Deduction u/s 10A/B to be computed "Undertaking" wise

For the purpose of computing deduction under section 10A/10B, one has to consider the profit and gains as derived by an “undertaking” (Unit Wise).


IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'C'
ITA No.590/Bang/08
Asstt. Year : 2003-04

TATA CONSULTANCY SERVICE LTD


1. The assessee has filed an appeal against the order of learned CIT, Bangalore dated 19th February, 2008 passed u/s 263 of the IT Act.

2. The appellant is aggrieved against the invoking of power u/s 263 of the IT Act by the learned CIT. According to the appellant, the order is not erroneous, as the Assessing Officer has accepted one of the possible views. The alternative ground of appeal of the appellant is that the learned CIT has erred in directing the Assessing Officer to recompute the deduction allowable u/s 10A of the Act in respect of STP Unit-1 after setting off of the loss of STP Unit-2.

3. The Assessing Officer passed an assessment order on 29th March, 2006 for the asst. year 2003-04. The assessee was having profit in STP Unit-1 while it was having a loss of Rs.7,12,46,057/- in STP Unit-2. The assessee claimed deduction u/s 10A in respect of Unit-1. No deduction u/s 10A was claimed in respect of Unit-2. The deduction u/s 10A for Unit-1 was claimed on the basis of the profit derived from Unit-1.

4. The Assessing Officer while passing the assessment order, has made a transfer pricing adjustment of Rs.7,15,39,506/- to STP Unit-2. The Assessing Officer reduced the communication charges and foreign exchange incurred for onsite development from the export turnover for computing deduction u/s 10A for Unit-1. Accordingly, the AO determined that a sum of Rs. 45,32,911/- has been claimed as excess in respect of deduction u/s 10A for STP Unit-1. Since the transfer pricing adjustment in respect of STP Unit-1 was more than the loss claimed in STP Unit-2, therefore, the Assessing Officer set off the loss in STP Unit-2 against transfer pricing adjustment.

5. The learned CIT perused the income tax record of the assessee for the asst. year 2003-04 and issued a show-cause notice to the assessee u/s 263 of the IT Act. The learned CIT was of the opinion that the assessment order passed by the AO for the asst. year 2003-04 on 29th March, 2006 was erroneous and prejudicial to the interest of the revenue. According to the learned CIT, the AO has wrongly allowed the deduction u/s 10A before setting off of the loss of STP Unit-2 against the income of the STP Unit-1. According to the learned CIT, the deduction allowed u/s 10A in respect of STP Unit-1 without setting off the loss of STP Unit-2 against the income of STP Unit-1 was not in accordance with law.

6. In response to the show-cause notice issued by the learned CIT, the assessee submitted that as per the provisions of section 10A, deduction will be available to an undertaking in respect of profit and gains derived by the undertaking from export of articles or things or computer software. Attention was also drawn towards CBDT Circular No. 308 dated 29th June, 1981 in which it was made clear that the intention of the Legislature is to keep out the profits of the export in respect of the specified undertaking from the provisions of the Act. The main object of section 10A is not to tax export profits from STP Unit. The income of 10A unit has to be excluded before arriving at the gross total income otherwise the provisions of section 10A would have been shifted to Chapter VIA which deals with deductions from gross total income. It was further argued that section 10A is placed under Chapter III which deals with items which do not form part of total income. The appellant relied on the following decisions of the Bangalore Bench in support of its contention that the deduction u/s 10A is to be computed undertaking-wise and loss of one undertaking cannot be adjusted against the profit of the other undertaking for computing deduction u/s 10A in respect of other undertaking:-

ACIT v Yokogawa India Ltd 2007 13 SOT 470 (Bang.)
ITO v SCT Software Solutions India Pvt. Ltd. - ITA No.1014/Bang/2004.

7. It was further argued before the learned CIT that the order of the AO is not erroneous. There has been no error in applying the facts or law nor there is any deviation from the law. The order of the Assessing Officer is not erroneous so far as it relates to the computation of profits derived by an eligible undertaking u/s 10A. Reliance was placed on the following judgements:-
Russel Properties PR Ltd. Vs Addl. CIT 109 ITR 229 (Cal.)
Kiran Agencies Vs ITO 15 TTJ (Nag) 460
K S Gurumurthy Vs ITO 38 TTJ 448 (Mad.)
Badrudeen & Party v by. CIT 85 Taxman 313 (Mad) 56 TTJ (Jp) 400.

8. The learned CIT has considered the decision of the Bangalore Tribunal in the case of Yokogawa India Ltd. In this case, the assessee company was having three divisions i.e. software service division, project service division and system services division. The assessee earned profit in software service division and suffered loss in other two divisions and claimed exemption u/s 10A of the IT Act in respect of the profits earned. The Tribunal held that since there was no unabsorbed depreciation or unabsorbed business loss in respect of software service division, the profit and gains of such division was exempt u/s 10A of the IT Act and the loss of the other two units, whose income was not exempt could not be set off against the income of the unit covered u/s 10A of the Act. In the case of SCT Software Solutions India Pvt. Ltd., the issue involved was exemption u/s 10A of the IT Act without setting off the loss of non-STP unit. The learned CIT therefore felt that the issue involved in the present case is different from the issue involved in the case of Yokogawa India Ltd. and SCT Software Solutions India Pvt. Ltd. The learned CIT further mentioned that the department has not accepted the decision of the ITAT in the case of SCT Software Solutions India Pvt. Ltd. and appeal has been filed against the decision of the ITAT. The learned CIT was of the opinion that there has been an error in application of law in as much as the Assessing Officer has wrongly allowed the deduction u/s 10A before setting off of the loss of STP Unit-2 against the income of STP Unit-1. The order is also prejudicial to the interest of the revenue because it has resulted in allowance of deduction u/s 10A of an amount higher than what ought to have been allowed as per law. Accordingly, the learned CIT modified the order of the AO dated 29th March, 2006 for the asst. year 2003-04 and directed the AO to allow deduction u/s 10A after setting off the loss from STP Unit-2 against the profit of STP Unit-1.

9. During the course of proceedings before us, the learned AR drew our attention to section 10A(1). As per this section, deduction is allowable in respect of such profit and gains as are derived by an undertaking from the export of articles or things or computer software. It was submitted that the deduction is allowable on the basis of the profit and gains of the undertaking. If an assessee is having more than one undertaking, then the deduction u/s 10A is to be computed for different undertakings. Thereafter, the learned AR drew our attention to section 10A(4). The deduction to be computed for the purposes of section 10A(1) is to bear the same proportion to the profits of the business of the undertaking as the export turnover bears to the total turnover of the business carried on by the undertaking. It was submitted that section 10A(4) has been amended by the Finance Act, 2001 w.e.f. 1/4/2001. Prior to amendment, the deduction was to be computed in the same proportion as the export turnover bears to the total profit of the business. It was therefore argued that the intention of the Legislature is clear that deduction u/s 10A is to be computed on the basis of the profit of the undertaking and not on the basis of the profit of the business of the assessee. The learned AR also relied on the following decisions of the Bangalore Tribunal in support of its contention that deduction is to be allowed in respect of an undertaking without setting off the loss from the other undertakings:-

i) Nous Infosystems Pvt. Ltd. Vs ITO, Bangalore - in ITA No.1042/Bang/07 -The Bangalore Tribunal relied on its earlier decisions in ACIT Vs Yokogawa India Ltd. and in SCT Software Solutions (I) Pvt. Ltd. and held that as the profits of the Non-STP unit cannot be clubbed to the STP profit, therefore, the loss of the Non-STP unit cannot be set off against the profit of the STP unit for the purpose of arriving at the profits of the business eligible for tax benefits under section 10A of the Act.

ii) ACIT Vs Yokogawa India Ltd. in 2007 13 SOT 470 - The assessee company operated three divisions viz. software service division, product service division and system service division, during the previous year, the assessee earned profit in software service division and suffered losses in other two divisions and claimed exemption u/s 10A of the IT Act 1961 in respect of the profit earned.
The Hon'ble Tribunal held that since there was no unabsorbed depreciation or unabsorbed business loss in respect of software service division, the profit and gains of such division were exempt u/s 10A of the Act and the loss of other two units, whose income was not exempt, could not be set off against the income of unit covered u/s 10A of the Act.

iii) ITO Vs SCT Software Solutions India Private Limited in ITA No.1014/Bang/2004 - The assessee was engaged in the business of providing student administration software system for higher education institutions worldwide and provided product development service to the associate enterprise. The assessee claimed deduction u/s 10A of the Act in respect of the income of the STP unit. The assessing officer while passing the order u/s 143(3) reduced the deduction u/s 10A in respect of STP unit to the extent of loss relating to non-STP unit.
The Hon'ble Tribunal after referring to notification No. SO 3231 dated 29.09.1987 held that the profits and gains derived by an eligible industrial undertaking are to be excluded in their entirety and shall not be included in the total income of the tax payer for the eligible period.

iv) I Gate Global Solutions Ltd. Vs ACIT in 112 TTJ 1002 - If the STP unit is independent, then the loss cannot be set off against the profit of the other STP unit for the purpose of working out the tax benefit under section 10A. The tax benefit of the STP units are required to be independently calculated.

10. On the other hand, the learned DR supported the order of the learned CIT. It was submitted that the deduction is to be allowed from the gross total income and such deduction is to be on the basis of the profit included in the gross total income. It is not the case of the assessee that it is not claiming deduction u/s 10A in respect of STP Unit-2. If there are more than one units for which deduction u/s 10A is to be computed, then one has to see the total income included in the computation from the undertaking entitled for deduction u/s 10A.

11. We have heard both the parties. Before proceeding further, it will be useful to reproduce section 10A(1) and 10A(4):-
10A (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive 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 of computer software, as the case may be, shall be allowed from the total income of the assessee".
10A (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 turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking".

12. In Section 10A(1), the word 'an' has been used before the undertaking. Deduction is to be allowed on such profit and gains as are derived from the undertaking. Hence, to apply the provisions of section 10A, one has to consider the profit and gains as derived by an undertaking. It does not refer to profit and gains as are derived by the assessee. The assessee may have more than one undertaking. The word 'undertaking' is defined as any business or any work or the project which one engages in or attempts as an enterprise analogue to business or trade. Undertaking is therefore used in the sense of an enterprise which can be owned or transferred. In the instant case, the revenue has not given a finding that STP Unit-1 and STP Unit-2 are not different undertakings.

13. The jurisdictional High Court in the case of Shankar Construction Company Vs CIT 189 ITR 463 had an occasion to consider the meaning of the industrial undertaking as used in section 32A. While defining the industrial undertaking, the jurisdictional High Court at page 468 has referred to the meaning of the word "undertaking". The same is reproduced as under:-
"'Undertaking' must suffer a contextual and associational shrinkage as explained in D N Banerji Vs P R Mukherjee (1952-53) 4 FJR 443; AIR 1953 SC 58, so also, service, calling and the like. This yields the inference that all organized activity possessing the triple elements above mentioned, although not trade or business, may still be 'industry' provided the nature of the activity, viz. the employer-employee basis, bears resemblance to what is found in trade or business. This takes into the fold of 'industry' undertakings, callings and services, adventures analogous to the carrying on of trade or business. All features, other than the methodology of carrying on the activity, viz. in organizing the cooperation between employer and employee, may be dissimilar. It does not matter, if on the employment terms there is analogy".

It is needless for us to point out that the above ruling is binding on us.
In the matter of Sree Yallamma Coton, Woollen and Silk Mills Co. Ltd. (1970) 40 Comp Cas 466, 485; AIR 1969 Mysore 280, late Justice A Narayana Pai (as he then was), sitting as company judge, had occasion to judicially examine the expression 'undertaking' in the context of 'floating charge'. The learned judge ruled as follows (headnote of AIR 1969 Mys.):
"Undertaking" is not in the real meaning anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business or undertaking i.e. things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on of the activities leading to the earning of profits".

14. In the case of P Alikunju, M A Nazeer Cashew Industries Vs CIT 166 ITR 804, the Hon'ble Kerala High Court observed "undertaking" in common parlance means an "enterprise", "venture", "engagement". It can as well mean "the act of one who undertakes or engages in a project or business". Considering the definition of undertaking, it is clear that STP Unit-1 and STP Unit-2 are different undertakings as it has been treated as such by the revenue.

15. While introducing amendment to section 10A(4) by Finance Bill, 2001, it was mentioned in Notes on Clauses as Under:-
"Under the existing provision contained in subsection (4), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee. Sub-clause (b) seeks to clarify that such proportions shall be calculated with reference to the profits and gains of the business of the undertaking and not from any other business carried on by the assessee".

16. The Hon'ble Apex Court in the case of CIT Vs Canara Workshops P. Ltd. 161 ITR 320 had an occasion to consider the allowability of deduction u/s 80E of the IT Act. Deduction u/s 80E was allowable to priority industry. In that case, the assessee was carrying on two priority industries. The Hon'ble Apex Court held as under:-
"Held accordingly, in computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961, the loss incurred by the assessee in the manufacture of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry). The assessee was entitled to a deduction at 8 per cent, on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture".

17. The Hon'ble jurisdiction High Court in the case of CIT Vs Siddaganga Oil Extractions Pvt. Ltd. 201 ITR 968 had an occasion to consider the allowability of deduction u/s 80HH when there was a loss in one unit and there was profit in another unit. The Hon'ble jurisdictional High Court after referring to the decision of the Hon'ble Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs CIT held that the Tribunal was right in holding that deduction u/s 80HH should be allowed in respect of the solvent plant on its income without setting off the loss incurred in respect of the hydrogenation plant.

18. From the above discussion, it is clear that the deduction u/s 10A is to be computed on the basis of profit and gains derived by an undertaking. In the instant case, STP Unit-2 was having a loss and Therefore, its loss cannot be set off while ascertaining the deduction u/s 10A for STP Unit-1.

19. The Bangalore Bench in the case of I Gate Global Solutions Ltd. Vs ACIT 112 TTJ 1002 vide order dated 27th November, 2007 held as under:-
"Before us, it has not been clarified that Pune unit is an independent unit and is in no way related with the activities carried out at Bangalore or Chennai unit. In absence of the facts, it is not possible to say that Pune unit was an independent undertaking engaged in the business of software development, which was in no way related to the software development done at Bangalore or Chennai unit. In case, the Pune unit is found to be independent, then loss from such unit is to be independently calculated. In case such unit is associated with the activities, which are carried out at Bangalore or Chennai unit, then Pune unit will be considered as part of that undertaking. Hence, the issue of ascertaining as to whether Pune unit was an independent unit or a unit associated with activities of other two units is restored back on the file of the AO. In case it is found that it is part of the other two units and is associated with the activities done in other two units, then it will be considered as part of the same undertaking and loss will be adjusted. However, in case, if it is found, it is an independent unit then it will be treated as independent undertaking and the assessee cannot be forced to have exemption in respect of such independent undertaking. In that case the loss will (not) be adjusted against other income".
From the above, it is clear that the Assessing Officer has taken one of the possible views.

20. The Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. 243 ITR 83 had an occasion to consider the scope of section 263 of the IT Act. The Hon'ble Apex Court held that in order to exercise power u/s 263, it is necessary that the order, which is to be revised, is erroneous as well as prejudicial to the interest of revenue. Both the conditions are to be satisfied. If one of the conditions is absent, then power u/s 263 cannot be exercised. The Hon'ble Apex Court held as under:-
"A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interest of revenue. If one of them is absent-if the order of the Income Tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interest of revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of revenue. The phrase 'prejudicial to the interest of revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interest of revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue unless the view taken by the Income Tax Officer is unsustainable in law".

21. Thus, when the Assessing Officer has taken one of the possible views then the order of Assessing Officer cannot be termed as erroneous and the CIT was having no power to cancel that order u/s 263 of the IT Act. Since we have cancelled the order of the learned CIT u/s 263 of the IT Act, therefore, we are not giving any finding on the alternative submission.

22. In the result, the appeal of the assessee is allowed.