TMI Blog2016 (12) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... hould not be construed as splitting up or reconstruction of an existing business. Thus, this contention of the Revenue also fails. 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 on the basis of which the exemption u/s 10B could be denied to the assessee. Thus, after taking into account all the facts and circumstances of the case we find that deduction u/s 10B is allowable to the assessee and, therefore, the same is directed to be allowed - Decided in favour of assessee - I.T.A. No. 1933 to 1938/Mum/2016 - - - Dated:- 30-11-2016 - Shri Amit Shukla (Judicial Member) And Shri Ashwani Taneja (Accountant Member) Appellant by Shri Rajan Vora Nikhil Tiwari (AR) Respondent by Shri Premanand J (DR) ORDER Per Ashwani Taneja, AM These appeals pertain to same assessee involving identical issues, therefore these appeals were heard together and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the s year by the appellant; Invoking provisions of section 10B(7) rws 80IA(10) of the Act 6. erred in upholding order of the AO in invoking provisions of section 10B(7) r.w.s. 80IA(10) of the Act by holding that Appellant has 'arranged' its business, where more than ordinary profit is shown to-claim higher deduction under section 10B of the Act; 7. erred in confirming the action of the AO, wherein the AO on without prejudice basis held that the net profit rate of 2.88% earned in AY 2010-11 (i.e first year after expiry of 10B deduction period) is reasonable profit and thereby held that deduction if any to be allowed under section 10B of the Act, the same should be restricted to 2.88% of the turnover as against 14% claimed by the appellant; Applicability of provision of section 92E and initiation of penalty under section 271 BA of the Act 8. erred in confirming the action of the AO, in holding that (even though software exported by the appellant to non AE as defined in section 92A of the Act), provisions of section 92E will apply in the present case (i.e for obtaining report from accountant), by treating the impugned transaction as international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s indicated that the assessee firm had not developed any software on its own and utilized the assets, manpower and business clients of its sister concern namely World Wide Software Pvt. Ltd. ( in short WWSPL ). Further, it was noted by the AO that the assessee had shown very low GP as compared to other years when it was not eligible for exemption in compared to the profit declared for eligible years. Accordingly, to verify the genuineness of the claim of exemption u/s 10B of the Act, a survey action u/s 133A was carried out by the AO at the business premises of the assessee on 27.01.2011. Thus, during the course of assessment proceedings, after placing reliance on the statements recorded of the key employees, Mr. Abhay Waghimare Mr. Vijay Kumar and Dr. Padam Raj Singhvi (partner of the firm) as well as based on the some evidences found during tile course of survey operation and analysis of the submissions made during assessment proceedings, the AO arrived at the conclusion that the partners of the firm owned another company WWSPL, whose business, fixed assets as well as employees were shifted to the assessee firm and thus the conditions prescribed u/s 10B of the Income Tax Act w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the sides and thereafter upheld the action of the AO and denied the benefit of deduction u/s 10B. It was inter-alia held by him that the assessee firm was formed as a result of reconstruction or splitting up of the existing business carried out by the sister concern, viz. WWSPL. Ld. CIT(A) analysed the statements recorded during the course of survey operations of employees and also financial statements of the two parties and concluded that assets, manpower and business were shifted from WWSPL to the assessee (WWSE) from A.Y. 2000-01, i.e. the year since the assessee firm came into existence. Thus, Ld. CIT(A) disregarded the contention of the assessee that the assessee company was doing separate business in view of the fact that the foreign party, viz. Yoursoul.com, USA had made separate agreement with WWSPL and WWSE for developing software in India. After analysing the facts of the case, the Ld. CIT(A) concluded as under:- 25. From the detailed analysis of the issues in hand in the instant case, the following conclusions are drawn vis-a-vis guidelines laid down by the Hon'ble Apex Court in the above case. 1. It is an undisputed fact that Mr. Ajay Singlwi, main p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , one can only conclude that there is no separate and distinct identity of the WWSE, set up as new undertaking other than WWSPL. 26. In the light of discussion made in the aforesaid paragraphs, it is concluded that the appellant firm is formed by splitting up and reconstruction of the software business of the company WWSPL already in existence, as contemplated in sub para (ii) of sec. 10B(2) of the I.T. Act. Hence, the claim of exemption u/s 10B of the I.T. Act as made by the appellant for the year under consideration is rightly rejected by the AO. 6. In support of his justification, the Ld. CIT((A) relied upon various judgements. 7. The Ld. CIT(A) also rejected the submission of the assessee that since assessee firm was formed in assessment year. 2000-01 and exemption has been granted upto assessment year. 2003-04, therefore, no different stand could have been taken and thus exemption u/s 10B could not have been denied in A.Y. 2004-05 without disturbing the status of exemption for AY 2000-01. It was, in nutshell, contended by Ld. CIT(A) that it was for the first time in AY 2000-01 when the claim of the assessee has been examined on its merits. Further various facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant: Eligibility to be tested in the initial year of the claim of exemption and exemption for the first time cannot be withdrawn in subsequent years (Refer page 877 to 879 of fact sheet) Transfer of employees from WWSPL to the Appellant was within the prescribed limit as per the CBDT circular no 14/2014. (Refer page 886 to 887 of Fact sheet) There are factual errors in the statement of the employees and hence are not reliable (Refer page 887 to 890 of Fact sheet) 5. The Hon'ble Members during the course of hearing has asked the Appellant to support its contentions that there was no splitting and reconstruction of existing business of WWSPL to form WWSE. The Appellant wishes to submit that the exemption under section 10B of the Act can be availed if following 3 conditions are satisfied: This section applies to any undertaking which fulfils all the following conditions, namely:- it manufactures or produces any articles or things or computer software; it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Tribunal) The Mumbai Tribunal has held that the concept of reconstruction of business would no be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit. CIT v. Sonata Software Ltd. (343 ITR 397) (Born HC) The High Court held as regards the splitting up of a business, the relevant test is whether an undertaking is formed by splitting up of a business already in existence. Unless the formation of the undertaking takes place by the splitting up of a business already in existence, the negative prohibition would not be attracted. In the Sonata s case, the entire business of the software undertaking was transferred to the Assessee. The undertaking of the Assessee was not formed by the splitting up of the business. The first question of law would have to be answered in favour of the assessee. Further relying on the judgment of the Division Bench of this Court in Gaekwar Foam (35 ITR 662) explains that the concept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng or reconstruction of business already in existence as there was transfer of employees (within permissible limit) and no transfer of assets from WWSPL to WWSE resulting into close down of WWSPL. Further, in first year of operations (which was for 15 to 20 days) were started by partners with the help of 1 technical person and was subsequently expanded. 11. The Appellant further submits that a total of 4 (technical employees) out of 12 total employees i.e. approx. 25% of the total employees of WWSPL were transferred from WWSPL to the appellant firm in AY 2001-02 (i.e. second year of operations) which was within the prescribed limit as has been held in several decisions and subsequently accepted by circular issued by the CBOT circular no.14/2014 dates 8 October 2014. (Copy enclosed at page no. 871 of the legal paperbook) 12. Hence, the Appellant submits that transfer of aforesaid employees from WWSPL to the Appellant was within the limit mentioned as per aforesaid CBOT circular and hence such transfer of existing technical man-power from an WWSPL to the Appellant in the second year of business will not be construed as spitting up or reconstruction of an existing business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en carried by the old company i.e. WWSPL, it would still have been eligible for benefit under section 10B of the Act, since it was expansion. Hence there is no loss to the department, as in both the situations, profit on export of software would not be chargeable to tax and it is not that the case where exemption in new undertaking is claimed on expiry of exemption in old undertaking. 18. In view of the above, the appellant wishes to submit that it was eligible for claiming exemption under section 10B of the Act and the disallowance made by AO/CIT(A) should be deleted. 9. Per contra, the Ld. CIT-DR vehemently opposed all the arguments of the assessee. It was submitted that first three years went unnoticed as the assessment was done u/s 143(1). Though in A.Y. 2003-04 the issue was examined initially, but no facts were available regarding split up / reconstruction of the existing business. These facts came to light as a result of survey carried out on the assessee on 27-01-2011. During the course of survey proceedings various crucial facts were revealed which were not available earlier and since as per the time limit, reopening could have been done only for AY. 2004-05.Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WWSPL provided the services of software architecting whereas the assessee firm rendered services of development of software. Though the final product was same, but two different processes of the development of the product were followed by the two different entities. Under these circumstances, Ld. CIT(A) grossly erred in observing that WWSE had carried out same business which was earlier done by WWSPL. In support of his argument, he drew our attention upon the chart showing turnover of both the entities in different years. He summed up his argument by saying that the lower authorities wrongly concluded that the business of the assessee was carried out as a result of reconstruction of the existing business and requested for granting benefit of exemption. 11. We have gone through the facts and circumstances of the case. It is noted by us that much emphasis has been made by the Ld. Counsel that since the claim of exemption u/s 10B has been made from AY. 2000-01, which has been allowed till AY 2003-04, it cannot be disturbed for the first time in AY. 2004-05. Though, we principally agree with the Ld. Counsel on this aspect since this issue is well settled now in view of various judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in schedules attached to the agreement. On the other hand, the agreement entered into between WWSE (i.e. assessee) and 4Yoursoul.com (US) LLC is titled as Development Agreement . The scope of work clearly states that the assessee shall design and develop an updated version of the project as described in the project description contained in schedule A attached thereto. Thereafter, various other terms and conditions were narrated with regard to the title, scope of work of the assessee and Schedule (A) contained detailed description of the project as well as basic logarithm for the application was also outlined therein. It appears that both the lower authorities got influenced by this fact that most of the terms used in both the agreements looked identical. It was quite apparent when the ultimate product was same and the customer, 4Yoursoul.com (US) LLC (US firm) was also same, then the pattern and writing of the agreement may also be identical. But even on the basis of common sense, a man of ordinary prudence can make distinction between the two jobs. The development of software and architecting the software are altogether two different aspects. An example of total process required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess operations. Even Mr Ajay Singhvi has stated in the statement recorded during assessment proceedings that they have a practice of using assembled computers. Thus, from the perusal of the above, it is seen that all these evidences were shown to the AO and these were found acceptable by the AO. Under these circumstances, it was not appropriate on the part of the CIT(A) to disregard these evidences. In addition to that our attention was also drawn on page 433 and 435 of the paper book, which are invoice and ledger account of the computers showing purchase of computers on 16th March, 2000. Thus, this allegation is also not sustainable. 14. With regard to the shifting of employees, our attention was drawn to this fact that there was no transfer of employees from WWSPL to the assessee company in the year of formation / first year of claim of deduction u/s 10B. Further it was submitted that when the employees had joined M/s WWSPL, all the domestic clients were lost and hence, the only work being availed by WWSPL was pertaining to architectural work of M/s Arroweye Solutions Inc (ASI, in short). Subsequently, Shri Ajay Sanghavi felt that except consultant Shri Mohd Lokhandwala, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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