1. STI Pvt. Ltd. (‘the
company’ or ‘STIPL’ ) is a company registered under the Companies Act, 1956
having its registered office at Mumbai. The company was registered in 1999
originally under a different name which name was changed to STIPL in 2000 with
the consent of the Registrar of Companies.
2. The company is engaged in
the business of developing computer software and exporting the same. The
company carries on its operations and business from a Software Technology
Park. It is registered with the Software Technology Parks of India in 2000 and
has commenced its operations thereafter in 2000.
3. It is informed that the
company is eligible for deduction u/s 10A of the Income Tax Act at the rate of
100% of the export profits. The deduction is being claimed regularly upto A.Y.
2004-05 and has been granted by the Income tax Authorities.
4. The company is the
subsidiary of a company registered in the USA which holds 90% of share capital
of the company.
5. The company during the
financial year 2004-05 has shifted its operations entirely to Pune and has
registered itself with Software Technologies Park of India, Pune. The
production from Pune unit begun in October 2004. The shifting is done under
clearance from the said Software Technologies Park of India.
6. The company has made
sizeable investment in purchasing new plant and machinery and building for the
unit at Pune.
7. The company has sought the
opinion about the eligibility of the company for deduction u/s 10A for the
export profits in respect of Pune unit. It has raised the following specific
queries for consideration, with the bottom line to determine whether the
company would continue to get the deduction u/s 10A or not.
(a) What is the exact
meaning of the terms “shifting” and “expansion” as per the Income tax Act
u/s 10A and what are its implications in the scenario given above.
(b) What are the
implications of shifting the registered office to Pune.
(c) What are the
implications u/s 10A where the Saama Technologies Inc, acquires the balance
10% shares from the present shareholders and become a 100% holding company.
(d) Should the company
maintain separate accounts for the Pune unit and how can such separate
accounts be consolidated with the accounts of Mumbai unit upto the date of
shifting.
(e) Whether the amount of
Service tax should be added to the value of services procured while
deducting tax at source under the Income tax Act.
(i) it has begun or begins to
manufacture or produce articles or things or computer software during the
previous year relevant to the assessment year.
(a) commencing on or after
the 1st day of April 1981, in any free trade zone: or
(b) commencing on or after
the 1st day of April 1994, in any electronic hardware technology park, or,
as the case may be software technology park;
(c) commencing on or after
the 1st day of April, 2001 in any special economic zone.
(ii) 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 undertaking which is formed as a result of
the re-established, reconstruction or revival by the assessee of the business
of any such undertakings as is referred to in section 33B in the circumstances
and within the period specified in that section;
(iii) it is not formed by the
transfer to a new business of machinery or plant previously used for any
purpose.
Explanation – The provisions
of Explanation 1 and Explanation 2 to sub-section (2) of section 80I shall
apply for the purposes of clause (iii) of that sub-section as they apply for
the purposes of clause (ii) of that sub-section.”
(iv) Section 10A does not at any place use the terms “shifting” or
“expansion”. However, the same may be relevant for our discussion.
(v) The benefit u/s 10A is
conferred on an “undertaking”. This benefit is attached to an undertaking and
is not mainly related to the assessee. The deduction therefore is qua an
undertaking and not qua an assessee. The position in law is laid down by the
courts while interpreting similar incentive provisions granted to the
undertaking under the law. P. K. Engineering & Forging (P) Ltd. 87 Taxman 101
(Cal). This position is also confirmed by the Government vide issue of a
clarification dated 15/5/63 bearing F. NO. 15/5/63 -IT (PI).
(vi) The deduction is for
providing an incentive for the promotion of export of computer software from
the undertakings situated in Software Technologies Parks within the country.
(vii) In the past, the
section sought to regulate the change in shareholding involving transfer of
ownership or the beneficial interest in the undertaking beyond a prescribed
percentage. These restrictions contained in sections 10A(9) and (9A) are
omitted by the Finance Act, 2003 and are not applicable form A.Y. 2004-05
onwards.
(viii) The present s.10A
contains a limited restriction for such changes only in cases of transfers in
the scheme of amalgamation by an Indian company to another Indian company.
Accordingly this restriction is not relevant for the discussion.
(ix) The issue appears to be
revolving around the true meaning of the terms “splitting up” and
“reconstruction” used in s. 10A(2). If the act of querist in shifting from
Mumbai to Pune is considered to be an act of splitting up or reconstruction
then a doubt might arise about the eligibility of the querist for deduction
under s. 10A in respect of export profit of Pune unit.
(x) The term ‘split-up’
indicates that there must be two businesses in existence after a split-up
takes place. Splitting by implication indicates this. Accordingly there must
be two businesses in existence after a split-up, the old and the new. In the
case of the querist there is only one business in existence namely, at Pune.
Alternatively it may involve transfer of one business to another. In the case
of the querist there is no such transfer. Further, the restriction is imposed
qua the business in as much as disqualification applies where a business is
split-up and not where an undertaking is split-up. In the case of the querist
there is no such split-up of business. The Delhi High Court in the case of
Hindustan General Industries Ltd. 137 ITR 851 (Del) held that splitting up
indicated a case where the integrity of a business in existence was broken up
and different sections of activities, previously conducted were independently
carried on after the split up.
(xi) The term
“reconstruction” indicates the construction of the old business after putting
up such business to the changes. It is different from the new business. A
reconstructed business essentially means continuation of the old business but
with a change. In the case of the querist there is no change in the existing
business. Further, substantial alterations involving use of a new piece of
land, factory, plant and machinery and process cannot be construed as a case
of reconstruction but can be instead considered as the case of a new
undertaking. In the case of querist sizeable investment is informed to have
been made on the above lines at Pune unit. The Pune unit otherwise is an
independent production unit capable of producing commercially tangible product
and does not use the old plant and machinery, whose value exceeds 20% of the
total value of the plant and machinery of the Pune Unit. Textile Corporation
Ltd., 107 ITR 195 (SC).
(xii) The action of the
querist represents a simple case of shifting the existing business from one
place to another place. It is a case of relocation of the undertaking and
cannot be construed or equated with the splitting up or reconstruction.. In
the process of shifting the querist has expanded its existing base of
production which by no means could be held as splitting up or reconstruction.
In fact the size of expansion is such that the querist can be said to have
almost put up a new undertaking.
(xiii) It is significant to
note that the restrictions in sub-section (2) are incorporated to ensure that
an assessee does not claim any unwarranted benefit by continuing to claim the
benefit after the tax holiday period is over by claiming that he has set up a
new undertaking which in effect represents the continuation of the old
undertaking. The restrictions are for application for the period beyond the
Tax Holiday Period.
(xiv) The querist has
informed that it has no desire to elongate the period of deduction but is
interested in ensuring that the benefit u/s 10A continued for the balance
period of deduction.
(xv) The other aspect which
has to be examined is whether the restriction as to the use of the old plant
and machinery will adversely affect the case of the querist. In view of the
discussion above it is apparent that no new business has been formed neither
is there any transfer to such new business of machinery for plant previously
used for any purpose. Accordingly the question of applying reconstruction does
not arise at all. In any case as informed the value of the plant and machinery
previously used is less than 20% of the total value of the plant and machinery
at Pune unit.
(xvi) On the basis of above
discussion the queries raised are answered as under :-
(a) The querist will
continue to get the deduction u/s 10A for its export project earned from
Pune unit for the balance period of Tax Holiday, subject to the outer limit
of A.Y. 2009-10. The fact of shifting to Pune will not adversely affect the
claim of the querist. Alternatively the querist may put up a claim for the
Pune unit being treated as a new undertaking.
(b) Shifting the registered
office to Pune is an administrative act and does not affect the deduction
u/s 10A. However for continuity of assessment without a break, if desired it
may continue the registered office at Mumbai.
(c) Saama Technologies Inc.
purchasing the balance 10% shares of the company will not adversely affect
the claim for deduction u/s 10A by the company.
(d) The business of the
querist continues without a break and therefore there is no need to maintain
separate books of account for business transacted through Pune unit.
(e) Chapter XVII of the
Income tax Act provides for deduction of tax at source including vide s.
194J. The said s.194J requires deduction of the tax at source on payment of
fees for professional and technical services. The payer is required to
deduct an amount of 5% of such fees. The tax is to be deducted on the fees
for professional services which unless otherwise agreed will not include the
service tax charged in addition to agreed fees. Accordingly the tax that is
to be deducted is on the amount agreed to be payable as fees. However,
attention of the querist is invited to some circulars issued by the CBDT
which seems to have created a doubt about the above stated view. The querist
may deduct tax on the gross amount of fees including tax if it desires to
avoid any dispute on the subject as the payee will get full credit for such
deduction by tax at source.
The querist may seek any
clarification from me in the matter.