S.10A: Newly established undertakings‐ Free trade Zone‐Splitting up‐Allocation of expenses‐Support services ‐Acquiring a division on slump basis cannot be considered as splitting up or reconstruction, exemption under section 10A cannot be denied. Support services allocation on the basis of turnover is justified.

Assessee acquired a software division of Indian Organic Chemicals Ltd as a going concern on a slump sale basis. Assessee made claim under section 10A. The Assessing Officer rejected the claim on the ground that (1) if an STP undertaking was already engaged in manufacture of software programs before 1st April 1994 the benefit of section 10A cannot be extended (ii), it should not be formed splitting up or reconstruction of a business already in existence and it should not be formed by the transfer to new business of plant and machinery previously used for any purpose. The Assessing Officer also held that the undertaking was carrying on same business before 1995‐96. The finding of Assessing Officer was confirmed by Commissioner (Appeals). On appeal to the Tribunal the Tribunal the Tribunal held that the entire software division was transferred as a going concern by an agreement dated 19th October, 1994. The soft ware unit has two sources of income viz. from the non STP activity and the STP activity . The assessee has made a claim only in respect Activity which was set up only on 24th May, 1994, hence the requirement of commencement of production on or after 1st April 1994 was fulfilled. The Court also affirmed the view of Tribunal. As regards concept of reconstruction of a business implies that the original business is not to cease functioning and its identity is not lost. Where the ownership of a business or undertaking changes hands that would not be regarded as reconstruction. 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 present 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. Tribunal was therefore justified in holding that the assessee was entitled to exemption in respect of profits derived from the STP undertaking on the basis that conditions of section 10A(2) are fulfilled. As regards allocation of expenses the Court held that the Tribunal was justified in remanding the case with the direction allocate interest and depreciation of the support services division in the ratio of turnover between the section 10A and non section 10A activities. (A.Y. 1998‐99).

CIT v. Sonata Software Ltd. (2012) 343 ITR 397 / 249 CTR 441 / 70 DTR 369 (Bom.) (High Court)

S.10A : Exemption-Newly established undertakings- Free trade zone- Avoidance of tax-

Transfer pricing- Deduction under section 10A, cannot be worked on arm’s length price.

(S.14A,92C 144C)

The Assessing Officer referred the matter to Transfer Pricing Officer to determine the arm’s length price in respect of finance and accounting services to its associate enterprise. The Transfer Pricing Officer has accepted the method adopted by the assessee and no adjustments were made. However the Transfer Pricing Officer, passed the a draft order under section 144C(1) restricting the claim under section 10A by deducting the lease line charges incurred by the assessee from export turnover on the ground that those expenses were incurred by delivery of software outside India and foreign travel expenses from export turn over for the reasons that they were incurred in providing technical services out side India. He also proposed disallowance of o.5% of the investment expenditure estimated to have been incurred for earning non-taxable income in accordance with of rule 8D , read with section 14A. The Assessing Officer reduced the quantum of deduction under section 10A. The Dispute Resolution Panel rejected all the objections of assessee and confirmed the order of Transfer Pricing Officer. On appeal the Tribunal held that section 10A deduction not to be worked out on basis of Transfer Pricing Officer. That all such adjustments made by the Assessing Officer to the export turn over of the assessee had also to be made in the total turn over of the assessee. The disallowance under rule 8D was held to be not justified . A reasonable disallowance can be made. The draft assessment order cannot be said to be bad in law . When adjustments made by the were deleted by the Tribunal that irregularity was

automatically cured . In such circumstances the assessment order need not be invalidated. Therefore the assessment is not time barred.(A.Y. 2007-08)

Visual Graphics Computing Services (India) P. Ltd v. Asst.CIT (2012) 15 ITR 393 (Chennai)

S.10A : Exempt income- Free trade zone-Set off of losses-Brought forward unabsorbed losses- Eligible and non- eligible unit-Deduction is allowable without set off of losses of non-eligible units.

The question arose whether the brought forward unabsorbed depreciation and losses of a unit which was not eligible for s. 10A deduction could be set-off against the current profit of a unit eligible for s. 10A deduction. The Tribunal, relying on Scientific Atlanta India Technology (P) Ltd v. ACIT(2010) 129 TTJ 273/2ITR 66 (Chennai )(SB) held that the a. 10A deduction had to be allowed before set-off of the losses of the non-eligible unit. On appeal by the department to the High Court, Held dismissing the appeal: S. 10A is a deduction provision and not an exemption provision. S. 10A has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of s. 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. S. 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in s. 80C to 80U. S. 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable u/s 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. Accordingly, the decision of the Tribunal is affirmed since it is plain and evident that the deduction u/s 10A has to be given at the stage when the profits and gains of business are computed in the first instance (Hindustan Unilever Ltd vs. DCIT(2003) 325 ITR 102 (Bom) followed) (A.Y. 2006 – 07)

CIT v. Black & Veatch Consulting Pvt. Ltd (Bom.) ( High Court)

S. 10A : Newly established undertakings- Free trade Zone- Export of Computer Software – No material to show that assessee indulged in arrangement with foreign buyers to inflate profits - AO not entitled to invoke provisions of Section 80I(9) and determine reasonable profits

The assessee was engaged in the business of manufacture of hardware and software and exported its products (both hardware and software), the assessee claimed exemption in respect of its two units. It was held that the AO was not entitled to presume existence of close connection or arrangement of the assessee with the foreign buyer for purpose of invoking Section 80I(9) and determine reasonable profits as there was no material to indicate that the course of business had been so arranged so as to inflate profits. (AY 1995-96, 1996-97 and 1998-99)

CIT v. H.B. Global Soft Ltd. (2012) 342 ITR 263 (Kar)(High Court)

S. 10A : Newly established undertakings- Free trade Zone- - Export oriented undertaking-

Expenses disallowed –Expenses disallowed and added to profits of business is eligible

deduction (S.80IA(10).

If any addition is made to the profits by way of disallowance of expenses, the amount added would form part of the profits of the business and the same has to be considered while working out deduction u/s. 10A.(A.Y.(2004-05).

Sanghvi Jewellery Mfg. Co. (P) Ltd v. ITO(2012) 68 DTR 177(Mum)