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TMI Blog2016 (12) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of the AO in assessing the total income of the Appellant at Rs. 5,54,700/- as against NIL offered by the Appellant in the return of income; Disallowance of claim of exemption under section 10B of the Act of Rs. 5,54,694/- 2. erred in confirming the action of the AO in not granting deduction under section 10B of the Act of Rs. 5,54,694, in the 5th year of claim (out of block period of 10 year) on the ground that conditions with regard to formation etc. is not being satisfied by the appellant. 3. erred in confirming the action of the AO in denying deduction under section 10B of the Act, in the s" year of claim (out of block period of 10 year), on the profits earned by Appellant on export of software to Arroweye Solutions Inc, without appreciating that firm was formed in the AY 2000-01 and deduction was allowed by AO in earlier year after verification of facts and hence not justified for denial of deduction claimed in the s" year by the appellant on account of non fulfilment of conditions; 4. erred in confirming the action of the AO in holding that Appellant is formed by splitting up or the reconstruction of the existing business i.e. Worldwide Software Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the grievance of the assessee for denying benefit of exemption claimed by the assessee u/s 10B amounting to Rs. 5,54,694/-. 4. The brief facts as culled out from the orders of the lower authorities are that the assessee firm i.e. M/s Worldwide Software Exports (hereafter referred to as (WWSE or the "assessee firm") was formed in the F.Y.1999- 2000 relevant to AY.2000- 01 by claiming itself 100% export oriented unit (EOU) engaged in the business of exporting computer software. It claimed that it was eligible for exemption u/s 10B of the Income Tax Act for 10 years i.e. from A.Y. 2000-01 to A.Y. 2009-10. The assessee firm is stated to be registered with Software Technology Parks of India vide STPI approval dated 25/03/2000 as 100% EOU. It filed its original return of income for the A.Y. 2004-05 showing total income at Rs. 55,569/- after claiming exemption u/s 10A amounting to Rs. 5,00,125/-. During the assessment proceedings, a revised return of income was filed on 08.12.2004 declaring total income at Rs. Nil after claiming exemption u/s 10B at Rs. 5,55,694/-. The assessment was completed u/s 144 vide order dated 26.12.2006 assessing total income of Rs. 5,66,4001/-. During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act is to be allowed, the same should be restricted to 2.88% of the turnover for the aforesaid assessment year, which arrives at RS.1,03, 118/- (2.88% of T.O.) for A. Y.2004-0S. The AO determined the total income of the assessee at Rs. 5,60,794/- for the year under consideration. 5. Being aggrieved, assessee filed appeal before the Ld. CIT(A) and made exhaustive submissions to demonstrate that the assessee firm was freshly constituted and it was not formed as a result of split up or reconstruction of the earlier business and that there was no transfer of asset nor the transfer of employees in violation of provisions of law. It was also demonstrated that the business of the assessee firm was different from the earlier business of its sister concern, namely WWSPL. Various documentary evidences were submitted to show that the nature of business was different, copies of agreement were submitted, copies of affidavits from the partners and employees were also submitted, copies of ledger accounts, financial statements, etc. were submitted, various additional evidences were submitted in support of the facts claimed to be correct by the assessee. The Ld. CIT(A) sent these s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the assetscomputers, manpower etc. of the old business of WWSPL are utilised substantially in the new undertaking WWSE at the time of its formation during F.Y. 1999-2000. As discussed in tile preceding paragraphs, neither any computer nor any software was purchased by WWSE to start the software export business. 3. On verification of the balance of the appellant firm it is found that during F.Y. 1999-2000, the partners have brought capital of Rs. 1 lac only. Against which under the head fixed assets a computer of Rs. 48,000/- is shown as the only item. Even this computer has been established as only spare parts nothing else. Hence, there is no infusion of substantial fresh capital in the appellant business. 4. There is no employment of any person during F.Y. 1999- 2000, as the only person shown to be employed was paid its meagre salary of Rs. 6670/- only, that too, paid in the month of May, 2000 i.e. in the next F.Y. 5. When there exists no computer hardware or software and there is no evidence of any computer trained person employed by the appellate firm there is no question of manufacture or production of any software by the newly established undertaking during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E and rightly initiated penalty proceedings u/s 271BA for non compliance of provisions of section 92E by the assessee. 8. Being aggrieved, assessee filed appeal before the Tribunal. During the course of hearing, exhaustive submissions have been made by the Ld. Counsel of the assessee to meet adverse observations of the lower authorities and to demonstrate that there was no violation of condition in section 10B and all the conditions were duly complied with and exemption u/s 10B has been rightly claimed by the assessee. Ld. Counsel was requested to summarise all his arguments and accordingly, he filed a brief note wherein all his pleadings in support of his claim u/s 10B have been summarised, which reads as under:- "3. The Assessing Officer ('AO') and the Commissioner of Income Tax (Appeals) ('CIT(A)') had held that the appellant firm Worldwide Software (Exports) was formed with a view to take the benefit of section 10B of the Act by transferring the assets and employees from Worldwide Software Private Limited ('WWSPL'), which was owned by the partners of appellant firm. The contention of the AO was that the appellant firm was formed by splitting and recon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Corporation Ltd. (107 ITR 195) (SC) The Supreme Court held that to constitute reconstruction, there must be formation of new unit by transfer of assets of the existing business to the new industrial undertaking. In the instant case industrial undertaking is formed by splitting up of the existing business undertaking since that can take place only when the substantial assets of the old business are transferred to the new undertaking. There is no such transfer of assets in the two cases with which this case is concerned. Reconstruction of business involves the idea of substantially the same persons carrying, on substantially the same business . * Hindustan General Industries Limited reported in (137 ITR 851) (Del HC) The High Court held that where the assessee sets up a new factory and only an insignificant portion of plant and machinery from previous business is utilized and the integrity of earlier unit is not affected, the new unit cannot be said to be reconstruction, splitting up or transfer of assets of existing business, hence entitled to deduction under s. 84. The Mumbai Tribunal has held that the concept of reconstruction of business would not be attracted when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . software architecture and software development respectively and both work simultaneously. It is not the case of closure of undertaking by WWSPL and same business is transferred to WWSE with all assets, liabilities and employees. 8. The Appellant submits that it had entered into a Software Development Agreement with Arroweye Solution Inc. ("ASI") dated 14 March 2000 for the development of the software. (Copy of agreement between the Appellant and ASI is enclosed at Page no. 286 to 299 of Paper Book). The software application had been architected by WWSPL. (Copy of agreement between WWSPL and ASI is enclosed at Page no. 286 to 299 of Paper Book). Therefore, the Appellant submits that there were two different contracts entered by the Appellant and WWSPL with ASI respectively and the business started and carried on by the firm was not carried on by the WWSPL, hence there is no question of transfer of business by WWSPL to Appellant firm. 9. Further there was no transfer of assets and employees (within permissible limit) leading to splitting and reconstruction of existing business. It is therefore submitted that it is not a case of reconstruction of existing business or splitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in existing business (where there was no deduction available under section 10B of the Act) would be eligible for deduction in section 10B of the Act 15. The appellant wishes to place reliance on the press release of CBDT dated 17 January 2013 wherein it has been clarified whether setting up of new unit/undertaking in a location (covered by sections 10A, 10AA or 10B), where an eligible unit is already existing, would amount to expansion of such already existing unit and would be eligible subject to satisfying the condition of section 10B of the Act. 16. We would like to place reliance on Special Bench decision of Maral Overseas Ltd. Vs. ACIT (146 ITR 129) (Indore Tribunal) wherein the Hon'ble Special Bench after considering the fact of the case has held that expansion carried out in the existing unit would be entitled for benefit of exemption under section 10B of the Act (if all other condition of section 10B are satisfied). The Hon'ble Special Bench in the detailed discussion after considering all the argument of Assesse I OR and relying on earlier decision of various court including SC has decided the issue in favour of Assessee. Therefore an existing unit claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. It was also submitted that major employees of WWSPL were shifted to WWSE. It was re-emphasised by Ld. DR that the agreements entered into with US company was that similar nature of business is done by both the companies from India and therefore, it is a clear case of transfer of business and therefore, the benefit of deduction has been rightly denied. 10. In response, the Ld. Counsel of the assessee submitted that the lower authorities erred in not appreciating the facts correctly. It was submitted that during the course of remand proceedings it was shown to the AO that the nature of business mentioned in the respective agreement by WWSPL and WWSE with the US company show that the nature of business was totally different. This fine distinction has been ignored by the lower authorities although it was explained to the AO and the AO was satisfied and mentioned it so in the remand report, but Ld. CIT(A) as well as the CIT-DR overlooked this crucial fact. It was also submitted that facts sheet available in the record would show that employees transferred from WWSPL were less than 50% and thus within the permissible limit as prescribed by the CBDT in its circular. It was also sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, merely for the reason that the deduction has been allowed in the first year in absence of disclosure of proper facts by the assessee. Under these circumstances, we find it appropriate to examine the averments and allegations made by the AO as well as by Ld. CIT(A), independently on merits, to examine their effect on the claim made u/s 10B by the assessee. 12. With a view to find out whether there has been splitting up or reconstruction of business, the first step, in our opinion, would be to analyse the nature of business carried out by both the concerns. With the assistance of both the parties, we have gone through the agreement made between WWSPL & 4Yoursoul.com (US) LLC (US firm) and between WWSE (i.e. assessee) & 4Yoursoul.com (US) LLC (US firm). It is noted by us that the agreement entered into by WWSPL is titled as 'Software Architecting Agreement'. The scope of work clearly says that the client (i.e. 4Yoursoul.com (US) LLC retained WWSPL to architect a software platform to provide for the electronic transmission of green cards to be used for various purposes. It has been further provided that the client has retained WWSPL to interact with client software development te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l but the work to be carried out in both the agreements is different from each other. In our considered opinion, perusal of the agreement suggests that different activities have been carried out and lower authorities have not properly understood the facts in this regard. Thus, this allegation is not sustainable. 13. Further, with regard to the allegation of the AO that no fresh computers were purchased by the assessee, it is noted that the assessee presented before the AO during the course of remand proceedings the bills of the computers showing that since assessee was in this line of business it was economical and commercially expedient for the assessee to buy parts of computer and then assemble them for their usage. Therefore, the bills produced by the assessee were for purchase of parts of computers. Our attention was also drawn on the remand report where following observations have been made by the AO: "Page 96 gives ledger accounts of computers for A.Y. 2000-01 in the books of M/s WWSPL, The assessee has submitted a few bills from Arihant Computers that shows that the assessee firm has purchased computers in subsequent years as the assessee firm grew. 10. In addition, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng business so long as number of technical manpower so transferred does not exceed 50% of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit. It was demonstrated that in the case of the assessee, there was transfer of only 25% of technical employees from WWSPL to the assessee company. Thus, under these circumstances, we find force in the argument of the Ld. Counsel that transfer of the aforesaid employees from WWSPL to the assessee was within the limit prescribed in the CBDT circular and hence, such transfer of existing technical manpower from WWSPL to the assessee in the first year of commencement of business should not be construed as splitting up or reconstruction of an existing business. Thus, this contention of the Revenue also fails. 15. We have gone through the other allegations made by the AO as well as the Ld. CIT(A). We find that these allegations are merely unsubstantiated doubts and, in any case, do not have any material bearing on the issue before us. Under these circumstances, we find that the lower authorities have mis-appreciated the facts and have not been able to bring any evidence on record ..... X X X X Extracts X X X X X X X X Extracts X X X X
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