TMI Blog2010 (10) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, apart from being much in excess of the statutorily prescribed ratio of 20%, has played a significant role in the setting up of its undertaking, apart from other assets/resources, equally crucial, and similarly transferred or even shared, so that it is not a new undertaking or even a substantially so. Under the circumstances, we, therefore, hold that the assessee’s undertaking does not fulfil the conditions stipulated u/s. 10B(2) and, as such, is not qualified for the benefit conferred by the said section - Decided against the assessee Regarding disallowance of consultancy charges - No doubt, the onus for a disallowance u/s. 40A(2)(a) is on the Revenue, but the same can only be on the basis of the primary details and the information supplied in support by the assessee - The term `consultancy’ is too wide and vague to provide any definite understanding of the services rendered by him, particularly as the assessee has a whole range of professional and, further, who stand paid much less in comparison - In the present case, however, it is just the reverse, with the assessee claiming full tax exemption, while the remuneration allowed to its resident director, being in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (as on 31.3.2004) reflected plant and machinery as at the beginning of the year (31.3.2003) at Rs. 3.33 lakhs, to which additions for Rs. 16.48 lakhs stood made during the year, resulting in a total investment therein at Rs. 19.81 lakhs. As against this, the company had leased plant and machinery worth Rs. 17.66 lakhs. The ratio of the leased machinery to the total, thus, worked to over 47%. Further, the total investment in plant and machinery, i.e., computers, software, accessories, etc., by STPL was at Rs. 95.45 lakhs. The Assessing Officer (A.O.) thus observed the ratio of the plant machinery leased by STPL to be highly incongruent with or disproportionate to the space leased out by it, i.e., 4000 sq. ft. of the total 6000 sq. ft. area available with it, i.e., at 66.66% of its total area. That is, in his view the corresponding value of the machinery given on lease to, or allowed user by, the assessee, ought to be to the tune of Rs. 66 lakhs, i.e., 2/3rd of 95.45 lakhs. In other words, he inferred that the entire space was being utilized by STPL for its purposes, with part rented out to the assessee on `as is where is basis, or involving only minor adjustments, i.e., as against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking stands set up only by leasing out space and other essential infrastructure from another firm, STPL. The fact that the lease amounts to a transfer is no longer res integra, having been settled by the hon ble Apex Court in, among others, the case of CIT v. Narang Dairy Products (supra). The ld. CIT(A) had brushed aside the positive findings by the AO, based on materials on record, and rendered his own without any cogent basis, also accepting evidence/s without complying with the procedure under Rule 46A, including affording an opportunity to the AO to meet the same. 4.2 The ld. AR, on the other hand, vehemently objected to the same. The AO had not made out any case with regard to a split-up of a business already in existence, which would stand to fall u/s. 10B(2)(ii), but only under section 10B(2)(iii). The argument of the ld. DR would amount to a new case, which cannot be allowed to be made at this stage. Further, it is not denied that a `lease amounts to a `transfer , as the term is used and is to be understood in section 10B(2)(iii), even as conceded to before the ld. CIT(A) with reference to the decision in the case of Bajaj Tempo Ltd. v. CIT (supra), wherein it stands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s. 10B(1) of the Act; the ratio of the leased plant and machinery being at over 47% of the total plant and machinery with the assessee as at the end of the year of formation of its undertaking. Reliance stands placed by it for the purpose on the decision in the case of CIT v. Narang Dairy Products (supra). The assessee, on the other hand, does not dispute that the lease of the machinery constitutes a `transfer within the meaning of the term under the said provision. However, even so, the same should be toward formation of the undertaking under reference. Insofar and to the extent it does not, the condition of section 10B(2)(iii) cannot be said to be uncomplied with, so as to disqualify an Undertaking for the benefit u/s. 10B, for which reliance stands placed by it on the decision in the case of Bajaj Tempo Ltd. v. CIT (supra). It, however, stops there, and does not link the said statement of law with the facts of its case, i.e., apart from appealing to the peculiar nature of its trade/industry, so that de hors the same, it tacitly admits to being hit by the condition of s. 10B(2)(iii). So however, that being the subject matter of the dispute, we shall examine the same thread- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the denial of relief or benefit sought. As such, the transfer of the plant and machinery, to take the transferee-assessee outside the purview of the section, must be such that the new undertaking would not have come into being but for the transfer. That is, what is relevant and to be seen is whether the part played by the leased, previously used, plant and machinery was dominant or not in the formation of the new undertaking, so that where it was not, the benefit to the Undertaking could not be denied. Further, as explained, the words `previously used in any other business could not be construed so narrowly so as to confine their meaning to a user by the assessee only. This stipulation, in fact, is no longer relevant as the ambit (of the condition) stands further broadened under the extant provision by the use of the words `previously used for any purpose instead. In the instant case it is not under dispute the leased assets were previously used by the lessor-transferor for the purposes of its own business. What, therefore, is relevant and crucial to decide the instant case is whether the assessee s undertaking could be said to have been formed by the transfer of the plant and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reference to the above decision is misconceived. The same has no relevance to the question whether the assessee herein is formed by the transfer of second hand machinery and in the light of that finding, the reasoning of the Assessing Officer based on the above decision has to be rejected. For these reasons, I uphold the claim for exemption u/s. 10B and delete the addition of Rs. 55,32,103/- to the declared income. The ld. CIT(A) has thus rendered two findings. One, that the reliance on the decision in the case CIT vs. Narang Dairy Products (supra) by the AO is misconceived as the issue involved in the instant case is the formation of the assessee s undertaking by the transfer of the secondhand machinery (and, by implication, not of the `lease as constituting a `transfer or not) and, secondly, that in the fact-situation of the case, it could not be said that the assessee s undertaking came to be formed by the transfer of second-hand machinery; the same having been set up by taking on lease furnished office space, properly equipped with computers, workstations, accessories, etc. 5.4 We shall consider both the findings of the ld. CIT(A) for their validity. With regard to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the undertakings. It is true that the term newly established does not occur in the body of the section, but it is implicit in its very object and purpose. A necessary corollary of this is that the undertaking itself must be a newly established one, and not a new undertaking to the person acquiring the same from another. The emphasis is on the establishment of the undertaking and not on the person who acquires it afterwards. Otherwise, an undertaking, having enjoyed the special deduction, can continue to claim the deduction virtually for all time to come by mere change of hands, which is not the object or the purpose of the provision. Accordingly, a lease was held to be a transfer within the meaning of the section, so that there was a violation of the basic conditions of s. 80J(4), which is identically worded to s. 10B(2). The said condition, in fact, finds mention in many a provision, so that the decisions rendered thereon, holding likewise, are also relevant and fully applicable, to some of which we may refer: Blue Bay Fisheries (P.) Ltd. vs. CIT, 166 ITR 1 (Ker.); L.G. Balakrishnan and Bros. Ltd. vs. CIT, 151 ITR 270 (Mad.); CIT vs. Indian Expanded Metals (P.) Ltd., 134 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact-situation it becomes also incumbent on us to consider if the matter ought to be proceeded with by us or would it merit remission back to the file of the AO for his relevant findings. We decide in favour of the former. This is as the AO has specifically invoked s. 10B(2)(iii), and thus the finding of the formation as a result of lease, to which the assessee objected before him by stating of it (lease) as not constituting a transfer (though so in in law), is implicit in his order, particularly in the absence of the assessee raising any objection on this matter of fact before him. Secondly, the Revenue, whose interest may stand to be prejudiced thereby, has not raised any specific plea before us in this regard, i.e., of the ld. CIT(A) having proceeded in the matter without allowing opportunity to the AO to render his independent findings in the matter, particularly as we do not find any fresh material as having been adduced before, or considered by, the ld. CIT(A) in dealing with the assessee s said argument raised before him for the first time. No doubt, the Revenue has raised a ground (6) qua violation of rule 46 (read 46A), but the same speaks of admission of additional (fresh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (supra). In fact, even trial production, which precedes the commercial production, could also only be after `formation inasmuch it would require all the factors of production to be in place and in a state of preparedness. The assessee had 28 personnel on its rolls during April, 2002 (which incidentally also happen to be the average number of its employees during the ensuing year, f.y. 2002-03), whose profile covers a range, viz. project leaders, project managers, software engineers, administrative staff, and was headed by a competent professional in one, Mr. Lyju Alexander Thomas, who also headed STPL, besides being functionally responsible for the quality portfolio. It paid, during the said financial year, which is also its accounting year, a deposit of Rs. 12 lakhs to STPL (though termed as `advance-rent , which we consider as incorrect, if not also misleading, as the same continues to outstand as such over the years, and not adjusted against the monthly lease rentals) against the lease aforesaid, which was for a yearly rent of Rs. 7.44 lakhs, allowing user of its interiors and equipment, including 15 computers, work stations, accessories, besides furniture. Additions to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of second hand machinery. Thus, while he notes that the assessee s unit came to be set-up by taking on lease the various tangible resources required for the purpose, he concludes, immediately thereafter, of the same having not been formed by the transfer of second-hand machinery, and which is clearly dichotomous. How was, if not thereby, it then formed, one may ask? Until, of course, he considers or regards `lease as not amounting to a transfer within the meaning of the section, as implied by his first finding, and which we have already considered and discussed at para 5.4. For our purposes, it would be sufficient if the used plant machinery as transferred played a dominant position in the formation of the assessee s undertaking, which we find to have been set-up only therewith, so that the assessee s case falls to be covered wholly u/s. 10B(2)(iii) and, accordingly, its undertaking excluded there-under. 5.6 In fact, there is sufficient indica on record to infer that the assessee s undertaking stood formed by a split-up or reconstruction of a business already in existence, i.e., of STPL, engaged in the same business of producing and supplying the same thing computer so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not think it would be, in the absence of further investigation into facts, proper to pursue this matter or draw any adverse inference on that basis. The same, as well as the information with regard to employees, as referred to earlier would, if so, i.e., as the facts and circumstances suggest, only go to fortify the even otherwise unmistakable and irresistible conclusion that the assessee s undertaking stood formed almost wholly by the transfer of resources, including plant and machinery, from STPL. 5.7 We are aware that the AO has not made out any case u/s. 10B(2)(ii), specifically stating of the said clause as being not applicable, even as pointed out by the ld. AR in response to a similar contention advanced by the ld. DR. However, it is not the question of a particular provision, but of an inference from the proven and undisputed facts and circumstances of the case, and which could vary from person to person. Besides, as we see it, the difference between clauses (ii) and (iii) of s. 10B(2), where the existence of an existing business and its nexus with the new business is proven and undisputed - as of STPL in the instant case - is only one of degree, i.e., whether only plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was available only to newly established industrial undertakings on fulfilment of the conditions mentioned in subsection (2). The two conditions relevant for the purpose were: (i) that such undertaking was not formed by the splitting up or the reconstruction of a business already in existence and (ii) it was not formed by the transfer to a new business of building, machinery or plant previously used for any purpose. A careful perusal of these two conditions clearly showed that the benefit under the scheme was intended to be given only to undertakings which were in the real sense newly established industrial undertakings. If the undertaking was already in existence and out of such existing undertaking, a new industrial undertaking had been created, the benefit was not available. Similarly, this section, would not apply and its benefit will not be available, if there was a transfer to the new business of building, machinery or plant previously used for any purpose. The word transfer cannot be given a narrow meaning. It has to be interpreted in a broader sense, with reference to the context in which it is used. So interpreted, it will take within its ambit lease of building o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not follow as a matter of course, and a decision shall have to be taken on an overall consideration of the entirety of the facts and circumstances, even as it may be clarified that the onus to prove that it is eligible for exemption being sought is always on the assessee. Our this understanding of the provision, elucidated by the higher courts of law, explains the foregoing exercise, which thus is only an attempt to answer the test as laid down by the apex court, so as to be able to apply the law in a meaningful and purposive, rather than mechanical, manner. Whether, therefore, as a result, the assessee s case falls u/s. 10B(2)(ii) or (iii) is secondary and not of much significance, given the tests laid down, particularly in the fact setting of a business already in existence and its close and direct connection with the formation of the assessee s enterprise, and is more a question of the facts fitting more neatly into one provision in preference to the other. 5.8 On the basis of the foregoing analysis, we are of the clear view that the assessee s undertaking could not be formed but for the transfer of plant and machinery, and which, therefore, apart from being much in exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble apex court and the hon ble jurisdictional high court in the matter, both of which have advocated the interpretation of the term in consistence with the stated object of the provision, i.e., of a new, qualifying undertaking coming into existence. The issue, in fact, stands settled by the various decisions, as, among others, Narang Dairy Products (supra); Bajaj Tempo Ltd. (supra); Kerala State Cashew Development Corporation vs. CIT (supra), in relation to like beneficiary provisions, being identically worded. 5.10 The third case relied upon by the assessee is ITO vs. Tech Drive (India) Pvt. Ltd. (supra). The same is in the context of the extant provision (section 10B), and decides the issue as to whether the ownership of plant machinery by the assessee is to be read as a qualifying condition for satisfaction of s. 10B(2)(i), i.e., the manufacture or production of an article or thing or computer software. The same has no relevance or bearing on the facts of the case which falls under the other two clauses of section 10B(2), with clause (i) being satisfied. As regards the contentions raised, we consider that the host of case law in the matter, to some of which reference stands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its Ground No.7 pertains to the deletion of disallowance at Rs. 4.25 lakhs in respect of consultancy charges paid to Lyju Alexander Thomas, resident director of the assessee-company. The AO called for details in respect of his qualifications and justification in terms of reasonableness of the charges paid in view of the applicability of section 40A(2)(a) of the Act. The assessee explained him to be rendering consultancy in connection with software development. Further, he was a qualified Engineer in the discipline of Electronics and Telecommunications and is a certified Project Manager (PMP), besides holding certifications like Microsoft Certified Systems Engineer (MCSE) and CISCO Certified Network Associate (CCNA). The amount paid, and the claim in it respect, was stated to be reasonable. In appeal, the assessee reiterated its stand. The ld. CIT(A), deleted the same, holding thus: I am not satisfied with the reasons given by the AO for rejecting 50% of the claim. U/s. 40A(2) expenditure can be disallowed only when the assessing officer is of the opinion that such expenditure is excessive or unreasonable, having regard to fair market value of the goods, services or facilities fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derstanding of the services rendered by him, particularly as the assessee has a whole range of professional and, further, who stand paid much less in comparison. The quality of the services rendered may not be amenable to assessment by the AO, being not a technical person, but their scope definitely is. Also, the comparison, for any objective assessment, is to be with reference to the fair market value, so that what is to be seen is the market price of similar services, i.e., if the assessee were to engage another professional of similar standing and expertise, all of which would require profiling those services. Also relevant in the matter is the fact that the director also heads and has functional responsibilities in STPL, presumably against some remuneration, so that he is not devoted full-time to the assessee. The earning of profits by the assessee, or their scale, which has also influenced the decision by the ld. CIT(A), is not relevant for the purpose, which only requires a commercial evaluation of the services that stand paid for. 9.2 Even so, the Board has clarified that the provision of s. 40A(2)(a) is to be applied only where there is scope of availing any tax benefit/s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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