Income Tax Appellate Tribunal - Hyderabad
Conexant Systems Private Limited, ... vs Assessee on 12 November, 2014
.
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 710 to 714/Hyd/2014
Assessment Years : 2001-02 to 2004-05 and 2008-09
M/s Conexant Systems Pvt. Ltd., Dy. Commissioner of Income-
Hyderabad. tax, Circle - 16(2), Hyderabad.
PAN - AABCM 4751 G)
(Appellant) (Respondent)
Assessee by Shri Kanchun Kaushal &
Dhanesh Bafna
Revenue by Shri Y.V.S.T. Sai
Date of hearing 25-09-2014
Date of pronouncement 12-11-2014
O RDE R
PER SAKTIJIT DEY, J.M.:
Present appeals, five in number, have been filed by assessee against two separate orders of ld. CIT(A)-II, Hyderabad pertaining to AYs 2001-02 to 2004-05 and 2008-09.
2. The factual matrix of the case, briefly stated are, assessee earlier known as M/s Paxonet Communications (India) Pvt. Ltd. is a 100% subsidiary of CoreEL Microsystems Inc. (CMS), a US based company. As stated by assessee, prior to 1999 CMS was involved in the business of design services of semi conductors. During the period from 1996 to 1999 CMS derived its revenue from the following activities:
From Xilinx Inc. (design service and distribution revenue) - 45%.2
ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
Design service & intellectual property business from OKO Semiconductor and Exar Corporation - 26% Local consulting - 10% Other intellectual property, distribution & design service business - 19%.
2.1 CMS performed certain services and used to outsource some of its activities to CG CoreEL Logic Systems Ltd. (CGCLS) a Pune based Indian company. The particular tasks outsourced involved field programmable gate array (FPGA) design, BLSI design verification, assistance in verifying intellectual property design and assistance in supporting FPGA customers in India. CMS itself performed intellectual property architecture and key technology critical design. In 1999, major changes occurred in the business model of CMS because of the following reasons:
• Its main customer Xilinx Inc which accounted for 45% of the revenue was sold out.
• OKI Semiconductor decided to close its development subsidiary in USA in1999. In addition Exar Corporation project was completed in 1999.
• Design agreements with other major customers were either terminated or came to an end.
2.2 Due to the drastic set back in business of CMS in 1999 which also affected the business executed by CGCLS for CMS, CMS had only two option, either to close its operations or start afresh by raising additional funding and recruit a new engineering team. Towards achieving the aforesaid purpose, CMS was able to raise a small round of funding from venture capitalists on the condition that it would get out all IP and design service business in which it was engaged during the period 1996 to 1999 and focus on developing its own product. Therefore, CMS took steps to become an optical semi-conductor company. As a result, target customers of CMS also changed from existing set of customers. As stated by assessee, CGCLS was not a research and development arm of CMS at any point of time. It simply performed point to point tasks assigned to 3 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
them based on the very specific requirement of CMS. The specific tasks performed by CGCLS are as under:
• Tasks under contract from CMSD - which involved design, verification and preparing test criteria.
• Tasks under contract from Crompton Greaves Ltd. • Tasks under contract from third parties in India - which involved design services and consulting.
2.3 As per the changed business model, CMS decided for designing and development of its own products and for this purpose a new company was incorporated in India on December 1, 1999 in the name and style of CoreEL Labs P. Ltd. (CELPL), i.e. the present assessee. Assessee is basically engaged in the research and development for design and development of semi-conductor IC (Integrated Circuits) and supporting hardware and software products particularly for communication industry.
For this purpose, assessee has set up two STPI undertakings, one in Pune and the other in Bangalore, both approved in the year 2000. In the year of formation, assessee had capital base of Rs. 2 crore and had made approximate investment of Rs. 1.3 crore in plant and machinery, fixed assets, etc. For the AY 2001-02, assessee filed its return of income on 31/10/2001 declaring total income of Rs. 34,470 after claiming deduction u/s 10B. Initially assessment in case of assessee was also completed u/s 143(3) accepting the income returned. Subsequently, assessment completed u/s 143(3) was reopened for excess depreciation claimed and exemption wrongly claimed u/s 10B. As the issue relating to wrong claim of depreciation is not before us, we consider it inappropriate to deal with that issue. However, so far as wrong claim of deduction u/s 10B is concerned, AO was of the view that as the assessee is not a new undertaking but has been created by splitting up/reconstruction of a business already in existence i.e. CGCLS, the exemption claimed u/s 10B cannot be allowed. He, therefore, proposed to disallow the exemption claimed. Though, assessee objected to proposed disallowance of exemption claimed but the AO rejecting all submissions of assessee, held that assessee is not eligible to claim deduction u/s 10B and completed the 4 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
assessment accordingly. The reasons on which AO came to his conclusion are as under:
(i) that the ultimate shareholders of both the companies were same
(ii) that the business / product of the Appellant is same
(iii) that the Directors of both companies were the same
(iv) that CGCLS has transferred its entire P&M and computer software to the Appellant in AY 2001-02 (i.e. second year of operation of the Appellant)
(v) that in the first year of formation all the five employees of the Appellant were earlier working with CGCLS. 58% of the employees of the Appellant were from CGCLS in AY 2001-02 (i.e. second year of operation of the Appellant
vi) As per the press note dated April 20, 2000 - which stated that "CoreEL Labs has undertaken all of the research, development and application engineering functions of the parent company at its facilities in Pune and Bangalore". The AO has presumed that the word 'parent' referred to in the press note refers to CGCLS as CMS did not have any facilities in Pune and Bangalore.
(vii) that the approval issued by Ministry of Industry No. STP PER :
89 (1999)/EOP/97/1999 dated 17 January 2000 was in the name of CMS and not in the name of the Appellant.
(viii) The AO observed that the sales of CGCLS has gone down.
(ix) that it is a device to extend period of deduction.
(x) that in substance the Appellant was formed in AY 2001-02 as in AY 2000-01, there was only one sale by the asseessee in the month of March 2000.
(xi) that undertaking in Bangalore is not a separate unit as the Appellant is not maintaining separate books of accounts. There is only one fixed assets register and PF of all the employees is paid in Maharashtra. The claim is admittedly not been made in the original return of income. It had also not been claimed along with the proper form."
2.4 Being aggrieved of the assessment order so passed, assessee preferred appeal before the CIT(A).
5ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
3. In course of hearing of appeal before the CIT(A), though, assessee advanced detailed submission in support of its claim of exemption u/s 10B/10A, but, Ld. CIT(A) also upheld the view of the AO on the following grounds:
(i) that the shareholders of both the companies were same.
(ii) that the business of both the companies were the same and
(iii) that CGCLS has transferred its entire plant and machinery and computer software to the assessee."
While coming to such conclusion, CIT(A) also relied upon a number of decisions. Against the order passed by Ld. CIT(A), assessee preferred appeal before the ITAT, Pune Bench.
4. In course of appeal hearing before the ITAT registered as ITA Nos. 1047/PN/2006, 1805/PN/2005, 12/PN/2007 & 552/PN/2008, assessee advanced various arguments in support of its claim of exemption u/s 10A. The ITAT after considering the submissions of assessee and other materials on record, prima-facie, was of the view that the assessee has wrongly claimed exemption u/s 10B though legally assessee may be eligible for exemption u/s 10A. Ultimately, the ITAT set aside the order of the CIT(A) and restored the matter back to the file of ld. CIT(A) for considering assessee's claim of exemption afresh by observing as under:
"15. After having gone through the above submissions, we find that before us, the ld. AR has tried to meet out the above stated objections raised by the authorities below while denying the claimed deduction u/s 10B of the Act. The Ld. AR supporting the additional ground has also submitted that the assessee is actually eligible for the deduction u/s 10A of the Act, but, has mistakenly claimed deduction u/s 10B of the Act. We, prima facie, find substance in the above submission of the Ld. AR in support of the claimed deduction. At the same time, we are of the view that the related facts regarding the fulfillment of the claimed deduction as submitted by the ld. AR hereinabove in detail needs fresh verification to test the entitlement of assessee to claimed deduction in question. We thus in the interest of justice set aside the matter to the file of the Ld. CIT(A) for fresh consideration and adjudication of the issue after affording reasonable opportunity of being heard to the parties and considering 6 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
the material already available on record. Ground Nos. 1, 2 & 3 are allowed for statistical purposes.
16. So far as the issue raised in additional ground as to whether the assessee is entitled to claim deduction u/s 10B or 10A of the section is concerned, we are of the view that entitlement of deduction under the proper provisions of law is examined by the AO as per the established proposition of law and it does not matter under which provision assessee has claimed deduction. Even in those cases where assessee has failed to claim relief for which it is legally entitled to within the provisions of the IT Act, 1961, it is the duty of the AO to consider those relief while making the assessment. The requirement of law is for making just and proper assessment by the AO. We set aside this issue for consideration of the Ld. CIT(A) in view of his finding on the issue raised in Ground Nos. 1, 2 and 3 hereinabove. The additional grounds are thus allowed for statistical purposes."
5. In course of hearing of appeal before ld. CIT(A), in pursuance to the direction of ITAT, assessee made the following submissions:
"a) That the shareholders of the CoreEL Microsystems, Inc. (CMS), CG-CoreEL Logic Systems Ltd. (CGCLS) and the appellant company are not the same as observed by AO.
i) The shareholding pattern of the companies for the AY 2000-01 (the first year of operation of the appellant) is as under:
Shareholders In CMS [%) In CGCLS (%) In Appellant (%) Chetan Sanghavi 29.8 50 .1% Crompton Greaves 28.9 50 Others 41.3 "
CMS NA - 99.8%
T A Ramaswamv .1%
Total 100 100 100
(ii) Even if the management is the same, lOA /lOB deduction cannot be denied
on the ground that a new unit is formed by way of reconstruction of an existing unit.
(b) That the Directors of both the companies were not same and were different:
(i) The Directors of the companies as on 31.03.2000 i.e., in the 1st year are as under:
CGCLS Appellant
K.K.Nohria T.A.Ramaswamy
B.M.Suri S.Javaram
Mr.Chetan V.Sanghavl Mrs.Champa V.Sanahavi
7
ITA Nos. 710 to 714/Hyd/2014
Conexant Systems Pvt. Ltd.
V.M.Sanghavi
(ii) Even if the Directors of both the units are same, lOA deduction cannot be
denied on the ground that a new unit is formed by way of reconstruction of existing unit.
(c) That the product of the CGCLS and the appellant company are different:
(i) CGCLS was a designing company. It used to accept designing work from CMS.
In contrast, the appellant designed and developed products (Chips) for CMS.
(ii) The specific tasks undertaken by the appellant can be broken down as under:
1. Products requirements study
2. System level architecture
3. Detailed IC architecture
4. Detailed IC Design broken into multiple semi independent block
5. Block level RTL design
6. Block level RTL test bench
7. Block level RTL simulation and validation
8. Block level synthesis
9. Block level pre-layout and timing validation
10. System level test bench
11. Full chip simulation and validation
12. Full chip level synthesis
13. Scan chain design and fault coverage vector generation
14. Functional vector generation
15. Full chip placement
16. Hierarchical chip routing
17. Timing closure and fixing various race conditions
18. Formal netlist validation with RIL
19. Design rule checking
20. Metal migration, antennas and other crosstalk checks
21. Metal fill and final back end GDS2 database generation
22. Interface with foundry for prototype, run
23. Package design and electrical interface validation
24. Development of system level validation test board and associated software
25. Prototype testing for fault coverage (tester program development)
26. System level validation
27. Application note and engineering.
Out of the 27 steps performed by the appellant, CGCLS performed only 6 steps (5,6,7,8,10 & 11).
(iv) The designs made by the appellant are much more complex compared to the designs made by the (GeLS.
(v) The tasks undertaken by CGCLS were more labour intensive than the jobs undertaken by the appellant.
(vi)Though the generic names of the product developed by both the companies is one and the same, the specific tasks performed by two companies are 8 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
different.
(vii) Even if the product manufactured by both the units is same, lOA deduction cannot be denied on the ground that there was a reconstruction of an existing unit.
(d) That the CGCLS has not transferred its plant and. machinery and computer software to the appellant:
[ii) In A.Y.2001-02 CGCLS transferred its fixed assets to the appellant. However, such additions transferred constituted less than 20% of total assets of the appellant.
(iii) Even if limit of 20% is to be seen every year, the appellant has satisfied this criteria as well.
( e) That the 58% of the employees were from CGCLS :
(i) There is no legal requirement that the appellant should not employ the persons who were previously employed by any other company. The employees who were earlier working with CGCLS resigned from their jobs and joined the appellant company. In any case 10A deduction cannot be denied on the ground that some of the employees of new unit were from old unit. Reliance is placed on CIT vs. Metropolitan Springs (P) Ltd. 191 ITR 288 (Born) and ITO vs. Servion Global Solutions Ltd. 308 ITR 375 (Chennai).
(f) Press note dated 20.04.2000 : (i) The Assessing Officer has totally misunderstood the Press note and held that
CGCLS is the parent company of the appellant. Infact, it is the eMS which is the parent company of the appellant
(g) The business of CGCLS had continued even during A.Y.200S-06. CGCLS is a running company even in A.Y.2005-06, as per the annual report of 2005-06, it bagged orders worth Rs.98,OO,000j- and has been elected as Agency for Development of Remote Surveillance System by Military College of Electrical and Mechanical Engineering, Hyderabad. Therefore, forming of appellant company is not a device to extend the period of deduction. Even otherwise, an act valid in law cannot be treated as non-est merely on the ground that some benefit resulted out of such action. Reliance is placed on
(h) The first year of appellant company was A.Y.2000-01 :
(i) The appellant was incorporated on 01.12.1999 and obtained permission from STPI on 17.01.2000 and made exports to CMS before the year 2000.
.
Therefore, the first year of appellant company was A.Y. 2000-01 and not A.Y.200l-02.
(ii) Even if eligibility of deduction is to be tested in every year the appellant fulfilled that criteria also as machinery transferred from other unit was less than 20%.
[i] That undertaking at Bangalore unit was a separate unit, therefore, exemption u/s.l0A can be given to this unit even if 10B deduction is not allowed to Pune unit on the ground of reconstruction:
(i) That CIT(A) for AY.2004-05 allowed lOA claim for Bangalore unit.
(ii) That Bangalore unit was separately registered as STPI unit on 20.05.2000.
(iii) That two units belong to the same company with one sl.no. for invoices raised and accounting I payroll was centralized does not affect 10A claim as there is no stipulation u/s.10A or 10B that separate invoices and separate accounting and payroll has to be maintained unit-wise .
(iv) The Bangalore unit did not suffer from the purported defects pointed out for Pune unit.
(v) That section 10A(S) does not prescribe that form nO.S6F has to be filed before the time allowed u/s.139(1). Instead it requires that Form No.S6F has to be filed alongwith the return of income. Since Form No.56F was filed with revised return of income, the claim u/s.10A is allowable.
(j) That the STPI approval dated 17.01.2000 is in the name of appellant only and not in the name of CMS."
6. Ld. CIT(A) noted that the ultimate ownership of CGCLS and of CMS is in the hands of Crompton Greaves and Chetan Sanghvi. The product produced by both the units is one as revealed from the annual reports of the respective companies. In this context, learned CIT(A) referred to the observations made by her predecessor in the appeal order passed earlier which was set aside by the Tribunal. Further, learned CIT(A) noted the following facts:
a) The appellant had only one sale in the AY 2000-01 in March 2000 of Rs. 2,93,153.
b) The depreciation schedule for AY 2000-01 of assessee company and that of CGCLS show that the entire plant and machinery and computer software of CGCLS was transferred 10 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
to the appellant company. The said transfer was on 30.06.2000. A special note also was mentioned below the depredation schedule that "assets have been sold at WDV to Paxonet Communications Pvt. Ltd. on 30.06.2000."
(c) Further, as evident from para 6 [f], the Assessing Officer has clearly brought out that in the initial year all the 5 employees of the appellant company were the employees of CGCLS. Further, in the A.Y.2001-02 58% of the employees were from CGCLS.
(d) The press note dated 20.04.2000 given as mentioned at para 6.{d) clearly reveals that the activities of CGCLS were taken over by the appellant company. Further, the appellant's claim that CGCLS continued for subsequent years also is of not much relevance as old company can always continued to exist, rather, than only it amounts to splitting up. Hence, the appellant company can be considered as formed by splitting up of CGCLS.
e) As rightly pointed out by the AO though a single sale was made before March 2000, by employing 5 persons from CGCLS, though technically the production started before F.Y.1999-2000 practically, the operations started only in the subsequent year i.e., F.Y.2000-01 (A.Y. 2001-02).
(f) The appellant's claim that the STPI registration to the Pune unit was given on 17.01.2000. However, it is verified from the copy of registration submitted by the appellant that such registration is in the name of CoreEL Micro Systems Inc. USA (CMS, USA) and not in the name of the appellant company. On this ground alone, the exemption u/s l0A/10B can be denied to the appellant.
Taking into account the aforesaid facts, learned CIT(A) disallowed assessee's claim of exemption u/s 10A on the following conclusions:
"8.3 In view of the above discussion it is evident that there was splitting up of the existing company namely CGCLS to form the appellant company by the same management, as the same product was produced, the same employees were used, plant and machinery also was same. Further, the circumstantial evidence brought out by the Aa that on the formation of appellant company the sales of CGCLS were drastically reduced would go a long way to prove that the appellant company was formed by splitting up I reconstruction of existing unit, CGCLS. The very purpose of introducing section 10A I 10B were to encourage the new industrial units and not to extend the benefits to the units which were formed by way of splitting up I reconstruction of the existing units. The deductions u/s.l0A/l0B and similar incentives of the other sections are given especially in the initial stages of the company as there would be several teething problems in the 11 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
beginning. And these exemptions I deductions help the companies to take off in the initial years smoothly. The Assessing Officer has also discussed elaborately by relating case laws on this subject. The case laws relied upon by the Assessing Officer discussed para 6(1) are very much applicable to the facts of the case, wherein similar circumstances the business was held to have been reconstructed out of the existing unit. Further, the facts of the appellant's case are identical with the facts in the case of China Information Technologies Pvt. Ltd. Vs. ITO, (2008) 25 SOT 432 (Mumbai, ITAT). The facts in China Information Technologies Pvt. Ltd. were there was an existing unit in SEEPZ the unit which was not entitled to lOA. The assessee took certain number of employees from the old unit and started a business at the premises of the client. The product developed was same as that of the old and new units little amount of plant and machinery was added in the new unit. The Tribunal clearly held that new business was formed by way of splitting up of old business and therefore, not eligible for 10A deduction".
8.4 For the purpose of lOA / lOB deduction, both the conditions as mentioned below have to be fulfilled,
(i) That the undertaking is not found by splitting up or reconstruction of an existing business,
(ii) It is not by transfer of used plant and machinery (however, transfer of used plant and machinery to the extent of 20% is allowed).
8.4.1 Again at the cost of repetition, it is to be emphasized that both the above conditions have to be fulfilled. It is not that all the new units where the plant and machinery transfer is zero to 20% are eligible for deduction u/s 10A/10B. In the beginning when the section was introduced, the condition was, the second hand machinery should not be used at all as the deduction is meant for new undertakings only. However, over a period of time the Courts have interpreted this condition liberally and held that transfer of used machinery to the new unit in small proportions can always be allowed. Since the proportion of second hand machinery was always matter of subjective interpretation, the legislation in its wisdom had to put the seal of 20% on transfer of plant and machinery. Further, for the formation of a new industrial undertaking, plant and machinery is only one part of several other factors like - men, material, management etc. etc. Hence, the focus is on the formation of the company, that it should not be formed by splitting up or reconstruction of the existing one, meaning thereby that the new company should not be formed using the employees, raw-material or any other 12 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
assets belonging to the earlier company. In the instant case it is the same management of CGCLS with the same employees started the appellant company to produce the same product. The entire sequence of events clearly lead to inevitable conclusion that the appellant company is formed with a deliberate plan to get extended benefits beyond period of 5 years.
8.4.2. Further, the Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT 214 ITR 801 held that the human probability and circumstantial evidence has to be kept in mind to decide the genuineness of the transactions. Further, in case of Som Nath Maini VS CIT 306 ITR 414 the Hon'ble Punjab & Haryana High Court, held that genuineness of transactions can be rejected even if the assessee backs the same with evidence which is not trustworthy.
8.5 In view of the details discussed above, it is concluded that the appellant company was formed by splitting / reconstruction of CGCLS to get the extended benefits u/s 10B, just before 10A benefit lapses for CGCLS with a clear motive of getting extended benefit u/s. 10A / 10B beyond 5 years of period. It is also pertinent to mention that the deductions under both the sections 10A I 10B are not allowable if the unit is formed by way of splitting up I reconstruction. Therefore, the appellant's grounds of appeal on the issue of claiming deduction u/s.l0Ail0B for A.Y.2001-02, 2002-03, 2003·04 & 2004-05 are dismissed. "
7. In course of proceeding before the ld. CIT(A), assessee also made an alternative claim to the effect that if assessee's claim of exemption u/s 10B is denied to Pune unit on the ground that it was formed by way of splitting up/reconstruction then 10A deduction should be given to Bangalore unit as the same was not formed by splitting up/reconstruction. Ld. CIT(A) did not find merit in the alternative claim of assessee also for the reason that assessee has been claiming deduction u/s 10B all along for the Pune unit. She also noted that assessee had been treating the business as one as same set of books of account are maintained for both the units and same products are made in both the units. The invoices of both the units are under one series and payroll of employees are also centralized. She observed that 10A deduction is allowable to the business houses where the units are located in SEZ, APEZ, ETPH for the units with 100% exports or at least more than 75% sales are exports. Whereas 13 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
10B is enacted to take care of units which are 100% exported oriented and not located in APEZ, SEZ ETPH etc. She observed that if interchanging of 10A and 10B were to be permitted there was no need for the legislature to have two sections separately. Therefore, the alternative claim of assessee for exemption u/s 10A for Bangalore unit is not allowable. Further, learned CIT(A) noted that for AY 2001- 02, the original return of income was filed on 31/10/2001 claiming exemption u/s 10B. Subsequently, in response to notice u/s 148, assessee filed a return on 28/11/05. However, in the said return no separate computation for Pune and Bangalore Unit was given. Further, assessee filed one more return on 31/03/06 submitting separating computation for Pune and Bangalore for the first time. CIT(A) observed that there is no provision permitting assessee to revise a return filed u/s 148. In this connection, learned CIT(A) referred to the order earlier passed by her predecessor. Ultimately, CIT(A) concluded that as the assessee has itself quantified loss for Bangalore unit, the question of allowing 10A deduction does not arise. Being aggrieved of the aforesaid order of learned CIT(A) assessee is in appeal before us.
8. The first common issue arising in all these appeals relate to denial of assessee's claim of exemption as a whole u/s 10A/10B of the Act.
9. The learned AR more or less reiterated the submissions made before the Tribunal in the earlier round of litigation. The propositions advanced by learned AR to counter the reasoning of AO and ld. CIT(A) in rejecting assessee's claim as culled out from the submissions made are as under:
• Deduction u/s 10A for separate units cannot be denied when the new unit has a separate and distinct identity capable of independent existence from fresh investment, new plant and machinery, substantial increase in capacity, separate identifiable premises and a separate license.14
ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
• Splitting up and reconstruction of the business already in existence suggests the splitting up or reconstruction of the existing business of assessee.
• The owners/management of the newly formed undertaking/company are the same as the old undertaking/company cannot be the basis for denying the benefit of section 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence.
• The fact that the newly formed undertaking dealt with the same or similar product; or carried on similar business activities as of the old undertaking, cannot be the basis for denying the benefit of section 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence.
• The fact that the unit has common directors of existing business is not relevant for denying the benefit of section 10A on the alleged ground that the new undertaking is mere colourable device adopted to exceed the deduction u/s 10B (to be read as 10A) of the Act for a prolonged period which was getting over in AY 2001-02.
• The assets transferred from CGCLS are less than 20% of total assets of appellant and therefore the benefit u/s. 10A cannot be denied to the appellant.
• The mere fact that some of the employees of the new undertaking are from the old undertaking cannot be the basis for denial of benefit u/s 10A on the alleged ground that the new undertaking is formed by way of reconstruction of a business already in existence.
• The fact that sales of CGCLS has gone down is an irrelevant consideration for the purpose of determining whether the appellant has been formed reconstruction or splitting up.
10. The gist of the submissions of learned DR justifying denial of exemption u/s 10A as taken from the written submission are as under:
a) Approvals dated 07-01-2000 for Pune Unit and 20-05-2010 for 15 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
Bengaluru Unit granted by STPI clearly indicate the fact that the permitted activity was "computer software development". In fact the approval for Pune unit is in the name of Core EL Micro Systems Inc, which is the US parent of the appellant.
b) M/s Core El Logic Systems Ltd commenced operations in April, 1996 and eligible for deduction for 5 years from F.Y 1996-97 as it got its registration with STPI cancelled. Just before the expiry of the said period, the assessee obtained approval from STPI. It is also evident from the press note 20-04-2000 issued by Core EL Micro Systems Inc, USA that the design operations of CG Core EL Logic Systems Pvt Ltd would be taken over by the appellant, which would be the R&D arm of Core EL Microsystems Inc. In light of the above, it is submitted that the argument taken by the assessee that Core EL Logic Systems Pvt Ltd was discharging only part of the design functions as a service company, the assessee is a product company discharging much wider functions and hence there was no reconstruction of existing business is devoid of merit. It is also submitted that merely because the assessee was discharging larger functions, the fact that the existing business of CG Core EL Logic Systems Pvt Ltd was taken over cannot be wished away. It is also misnomer on the part of the appellant to state that it is a product company because the STPI registration is for "development of computer software". It is submitted even if a product is developed, it is only a software product, which would not be in technical terms much different from the consultancy service on software project because both the developments are as per the specifications of the client.
c) It is also submitted that the fact that there were five employees with the assessee in the first year of operation and all of them resigned from CG Core EL Logic Systems Pvt Ltd and joined the assessee. In the second year, there were 118 employees, out of which 68 joined from CG Core EL Logic Systems Pvt Ltd. This clearly shows that the activity was shifted to the assessee from CG Core EL Logic Systems Pvt Ltd. The Hori'ble Bench may kindly note that in "computer software development", man power is the key and the entire business would be closed if the .technical manpower leaves a company and the entire business can be reconstructed by the same manpower in another company, which is precisely the present case. Reliance is also placed on Circular no. 12/2014 of CBDT, which clarifies the position on this issue.
d) Not only manpower, even substantial equipment was transferred at WDV on 30-06-2000. It is submitted that key P&M like computers, computer software which are essential 16 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
for embedded z Vl.Sl design and vehicles were transferred. As the transfer was at WDV and considering the fact higher depreciation rate of 60% was availed before transfer, the value at which transfer took place was in the opinion of the undersigned was at less than the fair market value. Even as per the own computation of the assessee, the ratio of old to new machinery stands at 19:81 %. It is submitted that the in the opinion of the undersigned, the ratio is artificially shown at 19%, apparently to avoid the 20% mark, which would make the assessee ineligible for deduction u/s 10A. It is also submitted that he argument that old assets were transferred only in A.Y 2001-02 also appears to be fallacious because there was only one transaction during A.Y 2000-01 and the substantial activity commenced only in A.Y 2001-02. Again, this could be a case of careful manipulation of the affairs so that the conditions are not violated in letter.
e) The sales of CG Core EL Logic Systems Ltd also drastically fell, once the assessee was established. This clearly indicates transfer of business and clients, which resulted in substantial turnover in case of the assessee from A.Y 2001-02, which is the first year of substantial operations.
f) It is also argued by the assessee that the business of CG Core EL Logic Systems Pvt Ltd continued even after formation of the assessee. However, the Hon 'ble Bench may kindly notice that the business of the subsequent period for M/s CG Core EL Logic Systems Pvt Ltd was domestic in nature (admittedly the activity was on development of remote surveillance system by Military College of EME, Hyderabad) and distinct from the earlier activity, which clearly indicates the foreign business of CG Core EL Logic Systems Pvt Ltd was taken over by the assessee.
The learned DR submitted that all three fronts of clientele, equipment, and manpower the business of CG CoreEL Logic Systems Pvt. Ltd. was transferred to assessee which amounts to reconstruction of existing business and which makes assessee ineligible for deduction u/s 10A.
11. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions 17 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
relied upon by the parties before us. For the sake of clarity, it needs to be mentioned that against the order passed by the learned CIT(A) earlier assessee came in appeal before the ITAT, Pune Bench. In course of hearing of appeal before the ITAT, Pune Bench apart from challenging the disallowance of deduction claimed u/s 10B, assessee raised an additional ground by claiming that it is eligible for deduction u/s 10A but it has mistakenly claimed deduction u/s 10B of the Act. After considering the submissions of assessee, the Tribunal though prima-facie found substance in the aforesaid claim of assessee but considering the fact that related issues regarding fulfillment of conditions of deduction claimed needs fresh examination remitted the issue back to the file of the learned CIT(A).
12. As can be seen from the operative part of the order of ITAT extracted hereinbefore, the Tribunal specifically directed the learned CIT(A) to examine assessee's claim of deduction u/s 10A irrespective of the fact whether assessee has claimed deduction u/s 10B. As according to the Tribunal, even where an assessee has failed to claim relief for which it is legally entitled to within the provisions of the Act, it is the duty of the AO to consider those relief while making the assessment. On a perusal of the order passed by learned CIT(A) it is to be seen that she has not given any specific decision on this issue apart from observing that the assessee is not eligible for deduction either u/s 10A or 10B. As can be seen from the assessment order the AO has not allowed deduction u/s 10B to the assessee basically for the reason that assessee has not fulfilled the conditions of sub- section (2) of section 10B. Firstly because it is formed by splitting up or reconstruction of a business already in existence and secondly it is formed by transfer of machinery or plant previously used for any purpose. The factors which led the AO to come to such conclusion are as under:
• CG CoreEL Logic System Pvt. Ltd. is a sister concern of assessee having common directors.18
ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
• CG CoreEL Logic System Pvt. Ltd. started its operation in April, 1996 after getting STPI approval on 12/07/1996. It filed its return of loss for AY 2002-03. The notes given to the return of income state that the company has cancelled its registration as STPI unit and the company was an STPI unit till PY 1999-00.
• Press note dated 20/04/2000 submitted by assessee during the assessment proceeding indicate that assessee company has taken over all the research, development and application engineering functions of CG CoreEL Logic System Pvt. Ltd. and the term parent in the said press note refers to CG CoreEL Logic System Pvt. Ltd. as CMS Inc. USA does not have any facility in Pune and Bangalore.
• FY 1999-00 is the first year of operation for assessee and there were only five employee who were earlier working with CG CoreEL Logic System Pvt. Ltd. In the second year of operation in FY 2000-01, out of 118 employees, 68 employees were earlier working with CG CoreEL Logic System Pvt. Ltd., which comprises of 58% of the total employees.
• STPI approval dated 17/01/2000 is not in the name of assessee but in the name of CG CoreEL Micro Systems Inc. • There were transfer of assets from CG CoreEL Logic System Pvt. Ltd to assessee on 30/06/00 worth Rs. 17,16,681.
• The products produced by assessee and CG CoreEL Logic System Pvt. Ltd are similar, which as per the submissions of assessee are "design and application support services for developing communication ICs and telecommunication silicon IPs".
19ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
• CG CoreEL Logic System Pvt. Ltd. was an STPI unit since 1996-97 to 1999-00 and it was claiming 10A deduction. Since assessee company was formed, the sales of CG CoreEL Logic System Pvt. Ltd. has gone down drastically whereas assessee got STPI approval on 17/01/2000 and its sales were Rs. 11,90,17,282 in FY 2000-01 when the products of both the companies are same.
13. As can be seen from the impugned order of learned CIT(A), while rejecting assessee's claim she has merely adopted the reasonings of AO and her predecessor in the earlier round of litigation.
14. In the aforesaid factual background it is to be decided whether the conclusion drawn by AO and ld. CIT(A) that assessee is not eligible for claiming deduction u/s 10B or 10A as it has been established by splitting up or reconstruction of its business already in existence and has been formed by transfer of plant and machinery previously used is correct. Before considering the merits of assessee's claim and the correctness of reasoning of the AO as well as CIT(A) while denying such claim, it is necessary to look into the relevant provisions. Section 10A of the Act provides exemption of income from export of articles or things or computer software for a period of 10 consecutive assessment years in respect of a newly established undertaking in free trade zone. However, sub-section (2) of section 10A lays down certain conditions for availing exemption. The same is extracted hereunder:
"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 20 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
(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 up26a, or the reconstruction26a, of a business already in existence :
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.--The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section."
Similarly, section 10B speaks of exemption to newly established 100% export oriented undertakings in respect of income derived from export of articles or things or computer software for a period of 10 consecutive assessment years subject to fulfillment of conditions imposed under sub-section (2) which is reproduced hereunder:
" 10B(2): This section applies to any undertaking which fulfils all the following conditions, namely :--
(i) it manufactures or produces any articles or things or computer software;
(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 undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.--The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) 21 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
of this sub-section as they apply for the purposes of clause (ii) of that sub-section."
A bare reading of sub-section (2) of both sections 10A and 10B shows that the conditions imposed are almost identical in nature.
15. It is clear from the assessment order, the AO has denied exemption u/s 10B for non-fulfillment of conditions prescribed under clause (ii) and (iii) of section 10B(2). Therefore, keeping aside for the time being the issue whether assessee is entitled for exemption u/s 10A or 10B let us examine whether assessee has actually not fulfilled the conditions of section 10B(2), as alleged by AO and upheld by ld. CIT(A). The first ground for rejection is, assessee company has been formed by splitting up or reconstruction of a business already in existence. The Hon'ble Supreme Court in case of Textile Machinery Corporation Ltd. Vs. CIT, 107 ITR 195 had an occasion to interpret the meaning of expression 'splitting up or reconstruction of business already in existence' as used in section 15C of 1922 Act. For the sake of clarity section 15C of 1922 Act is reproduced hereunder"
"15C. Exemption from tax of newly established industrial undertakings - (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking or hotel, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.
2) This section applies to any industrial undertaking which -
i) is not formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant previously used in any other business."
The Hon'ble Supreme Court while interpreting the true import of the aforesaid provision held as under:
"Again, the new undertaking must not be substantially the same old existing business. The third excluded category mentioned above is significant. Even if a new business is carried on but by 22 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
piercing the veil of the new business, it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investment of new capital is imperative. The words 'the capital employed' in the principal clause of s. 15C are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under s. 15C. Sub-so (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under s. 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under s. 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business."
16. As per the interpretation given by the Hon'ble Supreme Court 'business already in existence' as referred to in section 15C would mean business of the assessee.
17. The Hon'ble Gujarat High Court in case of CIT Vs. Suessin Textile Bearing Ltd., 135 ITR 443 while interpreting similar expression used in section 84 of IT Act, 1961 held as under:
"16. Thus, in the decisions which have been approved by the Supreme Court in Textile Machinery Corporation's case (supra) and in the decision of the Supreme Court itself, sufficient indications have been given that so far as "reconstruction of the business" is concerned or "splitting of business" is concerned, it must be, splitting up of the business which was already 23 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
being carried on by the assessee or the reconstruction of the business which was already being carried on by the assessee and the new industrial undertaking must have been formed as a result of the splitting up of the previously existing business of the assessee or the reconstruction of the previously existing business of the assessee. Thus, so far as the first two clauses are concerned, the only conclusions possible looking to the object of the Legislature and the words used by the Legislature in the relevant provisions laying down the conditions then obtaining regarding s. 84, are that in the first two conditions the previously existing business must be of the assessee himself. Similarly, the previously existing business which is resuscitated or reconstructed or which is being split up must be of the assessee himself. If that is so, the position is very clear, namely, that so far as the third condition mentioned at p. 202 is concerned, namely, that the new industrial undertaking of the assessee should not be formed by the transfer to the new business of building, machinery or plant used by another prior to April I, 1948, must apply in the context of the previous business being carried on by the assessee himself. These words must be held to take colour from the context in which they are appearing. "
18. Further, the Hon'ble AP High Court also had an occasion to interpret section 80J which also employed similar expression. For the sake of convenience section 80J is reproduced hereunder:
"80J (1): Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under s. 80HH or s. 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) ...
(4) This section applies to any industrial undertaking which fulfils 24 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
all the following conditions, namely:
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; .....
Provided that the condition in cl. (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section:
Provided further that, where any building or any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into account in computing the capital employed in the industrial undertaking."
19. The Hon'ble AP High Court while interpreting the expression 'splitting up or reconstruction of business already in existence' as used in section 80J took judicial note of the ratio laid down in case of Textile Machinery Corpn. Ltd Vs. CIT and CIT Vs. Suessin Textile Bearing Ltd. and held as under:
"We are principally concerned with cl. (ii) of sub-so (4) of s. 80J, which says that the undertaking must be one which is not formed by transfer to a new business of machinery or plant previously used for any purpose. Sec. 80J applies to all industrial undertakings except the three categories mentioned in cls, (i) and
(ii). The two excluded categories under cl. (i) are: where the undertaking is formed by splitting up of the existing business or by reconstruction of the existing business. These two categories are necessarily referable to the same assessee. Otherwise, the question of splitting up or reconstruction does not arise. The words "splitting up" or "reconstruction" of the business already in existence necessarily suggests the splitting up or reconstruction of the existing business of the assessee. The words "of the assessee" have necessarily to be read into the sub-section.
Similarly, the third excluded category in cl. (ii) also must necessarily refer to the case of the same assessee. The words "by the assessee" must be read at the end of the sub- section. The expression "transfer" in the context, means not transfer as used in the Transfer of Property Act, but transfer by the assessee of the assets used by him previously for any purpose, i.e., where 25 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
the assessee does not invest any capital, but merely transfers plant and machinery used by him previously either in an existing business or for any other purpose, he will not be entitled to the benefit. The words "for any purpose" were introduced by the 1961 Act by s. 84 which corresponds to the present s. 80J. In the 1922 Act, the words used were "plant and machinery previously used in any other business". The change brought about by the amendment is, the plant and machinery must not only not have been used in any business, but it should not have been used for any purpose. But the user is referable only to the assessee. Any other construction would result in nullifying the object of the Act. "
20. Thus, applying the legal proposition laid down in the decisions referred to above, 'splitting up or reconstruction of a business already in existence' mentioned in clause (ii) of section 10B(2) or for that matter section 10A(2) will mean splitting up or reconstruction of business already in existence of the assessee and not of any other person. At the cost of repetition it needs to be noted, AO while denying assessee's claim of exemption has concluded that assessee company has been formed by splitting up, or reconstruction of CG CoreEL Logic Systems Pvt. Ltd., a business already in existence. One of the reasons for coming to such conclusion is ultimate shareholders of the companies are same. However, a perusal of the shareholding pattern/ownership structure of CG CoreEL Logic Systems P. Ltd. as well as the assessee company in the first year of operation of assessee company, which is also referred to by ld. CIT(A) in the impugned order shows that though Chetan Sanghvi and Crompton Greaves, who are 100% share holders of CG CoreEL Logic Systems P. Ltd. are also holding respectively 29.8% and 28.9% shares in CMS, the parent company of assessee, rest 41.3% shares in CMS are held by others. However, so far as assessee is concerned, the parent company i.e. CMS holds 99.8% shares, whereas while Chetan Sanghavi holds .1%. Crompton Greaves has no shares. Therefore, AO's conclusion that ultimate shareholders of both the companies are same is without any basis. Even assuming for the sake of argument that shareholders of both the companies are same, it cannot be denied that both assessee and CG CoreEL Logic Systems P. Ltd. are 26 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
two separate entities having distinct identity and are capable of independent existence. The Hon'ble Supreme Court in case of Textile Machinery Corporation Ltd. Vs. CIT (supra) laid down tests for identifying a newly established industrial undertaking. They are:
a) investment of substantial fresh capital in the industrial undertaking set up.
b) employment of adequate labour
c) manufacture or production of articles in the said undertaking
d) earning of profits clearly attributable to the said undertaking
e) a separate and distinct identity of the industrial set up.
21. The same view has also been expressed in a number of decisions of different high courts as well as this tribunal. Reference in this regard can be made to the following decisions:
1. CIT Vs. Finolex Cables Ltd., [2012] 209 Taxman 79 (Bom)
2. M/s Kakatiya Cements Vs. ACIT (ITA No. 931/Hyd/2011, dt. 04/01/12
3. Gujarat Alkalies and Chemicals Ltd. Vs. CIT 350 ITR 94 (Guj.)
4. ACIT Vs. Changepond Technologies P. Ltd., [2008] 119 TTJ 13 (Chennai)
22. Applying the tests laid down in the decisions referred to above to the facts of assessee's case it is seen that assessee has made substantial capital investment of Rs. 2 crore out of which about Rs. 1.23 crores was in new plant and machinery, fixed assets etc. which is clearly evident from the balance sheet and P&L A/c for AY 2000- 2001 submitted in the paper book. Assessee has employed substantial work force. It has started manufacture or production of articles in the industry set up as per annual report for year ended 31/03/2000. Though, assessee incurred loss in F.Y. 1999-2000 but it returned profit in FY 2000-01. Assessee has separate identifiable premises at Pune and Bangalore. Both the units of assessee at Pune 27 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
and Bangalore have been approved as STPI undertakings on 07/01/2000 and 20/05/2000 respectively as per certificates issued, copies of which are placed in the paper book. From the aforesaid facts it becomes clear that CG CoreEL Logic Systems P. Ltd. and assessee are separate entities having distinct identity and capable of independent existence. More so, when CG CoreEL Logic Systems P. Ltd. is still in existence and continuing its business. Therefore, under no circumstances it can be said that assessee company has been formed by split up, or reconstruction of a business already in existence, much less a business in existence of assessee.
23. The AO while concluding that assessee has been formed by splitting up or reconstruction of a business already in existence has observed that product/business of assessee and that of CG CoreEL Logic Systems P. Ltd. is same, further 58% of assessee's employees were from CG CoreEL Logic Systems P. Ltd. These reasonings of AO, in our view, are also not valid. The coordinate bench of this Tribunal in case of M/s Virtusa (I) P. Ltd. Vs. DCIT in ITA No. 268/Hyd/2011 and ITA No. 482/Hyd/2011 dated 24/08/12 held that existence of some old employees in the new undertaking is not a disqualification for granting exemption u/s 10A as long as larger chunk of employees has not moved to the new unit from the old one. So long as both the units are existing and doing the declared business and are not formed out of the existing business 10A benefit cannot be denied. It was further held that even if the old as well as new unit are engaged in the same business with identical product but the same shall not contribute to the denial of exemption to assessee u/s 10A. The ITAT Chennai Bench in case of ACIT Vs. Change Pond Technologies P. Ltd., 119 TTJ 13 also expressed similar view.
24. The other reasonings of AO, such as, both companies are having common directors, press note dated 28/04/2000 referring to CG CoreEL Logic Systems P. Ltd. as assessee's 'parent', no STPI 28 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
approval in assessee's name, drastic reduction in sale of CG CoreEL Logic Systems P. Ltd. or even the allegation that assessee was formed only in AY 2001-02, in our view, are either irrelevant or are based on incorrect assumption of facts or wrong facts hence not relevant to conclude that assessee has been formed by splitting up or reconstruction. Though, in earlier round of litigation, the coordinate bench after considering all these facts had directed the ld. CIT(A) to consider assessee's claim of exemption in the light of facts considered by the Tribunal but ld. CIT(A), in our view, has done precious little to either establish the fact that assessee is formed by split up, or reconstruction of business already in existence of assessee or to controvert the submissions of assessee which are supported by facts and evidences. Ld. CIT(A) has merely repeated the reasonings of AO and her predecessor in the appeal order passed earlier. On the contrary, the facts and evidences brought on record by assessee if considered in the light of the decisions referred to hereinbefore, clearly demonstrate that assessee company cannot be said to have been formed by splitting up, or reconstruction of a business already in existence of assessee or for that matter CG CoreEL Logic Systems P. Ltd. Thus, seen from any angle AO's and ld. CIT(A)'s view that assessee is formed by splitting up or reconstruction of a business already in existence cannot be accepted. Restrictions imposed in clause (ii) of section 10B(2) will not apply to assessee.
25. Further, it is also the allegation of the AO that assessee has been formed by transfer of machinery or plant previously used, hence, it fails the condition imposed in clause (iii) of section 10B(2). However, facts brought on record by assessee in the earlier round of litigation before ITAT which were reiterated again before us show investment in plant and machinery and other assets are as under:
29ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
Particulars Opening Gross Transferred New Addition Ratio (%)
Closing
Block from
CGCLS Gross Block
AY 2000-01 - - 4,317,918 4,317,918
AY 2001-02 4,317,918 6,151,871 22,388,788 32,858,567 19:81
AY 2002-03 32,858,567 - 3,508,287 36,366,854
AY 2003-04 36,366,854 - 4,404,748 40,771,602
AY 2004-05 40,771,602 - 1,244,811 42,016,413
26. From the figures given in the above table it is clear that in the year of formation i.e. AY 2000-01 there is no transfer of assets from CG CoreEL Logic Systems P. Ltd. to assessee. Only in the second year of operation assets worth Rs. 61,51,871 was transferred to assessee. However, the value of such assets constitute 19.81% of the total cost of plant and machinery of the assessee which is less than prescribed limit of 20% as envisaged in explanation 1 to clause
(iii) of section 10B(2) read with explanation 1 & 2 to sub-section (2) of section 80I. This factual aspect has not been controverted either by the AO or by the ld. CIT(A) by bringing on record any substantive evidence.
27. In the aforesaid view of the matter, we have no hesitation in holding that assessee has not violated any of the conditions of section 10B(2). As the AO has rejected assessee's claim of exemption only on the ground of violation of clause (ii) and (iii) of section 10B(2), which in our view, will not apply to the facts of assessee's case, it is to be presumed that assessee satisfies all other conditions of the provision. Hence, assessee would be eligible for exemption u/s 10B.
28. Having held that AO and ld. CIT(A) were not correct in rejecting assessee's claim of exemption u/s 10B, it is necessary to decide the 30 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
appropriate section, i.e. 10A or 10B under which assessee is entitled to claim deduction. Though, the coordinate bench while remitting the matter has specifically directed ld. CIT(A) to decide this issue but ld. CIT(A) has not given any specific finding. Be that as it may, undisputedly, both the units of assessee are approved as STPI units. While the Pune unit has been approved on 07/01/2000, the Bangalore unit was approved on 20/05/2000. Therefore, the appropriate provision under which assessee is entitled to claim exemption is section 10A. Accordingly, we direct the AO to verify and allow assessee's claim of exemption u/s 10A.
29. The next common issue in all these appeals is the alternative claim of the assessee that in case exemption u/s 10B/10A is not granted to Pune Unit, 10A deduction to Bangalore unit should be granted as it is not formed by splitting up or reconstruction of Pune Unit.
30. So far as the issue of 10A deduction claimed in respect of Bangalore Unit, the departmental authorities have denied such exemption to assessee on the ground that for availing the deduction assessee has to file return within the due date specified u/s 139(1). Further along with the return of income assessee has to furnish Form No. 56F certified by a qualified auditor quantifying the deduction claimed. AO observed that all these years assessee has been claiming deduction for both the units u/s 10B. Only when AO denied 10B deduction, assessee came up with the plea for granting 10A deduction to Bangalore unit. It was observed by the AO as well as CIT(A) that assessee has always treated the business as one and the same set of books of account are maintained same products are produced in both the units, series of invoices for both the series is under one series, the pay roll of the employees also centralized. Thus, it was observed that as there is no separate books of accounts and employees are also same, the Bangalore cannot be considered to 31 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
be separate unit for the purpose of 10A. The learned CIT(A) further observed that deduction u/s 10A and 10B are based on different premises. Hence, interchanging of 10B and 10A if permitted then there was no need for the legislature to have two sections separately. Accordingly, she denied exemption to the Bangalore Unit.
31. The learned AR submitted before us that only because separate books of accounts are not maintained or the products are same, exemption u/s 10A cannot be denied. In support of such contention, he relied upon the following decisions:
32. The learned DR on the other hand submitted that assessee while claiming deduction u/s 10B for the Bangalore unit has filed a consolidated form No. 56G and only in the revised return filed in pursuance to notice u/s 148 for AY 2001-02, assessee claimed separate deduction for both the units. The learned DR submitted that as per the provisions of the Act, claim under section 10A must be filed along with return of income as per section 139(1). Whereas the assessee has not made any such claim in the original return. Further, the correct form to be for claiming exemption u/s 10A 56F whereas the assessee filed a common form for both the units u/s 56G. Therefore, it was submitted that as assessee itself not treating both the units are separate while filing a consolidated form 56G, there is no question of granting exemption u/s 10A for the Bangalore unit.
33. We have considered the submissions of the parties and perused the materials on record. This is an alternative claim made by assessee in the event of denial of exemption in respect of Pune Unit. In our view, this issue is of mere academic interest because of our decision that assessee is entitled for exemption u/s 10A, for ten consecutive asst. years which will be applicable to the income of assessee as a whole. However, considering the fact that parties were heard on this issue, we thought it appropriate to record our findings 32 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
on this issue. Assessee's claim for deduction u/s 10A for the Bangalore unit has been basically rejected for two reasons. No separate books of account are maintained for both the units and assessee has not claimed 10A benefit in the original return filed. However, we are of the view that these cannot be the sole criteria for denying exemption u/s 10A if otherwise it can be proved that the Bangalore unit is not formed by splitting up or reconstruction of existing business of assessee. However, the assessee has to prove such fact by producing necessary evidence. As the issue has not been properly examined either by AO or by learned CIT(A), we are inclined to remit the matter back to the AO for considering afresh, if warranted, after affording reasonable opportunity of being heard to the assessee.
34. One more issue which arises only in AY 2008-09 is in respect of disallowance of an amount of Rs. 98,77,157, being provision for expenses, while computing book profit u/s 115JB.
35. Briefly the facts relating to the aforesaid issue are, during the assessment proceeding, while examining the accounts of assessee, AO noticed that an amount of Rs. 98,77,157 is debited towards provisions under legal and professional charges, recruitment, other expenses, staff welfare and repairs & maintenance. AO being of the view that the provisions are contingent in nature, hence, not allowable called for an explanation from assessee. Assessee in its reply dated 13/12/2011, furnished details and submitted that in case of Pune, Bangalore, Hyderabad and HN units, if the addition is made by disallowing provisions, it will increase profits on which assessee will be eligible for deduction u/s 10A and only an amount of Rs. 17,51,380 relevant to Noida unit can only be treated as income of assessee. AO, however, rejecting submissions of assessee, concluded that as expenses are contingent in nature claim of assessee cannot be allowed. Accordingly, he added back the amount of Rs. 98,77,157 to 33 ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
the income of assessee and also made corresponding addition to the book profits. AO, however, allowed proportionate deduction u/s 10A in respect of HN unit. Being aggrieved of the disallowance made by AO, assessee preferred appeal before the learned CIT(A).
36. In course of appeal before the first appellate authority, it was submitted by assessee that provision made in the books of account pertained to service availed by assessee against which expenses have been incurred. However, as no invoices were received until the close of the year, the value of the services were appropriately determined and provided in the books, hence, the provision made cannot be considered as contingent liability but they are in the nature of ascertained liability. In support of such contention, assessee relied upon a decision of Hon'ble Supreme Court in case of Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62. Assessee submitted that as provisions made are in the nature of ascertained liability the same cannot be added to the book profit u/s 115JB. Assessee also made an alternative claim that in case expenses are treated as contingent and added back to the business profits of assessee, then, increased profit should be considered for the purpose of 10A deduction.
37. The learned CIT(A), however, did not find merit in the submissions of assessee. Ld. CIT(A) held that as assessee has not furnished the details of expenditure incurred and the basis for estimating expenses, AO has rightly disallowed the expenses claimed as they are contingent in nature. Ld. CIT(A) observed that as per Explanation 1 to section 115JB(2) any liability other than ascertained liability has to be added to the book profit. So far as alternative claim of allowance of deduction u/s 10A on the increased profit, ld. CIT(A) observed that AO himself in the assessment order has observed that if assessee furnishes necessary details unit-wise, then, deduction would be allowed to assessee. Accordingly, ld. CIT(A) dismissed the ground raised by assessee.
34ITA Nos. 710 to 714/Hyd/2014 Conexant Systems Pvt. Ltd.
38. We have heard the parties and perused the orders of revenue authorities as well as other materials on record. Ld. AR reiterating the stand taken before revenue authorities submitted before us that the provisions made are towards ascertained liability, hence, cannot be added to the book profit. However, learned AR submitted that the exact nature of provisions made, whether contingent or ascertained liability, can be verified by AO again. Learned DR, on the other hand, has no objection if the issue is examined again by AO. Considering the submissions of the parties and the nature of dispute as to whether provisions made are in the nature of contingent or ascertained liability, we are inclined to remit the matter back to the file of the AO, who after verifying necessary detail and considering the submissions of assessee and keeping in view decisions on which assessee may rely upon, decide the issue in accordance with law after affording due opportunity of being heard to assessee. This ground is to be allowed for statistical purposes.
39. In the result, all the appeals under consideration are allowed for statistical purposes.
Pronounced in the open court on 12 th November, 2014 Sd/- Sd/-
(B. RAMAKOTAIAH) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated:12 th November, 2014
kv
35
ITA Nos. 710 to 714/Hyd/2014
Conexant Systems Pvt. Ltd.
Copy to:-
1) Conexant Systems Pvt. Ltd., 5 th Floor, Pioneer Towers, Plot No. 16, Survey No. 64/2, Software Unit Layout, Madhapur, Hyderabad - 500 081
2) DCIT, Circle - 1(2), Hyderabad
3) CIT(A)-II, Hyderabad
4) CIT-I Hyderabad
5)The Departmental Representative, I.T.A.T., Hyderabad.