TMI Blog2008 (8) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,35,646 being the income of the new unit under section 10A of the Income-tax Act. The Assessing Officer made a detailed examination of the working of the new unit and noted that after the new unit got approved as STP unit, the assessee had made addition to the plant and machinery of Rs. 84,000 and to furniture and fixtures of Rs. 1,25,000 after 30-9-2000 and the addition to asset did not indicate any asset on account of software development. The Assessing Officer therefore asked the assessee to explain as to why the exemption under section 10A should not be disallowed. The assessee explained that it had set up the new unit in view of the amendment made by the Government to section 10A as per which new STP units were entitled for deduction. The assessee had deputed a business development Manager to establish a new office at New York for carrying out marketing and sales activities. The software work executed at the new unit was carried out by new employees of the unit either at the STP unit or at the customer s site. The assessee referred to the Circular No. 694, dated 23-11-1994 of CBDT as per which the STP unit developing software at the client s premises would also enjoy the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he new unit had been created by splitting of the business of existing unit. He therefore upheld the decision of the Assessing Officer disallowing the claim of deduction under section 10A against which the present appeal has been filed by the assessee. 3. Before us, the Learned AR for the assessee reiterated the submissions made before the lower authorities and argued that the new unit was a separate and independent unit and not created by splitting of the old unit. Only some employees of the old unit had been transferred to the new unit and on this ground, it could not be treated as a case of splitting up of business. Reliance was placed on the decision of Chennai Bench of Tribunal in case of ITO v. DSM (Softs) (P.) Ltd. [2008] 115 TTJ (Chennai) 469. It was also submitted that the clients of STP unit were different from the old unit which was clear from the details of clients given on page 25 of the paper book. The Learned AR also pointed out that turnover of the old unit had declined during the year and therefore it could not be said that business had been taken over by the STP unit from the old unit. It was accordingly urged that deduction under section 10A should be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us in order to avail of the benefits of section 10A, the new undertaking should not be formed by splitting up or by reconstruction of the business already in existence. This condition will however not apply in case of re-construction or revival of business referred to in section 33B of the Income-tax Act. Admittedly the case of the assessee is not covered by the said exception. The issue for consideration therefore is whether the new STP unit formed by the assessee was by way of splitting up or reconstruction of existing business or it was an independent unit. The Assessing Officer has given a finding that after the STP unit was approved on 29-3-2000, the assessee had made addition to plant and machinery of only Rs. 84,000 and furniture and fixtures of Rs. 1,25,000 and there was no indication of any asset added on account of software development. The assessee had taken only a new premises on lease and recruited some new employees. However, the authorities below, on examination of employee records, noted the entire work of software development on-site at the clients premises which was entitled for exemption under section 10A had been undertaken by existing employees of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ization being taken up for which setting up of a new unit can be said to have become a business necessity. Merely because the customers in the new unit were different, it cannot be a basis to hold that the new unit was separate and independent. In case, customer is the criterion to classify a new unit, one can easily set up a new office and start executing orders from new customers from the new place and get exemption by splitting up the business which is not permissible. Whether a new unit is different and a separate can be decided not by difference in customers but by the fact that the same is independent and is capable of functioning as such and is not an integral part of the old business. When a new unit is set up to produce a different product requiring different specialization and set up, it can be easily identified as a new and independent unit. The difficulty arises when new unit is doing the same business where the possibility of splitting up is very high. 4.4 In case of Chembra Peak Estates Ltd. ( supra ), which has been relied upon by the Assessing Officer, the assessee who was owning tea and coffee plantation had a factory for manufacture of tea. It established an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f to the new office in the same area taken on lease by making small investment of about two lakhs in furniture and equipments and from where new orders of the same business have been executed. In our view this is a case of splitting up of business and not a case of independent unit. That the business had been diverted to the new unit is also clear from the fact that the business of the old unit declined substantially during the year which was obviously because of diversion of new customers. 4.6 The assessee has relied on the decision of Tribunal in the case of DSM (Softs) (P.) Ltd. ( supra ) which is distinguishable. The assessee in that case had made a substantial investment of over Rs. 50 lakhs in the new plant and machinery and had started new services such as geological information system and photo gramatory from the new unit for which assessee had recruited large number of technically competent new employees for doing the software development work. Relatively, only a small number of employees had been taken on transfer from the old unit. The fact that the new unit had been set up in a different city by making large investment for doing a different type of work clearly in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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