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THE COMMISSIONER OF INCOME TAX-II Versus MASTEK LTD.

2016 (9) TMI 865 - GUJARAT HIGH COURT

Additions made on accounts of exemptions under section 10A - confirmation of separate and distinct identity - ITAT confirming the order passed by the CIT(A) in deleting additions - Held that:- We notice that CIT (Appeals) as well as the Tribunal have, while coming to the conclusion as reflected in respective orders, considered several factors and tested the contention of the revenue from all these aspects. The authorities have also considered the business activities of both the units; the busine .....

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tc and also considered the parameters prescribed under Section 10A of the Act so as to become eligible for deduction. The Tribunal has also considered the relevant circular which has been placed for consideration and various authorities submitted to it and therefore, appears to this Court that the conclusion arrived at by the Tribunal is based upon sound reasoning, the orders impugned are not required to be interfered with. - From the aforesaid background of fact since it is clearly emerging .....

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or set aside and therefore, having not found case in favour of the revenue, we hereby confirm the order of the Tribunal - TAX APPEAL NO. 604 of 2008 With TAX APPEAL NO. 605 of 2008 TO TAX APPEAL NO. 606 of 2008 - Dated:- 16-9-2016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI FOR THE APPELLANT : MRS MAUNA M BHATT, ADVOCATE FOR THE OPPONENT : MRS SWATI SOPARKAR, ADVOCATE CAV JUDGMENT (PER : HONOURABLE MR.JUSTICE A.J. SHASTRI) 1. Present three Tax Appeals are filed by the Income-tax department challengi .....

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passed by Income Tax Tribunal, Ahmedabad in connection with ITA-1867/Ahd/2001 for Assessment year 1998-99. In this appeal assessee had originally claimed exemption u/s 10A which was disallowed by Assessment Officer. Against the said disallowance, in an appeal filed by assessee CIT(A) directed to allow exemption u/s 10A of the Act in respect of Unit no.107 which came to be upheld by the Tribunal against which this tax appeal came to be filed by Revenue. 1.1 Similarly, in case of Tax Appeal No.605 .....

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ng the controversy in question. 2. This Court vide order dated 2.9.2008 has admitted the appeal, namely Tax Appeal No.606 of 2008 for consideration of following substantial questions of law which are reproduced hereinafter. (1) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting additions made on accounts of exemptions under section 10A? (2)Whether the Appellate Tribunal is right in law and on facts in confirming the order passed b .....

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ts are that the assessee company is dealing in the business of development of software and packaged software product which is divided into four groups, namely, customerized software, packaged software product, agency product and exports. The assessee company is carrying on its activity in India as well as abroad which is detailed out and reflected from assessment order. The assessee company which is dealing in customerized software has developed software packages for various sectors and these se .....

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ipal wherein, the softwares such as Ingress, Comshare and LBMS are marketed. So far as exports related market is concerned, the main area of the assessee company of exports are USA, U.K., Singapore, New Zealand and in these foreign countries, the company is providing software services in the field of development of software. In response to the activities which are undertaken by the assessee company, the activities center is set up by the company at three places of various locations (i) Mastek, U .....

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pect of Unit-106 the benefit under Section 80HHE may be allowed. In the present proceedings, we are not concerned with other claims submitted by the assessee company but, only question which is called for consideration is in respect of exemption claimed under Section 10A of the Act and it is in this context a substantial question of law put for consideration. First of all a bare look at the relevant portion of statutory provision of Section 10A is worth to be taken note of, hence reproduced here .....

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s 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 deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years : Pr .....

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computer software] in such free trade zone or export processing zone : [Provided also 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 under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2012] and subsequ .....

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nsecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter; (ii) for the next three consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account o .....

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139] (1B) The deduction under clause (ii) of sub-section (1A) shall be allowed only if the following conditions are fulfilled, namely:- (a) the amount credited to the Special Economic Zone Re-investment Allowance Reserve Account is to be utilised- (i) for the purposes of acquiring new machinery or plant which is first put to use before the expiry of a period of three years next following the previous year in which the reserve was created; and (ii) until the acquisition of new machinery or plant .....

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xxx (2) This section applies to any undertaking which fulfills 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 (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 .....

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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 subsection as they apply for the purposes of clause (ii) of that sub-section. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India .....

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to in this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India. [(4) For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turno .....

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rrectly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,- (i) section 32,section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36, shall apply as if ever .....

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on (2) of section 32, clause (ii) of sub-section (3) of section 32A,, clause (ii) of subsection (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of subsection (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction; (ii) no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forwar .....

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claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year. (7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. [(7A) xxx xxx xxx [(7B) xxx xxx xxx (8) xxx xxx xxx 4.1 In view of aforesaid statutory provisions, a bare reading of the same indicates .....

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f the Act in respect of Unit-107, has held upon consideration that Unit-107 is not an independent unit and activities of both the units are not separable and is not possible to hold that Unit-107 is separate and viable unit on its own as it cannot function without using infrastructure of Unit-106 in India and therefore, has held that Unit-107 is nothing but a mere extension of old Unit-106 and thereby, claim submitted by the assessee company came to be disallowed and consequently, profits of Uni .....

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ppeals) and the CIT (Appeals) along with other issues which have been canvassed before it, has dealt with an issue related to Section 10A of the Act and has directed the Assessing Officer to allow the assessee company s claim for exemption under Section 10A of the Act as per the directions given. The relevant extract of the said conclusion is reproduced hereinafter : 2. I have considered the rival submissions and also perused the various details filed with reference to queries raised during the .....

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that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such industrial 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. is entitled for exemption u/s.10A of the I.T.Act 1961. The As .....

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t function without using the infrastructure of Unit-106 as arrived at by the Assessing Officer. The appellant has rebutted both through arguments and evidence the arguments / observations of the Assessing Officer on non-allowability of exemption u/s.10A. The raison d etre and the field and scope of operation of unit 107 is entirely different from that of unit 106 and for carrying its activities unit 107 possesses necessary infrastructure in terms of personnels / machinery etc. as is evident from .....

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se) and deploying the necessary expertise for its successful / execution / maintenance etc. because highly technical and sophisticated software (whether customized or otherwise) by itself will not be a salable commodity unless it is successfully executed to the users satisfaction and this latter process more often that not requires modification / alteration and for that purpose deployment of expertise is must. From the facts and circumstances explained by the appellant it is seen that the recrui .....

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ucture during my visit that the expertises deployed are the regular employees of the appellant company and on successful execution of the software/completion of the project as the case may be returned to the appellant company. Therefore as rightly pointed out by the appellant the deployment of expertise with a particular software is an integral part of the industrial activity undertaken by the appellant and therefore income derived from it is eligible for exemption u/s.10A of the I.T.Act,1961. 4 .....

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the I.TAct as per the directions given above. 7. Before coming to such conclusion, CIT (Appeals) has considered various aspects and contentions raised before it. It appears from the record that against the said decision delivered by the CIT (Appeals), the department had approached the Income-Tax Appellate Tribunal at Ahmedabad by preferring three Appeals related to three assessment years as stated above. The said appeals were numbered as Income- Tax Appeal Nos.1530/2000, 1867/2001 and 368/2001. .....

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mentioned above. Since these appeals are raising similar issues as stated above, by treating Tax Appeal No.606 of 2008 as a lead matter, the Court is taking up the examination of issues raised in all the appeals by way of this common judgment. 9. Learned counsel, Mrs.Mauna Bhatt for the revenue contented that Unit-107 has been formed by splitting of Unit- 106 and thereby, contended that Unit-107 is nothing but an extension of Unit-106 inasmuch as the activities are almost similar in nature and m .....

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d. which was re-named as Mastek (UK) vide special Resolution dated 20.10.1995. It was also contended on behalf of counsel for the revenue that the activities which were carried out by Unit-106 prior to coming into existence Unit- 1067 and the software supplied by Unit-107 is nothing but software development by Unit-106 and thereby, contended that commission has been achieved by manipulating business activity and therefore, can never be said that Unit-107 is not an independent unit so as to becom .....

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f the Act. Learned counsel relying upon some of the terms of the agreement between Laternal Profiles Ltd. and the respondent - assessee and then submitted that the status of assessee is of independent contractor and not developer of software. It was then submitted that reading the terms of the agreement clearly indicates that respondent - assessee carried out its activity for providing technical help to foreign counter parts and there is no connection with any software development. By indicating .....

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itled to deduction in respect of revenue earned in the name of recruitment and training activities and reimbursement of expenses and by submitting this, learned counsel for the revenue stated that Unit-107 is not entitled to seek any benefit of provision under Section 10A of the Act. No other submissions have been made. 10. As against this, learned counsel, Mr.Bandish Soparkar for the respondent - assessee submitted that Unit-107 is set up in a separate premises, acquired under the separate rent .....

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nit which has plant and machinery, a separate ledger is maintained for expenses exclusively incurred with respect to Unit-107 and thereby, submitted that it is an independent and exclusive unit. Learned counsel submitted that if the contention of the revenue is accepted that Unit-107 was established to take over the business of Unit-106 then in that case, business and employment of Unit-106 should decline and may come to an end. However, the record indicates that on the contrary, the strength of .....

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iness already in existence. It was stated before the Court that section nowhere talks of common management and therefore, there may be a situation that in one common management, there may be more than one unit who will be entitled and eligible for exemption provided that there are independent units and not formed by reconstruction or splitting up of the business already in existence. Learned counsel for the respondent - assessee has submitted that Unit-106 was catering and still catering the req .....

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p clearly which indicates that both the units are distinct and independent units and it was submitted that these facts have not been disputed by the Assessing Officer. Learned counsel for the respondent - assessee further submitted that if some of the telephones and other expenses of Unit-106 were paid by Unit-107 on few occasions, those payments / expenses cannot be distracted from fundamental fact that both units are distinct and separate in operation, physical expenses as also revenue generat .....

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el relied upon the decision of the Supreme Court in case of Textile Machinery Corporation Ltd. V/s. CIT, reported in 107 ITR 195(SC) and has submitted that if an undertaking is not formed by the reconstruction of old business, said undertaking will not be denied the benefit of Section 15C merely because it goes to expand the general business of assessee in some direction. Section 15C was dealt with by the Supreme Court in the said decision. However, the principle underlying in the said decision .....

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32 (Gujarat) and contended that the unit had a separate and distinct identity and since the setting up of Unit-107 is upon investment of fresh capital and the additional labour force, the benefit of Section 10A of the Act cannot be deprived of. It was also brought to the notice of the Court another decision in case of Commissioner of Income-Tax V/s. Rohtas Industries Ltd., reported in 120 ITR 110 (Calcutta) and reiterated the submission that Unit-107 be treated as a distinct and separate establi .....

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the Tax Appeals. 11. Having heard both the learned counsel appearing for the respective parties and having gone through the details of the case on hand, it appears that detailed examination has been undertaken by the Tribunal and has rightly come to the conclusion that Unit-107 is a separate establishment and is entitled to benefit of Section 10A of the Act. The comparison of each aspects appeared to have been undertaken by the Tribunal to ascertain whether Unit-107 is truly and new and separat .....

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and water meters. It is also emerging from the record that while setting up Unit-107, new investment has been made for acquiring the new furniture and fixtures as also plant and machinery, namely, computer and computer equipments and more than 10 persons have been employed by Unit-107 and these facts were not in dispute and therefore, the Tribunal has rightly observed and concluded that Unit-107 becomes an independent unit in all physical terms. It was also concluded by ascertaining the figures .....

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106 in any manner. 12. From the record it is further emerging that business of Unit-106 went in upward direction in terms of its turnover, employment which is indicated that business of Unit-106 which was a unit in existence has not diverted to Unit-107. It was also emerging from the record that old unit was operating in territory of USA and allied markets through different subsidiary i.e. Masket (US) whereas Unit-107 operates in U.K. and allied market by separate agreements with Masket (U.K.). .....

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cord indicates that a personal visit has also been made to verify the contention of the respondent assessee and upon physical verification also of both the units, namely, Unit-106 and Unit-107, it was held and ascertained that Unit-107 was an independent unit and not formed by way of any splitting up of Unit-106 and therefore, the conclusion arrived at by the Tribunal appears to be substantially by cogent material and the decision relied upon by counsel for the respondent appears to have been ap .....

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rom all angles and parameters, Unit-107 is to be treated as separate and distinct unit. The Tribunal found to have also dealt with various terms of the agreement and then come to the definite conclusion as stated hereinabove and while coming to that, Article 425 has also been examined and it was rightly found by the Tribunal that clause contained therein at the most indicates the independent status of these units is not possible to be intermixed and therefore, it was noticed by the Court that co .....

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y the benefit of exemption which is ultimate object by maintaining such provision in the Act and therefore, overall examination of material on record, it is clearly emerging that Unit-107 in all respect is a separate and independent unit. Therefore, it appears that the contention raised by the revenue are not worth enough to dislodge the conclusion arrived at by the Tribunal. As stated above, learned counsel for the respondent who has relied upon a decision in case of Textile Machinery Corporati .....

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benefit of section 15C of the 1922 Act simply because it goes to expand the general business of the assessee in some directions. As in the instant case, once the new industrial undertakings were separate and independent production units in the sense that the commodities produced or the results achieved were commercially tangible products and the undertakings could be carried on separately without complete absorption and losing their identity in the old business, they were not be treated as bein .....

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foresaid two decisions of the Supreme Court, the Division Bench of this Court as in case of Digvijay Cement Co. Ltd. (Supra) has held that investment of fresh capital and employment of additional labour force are the relevant factors to hold that unit had a separate and distinct identity and the results of production increased would also lead to hold that unit has a separate and distinct identity. It was observed by the High Court relying upon aforesaid decisions of the Supreme Court that all te .....

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sidering that, the High Court has confirmed in that case the decision of the Tribunal to hold that the unit in that case had a separate and distinct identity and therefore, counsel for the revenue has rightly relied upon the said decision. 15. We notice that CIT (Appeals) as well as the Tribunal have, while coming to the conclusion as reflected in respective orders, considered several factors and tested the contention of the revenue from all these aspects. The authorities have also considered th .....

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