure should not be disallowed as not being wholly and exclusively relatable to the assessee's business. It was explained that Sri BGV Krishna, as per the understanding with the company, after completion of his education would serve the company. In view of this tacit understanding (as no resolution could be passed by the company due to technical reasons), it was claimed that the expenditure should be allowed as a permissible deduction. However, in the absence of any written agreement and resolution to this effect and more importantly, for the reasons that the expenditure is in the nature of personal expenditure, the same is disallowed in the hands of the company i.e., Rs. 58,175.
V. Scrutiny of the accounts further snows that the company had expended Rs. 7,92,601 towards the training fee of Sri BGV Krishna in Purdue University, USA. The assessee was asked to explain as to why this expenditure should not be disallowed as not being relatable to assessee's business. The assessee has filed the same Explanation as discussed in the preceding para. However, since this expenditure is in the nature of personal expenditure, the same is disallowed in the hands of the company ...... Rs. 7,92,601"
The CIT(A) upheld the action of the AO with the following remarks :
"5. The next ground of appeal is directed against disallowance of expenditure of Rs. 58,175 and Rs. 7,92,601 on foreign travel and training fees of Sri BGV Krishna. Sri BGV Krishna happens to be the son of the managing director of the appellant company. The AO disallowed the expenditure on the ground that the expenditures were personal in nature and could not be considered as business expenditure. The AO has made detailed discussion in this regard in the assessment order.
5.1 Before me, the learned authorised representative of the appellant had argued that Sri BGV Krishna was sponsored for foreign education with the clear understanding that on completion of the course, he would serve the appellant company. The learned authorised representative had pleaded that the entire amount should be allowed as business expenditure.
5.2 There is no merit in the argument of the learned authorised representative. During the course of appeal hearing, the appellant had filed a letter dt. 27th July, 2000. This letter shows that Sri BGV Krishna was sponsored for Bachelor of Science (Electrical Engineering) in Purdue University, USA. Sri BGV Krishna is the son of the managing director and he is not connected to the appellant company in any way. The case of Sri BGV Krishna is an isolated case where the appellant company has sponsored somebody for course in foreign university. There is no guarantee that Sri Krishna will complete the course and after completion, he will serve the appellant company. I, therefore, agree with the AO that the expenditure was entirely personal in nature and had no connection with the business of the appellant. The disallowance of Rs. 58,175 and Rs. 7,92,601 are, therefore, confirmed."
Before us, the learned counsel for the assessee has filed a letter dt. 14th Feb., 2000, addressed to the AO which reads as under:
"Sub : Your letter No. Nil dt. 14th Feb., 2000.
With reference to your letter cited above, we wish to inform you that we have verified the minutes books of the company for the financial year 1996-97 in respect of education of Mr. BGV Krishna in USA and the amount of Rs. 6,46,669 made under the head Training Expenses. We confirm that no resolution was available in this respect.
This is for your information.
Thanking you,"
He also filed a copy of the resolution passed by the company in its Extraordinary General Meeting held on 10th Jan., 2002, appointing Mr. BGV Krishna as an employee of the company. The resolution reads as under:
"Resolved that pursuant to the provisions of Section 314(1)(b)(ii) and other applicable provisions, if any, of the Companies Act, 1956 consent of the company is hereby given to appoint Mr. BGV Krishna as Business Development Manager-Engineering Services and Embedded Systems, at Info Tech Enterprises Europe Ltd., UK w.e.f. 1st Nov., 2001."
"Resolved further that Mr. Krishna shall be paid an annual salary of 36,000 (GB pounds thirty six thousand only) per annum during the first year. The remuneration may progressively go up subject to his performance and industry trends subject however, that in no case the remuneration shall exceed 1,00,000 (GB pounds one lakh only) per annum in a span of five years. In addition to the above he is eligible for margin based commission on sales, entitlement to participate in company's health plan, pension scheme, encashment of leave and reimbursement of transport expenditure as per company's policy."
In the light of the above, it is claimed that the company was completely justified in financing the education and travel of Mr. BGV Krishna abroad because there was already an undertaking that Mr. Krishna would take up the employment with the assessee-company. It is also claimed that it is not for the Revenue to judge as to how the assessee should conduct its business.
28. We are afraid, we do not agree with the plea taken by the learned counsel for the assessee. It is observed by the CIT(A) that Sri BGV Krishna is the son of the managing director and he is not connected to the assessee-company in any way and his foreign tour and education is not shown to have been financed under any scheme or policy of the company. At the time of financing him, there was no agreement between him and the company about any future employment. Therefore, financing the foreign education of Sri BGV Krishna is totally unconditional at the inception and we see more of personal benefit to the managing director by way of financing his son's education abroad than meeting the business requirements of the assessee-company. It is also immaterial that the amount has been treated as a perquisite in the hands of managing director of the company. That does not bar the disallowance of the expenditure as not constituting a legitimate business expenditure in the hands of the company. For these reasons, we uphold the order of the CIT(A).
29. In the light of the above, the appeal for asst. yr. 1997-98 is partly allowed.
30. Next, we will take up the matter for asst. yr. 1998-99. The grounds taken up before us read as under :
"1. The order of the CIT(A) is erroneous in so far as it is opposed to provisions of law and facts on record.
2. (a) The CIT(A) erred in holding that benefit of Section 10B cannot be allowed in respect of income from new STP unit set up at Nagarjuna Hills, Punjagutta as it was not approved by the Board appointed by the Central Government in exercise of the powers conferred by Section 14 of the Industries Development and Regulation Act, 1951 and Rules made thereunder.
(b) The learned CIT(A) ought to have accepted the submission of the assessee that the Central Government has conferred authority on the Department of Electronics, to grant approval under Section 14 of the Industrial Development Regulation Act, 1951 and Rules made thereunder pursuant to which the approval was given to the Nagarjuna Hills unit and as such benefit of exemption under Section 10B in respect of the income therefrom was available to the assessee,
(c) The CIT(A) ought to have held that the benefit of exemption from tax in respect of income from STP unit at Nagarjuna Hills was available to it under Section 10A by virtue of the fact that under letter dt. 26th June, 1995 of the Department of Electronics, the said unit was approved as its initial plant at Maithrivanam complex which was approved as 100 per cent Export Oriented Unit under letter dt. 26th June, 1991 of the said Department.
(d) The CIT(A) erred in holding that the benefit of Section 10A cannot be extended to the income at Nagarjuna Hills unit under Section 10A as the work at Maithrivanam started before 1st April, 1994, ignoring the Circular No. 694, dt. 23rd Nov., 1994, of CBDT which directly supports the assessee's claim.
3. The CIT(A) is not justified in holding that the interest earned on fixed deposit (Rs. 32,15,465), interest on staff loan (Rs. 51,403) and income from miscellaneous receipts (Rs. 55,625) are not income derived from the business of the assessee.
4. Without prejudice, the CIT ought to have allowed the interest paid of Rs. 29,29,215 from the foregoing receipts before excluding the same from export business income for the purpose of relief under Section 80HHE.
5. For these and any other grounds that may be urged before the time of hearing it is prayed that the income of the assessee be exempted under Section 10A or Section 10B of IT Act and alternatively that only net interest be considered for the purpose of computing relief under Section 80HHE of IT Act."
Even for this year, there is variation between the grounds accompanying in Form No. 36 and the grounds taken before us. In the course of hearing, the assessee mentioned that the unit at Nagarjuna Hills is only an extension of the earlier unit at Maithrivanam which was set up in the year 1991 and the income from the entire operations of the company is entitled for exemption under Sections 10A and 10B of the Act. We have already discussed this issue for the earlier assessment year for 1997-98 in the assessee's own case and for the reasons recorded therein, we hold that the assessee is not entitled for exemption under Sections 10A and 10B of the Act. This exemption under Sections 10A and 10B of the Act cannot be extended even to the operations at Nagarjuna Hills as this unit is an extension of earlier unit of Maithrivanam.
31. The next effective ground is that the CIT(A) erred in holding that the interest earned on fixed deposit of Rs. 32,15,465, interest on staff loan at Rs. 51,403 and income from miscellaneous receipts of Rs. 55,625 are not income derived from the business of the assessee. Alternatively, it is claimed that the CIT(A) should have allowed an amount of 29,29,215 being interest payments made by the assessee during the year from the foregoing receipts before excluding the same from business income for working out the deduction under Section 80HHE of the Act. No arguments have been advanced before us as to why the interest on FDs and interest on staff loan and miscellaneous receipts should not be treated as income not falling under the head "business". We, however, find merit in the alternative contention that the CIT(A) ought to have allowed the interest payments from the foregoing receipts and thus excluded only the net interest receipts from the business income for the purpose of working out the relief under Section 80HHE of the Act.
32. We find this issue is covered in favour of the assessee by the decision of Hyderabad Bench of the Tribunal in the assessee's own case for asst. yrs, 1994-95 and 1995-96. Following the earlier order of the Tribunal in the assessee's own case, the interest paid of Rs. 29,29,215 may be reduced from the other interest and miscellaneous expenditure aggregating to Rs. 37,72,120 and it is this balance that should be excluded from income from export business. In the light of the above, the appeal succeeds in part.
33. In the result, both the appeals are allowed in part.