Income Tax Appellate Tribunal - Kolkata
Cfi Technologies Pvt. Ltd., Kolkata vs Department Of Income Tax on 28 June, 2010
आयकर अपीलीय अधीकरण, Ûयायपीठ - "सी" , कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH : KOLKATA
सम¢) एस भी.मे
सम¢ ौी एस.
(सम¢ भी मेहरोऽा , लेखा सदःय एवं ौी महावीर िसंह, Ûयायीक सदःय,
सदःय )
[Before Hon'ble Sri S.V. Mehrotra, A.M. & Hon'ble Sri Mahavir Singh, J.M.]
आयकर अपील संÉया / I.T.A No. 1678/Kol/2010
िनधॉरण वषॅ/Assessment Year : 2007-2008
Deputy Commissioner of Income Tax, -vs.- M/s. CFI Technologies Pvt. Ltd., Kolkata
Circle-8, Kolkata (PAN : AACCC 8687 L)
(अपीलाथȸ /Appellant) (ू×यथȸ/Respondent)
For the Appellant : Shri S.S. Gautam, CIT, D.R.
For the Respondent : S/Shri R.N. Bajoria, R. Salarpuria, S. Jhajharia & Himangsu Patel, A.R.
आदे श/ORDER
एस भी.मे
Per Shri S.V. Mehrotra, Accountant Member/ ौी एस. भी मेहरोऽा , लेखा सदःय :-
The Department has filed this appeal for assessment year 2007-08 against order of ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata dated 28.06.2010.
2. The assessee, a Private Limited Company, in the relevant assessment year carried on the business of providing design and Engineering Services to Fertilizer, Process and Chemical Industries. It was involved as engineering consultant for several projects covering projects like LDAN, Ammonium Nitrate, Calcium Nitrate, NPK, ANP, Sulfuric plants, etc. It had filed its return of income showing profit of Rs.2,00,47,743/- from export of software. The assessee had claimed deduction under section 10A on the ground that it was an entity registered as Software Technology Park (hereinafter to be referred in short 'STP') with Software Technology Park of India (hereinafter to be referred in short 'STPI'). Assessing Officer noticed that assessee carried out following work-order in financial year under consideration, which is reproduced as under:-
(i) Work for Chemical & Fertilizer Industry Engineering (CFIe) on the basis of an agreement dated 25.08.2006. This work was supposed to be completed within 3 months of the work order i.e. within 25.11.2006 and it was completed within time. Total bill of Rs.1,17,48,712/- was raised by the assessee in financial year under consideration.
(ii) Work for Dyno Nobel Morambah PTY Ltd. on the basis of an agreement dated 19.06.2007. Although date of agreement pertains to the date after the end of the financial year under consideration, the actual work in respect of above client 2 ITA No. 1678/Kol./2010 started in November, 2006. On the basis of progressive milestone achieved and submission of Design Documents, the assessee raised the bill and the same was shown as sale proceeds. Total bill of Rs.2,83,64,437/- was raised by the assessee in financial year under consideration.
From the aforementioned details, Assessing Officer required the assessee to show following important points :-
(i) The assessee made application for setting up of unit under Software Technology Park (STP) vide its application dated 15th March, 2007. This fact is evident from letter No.STPK:DIR:49:2006-07:1757 dated 16th March, 2007 of Software Technology Park, Kolkata wherein date of assessee's application is shown as 15th March, 2007.
(ii) As per letter dated l6th March, 2007 of Software Technology Park, Kolkata, it is evident that the assessee proposed to import capital goods of Rs.120 lakhs and indigenous goods of Rs.225 lakhs for the project. This proposal for purchase was made by the assessee vide its application dated 15th March, 2007 to Software Technology Park, Kolkata.
(iii) On 19th March, 2007, the assessee entered into an agreement with 'the Government' for Software Export Techonology Park. As per this agreement, the assessee was supposed to produce 'Computer Software and execution of IT enabled services' for a period of five years beginning from the first day after the completion of the gestation period allowed by the Government (referred as prescribed date). It means that export obligation as per Software Technology Park (STP) guidelines starts from the day after the completion of gestation period allowed by the Government i.e. the prescribed date. Any export before prescribed date cannot be said as 'export' under STP scheme.
(iv) As per agreement dated 19th March, 2007 with 'the Government', the assessee was required to intimate the date of commencement of production for 100 per cent export within one month of such date to the concerned Director of Software Technology Park (STP). , 2.1. Thus, Assessing Officer required the assessee to explain as to why it should not be held that any export before 'prescribed date' was not an 'export' in terms of STP for 100% export of Computer Software. It was also pointed out by Assessing Officer that assesese's export obligation starts from the prescribed date only and for the purpose of section 10A of the Income Tax Act, only export which was made on or after 'prescribed date' was eligible for claiming deduction under section 10A of the Income Tax Act. Assessing Officer further noticed that in the application for setting up of unit in STP, assessee has stated that it required total capital goods of Rs.345 lakhs. This addition to fixed asset was in addition to fixed assets that assessee was already having as on date of application, i.e. 15.03.2007. From the details furnished by 3 ITA No. 1678/Kol./2010 assessee, Assessing Officer concluded that no addition to fixed assets was made in the period 16.03.2007 to 31.03.2007. Therefore, he concluded that addition to fixed assets, if any, as per the application dated 15.03.2007 would have been made in subsequent financial year, i.e. financial year 2007-08. He, therefore, held that since the obligation with STP, Kolkata was not fulfilled in financial year 2006-07, the Computer Software produced in financial year 2006-07 could not be termed as computer software produced as per terms of STP Schemes. After considering the detailed reply, Assessing Officer rejected the assessee's contention and disallowed the claim under section 10A, inter alia, observing as under :-
From the schedule of fixed asset it is evident that no addition to fixed assets was made in financial year 2006-07 after the assessee got approval for setting up of the 100% export oriented Software Technology Park under software export scheme of Ministry of Communications & Information Technology. The employees and set up of the business which were there till 15.03.2007 remained as it is even it got approval for setting up of the software Technology Park. There was no change in the set up of the business, employees, resources, assets of the company etc. From this it is clear that the assessee carried out its activity in terms of section 10A of the Act (i.e. on and after 16th March, 2007) utilizing its old assets, infrastructure, resources manpower etc. that were there with the company before approval for setting up of the export oriented Software Technology Park was obtained. So it can be said the assessee reconstructed its business that was already in existence before approva1 for setting up of Software Technology Park was received.
3. Ld. CIT(Appeals) upheld the finding of Assessing Officer that assessee was eligible for deduction from 16.03.2007 only and not before that date because prior to that, there was no approval for eligibility of deduction under section 10A. Accordingly ld. CIT(Appeals) held that assessee was eligible for deduction under section 10A of the Act only from 16.03.2007. However, Ld. CIT(Appeals) did not accept the finding of Assessing Officer that it was a case of re-construction of business already in existence, inter alia, observing that there was no transfer of assets and the letter of approval referred to by Assessing Officer could not, under any circumstance, be seen to have created a new industrial undertaking. Ld. CIT(Appeals) relied on the decision of Hon'ble Supreme Court in the case of Textile Machinery Corporation Ltd. -vs.- CIT reported in 107 ITR 195]. Being aggrieved with the order of ld. CIT(Appeals), Department has taken following Ground No. 1 of appeal :-
"That the ld. CIT(A.) has erred on facts and circumstances of the case and in law by holding that the assessee is eligible for deduction under section 10A of the Act even though assessee had merely reconstructed its business already in existence and thus, failed to fulfill condition prescribed in clause
(ii) of sub-section (2) of section 10A of the Act".4 ITA No. 1678/Kol./2010
4. Learned Departmental Representative for the revenue relied on the assessment order and specifically referred to the findings of Assessing Officer, as re-produced above in para 2.1 of this order.
5. Ld. Senior Counsel, Shri R.N. Bajoria submitted that the main dispute is whether assessee could get relief under section 10A after 16.03.2007. Ld. counsel for the assessee referred to section 10A, sub-section (2), which is reproduced below :-
"10A(2) This section applies to any undertaking which fulfils all the following conditions, namely:
(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year--
(a) commencing on or after the 1st day of April, 1981, in any free trade zone;
or
(b) commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park;
(c) commencing on or after the 1st day of April, 2001 in any special economic zone;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence.
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose".
Shri Bajoria submitted that assessee-company was incorporated on 21.08.2006 and got the approval from STPI vide letter dated 16.03.2007. He further submitted that there was no reconstruction of business already in existence. Ld. counsel filed before us Foreign Trade Policy issued by Ministry of Commerce & Industry, Department of Commerce, Government of India for the period 01.09.2004 to 31.03.2009 w.e.f. 01.04.2006 and referred to the Notification No. 1(RE-2006)/2004-2009 dated 07.04.2006 issued by Director General of Foreign Trade published in the Gazette of India Extraordinary Part-II, Section 3, sub-section (ii) in para 6.19, which is reproduced as under :-
5 ITA No. 1678/Kol./2010"6.19. (a) Existing DTA units, may also apply for conversion into an EOU/EHTP/STP/BTP unit, and Income Tax benefits under section 10A & 10B will be available under the scheme for plant, machinery and equipment already installed.
(b) The existing EHTP/STP units may also apply for conversion/ merger to EOU unit and vice-versa. In such cases, the units will remain in bond and avail the exemptions in duties and taxes as applicable under the relevant scheme".
With reference to the above noted Foreign Trade Policy, ld. counsel for the assessee submitted that in assessee's case there is only conversion of existing DTA units into STP units and, therefore, assessee was eligible for deduction under section 10A. Ld. counsel further referred to CBDT Circular No. 1/2005 dated 06.01.2005 issued for giving certain clarification regarding section 10B and referred to para 4 of the said Circular, which reads as under :-
"The matter has been examined and it is hereby clarified that an undertaking set up in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufactured or produced by it, which is subsequently converted into ECU, shall be eligible for deduction u/s. 10B of the IT Act, on getting approval as 100% export oriented undertaking. In such a case, the deduction shall be available only from the year in which it has got the approval as 100% EOU and shall be available only for the remaining period of ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as a DTA unit. Further, in the year of approval, the deduction shall be restricted to the profits derived fro exports, from and after the date of approval of the DTA Unit as 100% EOU. Moreover, the deduction to such units in any case will not be available after assessment year 2009-10".
Ld. counsel relied on the decision of Hon'ble Karnataka High Court in the case of CIT -vs.- Expert Outsource (P) Ltd., wherein it has been held that ratio of CBDT Circular No. 1/2005 issued with reference to section 10B dated 06.01.2005 equally applies to section 10A of the Act.
6. We have considered the rival submissions and perused the material available on record. From the record, we find that assessee-company was incorporated on 21.08.2006. The registration with STPI was obtained vide STPI's letter dated 16.03.2007. Before we proceed further, we may point out that assessee has not preferred any appeal against the findings of ld. CIT(Appeals) that it is eligible for deduction under section 10A w.e.f. 16.03.2007. Now, the only dispute which is raised before us by the Department is whether it is a case of re-
6 ITA No. 1678/Kol./2010construction of already existing business or not. Assessee's plea is that it is not a case of re- construction of business as only already existing business was got registered with STPI. Assessing Officer held that it was a case of re-construction of business for the following reasons :-
(a) The employees and set up of business remained the same till 15.03.2007 even after obtaining approval from STPI;
(b) On and after 16.03.2007, assessee continued to carry on its business by utilizing its old assets, infrastructure, resources, manpower, etc.
(c) Assessee did not make any addition to fixed assets during financial year 2006-07, after obtaining approval from STPI.
6.2. Hon'ble Supreme Court in the case of Textile Machinery Corporation Limited (supra) has held as under :-
"The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognizable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is no reconstruction of the old business. For the purpose of section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for providing either the same commodities or some distinct commodities. In order to deny the benefit of section 15C the new undertaking must be formed by reconstruction of the old business. Now in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned.
Thus, there has to be transfer of assets of the old business to new undertaking if the old business is reconstructed.7 ITA No. 1678/Kol./2010
6.3. Further Hon'ble Supreme Court noticed the observation in In re South African Supply and Cold Storage Co. [1994} 2 Ch 268(Ch D) Buckley J., dealing with the meaning of the word 'reconstruction' in a company matter, which are reproduced hereunder :-
"What does 'reconstruction mean? To my mind it means this, An undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on that would be a mere sale- but in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves, I think, that substantially, the same business shall be carried on and substantially the same persons shall carry it on. But it does not involve that all the assets shall pass to the new company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the same".
The term 'reconstruction' implies that rights of shareholder and/or creditors are varied. According to Halsbury's Laws of England : "Neither 'reconstruction nor amalgamation' has a precise legal meaning. Where an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is a reconstruction. It is none the less a reconstruction because all the assets do not pass to the new company, or all the shareholders of the transferor company are not shareholders in the transferee company, or the liabilities of the transferor company are not taken over by the transferee company.
7. In the light of aforementioned principles if we examine the facts of this case, we find that admittedly the Unit was set up on 21.08.2006, i.e. during the financial year under consideration only and entire business of the company was new. Therefore, there was no question of any re-construction of business already in existence. Only registration was granted by STPI w.e.f. 16.03.2007. The same business continued without any alteration or change. There was no change in the entire composition of assessee's business. The object of reconstruction is usually to reorganize capital or to compound with creditors or to effect economies. If the scheme involves the transfer of a company's undertaking to another company, usually the transfer is brought about by allotment of shares to the shareholders of the transferor company, in satisfaction of the assets transferred. Therefore, it was not a case of re- construction and assessee was entitled for benefit under section 10A of the Act w.e.f.
8 ITA No. 1678/Kol./201016.03.2007 onwards. The contention of Assessing Officer that there was no addition to fixed assets, is devoid of any merit because section 10A itself contemplates that an already existing business if fulfills the conditions laid down under section 10A, would be eligible for deduction under section 10A. Therefore, no addition to fixed assets, was of no consequence. We find that the decision of Hon'ble Supreme Court squarely covers the issue before us. Further, we find considerable force in the submission of ld. counsel in placing reliance on Circular No. 1/2005 issued by CBDT, which provides that an existing DTA Unit, which was subsequently approved as 100% EOU Unit by the Board appointed by Central Government, shall be eligible for deduction under section 10B of the Act. The Hon'ble Karnataka High Court in the case of Expert Outsource (P) Ltd. (supra) held that the Circular is applicable for giving benefit under section 10A of the Act. Therefore, in view of the CBDT Circular also, assessee's claim was fully justified because it was merely a transformation of DTA unit to STPI unit. Further, the import export policy relied upon by ld counsel for the assessee also supports the assessee's claim. As per this policy also, existing DTA unit could apply for conversion into STP unit and claim benefit under section 10B on plant, machinery and equipment already installed. We find that w.e.f. 16.03.2007 assessee's claim is fully within the frame-work of import & export scheme. In view of above, we confirm the order of ld. CIT(Appeals) on this issue and reject Ground No. 1 of the appeal taken by the Department.
8. Ground No. 2 of the appeal reads as under :-
"That the ld. CIT(A.) has erred on facts and circumstances of the case and ion law by holding that expenditure on software incurred by the assessee towards purchse of software is not capital but revenue in nature".
9. Brief facts apropos this issue are that assesee had claimed software expenses of Rs.67,58,897/-. Assessing Officer required the assesee to furnish nature of software alongwith its technical specification. Assessee submitted that software purchased by the Government for specific requirements for Dyno Australia Project reads as under :-
(i) Auto-CAD (which is used for two dimension drawing, pipe stress analysis and vessel design);
(ii) STAAD PRO 2006 (used for configuration with Australian Code);
(iii) IQUINOX Software (used for E-mail server);
(iv) Smart Plant Software (used for three dimensions design and engineering) and 9 ITA No. 1678/Kol./2010
(v) ASPEN TASC + Software & ASPEN TEAM Software (which is used for process Heat Exchanger designing and Process Heat Exchanger Mechanical designing).
Assessing Officer noticed from the perusal of agreement with Dyno Nobel Morambah PTY Ltd. that project was carried out in financial year 2006-07 and also in 2007-08. Further, the purpose of each software is general in nature in context to assessee's line of business. He, therefore, treated the amount of expenses as revenue expenditure and allowed depreciation of Rs.20,39,741/-.
10. Ld. CIT(Appeals) allowed the assessee's claim by observing as under :-
"The basic submission of the appellant that the software in question is specific to a project has not been denied by the AO. It therefore remains a suspicion that the said software can be used for other projects. The AO, in my opinion, has not brought on record any evidence to indicate that the software in question could have been used by the appellant for other project also. No technical analysis of the said software has been made by him. Besides, usage of the software over a two year period cannot be said to have given the appellant on enduring benefit neither can it be said that the expenditure has resulted in the creation of a capital asset. The case laws cited by the appellant have been perused. Respectfully following these, I hold that the expenditure incurred by the appellant towards purchase of software is revenue in nature"
11. We have heard the rival submissions and perused the material available on record. We find that the decision of Special Bench in the case of Amway India Enterprises -vs.- DCIT reported in (2008) 111 ITD 112 (Delhi- SB.) is squarely applicable to the facts of this issue before us. We respectfully following the same restore the issue to the file of Assessing Officer to decide the same afresh after giving due opportunity of hearing to the assessee. Resultantly, this ground of appeal is allowed for statistical purposes.
12. In the result, appeal of the Department is partly allowed as indicated above.
ORDER PRONOUNCED IN THE OPEN COURT ON 23/ 09/2011.
Sd/- Sd/-
महावीर िसंह]
[ Mahavir Singh /महावीर एस भी.मे
[S.V. Mehrotra/ (एस. भी मेहरोऽा)]
रोऽा
Judicial Member/ Ûयायीक सदःय Accountant Member/ लेखा सदःय
Dated : 23/ 09/ 2011
10 ITA No. 1678/Kol./2010
Copy of the order forwarded to:
1. M/s. CFI Technologies Pvt. Ltd., 4B, Little Russel Street, Kolkata-71.
2 DCIT, Circle-8, Kolkata, 'Aayakar Bhavan", P-7, Chowringhee Square, 5th floor, Kolkata-69.
3. CIT(Appeals)- ,Kolkata
4. CIT- , Kolkata
5. DR, Kolkata Benches, Kolkata (True Copy) By Order Assistant Registrar, I.T.A.T., Kolkata Laha, Sr. P.S.