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TMI Blog2010 (10) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies Pvt. Ltd (`STPL' for short), which was explained to be by way of advance rent for 4000 sq. ft. of built-up area sub-leased by it from STPL, which held lease-hold rights therein; the said concern having itself paid like advance to the owner -Technopark. The lease was for Rs. 62,000/- per month (increased to Rs. 64,000/- with effect from January, 2004), including Rs. 10,000/- for interiors and equipment, so that the lower lease charges paid by STPL, it was explained, were only indicative and not very relevant. The arrangement allowed the assessee user of a set of 15 old computers, work stations and chairs, besides furniture, of STPL. The details of the leased assets revealed the same to have been purchased by STPL during August/September, 2000 at a cost Rs. 17.66 lakhs (the cost of 'computers' though stands wrongly mentioned in the assessment order at Rs. 5.63 lacs as against the correct value of Rs. 8.63 lacs/refer Annex 1 at PB-II, pg. 18). The balance-sheet (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 therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowability of its claim. 3.3 In appeal, the assessee placed reliance on the decision in the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC). The disentitlement to the benefit under the section in case of transfer of plant and machinery is not to be viewed with reference to `transfer' per se, but where there is formation of a new undertaking thereby, i.e., as a result of such transfer; the emphasis of the condition provided thereunder being on the `formation' and not on `transfer', and which is the key to its interpretation. In the facts of the case, it was found by the ld. CIT(A) that the assessee's unit could not be said to have been formed by the transfer of second-hand machinery. He, accordingly, deleted the disallowance of the assessee's claim for deduction u/s. 10B(1). Aggrieved, the Revenue is in appeal. 4.1 Before us, the ld. DR would submit that the assessee's case fell to be disqualified u/s. 10B(2)(ii). As would be apparent, the assessee's undertaking 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in the case of I.T.O. vs. Tech Drive (India) Pvt. Ltd. (2010) 124 ITD 249 (Del.), holding that there is in fact no requirement for such an assessee to even own plant and machinery or equipment (which was the issue in that case) to produce computer software, so that where the same was done by contracting it from outside parties under the assessee's supervision, the same would qualify for exemption u/s. 10B(1). 5. We have heard the parties, and perused the material on record, as well as the case law cited. 5.1 The Revenue's case is that the lease of plant and machinery, being a set of 15 computers and workstations along with other allied equipment, including furniture, out of its existing portfolio of assets, by STPL to the assessee, its sister concern, would constitute a `transfer' within the meaning of the term as used in section 10B(2)(iii), so that the assessee's undertaking, which stands formed as a result, is not qualified for the benefit of deduction 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally worded, and bearing, as such, the same condition as in section 10B(2)(iii), by the higher courts of law, including the apex court, as in the cases of CIT v. Narang Dairy Products (supra) and Bajaj Tempo Ltd. v. CIT (supra); the latter being relied upon by the assessee itself. In fact, it (assessee) does not contest the same; it only states that in the facts and circumstances of its case, the same does not lead to or result in the formation of an Undertaking for the said condition to have an application. The law in the matter is amply clear. To restate, as clarified in Bajaj Tempo Ltd. v. CIT (supra), the denial of the benefit under the incentive provision arises not by the transfer itself but when the transferee undertaking is formed by such a transfer, and which fact alone is crucial, being the basis of the application of the provision. It is only where the transfer is found to have resulted in the formation of a 'new' undertaking that would lead to 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver declared for A.Y. 2004-05 is from export. The computation of net profit of Rs. 55,32,103/- as profit from exports is also not in dispute. The Balance Sheet of the assessee reflects the investment in computers and accessories. The assessee took on lease 4000 sq. ft. of furnished office space in the Technopark Campus with workstations, wiring, flooring and computers. In the context of the above fact situation, it cannot be held that the unit of the assessee was formed by transfer of second hand machinery. On the other hand the assessee has fulfilled the conditions of section 10B to become eligible for deduction of the export profits. 2. The advocate referred to the decision cited by the Assessing Officer, namely CIT vs. Narang Dairy Products, 219 ITR 478 where the issue was whether for the purpose of withdrawal of development rebate, lease of machinery amounted to transfer within the meaning of the definition contained in section 2(47). I find that the 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 Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer, even as, as afore-stated, it emphasized on the purpose of the transfer, i.e., toward formation of the Undertaking, as being the essence of the section. The jurisdictional high court in the case of Kerala State Cashew Development Corporation vs. CIT (1994) 205 ITR 19 (Ker.) considered this issue with reference to a leased unit, qua the analogous provision of s.80J, prescribing the same condition as in s. 10B (2)(iii), to hold the `lease' to be a `transfer', so that the condition(s) prescribed u/s.80J(4) stood not satisfied. We reproduce hereinbelow a part of the relevant part of the order: (head note) The object with which section 80J of the Income-tax Act, 1961 has been enacted is to encourage the establishment of new industries in the country. The heading of the section refers to "newly established industrial undertakings", and the conditions laid down by sub-section (4) for the applicability of the section emphasise the newly established nature of 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 new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; the language of the section being clear - the bar thereby operates only where the Undertaking under reference is formed by the transfer - nothing prevented it to take this stand, even if in the alternative before the AO. Be that as it may, the point is that the issue of `formation' came to assume significance in light of its said argument, being not in issue prior thereto, requiring a specific finding in its respect. The issue raised before him by the assessee requiring a factual finding for resolution, the ld. CIT(A), under the circumstances, if of the view that the same is relevant, which indeed it is, as is also apparent from the fact of his having rendered a definite finding in the matter (which constitutes his second finding), and allowed relief to the assessee on that basis, he ought to have, in our view, prior there-to, sought a remand report from the AO in the matter, rather than proceeding to issue his finding/s straight away. Under this 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lth Care Media (P.) Ltd., and is itself a 100% EOU, producing computer software and supplying it to the parent company. The commercial production commenced on 1.4.2002 (refer para II(2) of the Notes to the Accounts as on 31/3/2003). As such, the assessee's undertaking, the eligibility of which u/s. 10B(2) is in issue, stood `formed' on or before 1.4.2002. This is as the commercial production could start only after the formation, which entails adequate access to all the factors of production so as to constitute a whole or a nucleus, and the harmonious working of which produces the output for which the unit is set-up or formed. Further, commencement of commercial production signifies that the different such factors have been checked for compatibility and harmonious working so as to be able to deliver on a regular basis at commercially viable levels. Reference in this context is also drawn to the decision in the case of L.G. Balakrishnan & Bros. Ltd. v. 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stood formed only some time during the immediately preceding year, if not actually prior thereto. This fully, which the apparent nature of the mistake, emanate as it does out of undisputed and admitted facts, impels our terming it as so, could perhaps have been avoided had the first appellate authority proceeded, even as observed by us earlier, by calling for a remand report in the matter from the assessing authority. Continuing further, a bare reading of the two lines of his para 1 containing his second finding aforementioned (reproduced at para 5.3 of this order), which stands highlighted by us, would show it to be self-contradictory. The same, being relevant, are reproduced again, as under: `The assessee took on lease 4000 sq. ft. of furnished office space in the Technopark Campus with workstations, wiring, flooring and computers. In the context of the above fact situation, it cannot be held that the unit of the assessee was formed by transfer 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 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also include some crucial personnel from the said sister concern, even as both are headed by the same functional head. That is, the tangible resources as well as the functional head in the form of the Director/Q.A. Manager, Lyju Alexander Thomas, with which the unit stands formed is that which is transferred from or shared with the existing business of STPL. If the number of employees with STPL has also witnessed a decline during the said period, the case of a split-up or reconstruction would rather stand proved without any doubt. Also, it does appear rather odd that the value of the plant and machinery per unit space (say per 100 or 1000 sq. ft.) with STPL, taking the figures of space and machinery available with it, should witness such a drastic increase, i.e., post lease, so that, perhaps, even as suggested by the AO, the machinery/resources transferred or shared by it with the assessee were more extensive than that stated. However, we do 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer' and `formation' form part of a composite condition, so that while applying the law in a particular case, the transfer has always to be examined with reference to its effect, i.e., on the setting up or formation of the transferee-undertaking. The observations by the hon'ble court in the case of CIT vs. Super Tool Co. Pvt. Ltd., 202 ITR 50 (Bom.), rendered in the context of a pari materia provision would be relevant and contextual and, therefore, are reproduced as under: "Section 84 of the Income-tax Act, 1961, as it stood at the relevant time (assessment year 1965-66) provided for relief to be granted to newly established industrial undertakings to the extent of 6 per cent per annum on the capital employed in such undertakings. Sub-section (2) thereof laid down the conditions which were to be fulfilled to avail of this benefit. It is evident from a plain reading of section 84(1) that the special relief contemplated by this sub-section 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, and Explanation 1 & 2 to the provision, resolves any doubt, if any, in the matter; the Explanations also acting as operational guidelines where some previously used plant and machinery is also deployed. The whole premise of the foregoing decisions, is that a new or substantially new undertaking has to come into being for it to qualify for the statutory benefit. The jurisdictional high court, in fact, in the case of Kerala State Cashew Development Corporation vs. CIT (supra) read the condition of the undertaking (being set up or formed) as being new even in the absence of the word `new' qualifying it in the relevant statutory provision by reading the same meaningfully and purposively. As such, even if the transferred second-hand plant and machinery exceeds the statutorily prescribed ratio of 20% for such machinery (which was not availableunder the 1922 Act), the inference of the non-satisfaction of the condition of s. 10B(2)(iii) would 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 soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question as to whether or not the same would fall under the ambit of the term manufacture or production of article or thing does not arise for consideration, i.e., is irrelevant. Even going by its ratio, i.e., of the expression used in a taxing statute to be read in harmony with the object thereof to effectuate the legislative intent, the same is of no moment. This is as, firstly, production of computer software is a specified activity qualifying for deduction u/s. 10B, so that there is no occasion for any interpretation. Secondly, the question whether the assessee's undertaking is an eligible one or not in terms of the conditions set out in section 10B(2)(iii) [if not also s. 10B(2)(ii)] is a matter of finding of fact, and has nothing to do with the interpretation or understanding of the language of the statute or expression used therein. If at all, we have, in arriving at our decision, only applied the law as laid down by the hon'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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion to consider the condition of section 80-IB(2)(ii), which is the same as in section 10B(2)(iii), in the case of Olam Exports (India) Ltd. vs. CIT (I.T.A. 247/Coch/2007 dated 30.3.2010). It observed in favour of a lease amounting to a transfer, following the afore-noted decisions. Also, it may be clarified that it is trite law that an exemption provision is to be interpreted strictly, and only once the qualifying condition(s) is satisfied that the provision is to be applied in a liberal fashion so as to give full effect to the legislative intent and, further, the onus that it falls within the ambit of the exemption provision is on the assessee. 6. In view of the foregoing, we decide the issue represented by the Revenue's Ground Nos. 2 to 6 in its favour, and the assessee's grounds 2 & 3, against it, with ground # 1 in both the appeals being general in nature warranting no adjudication. 7. The second issue raised by the Revenue per 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 just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same can only be on the basis of the primary details and the information supplied in support by the assessee. The matter has two aspects. First, the question of competence with regard to the stated services. The assessee has stated his professional qualifications in this regard. However, merely doing so, without some material to support, may not be adequate. Then again, it is a question of experience, as clearly the payee is not a freshly qualified graduate and professional competence, in a large measure, is on the basis of relevant experience. The second aspect required to be considered is the services rendered, for the impugned charges stand allowed to him only in respect thereof. A person may be highly qualified but that by itself is neither sufficient nor a reason for paying charges to him. The exact nature of the services, therefore, needs to be spelt out. 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. The quality of the services rendered may not be amenable to assessment by the AO, being not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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