Commissioner Of Income Tax Chennai Iii v. M/S Soffia Software Limited, (Presently Quintgra Solutions Ltd.)

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED:03.09.2014 CORAM THE HON'BLE MR.JUSTICE R. SUDHAKARANDTHE HON'BLE MR.JUSTICE G.M. AKBAR ALI T.C.(A) No.748 of 2009 Commissioner of Income TaxChennai III ...Appellantvs M/s Soffia Software Limited,(Presently Quintgra Solutions Ltd.)No.168, Eldams Road, Chennai-600 018 ...Respondent TCA No.191 of 2014 under Sec.260-A of the Income Tax Act filedagainst the order of the order of the Income Tax Appellate Tribunal,Chennai "C" Bench in ITA No.2797/Mds/2005 dated 5.9.2008 forAssessment Year 2000-2001. Appeal against the order of Commissioner of Income Tax (Appeals)in ITA No. 88/2003-2004 dated : 28.07.2005 against the assessmentorder of Deputy Commissioner of Income Tax Company Circle, in GIR No.PAN SO-1/AAA CS 7016 B VI (3) Chennai - 34, dated: 24.03.2003. For Appellant:Mrs.Hema Muralikrishnan forMr.T. Ravikumar JUDGMENT(Judgment of the Court delivered by R. SUDHAKAR,J.,) Appeal filed against the order of the Income Tax AppellateTribunal, Chennai "C" Bench in ITA No.2797/Mds/2005 dated 5.9.2008for Assessment Year 2000-2001. 2. The respondent/assessee is engaged in Software Developmentand Export. In respect of the Financial Year 1999-2000 and AssessmentYear 2000-2001 assessee filed returns. The assessment of the assesseecompany for the assessment year 2000-01 was completed under sec.143https://hcservices.ecourts.gov.in/hcservices/ (3) of the Income Tax Act on 24.03.2003 determining the book profitu/s 115JA at Rs.1,91,10,174/-. The assessee filed revised return ofincome on 27.6.2001, claiming deduction u/s10A of the Act atRs.1,37,72,884/-, instead of deduction u/s 80 HHE, claimed in theoriginal return. 3. The Assessing Officer held that the Assessee is not eligiblefor deduction under sec.10A. The assessee, in support of the plea forclaiming deduction under sec.10A, filed a copy of the communicationdated 4.3.2000 from the Software Technology Parks of India (STPI) (anautonomous society under Government of India, Ministry of Informationand Technology) according permission for setting up of 100% EOU tobear the claim of total export turn over of Rs.5,46,77,452/-, andsubmitted that the profits thereon are entitled to the benefit underSec.10A of the Act. According to the Department, the assessee isentitled to the benefit of deduction under sec. 10A only from4.3.2000. 4.Insofar as the claim for export turn over prior to 4.3.2000,the Department contended that the assessee will be entitled to seekdeduction under sec.80HHE. The Assessing Officer, considering thetotal turn over and export total from STPI, allowed the expenditureattributable to STFI unit as enumerated by the Appellate Authority isas follows: "The Assessing Officer has taken intoconsideration the total turnover and exportturnover from STPI as mentioned above andallowed the expenditure attributable to STFIunit as under:Rs.Total turn over 5,46,77,452Turnover in respect of STPI 3,69,34,524Turnover for the purpose of 80HHE 1,77,42,928(Rs.5.40 Crores-Rs.3.69 Crores) Operating cost towards exportseligible for deduction under section 1,32,77,78580HHE Profit of STPI Rs.3,69,34,525 Less:Operating cost attributable to STPI Rs.2,76,27,283 Profit of industrial unit STPI Rs. 93,06,241 Having arrived at the profit of STPI unit asabove the Assessing Officer has restricted thesame to the gross total income computed atRs.39,89,404/-. 5.The matter went on appeal before the Commissioner (Appeal)and the issue was considered by the Commissioner (Appeals) in thefollowing manner: "The dispute is only whether the exemption undersection 10A of the Act, is available for theprofits derived from Ëxport of software for thewhole year are only the 'profits' earned afterthe unit is approved as a STPI unit. Operating cost towards exportseligible for deduction under section 1,32,77,78580HHE Profit of STPI Rs.3,69,34,525 Less:Operating cost attributable to STPI Rs.2,76,27,283 Profit of industrial unit STPI Rs. 93,06,241 Having arrived at the profit of STPI unit asabove the Assessing Officer has restricted thesame to the gross total income computed atRs.39,89,404/-. 5.The matter went on appeal before the Commissioner (Appeal)and the issue was considered by the Commissioner (Appeals) in thefollowing manner: "The dispute is only whether the exemption undersection 10A of the Act, is available for theprofits derived from Ëxport of software for thewhole year are only the 'profits' earned afterthe unit is approved as a STPI unit. The appellant company has been enjoyingdeduction under Section 80HHE of the Act, inrespect of "Profits"derived from "export"ofcomputer software. It has chosen to become ASTPI unit and applied for the same. The unithas been approved as 'SIPI'on 04.03.2000. Henceit is entitled for exemption under section 10Aof the Actonly from that date onwards prior tothe date of the assessee can claim deductionunder section 80HHE of the Act and there is noinfirmity in the method of computation undersection 10A of the Act by the AssessingOfficer. 2. The Assessing Officer has correctlyidentified the 'turnover of STPI unit, computedthe profits there and allowed exemption undersection 10A of the Act, as per law, 3. The assessee reference to section 88B (taxrebate for senior citizen for computation ofhouse property) not relevant the issue involvedis totally different and there can be nocomparison between the two. Even in respect ofproperty income when the property is let andvacant during the whole or part of the previousyear rent received or receivable for the periodit was let out only is taken as 'Annual value' https://hcservices.ecourts.gov.in/hcservices/ 2. The Assessing Officer has correctlyidentified the 'turnover of STPI unit, computedthe profits there and allowed exemption undersection 10A of the Act, as per law, 3. The assessee reference to section 88B (taxrebate for senior citizen for computation ofhouse property) not relevant the issue involvedis totally different and there can be nocomparison between the two. Even in respect ofproperty income when the property is let andvacant during the whole or part of the previousyear rent received or receivable for the periodit was let out only is taken as 'Annual value' https://hcservices.ecourts.gov.in/hcservices/ Hence the assessee's contention on this pointare misplaced and without merit and deserve tobe rejected.4. The board has asked a Circular No.1/2005dt.6.1.2005 regarding the allowance of taxholiday under section 10B of the Act. In thiscircular it is clarified that 'án undertakingset up in domestic tariff Area (DTA) andderiving profit from export of articles orthings or computer softward manufactured orproduced by it which is subsequently convertedinto a EOU shall be eligible for declarationunder section 10B of the Income Tax Act ongetting approval as 100% EOU in such a case thededuction shall be available only from the yearin which it has got the approval as 100% EOU andshall be available only for the remaining periodof ten consecutive assessment years beginningwith the assessment year relevant to theprevious year in which the undertaking begin tomanufacture or produce articles or things orcomputer software as a DTA unit. Further in theyear of approval the deduction shall berestricted by the profits derived from exportsfrom and aftr the date of approval of the DTAunits as 100% EOU.Though the circular was issued in the context ofsection 10B of the Act it is applicable tosection 10A of the Act as well as both thesections provide for exemption of income inrespect of newly established undertakings in anyFree Trade zone or Electronic HardwareTechnology park or software technology park orspecial economic zone commencing activities onor after the dates specified in sections 10A(2)and 108of the Act applies to newly establishedhundred percent Export oriented undertakings.Both the sections provide exemption or deductionin respect of profits derived from export ofarticles or things or computer software. Theconditions prescribed are also similar underboth the sections. Hence the above circular ofBoard is clearly applicable to the applicantcase.Hence the assessee would be entitled forexemption under Section 10A of the Act only inrespect of profits earned after it had beenregistered as a STPI unit and not for theearlier period. Hence the computation ofexemption under section 10A of the Act by theAssessing Officer restricting the exemption in https://hcservices.ecourts.gov.in/hcservices/ respect of profits derived from 'export' afterthe unit is approved as STPI i.e. On 04.03.2000is correct and confirmed. Hence this ground ofappeal is rejected. 6.The Commissioner (Appeal) placed reliance on a Circularissued in the context of Section 10B of the Act and came to theconclusion that the assessee will be entitled to the benefit derivedfrom 'export' after the unit is approved as STPI i.e., on 04.03.2000and to that extent the appeal was rejected. Against which, theassessee went on appeal before the Tribunal. 7.The Tribunal, by referring to the provisions of sec.10A andalso distinguishing the view of the Commissioner (Appeals), held thatthe Circular issued under Section 10B is not applicable to restrictdeduction under section 10A and in any event, the Circular, which wasissued on 6.1.2005, cannot be made applicable to the assessment year2000-2001. Against which, the Revenue has preferred the presentappeal. 6.The Commissioner (Appeal) placed reliance on a Circularissued in the context of Section 10B of the Act and came to theconclusion that the assessee will be entitled to the benefit derivedfrom 'export' after the unit is approved as STPI i.e., on 04.03.2000and to that extent the appeal was rejected. Against which, theassessee went on appeal before the Tribunal. 7.The Tribunal, by referring to the provisions of sec.10A andalso distinguishing the view of the Commissioner (Appeals), held thatthe Circular issued under Section 10B is not applicable to restrictdeduction under section 10A and in any event, the Circular, which wasissued on 6.1.2005, cannot be made applicable to the assessment year2000-2001. Against which, the Revenue has preferred the presentappeal. 8.While admitting the appeal, the following substantialquestion of law was formulated:1. Whether on the facts and in thecircumstances of the case, the AppellateTribunal was right in holding that theassessee company was entitled to deductionu/s 10A in respect of the profitsattributable to the export turnover forthe entire previous year relevant to theassessment year 2000-01 even thoughregistration from the Software TechnologyParks of India (STPI), as an STPI unit wasobtained only on 04.03.2000 and theAssessing Officer was not correct inrestricting the deduction to the exportprofits relating to the turnover of theperiod after the date of registration ascertified by the STPI? 9.It was contended that Sec.10A provides that any profits orgains derived by an assessee from an industrial undertaking to whichthis section applies shall not be included in the total income of theassessee and this section applies to any industrial undertaking whichfulfills all the following conditions and the section reads asfollows; "10A (1) Subject to the provisions of thissection, any profits or gains derived by anassessee from an industrial undertaking towhich this section applies shall not beincluded in the total income of the assessee. https://hcservices.ecourts.gov.in/hcservices/ (2) This section applies to any industrialundertaking which fulfils all the followingconditions, namely: (i) it has begun or begins to manufacture orproduce articles or things during theprevious year relevant the assessment year- (a)commencing on or after the 1st day ofApril, 1981, in any free trade zone; or(b) commencing on or after the 1st day ofApril, 1994, in any electronic hardwaretechnology park, or, as the case may be,software technology park; (ia) ......(ii) ......(iii)...... (3) The profits and gains referred to insub-section (1) shall not be included in thetotal income of the assessee in respect ofany (ten) consecutive assessment years,beginning with the assessment year relevantto the previous year in which the industrialundertaking begins to manufacture or producearticles or things. (4).....(i)....(ii) ....(iii)....(iv) .... (5).....(6)....(7)....(8).... Explanation :- For the purposes of thissection: (i) "free trade zone"means the Kandla FreeTrade Zone and the Santacruz ElectronicsExport Processing Zone and includes any otherfree trade zone which the Central Governmentmay, by notification in the Official Gazette,specify for the purposes of this section. (ii) "relevant assessment year"means the tenconsecutive assessment years referred to insub-section (3) https://hcservices.ecourts.gov.in/hcservices/ (iii) "manufacture"includes any -(a) process or(b) assembling or(c) recording of programmes on any disc,tape, perforated media or other informationstorage device. (iv)"electronichardwaretechnologypark"means any park set up in accordance withthe Electronic Hardware Technology Park(EHTP) Scheme notified by the Government ofIndia in the Ministry of Commerce. (i) "free trade zone"means the Kandla FreeTrade Zone and the Santacruz ElectronicsExport Processing Zone and includes any otherfree trade zone which the Central Governmentmay, by notification in the Official Gazette,specify for the purposes of this section. (ii) "relevant assessment year"means the tenconsecutive assessment years referred to insub-section (3) https://hcservices.ecourts.gov.in/hcservices/ (iii) "manufacture"includes any -(a) process or(b) assembling or(c) recording of programmes on any disc,tape, perforated media or other informationstorage device. (iv)"electronichardwaretechnologypark"means any park set up in accordance withthe Electronic Hardware Technology Park(EHTP) Scheme notified by the Government ofIndia in the Ministry of Commerce. (v) "software technology park"means any partset up in accordance with the SoftwareTechnology Park Scheme notified by theGovernment of India in the Ministry ofCommerce"(vi) "produce"in relation to articles orthings referred to in clause (i) of sub-section (2) includes production of computerprogrammes. 10.The Explanation provides that for the purpose of extendingthe benefit as above, the Technology Park should be notified byGovernment of India, Ministry of Commerce.11.Software Technology Parks Scheme ISO 388(E) dated 30.4.1995provides as follows:“ 2.2. A Software Technology Park (STP) maybe set up by the Central Government, StateGovernments, public or private sectorundertakings or any combination thereof. AnSTP may be an individual unit by itself orit may be one of such units located in anarea designated as STP Complex by theDepartment of Electronics.”......2.8 The STP unit shall be eligible for thefollowing benefits.2.8-1 Tax holidayThe STP will be exempted from payment ofcorporate income-tax for a block of fiveyears in the first eight years of itsoperation”. 12.From the reading of Sec.10A(2), it is clear that thissection applies to any industrial undertaking which fulfills thehttps://hcservices.ecourts.gov.in/hcservices/ conditions viz., it should begun or begins to manufacture or producearticles or things or computer software during the previous yearrelevant to the assessment year and it should be notified by theGovernment of India, Ministry of Commerce. 13.In the present case, we find that the assessee SoffiaSoftware Limited has been notified on 04.03.2000 and the assessee hascommenced its software production during the previous year related tothe Assessment Year. From the date of notification, the assessee wouldbe entitled to the benefit of Sec.10A if other conditions have beenfulfilled. 14.The Tribunal, in paragraph-7 of the Order, came to theconclusion that in Section 10A, nowhere there is a restrictionprovided that deduction may be applicable only after registration withSTPI or only for the amounts earned after such registration. 15.The Commissioner (Appeals) as well as the AssessingAuthority fell into error by holding that registration as an STPI Unitis a requirement for the assessee to claim the benefit of Sec.10A. Sec.10A applies if any industrial undertaking has begun or begins tomanufacture or produce articles or things during the previous yearrelevant to the assessment year. 16.In this case, the date of Notification is 04.03.2000. Wetherefore hold that if the assessee has to derive the benefits of thespecial provisions of Sec.10A, the assessee has begun or begins tomanufacture or produce articles or things during the previous yearrelevant to the assessment year in the STPI Unit and it will beentitled to deduction under Sec.10A in respect of profits attributedto export turn over. 17.We, therefore, uphold the view of the Tribunal that theCircular issued under Section 10B cannot be made applicable to thecase falling under sec.10A, as we find that Explanation 2 to Section10B of the Act defines 100% Export Oriented Unit, which reads asfollows: 16.In this case, the date of Notification is 04.03.2000. Wetherefore hold that if the assessee has to derive the benefits of thespecial provisions of Sec.10A, the assessee has begun or begins tomanufacture or produce articles or things during the previous yearrelevant to the assessment year in the STPI Unit and it will beentitled to deduction under Sec.10A in respect of profits attributedto export turn over. 17.We, therefore, uphold the view of the Tribunal that theCircular issued under Section 10B cannot be made applicable to thecase falling under sec.10A, as we find that Explanation 2 to Section10B of the Act defines 100% Export Oriented Unit, which reads asfollows: “ Explanation 2.-For the purposes of this section,- (iii) ........ (iv) "hundred per cent export-orientedundertaking" means an undertaking whichhas been approved as a hundred per cent.export-oriented undertaking by the Boardappointed in this behalf by the CentralGovernment in exercise of the powersconferred by section 14 of the Industries(Development and Regulation) Act, 1951 (65of 1951), and the rules made under thatAct” (iv) "hundred per cent export-orientedundertaking" means an undertaking whichhas been approved as a hundred per cent.export-oriented undertaking by the Boardappointed in this behalf by the CentralGovernment in exercise of the powersconferred by section 14 of the Industries(Development and Regulation) Act, 1951 (65of 1951), and the rules made under thatAct” https://hcservices.ecourts.gov.in/hcservices/ Further more, the Circular which has been relied upon by theCommissioner (Appeals) dated 6.1.2005 has no relevance to theAssessment Year 2000-2001. 18.There is a clear distinction between the establishment ofSec.10A and the special provisions of Sec.10B of the Act whichdefines 100% Export Oriented Undertakings. 19.There is no scope for drawing inference from the provisionsof Sec.10B as we find that so long as the assessee satisfies therequirement of Sec.10A, it will be entitled to such benefit. 20.The learned counsel for the assessee appropriately pointedout the decision of this court reported in (2011) 336 ITR 513 (Mad)(Commissioner of Income Tax vs Wheels India Ltd), wherein, it hasbeen held that the benefit of clause (1) of Sub Section (2AB) ofSection 35 will enure to the Assessee for the whole assessment yearand cannot be restricted only to the period after the publication ofNotification dated 21.9.2004. 21.In the present case also, we find that the Assessing Officerhas restricted the deduction based on an artificial cut off date(i.e.) 4.3.2000 which we hold is not the correct method of computationfor benefit flowing under sec.10A. 22.Therefore, we find that the Tribunal has not committed anyerror. We answer the question of law in favour of the assessee andagainst the Revenue. 23.In the result, the income tax appeal is dismissed and theorder passed by the Income Tax Appellate Tribunal, Chennai "C" Benchin ITA No.279/Mds/2005 dated 5.9.2008 for Assessment Year 2000-2001 isconfirmed. No costs. Sd/-Assistant Registrar(CS-IV) //True Copy//Sub Assistant Registrar sr https://hcservices.ecourts.gov.in/hcservices/ To 1. The Commissioner of Income TaxChennai III. 2. The Deputy Commissioner of Income Tax,Company Circle VI (3),Chennai - 34. 3. The Commissioner of Income Tax (Appeals) V,Chennai - 34. 1 CC to Mr.T.Ravikumar, Advocate SR.No. 41501 1 CC to Mr.S.Sridhar, Advocate SR.No. 41698 T.C.A No.748 of 2009KS (CO)PSI (14.11.2014)