Income Tax Appellate Tribunal - Mumbai
Gebbs Infotech Ltd., Mumbai vs Department Of Income Tax on 9 February, 2007
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IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "G", MUMBAI
BEFORE MR. J. SUDHAKAR REDDY (AM) & MR. V. DURGA RAO (JM)
ITA No.3370/Mum/2007 :: Assessment Year 2003-04
ITA No.7738/Mum/2007 :: Assessment Year 2004-05
ITA No.7196/Mum/2008 :: Assessment Year 2005-06
The Jt. CIT (OSD), I/C Circle - 8 (1) /
D C I T - 8 (1) /
I T O, Ward - 8 (1) (4),
Room No.210, 2nd Floor,
Aayakar Bhavan, M. K. Marg,
Mumbai - 400 020. ... Appellent
V/s.
M/s.Gebbs Infotech Ltd.,
Central Road, MIDC, Marol,
Andheri (East),
Mumbai - 400 093. ...Respondent
PAN - AAACG 2949 P
Appellant by : Mr. Ajay Kumar Srivastava.
Respondent by : Mr. K. Shivram & Paras Sarla.
ORDER
PER SHRI SUDHAKAR REDDY, A.M.
These three appeals filed by the Revenue are directed against the separate orders of CIT (A)-VIII, Mumbai, dated 09.02.2007 relating to the Assessment Year 2003-04, dated 12.10.2007 relating to the Assessment Year 2004-05 & dated 27.10.2008 relating to the Assessment Year 2005-06 against the order under Sec. 250 r.w.s. Section 143 (3) of the I.T. Act, 1961.
2 ITA No.3370/Mum/2007 :: Assessment Year 2003-04:2. The Revenue has raised the following grounds in its appeal:
"1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not upholding the action of the Assessing Officer in not allowing set off of losses relying on Section 10B(6) of the Act and holding that the set off was not allowable u/s. 10A/10B.
2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not upholding the action of the Assessing Officer in not allowing deduction under Section 10B of the Act on receipt of Rs.3,60,04,610/- without appreciating the facts of the case.
3. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not upholding the action of the Assessing Officer in not allowing deduction under Section 10B of the Act on proportionate amount worked out at Rs.1,74,34,738/-."
3. The facts in brief are that the assessee is a private Ltd. Company engaged in the business of 100% export of computer software services and software development, mainly to USA and other countries. Initially the assessee company was incorporated in 1985 in the name and style of M/s.Gebbs Micro systems Pvt. Ltd. and was in the business of manufacturing computer monitors only. From the year 1999, its name was changed to M/s.Gebbs Infotech Ltd. and it started developing software, for exports. Further, the promoters incorporated another company viz., Gebbs Data Products Pvt. Ltd. in 1986, which was non-functional. In the year 1997, its name was changed to Gibs Software International Pvt. Ltd. In the year 1999, both the M/s.Gebbs Infotech Ltd. & Gibs Software International Pvt. Ltd. were amalgamated into Gebbs Infotech Ltd. Prior to the amalgamation, 3 the business model was that GSI Inc. used to obtain orders from the US market, service its clients and deliver on site solutions. Offshore work was done either by GSIPL or GSI Inc. The assessee paid Associate enterprise, GSI Inc. for its services at arms length and the transactions were cleared by the transfer pricing wing in A.Y. 2003-04 & 2004-05 without any change. There was no reference made to the T.P.O. in A.Y. 2002-03 & 2005-06 also. The assessee claimed deduction under Section 10A in A.Y. 2001-02 for the first time. For the A.Y. 2002-03 there was loss and therefore no deduction under Section 10A of the Act was claimed. During the year under consideration, Return of Income was filed declaring the total income of Rs.2,112/- after claiming the deduction under section 10B of the Act to Rs.3,61,86,121/-. The income from the 10B unit was at Rs.4,02,06,801/-, 90% of it was claimed by the assessee as deduction and balance of Rs.40,20,680/- was set off against brought forward losses of A.Y. 2001-02. The A.O. determined the income at Rs.1,09,88,220/- after disallowing the set off of carried forward loss and reducing the exemption under Section 10B.
4. With regard to ground No.1, the A.O. observed that the assessee had suffered losses for the assessment year 2002-03, which it had carried forward and had set off against the profits of the subsequent years. Therefore, the A.O. was of the opinion that such a set off was not allowable under sectons 10A/10B of the Act and relied on section 10B(6) of the Act to arrive at his conclusion. The CIT (A) after considering the submissions made before him, allowed the ground of the assessee. Aggrieved by the decision of the CIT (A), the Revenue is in appeal before us.
45. The learned DR, Mr. Ajau Kumar Srivastava, submitted that the assessee has made a claim for deduction u/s 10A for the assessment year 2001-02 and that he did not make any claim for deduction u/s 10A for the assessment year 2002-03. He argued that merely because the assessee has not made a claim u/s 10A for the assessment year 2002-03, it cannot be said that the unit becomes a non-eligible unit and that the losses incurred by such unit in that year, could be set off against the profits of the 10B unit.
6. The learned counsel for the assessee submitted that the loss of Rs.47,75,070/- was assessed and allowed to be carried forward for A.Y. 2002-03. Since, no deduction u/s.10A of the Act was claimed for A.Y. 2002-03, the loss can be set off against the profits determined as taxable in the subsequent years. He contended that w.e.f. 1/4/2001, section 10A is a deduction provision and not an exemption provision. To support his claim, the learned counsel relied on the decision of Honeywell International (India) P. Ltd. Vs. DCIT [2007] 108 TTJ 924 (Del.) for the proposition that the retrospective amendment by Finance Act 2003, w.e.f. 1/4/2001 to section 10A(6) does away with restriction of carry forward and set off of losses.
7. We have heard rival contentions. Section 10A(6)(ii) reads as follows :
" Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent year,-
(i) -------
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- -------
(ii) No loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years [ending before the 1st day of April, 2001]; "
The undisputed fact in this case is that the assessee has not claimed deduction u/s 10A for the assessment year 2002-03. An order u/s 143(3) was passed on 24-3- 2005 for the assessment year 2002-03 and returned loss has been accepted. Thus the assessee is entitled for carry forward and set off of the assessed loss pertaining to the assessment year 2002-03. In any event, section 10A(6)(ii) has been amended by the Finance Act 2003 w.r.e.f. 01-04-2001 and the following words were added :
" Ending before the first day of April, 2001"
This amendment clearly comes to the rescue of the assessee. Under these circumstances, we uphold the following decision of the learned CIT(Appeals:
" Sub-clause (2) of clause (6) to section 10A clearly states that no loss shall be carried forward or set-off where such loss relates to any of the relevant Assessment Years. There is no ambiguity in the Act and it is also an undisputed fact that the appellant was entitled to deduction u/s 10A which it had been allowed in the A.Y. 2001-02 and which it allegedly did not claim in the A.Y. 2002-03. It is also not in dispute by the A.O. that the appellant had not made a declaration as required u/s 10A(8) of the Act for not claiming deduction u/s 10A of the Act. In this regard the ld. Counsel for the appellant has pointed out to the declaration vide letter dated 08.10.2002 In view of the above facts and circumstances of the case, the stand of the A.O. not allowing the set-off of carry forward loss incurred during the A.Y. 2002- 03 cannot be sustained. This ground is allowed in favour of the appellant."6
8. In the result, ground No.1 of the Revenue is dismissed.
9. With regard to ground No.2, the A.O. disallowed the claim u/s. 10B of Rs.3,60,04,610/- , on assessee for on-site development of computer software at the site of customers abroad, on the ground that the employees who have worked onsite had left India for USA, before the date of setting up of SEEPZ Unit. The A.O further observed that the assessee was having two units, one which was located in SEEPZ i.e., on SEZ and one which was outside the SEZ i.e., STPI Unit on which it claimed deduction u/s. 10A in earlier years. The A.O. allowed the deduction u/s. 80HHE on balance profits. On appeal, the CIT (A) allowed the claim of deduction u/s. 10B of the Act. Aggrieved by the same the Revenue is in appeal before us.
10. The learned DR submitted that in the case of the assessee, none of the employees who were working, onsite, left India after the date of set up of SEEPZ and SEZ Unit. He drew the attention of the Bench to para 5.3.5 to 5.3.9 of the assessment order at pages 3 and 4. He vehemently contended that this is a case where child is born before the mother is born for the reason that the employees were born before the assessee has come into existence. He vehemently contended that these employees had already gone abroad as employees of another Company. He also alleged that the payments are not made at arm's length price.
11. The learned counsel for the assessee, on the other hand, submitted that these persons were employees of the assessee company and they were earlier working for the different unit of the same company. He pointed out that 7 the assessee is having two units, one which is located in SEEPZ i.e. SEZ and one which is outside the SEZ and which is a STPI unit on which the assessee has claimed deduction u/s 10A in the earlier years. He pointed out that the AO had himself accepted that the letter of appointment was given to all these employees listed out at page 4 of the assessment order, by M/s Geebs Software International Pvt. Ltd. which, amalgamated into the assessee company on 01-04- 1999. He submitted that the employees were highly specialized and they have been shifted from one project to another according to the needs of the company. He further argued that there is no requirement u/s 10B that the employee should be of the same unit and that the employees have to leave India only after the unit is set up. He relied on the Circular of the CBDT No. 694 dated 23rd Nov., 1994. He further relied on the judgments in the case of ITO vs. Servion Global Solutions Ltd. (2008) 115 ITD 95 for the proposition that if an assessee has established in STPI unit by acquiring assets and fulfilling the other conditions laid down in that section, exemption u/s 10A could not be denied on the ground that, the same was established by splitting up old unit only because it also dealt in the same products and because some of the units were old. He further relied on the decision of the Delhi Bench of the Tribunal in the case of ITO vs. Techdrive (India) (P) Ltd. (2010) 124 ITD 249 for the proposition that under section 10B it is not the requirement that the assessee should own plant and machinery or equipment and manufacture or produce computers software on the same, in order to be eligible for the exemption. The assessee getting computer software developed in its subsidiary under its direct supervision is entitled to exemption u/s 10B. He pointed out that the AO has himself allowed deduction u/s 80HHE and argued that the conditions u/s 80HHE are similar to that of section 10B. Alternatively he 8 submits that in case the AO feels that onsite employees belong to the unit which is exempt u/s 10A, then consequential relief should be granted u/s 10A. He prayed that the order of the first appellate authority be upheld.
12. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.
13. From the facts it is clear that the finding of the AO that the employees do not belong to the Company is incorrect. All the employees belong to the company. They are the employees of M/s Geebs Software International P. Ltd. which has amalgamated to the assessee company. Just because the employees were allocated to an other unit of the company which is exempt u/s 10A in the earlier years, and because these employees were assigned duties of the SEZ units in the impugned assessment year, it does not lead to a conclusion that the assessee cannot claim exemption u/s 10B. The AO has granted exemption u/s 80HHE. The allegation that the payments not made are at arm's length is also not correct because for the assessment year 2003-04 the Transfer Pricing Officer has passed an order u/s 92CA(3) upholding the price paid by the assessee as that which is an another employee. On these facts, we uphold the following finding of the CIT(Appeals);
" There is merit in the case of the appellant, in as much as, it is a fact that the A.O. has indeed allowed deduction u/s 80HHE of the Act and has also allowed deduction u/s 10B of the I.T. Act albeit in part. Further, deductions under sections 10A/10B is granted to a unit which satisfies various parameters which however, does not include the employees of the appellant company who are involved in the creating of software on a site outside India or outside the unit to necessarily have to be belonging to a 9 particular unit. It is not in doubt or dispute that the product which has been exported belongs to the unit itself. It is also an undisputed fact that the employees belong to the appellant company can be assigned to work anywhere depending upon the requirement. The core question to be answered is whether the profits and gains have been derived from the undertaking or not. In the case of a deduction u/s 10B, the other requirement beyond the requirement of section 10A is that the undertaking should be a 100% export oriented undertaking. The clarification issued by the C.B.D.T. which has been relied upon by the Ld. Counsel clearly indicates that what is to be seen is whether the unit under consideration is itself producing the computer programme or not and exporting the programme so produced. I see no dispute in the facts of the case of the appellant in as much as, the programme so produced belongs to the unit. The stand of the A.O. cannot be sustained. This ground of the appellant is therefore allowed."
14. In the result, ground No.2 of the Revenue is dismissed.
15. Coming to ground No. 3, the AO observed that the payments of R.13,69,950/- was made to certain companies on account of job work and concluded that as the assessee is not a manufacturer to that extent, the exemption u/s 10B should be worked out on proportionate basis. The learned DR submitted that what was got done by the assessee by of loading certain works to job work contractors, is an intermediate product. He contends that what was given by the job work contractors was an end product by itself. He submits that the product is a module by itself and not a part of overall module. On a query from the Bench, he submitted that in a software industry the full work for development of software is undertaken by one developer. He relied on the order of the AO and submitted that the AO's finding that the assessee should get proportionate deduction is to be upheld.
1016. The learned counsel for the assessee, on the other hand, submitted that there is no finding whatsoever in the assessment order that what was contributed to the assessee company by the job work contractors, was part of a module and not the module itself. He argued that there is no prohibition laid down in the Act for getting jobs done on job work basis. He contended that the software development cycle consists of more than 20 different facts and only part of the software development was outsourced. He relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Penwalt India Ltd. 196 ITR 813 (Bom.) as well as on the decision of the Hon'ble Bombay High court in the case of CIT vs. New Pharma Private Ltd. 137 ITR 879 (Bom.). Similarly he relied on the decision in the case of CIT vs. Anglo French Drug Co. (Eastern) Ltd. 191 ITR 92 (Bom.).
17. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we are of the considered opinion that the order of the first appellate authority on this issue has to be upheld for the following reasons.
18. Nowhere in the assessment order, the AO has given a finding, that what is got by the assessee from the job work contractors is a product by itself. The assessee had in fact contended before AO that only a part work was done through job work contracts. The AO, in our considered view, was wrong in coming to a conclusion that in the case of manufacture of software, no part job can be outsourced, as in the case of other manufacturing activities. Out of a total receipt on account of sale of software of 13.11 crores, the outsourcing billing was 11 Rs.1.36 crores. A software product, contains within its numerous sub software programmes which are integrated. On these facts we uphold the following finding of the CIT(Appeals):
" As has been stated in the earlier part of the order, deduction u/s 10B is to be allowed on such profits and gains which are derived from the undertaking and which fulfills different parameters. It goes without dispute in the case of the appellant that the unit is a 100% export unit and the profits and gains derived pertain to such exports. It is not the requirement of the section that the deduction which have been claimed in the case of an assessee is not admissible where a part of the software development programme has been carried out as job work by other parties. It is not the case of the A.O. that the deduction has been claimed by the appellant on the export of software which has been manufactured by other independent concerns and entities and that the appellant has included the export proceeds generated out of such software programmes which do not belong to it and on which it had claimed exemption u/s 10B of the I.T. Act. No evidence has been brought on record by the A.O. in this regard. The fact is that the appellant through its 100% export unit exported computer software and the profits on which deduction has been claimed is derived from the unit/undertaking. If part of the work has been done by outside parties, it cannot be concluded that the profit has not been derived by the appellant from the undertaking. It is not in dispute that the entire profit of 100% is only out of the export undertaking. Under the circumstances, the stand of the A.O. cannot be sustained. This ground is therefore allowed in favour of the appellant."
19. We also hold that this decision is in line with the judgment of the jurisdictional High Court in the case of CIT vs. Penwalt India Ltd. 196 ITR 813 (Bom.).
20. In the result, this ground of the Revenue is dismissed.
21. Ground No. 4 is general in nature.
1222. In the result, the appeal of the Revenue is dismissed.
23. ITA No. 7738/Mum/2007 & 7196/Mum/2008.
Facts in brief :
The assessee claimed deduction u/s 10B while filing a return of income on 31-10-2004. 90% of the profit was claimed as a deduction u/s 10B and the balance amount was set off against brought forward losses of the year 2001-
02. The AO disallowed the claim u/s 10B on the following grounds :
a) Out of 5000 sq.ft. premises, 2,000 sq.ft. was earmarked for the new unit, which received permission from the Development Commissioner on 17-11-2001. Thus he concluded that the SEEPZ unit was a restructuring of an existing unit.
b) The employees who has done onsite development were not appointed by SEEPZ unit.
c) Part of the software was done by outsourcing the job on job work basis.
The first appellate authority considered the submissions of the assessee and at pages 8, 9 and 10 of the order followed his decision for the assessment year 2003-04. While doing so, he observed that during the current year, in addition to the points raised by the AO in the earlier assessment year, one more issue has been taken and i.e. there is "restructure of the unit". The first appellate authority held that the AO had erred on facts. At pages 8 , 9 and 10 of his order he held as under :
13" I have carefully examined the issue and find that similar issues were raised in A.Y. 2003-04 by the AO. Regarding the grounds pertaining to carry forward and set off of losses; onsite software development by the employees who were held not to be the employees of the Undertaking claiming deduction u/s 10B and on the issue of profits generated through the jobs assigned to different parties, I have already considered the above issues in great detail in the appellate order No. CIT(A)-VIII/IT-18/06-07 dated 09-02-2007 and I see no reasons to differ from the findings given therein as also the conclusion drawn. However, for the sake of easy reference, necessary extracts of the order is reproduced as under :
Now, during the year under consideration, the AO has taken another additional issue which is regarding the "restructuring of the Unit" to deny the deduction u/s. 10B.
I have carefully examined the order of the AO and have taken into account the various details filed by the appellant pertaining to the assets in question which exclusively belongs to the STPI Unit - which was situated outside the SEEPZ-SEZ area - and the Unit which was situated within the SEEPZ SEZ and conclude that the AO erred on facts.
The Schedule of assets as per Schedule 'E' as on 31.03.2003 and the Schedule of assets as per Schedule 'E' 31-03-2004 clearly shows additions of Rs.28,99,998/- and Rs.27,79,309/-, respectively to the opening balances of Rs.10,45,29,541/- and Rs.10,70,27,124/-, respectively. Further, the ledger account of Computers purchased during the year 2003-04 along with the copies of the invoices, bills and challans clearly supports the view of the appellant that the Unit situated outside the SEEPZ Unit i.e. the STPI Unit which was itself eligible for deduction u/s 10A - and which had been in earlier year allowed the deduction - was a separate and exclusive Unit distinct from the SEEPZ-SEZ Unit and that in the Unit established in the SEEPZ, the addition to the fixed assets was to the tune of Rs.28,99,998/- during the A.Y. 2003-04 and further additions were made in A.Y. 2004-05 of a sum of Rs.27,79,309/-. On record is the detail of the above addition to assets and the requisite balance sheets and schedule of assets.
I do not see any discrepancy in the facts presented before me and I am of the view that the AO erred in holding that there was a restructuring of the 10B Unit located in the SEEPZ-SEZ area and the old assets had been 14 utilized in this particular Unit. The two units continued to be exclusive and distinct unit during the year and the Schedule of assets clearly shows that there was no restructuring. The stand of the AO cannot be upheld.
To conclude, in view of the above discussion and in view of the appellate order dated 09.02.2007 in the case of the appellant itself, I am of the view that the AO erred in disallowing the claim of the appellant u/s 10B, which in my view, is held to be in order. Ground Nos. 1, 2 & 3 are accordingly allowed in favour of the assessee."
We are in agreement with these findings. The assessee in this case had started a new line of business i.e. software programming and services, after closing down the earlier business of manufacturing colour monitors in the year 1997. Initially the assessee carried out activities at MIDC, Nelor which is a STIP unit and a claim for deduction u/s 10A was allowed to this unit for one year. The SEEPZ unit got permission on 17-11-2001 to start commercial production. The submission of the assessee that the opening balance of assets of about Rs.1.39 crores belong to the company for the other unit is not found wrong by the AO. It is also fact that the AO has allowed deduction u/s 10B for the same unit in the earlier year 2003-04. Thus in view of the above discussion, we agree with the CIT(Appeals).
24. As regards the other issues of software being done of outsourcing on job work basis and that the employees who have done onsite development were not appointed by the SEEPZ unit, we follow our earlier order and dismiss this appeal of the Revenue. The fact that the assessee has not maintained separate books of account also does not permit the AO to deny exemption as held by the Mumbai Bench of the Tribunal in the case of DCIT vs. Arabian Exports Ltd. (2007) 15 109 TTJ 440 (Mum.). Even otherwise when the entire income is from the 10B unit, no separate books need be maintained.
25. For the assessment year 2005-06, in ITA No. 7196/Mum/2008, both parties agreed that the issues are identical and the decision taken for the assessment year 2004-05 would apply to this year also.
26. In view of the above submissions, as we have upheld the order of the CIT(Appeals) for the assessment year 2004-05 as well as assessment year 2003- 04, we uphold his order for the assessment year 2005-06 also and dismiss the appeal of the Revenue.
27. In the result, all the three appeals of the Revenue are dismissed.
Order pronounced on the 13th day of October, 2010.
Sd/- Sd/-
( V. DURGA RAO ) ( J. SUDHAKAR REDDY )
JUDICIAL MEMBER ACCOUNTANT MEMBER.
MUMBAI,
DATE: 13th OCTOBER, 2010
Wakode
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Copy of the order for
warded to:
1. The Jt. CIT (OSD), I/C Circle - 8 (1) / DC I T - 8 (1) / ITO, Ward-8 (1) (4), Room No.210, 2nd Floor, Aayakar Bhavan, M. K. Marg, Mumbai - 400 020
2. M/s.Gebbs Infotech Ltd., Central Road, MIDC,= Marol, Andheri (East), Mumbai - 400 093
3. Commissioner of Income Tax (Appeals)- VIII, Mumbai
4. Commissioner of Income Tax, City - VIII, Mumbai
5. Departmental Representative, Bench 'G', Mumbai / TRUE COPY / By Order Asstt. Registrar, ITAT, Mumbai