TMI Blog2011 (4) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... for carrying on its business of computer software - Held that:- Assessee was carrying on its business from Unit I at SPIC Centre, Chandigarh and Unit II at Sector 34-A, Chandigarh. The address of Mohali was only a registered office of the assessee company from which no activity was carried out by the assessee company. There is no restructuring of business of the assessee. Further, the assessee having carried out its work on the loaned equipments and evidence in respect of which was considered by the CIT(A), the assessee is entitled to the claim of deduction u/s 10B of the Act. Invoices do not bear the address of the unit from which such invoices had been issued - Held that:- The assessee with its registered office at Mohali and its Unit I and Unit II at Chandigarh was operating as a composite unit and there is no requirement to furnish the addresses of the individual places from which services were rendered as against the mentioning of registered office on the invoices issued by the assessee. No approval from the Board appointed by the Central Government for 100% EOU status - Held that:- CIT(A) held the status of 100% EOU to be granted to the assessee on the basis of appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.9.2009 and 26.2.2010 relating to assessment years 2005-06 to 2007-08 respectively against the orders passed under section 143(3)of the I.T. Act, 1961. The Revenue has also filed an appeal in ITA No.116/Chd/2010 relating to assessment year 2005-06 against which the assessee has filed Cross objection being C.O. No. 22/Chd/2010. 2. All the appeals/cross objection relating to the same assessee and appeal of the Revenue having similar grounds were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No.1115/Chd/2008 relating to assessment year 2005-06 has raised the following grounds of appeal:- 1. That the Ld. CIT(A) has further erred in holding that the assessee's reasonable profit for the period 1.10.2004 to 31.1.2005 is the cost + @ 17% as against the profit shown at 49% merely on the suspicious premise holding it to be mode of computation of excessive profit which is arbitrary and unjustified. 2. That the Ld. CIT(A) has further erred in holding that the assessee would not be eligible for deduction under section 10B on the difference of profit shown by the assessee and the profit taken cost + @ 17% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's reasonable profit during the year is the cost + @ 22% as against the profit shown at Rs. 54.14% (assessment year 2006-07) and 52.70% (assessment year 2007-08) merely on the suspicious premise holding it to be mode of computation of excessive profit which is arbitrary and unjustified. 5. That the Ld. CIT(A) has further erred in holding that the assessee would not be eligible for deduction under section 10B on the difference of profit shown by the assessee and the profit taken cost + @ 22% holding it to be taxable which otherwise is exempt under section 10B of the Act and as such is arbitrary and unjustified. 7. The ground No.1 raised by the Revenue in ITA No. 116/Chd/2009 being general is dismissed. 8. The issue in ground No.2 raised by the Revenue is in connection with the exempt on claimed 10B of the Income Tax Act. The assessee vide ground Nos. 1 and 2 in ITA No. 115/Chd/2008 is aggrieved by estimation of profits of the business which in turn are eligible for deduction u/s 10B of the Act. 9. The brief facts of the case are that during the year under consideration the assessee had claimed its income from business as exempt u/s 10B of the Act. The assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04 and as such held that it had not started any new unit at Sector 34, Chandigarh, but the same was formed by restructuring of the old Unit of the assessee company. Thus, the Assessing Officer held that by virtue of section 10B (2) (ii) of the Act which provides that an undertaking in order to be eligible for exemption should not be formed by splitting or reconstruction of business already in existence, disabled the assessee to the exemption claimed u/s 10B of the Act. The next objection of the Assessing Officer was that as per section 10B of the Act, the profits and gains of 100% export oriented undertaking are exempt i.e. an undertaking which has been approved as 100% export oriented undertaking by the Board, appointed in this behalf by the Central Government, in exercise of powers conferred vide section 14 of the Industries (Development and Regulation) Act, 1951 and Rules there under. In response to the above said query, the assessee explained that it was not registered with the authority of Industries (Development and Regulation) Act, 1951 but was registered under the Punjab Shops and Commercial Establishment Act, 1958. The Assessing Officer held that the approval by the Softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the assessee company does not fall under Explanation (2)(i) (b) of section 10B of the Act but falls under the Explanation 2 (i)(a) of the Act. The assessee was engaged in the development of software which qualifies for exemption under Explanation 2(i) (a) of section 10B of the Act. Reference was made to several documents including approved invoices, agreements with clients, process, list of manpower and their qualification, software developed and other details/information filed before the Assessing Officer in support of the contention that assessee was engaged in the business of development of software. It was thus pleaded that the conclusion of the Assessing Officer that the business of the assessee did not fall under Explanation 2(i)(b) of section 10B of the of the Act was irrelevant. ii) The second contention of the Ld. AR for the assessee was that the development of software falls under service sector category for which no production records as such are maintained. However, necessary information has to be filed with STPI including annual as well monthly profits report, all invoices showing services provided, name of foreign party, total amount received and also de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed to be without any basis. It was also alleged that the Assessing Officer failed to give any opportunity to rebut the said allegations. v) In respect of no approval from the Board, it was pointed out that though such approval is necessary from the Board but 100% EOU should be registered with the Board is nowhere mentioned. Further, it was argued that the Assessing Officer had failed to ask whether approval was taken from the Board. The reliance by the Assessing Officer on Infotech Enterprises Ltd vs. JCIT (supra), was claimed to be misplaced by the Ld. AR for the assessee, in the present case, as assessee was claiming exemption under the new STP scheme which came into existence from 1.4.1994 vide amendment by the Finance Act, 1993, whereas in the facts of M/s Infotech Enterprises Ltd, the exemption was claimed in respect of unit coming into existence on 26.9.1991. vi) The other two objections of the Assessing Officer were in respect of the non mentioning of location in the invoices issued. It was explained by the Ld. AR that the assessee company is one unit and other units are mere expansion of the existing unit and all the invoices were at the registered office add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramming to render quality and testing assurance services, which are the programs which enables the computer to find out errors and bugs. 12. The CIT(A) on perusal of the rival contentions observed that the assessee was not engaged in any new production of the software and it was only the parent company, which developed the software. The CIT(A) held the assessee to have done job work for the various companies. The quantum of salaries paid to the key persons by the assessee company, as per CIT(A), indicated that assessee was not involved in the development of software and the same indicates that the assessee was only doing job work. The CIT(A) further held that the case of the assessee was covered by the notification No. SO-890(E) dated 26.9.2000. The CIT(A) observed that the assessee was doing back up office operations for the parent company and hence was entitled to the claim of deduction u/s 10B of the Act. In respect of the units operated by the assessee company, the CIT(A) observed that the address of Mohali was only a registered office address and no activity was carried out at Mohali. The other two units were the places from where the assessee was found to be operating. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto an agreement with STPI on 17.2.2003, copy of the said agreement is attached at 111 to 113 of paper book. On 4.3.2003, the company entered into an agreement with Chandigarh Administration for allotment of space, on lease, at First Floor, SPIC Center, PEC Campus, Sector 12, Chandigarh. The copy of allotment letter is enclosed at page 114 of the paper book. The assessee company got certification of Bonding of Operational Area from STPI on 17.3.2003, copy of which is placed at pages 129 of the paper book. The assessee further received the green card and RCMC from STPI, vide letter dated 20.3.2003 placed at page 125 of the paper book. The assessee further claims to have received Importer Exporter Code from Director General of Foreign Trade on 20.3.2003 and also approval for import of capital goods from STPI on 17.3.2003. After completing all the legal formalities and having all necessary approvals and permissions, the assessee company commenced its commercial operation from Ist July 2003 and intimation letter was submitted to the STPI regarding commencement of the commercial operations. The assessee started another unit at SCO 156- 157, 4th Floor, Sector 34, Chandigarh on 27.7.2004. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, improvements, date know how, formats, test results and research projects; ii) Information about costs, profits, markets, sales, contracts and list of customers, and distributors; iii) Business, marketing and strategic plans; iv) Forecasts, unpublished financial information, budgets, projections and customer identities, characteristics and agreements; and v) Employee personal files and compensation information. c) That the Proprietary information will necessary be communicated to or acquired by Consultant and its Agents in the course of providing consulting services to the Company and the company desires to obtain the services of Consultant only, if in doing so, it can protect the Proprietary information and goodwill. 19. Further, it was agreed upon between the parties:- That the company has provided the above proprietary information, equipments, etc so that the services to be provided by the Consultant are as per its specifications and project plans and also to ensure quality and timely delivery, confidentiality and to protect its goodwill and interest. These facilities have been provided to assist the Consultant so that there are no variations in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:- Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years:- [Provided [further] that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:-] Provided also that no deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e unit has not been formed by splitting up or reconstruction of an existing business; and c) That it has not been formed by the transfer to a new business of machinery or plant previously used for any purpose. 27. It is further provided that deduction u/s 10B of the Act shall be to the extent of 90% of the profits and gains derived by an undertaking from the export of such articles or things or computer software. The proviso under the section further stipulates that the eligible assessee would be entitled to deduction under this section only on furnishing of the return of income on or before the due dates specified u/s 139(1) of the Act. Under sub section (3) to section 10B of the Act, it is provided that the sale proceeds are to be received or brought into India in foreign convertible exchange within the period of 6 months from the end of the specified year or within such extended period as the competent authority may allow in this regard. The credit of the sale proceeds in the separate account outside India with the approval of the RBI is held to be in compliance with the provisions of the Act. The deduction u/s 10B(1) is not admissible to the assessee unless the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the present case and on perusal of the Agreement entered into by the assessee with its Principal, it is evident that the assessee is providing services to the client and the project undertaken was in the nature of production for which approvals were granted by STPI. The Development of the project undertaken is according to the specifications provided by the client or the customers. The assessee company is engaged in the programming to render quality and testing assurance services as per the requirements of its clients and all the progress made is on a software developed by the clients and the same is transmitted to the clients through internet. Such services carried on by the assessee are in the nature of back office operations and are covered by the notification issued by the CBDT vide No. 890E dated 26.9.2000 which has notified the information technology enabled products or services to be considered under Explanation 2 to section 10B of the Act. We uphold the order of CIT(A) in this regard. 29. We find that the assessee had made similar claim of exemption u/s 10B of the Act in the succeeding years i.e. assessment years 2006-07 and 2007-08. During the assessment proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc. that would qualify as computer software for the purposes of section 10-A/10-B of the Income Tax Act. The assessee is doing the back up office operations for M/s RAICO INC. DBA QA Source, USA and therefore is eligible for deduction u/s 10-B of the Income Tax Act." 31. In assessment year 2007-08, the Assessing Officer while passing the order u/s 143(3) of the Act dated 12.11.2009 granted the exemption u/s 10B of the Act to the assessee and the following office note was annexed to the assessment order, which is available in the paper book filed by the Revenue relating to assessment year 2007-08 at pages 21 to 32 of the paper book. The office note reads as under:- "1. The assessee company is in the business of providing software development and is eligible exemption u/s 10B of the Income Tax Act, 1961 in respect of profit earned from such activity. The assessee, besides the exempt income, has other income under the head income from other sources, capital gains and dividend income exempt u/s 10. 2. The assessee's case is covered as per Notification No. 50890 (E) dated 26.9.2000 which has notified that a number of I.T. enabled sources such as back office operations, call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company exported its entire software development from the above said address. 34. The second aspect of the issue is non purchase of capital goods by the assessee in Unit I at SPIC Centre, Chandigarh and Unit II at Sector 34-A, Chandigarh. The allegation of the Assessing Officer were that no capital goods were purchased by the assessee and hence it is presumed that the business at Unit I and Unit II was carried on after restructuring of the existing unit at Mohali, which is not permissible in view of the provisions of section 10B(2) of the Act. The assessee vide its written submissions furnished before the CIT(A) had tabulated the details of the units of the assessee company which are reproduced under para 25 at page 14 of the appellate order. The Unit I at SPIC Centre, Chandigarh received its STPI approval on 12.3.2003 whereas the Unit II at Sector 34-C, Chandigarh received its STPI approval on 5.8.2004. The claim of the assessee is that the equipments were loaned from its Principal which were pre loaded with the information on which the assessee had to carry on its progress reports in connection with the customers and export of said services to M/s Raico Inc. dba QASourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts and evidence in respect of which was considered by the CIT(A), the assessee is entitled to the claim of deduction u/s 10B of the Act. Further, there is no merit in the observation of the Assessing Officer that the non mentioning of the location from where the invoices were issued, disentitles the assessee to the claim of deduction u/s 10B of the Act. The assessee with its registered office at Mohali and its Unit I and Unit II at Chandigarh was operating as a composite unit and there is no requirement to furnish the addresses of the individual places from which services were rendered as against the mentioning of registered office on the invoices issued by the assessee 36. The next objection of the Assessing Officer was that there was no approval from the Board appointed by the Central Government for 100% EOU status. The CIT(A) vide letter dated 13.10.2008 requisitioned the assessee to furnish the necessary evidence of approval given as per the requirements of section 10B of the Act to which the assessee furnished a reply dated 5.11.2008. The Explanation of the assessee was that the Ministry of Industries (Department of Industrial Development) had delegated the powers to STPI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, a copy of which is enclosed at pages 111 to 113 of the paper book. In view of the above said evidence, upholding the order of CIT(A), we hold that the assessee is entitled to deduction u/s 10B of the Act as a 100% EOU on being registered with STPI. In the entirety of facts and circumstances of the case and in view of our observation in paras hereinabove, we uphold the order of CIT(A) in holding that the assessee is eligible to the exemption claimed u/s 10B of the Act. Accordingly, ground No.2 raised by the Revenue is thus dismissed. 40. The second aspect of the disallowance u/s 10B of the Act was the computation of income in the hands of the assessee on account of the services provided by the assessee to its client in USA. The Assessing Officer in the assessment order relating to assessment year 2005-06 had observed from Form 3CEB attached with the return of income that M/s Raico Inc. dba QASource, USA was an associated enterprises of the assessee company as per the provisions of section 92A(2) of the Income Tax Act by way of equity contribution. The Assessing Officer was of the view that according to section 10B(7) of the Act, the provisions of section 80IA(10), in case whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis was found by the Assessing Officer not justified vis-a-vis the profits shown by the assessee @ 54.14%. The same was held by the Assessing Officer to be excessive and Assessing Officer was of the view that profits up to 22% was reasonable and was eligible for deduction u/s 10B of the Act. The difference of profits shown by the assessee over and above 22% was treated as income from undisclosed sources resulting in an addition of Rs.1,30,21,367/-. 42. The Assessing Officer while completing the assessment relating to assessment year 2007-08, held the assessee to have shown excessive profits from the business. A comparison was made to the results declared by M/s Quark Systems Pvt. and M/s Quark Media Pvt. Ltd., who had shown the net profit and sales ratio at 12.3% and 20.85% respectively, scale down the profits of the assessee company to 22% and addition of Rs. 1,82,50,265/-was made being excessive profits claimed being not eligible to the deduction u/s 10B of the Income Tax Act. 43. The CIT(A) in assessment year 2005-06 was of the view that for the period starting from October 2004, a reasonable profit should be adopted at cost plus @ 17% as against the profits shown by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date:- Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. [Explanation:- For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.] (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide its letter dated 30.6.2003 placed at page 364 of the paper book. The addendum to the Consultant Agreement was also forwarded to the Additional Director, STPI, Mohali on 30.11.2004. The said communication is placed at page 365 of the paper book. Further, we find that during the course of assessment proceedings, the assessee furnished letter dated 26.12.2007, in which it was explained as under:- The assessee company is engaged in the filed of software development and other related activities and hence not maintaining any production records. However, copies of the following documents are enclosed herewith:- a) Export invoices approved by the STPI under the provisions of FF b) Monthly returns submitted with the STPI showing the export and c) Annual Return submitted the STPI d) Status report of software development activities. e) Proof of computer purchased f) Proof of internet connection. The details of the employees of the assessee company along with their qualifications and Form No.16 are enclosed herewith. The said letter is enclosed at pages 63 to 65 of the paper book filed by the department relating to assessment year 2005-06. 48. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered on a MARK UP on the expenses incurred by it. 50. From the perusal of the aforesaid details it is apparent that the assessee company raises monthly invoices, for the services rendered and copies of the same are submitted to the STPI for their perusal. The copies of the Export Declaration submitted in the form of Softex forms for the year under consideration are enclosed in the paper book filed by assessee. The copy of the Annual Return filed for the relevant financial year is also enclosed at pages 192 and 193 of the paper book. The information in respect of remuneration charged by the assessee on month wise basis was furnished before the STPI on a regular basis which is not disputed to by the Revenue authorities. The copies of the submissions made by the assessee before the Assessing Officer are enclosed in the paper book filed by the Revenue in this regard, a reference to which has been made by us in paras hereinabove. 51. In the totality of facts and circumstances, we find that the total remuneration declared by the assessee is backed by the bills raised by the assessee as per the terms of agreement between the parties, which in turn are open for scrutiny before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nheard and the case of the assessee is that the rates shown by the said concerns could not be applied to determine its profits as the said information was not confronted to it and further the business activity carried on by the two concerns were not identical. We find similar issue of estimation of profits arose before the Mumbai Bench of the Tribunal in Fabula Trading Company (P) Ltd. v. ITO [(2009) 21 DTR (Mumbai) (Trib) 210] wherein on similar issue it has been held as under:- "16. ................It is an established principle that there is no merit in estimating the trading results of a particular year based on the trading results shown in preceding or succeeding year. Similarly, there is no merit in comprising the trading results of a concern with the trading results of another concern carrying on similar or same business. In the facts and circumstances of the case before us, we find no merit in the gross profit rate shown by the assessee and delete the addition made on basis for invoking the provisions of S.92 of the Act, hence the addition made by the Assessing Officer is directed to be deleted. Thus, the grounds of appeal raised by the assessee are allowed." 54. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal in this regard by way of ground No.3 (2nd part). From the perusal of the appellate order, we find that the Assessing Officer had determined the expenses relatable to earning of dividend income @ 10% and made a disallowance of Rs.5,54,752/-. The CIT(A) upholding the order of the Assessing Officer in invoking the provisions of section 14A upheld addition of Rs.5,54,752/- and also held that the assessee was not eligible for deduction u/s 10B of the Act as per para 55 of the appellate order. In view thereof, where the addition has been upheld by the CIT(A), the ground of appeal raised by the Revenue in this regard is misconceived and hence the same is dismissed. 57. Now coming to the issue of expenses to be disallowed in relation to the exempt income earned by the under taking and the application of the provisions of section 14A of the Act, we find that the issue stands covered by the ratio laid down by the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. DCIT and Anr, [234 CTR 1 (Bom)] wherein the constitutional validity of Section 14A(2) and (3) of I.T. Act and Rule 8D of the Income Tax Rules was challenged. The Court held that the provisions of Rule 8D were ..... 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