Chartered Accountant Finance: [aaykarbhavan] Judgments and Service Tax Q & A.

REVERSE CHARGE - FEES PAID TO FOREIGN GOVERNMENT

1. We are engaged in export, marketing & selling of our products in foreign countries. In order to market & sell our products in other countries, we have to get our products registered as per the regulatory requirements of those countries. For such product registration, we have to pay fees to foreign Governmental authorities and their departments. Further, periodically such authorities carry out Inspection of our manufacturing premises in India and charge certain fees.

We consider such fees paid to foreign government as statutory payments and not as a service fee and, therefore, we do not pay any service tax in respect of such payments. Further, we believe that such activity is not a substitute to services provided by private entities and Government including foreign government also and thereby we don't pay any service tax. Are we liable to pay service tax under reverse charge ?

The following may please be noted -

1.		Government doesn't include foreign government as per the General Clauses Act; hence, the services provided by foreign government cannot fall under negative list entry under Section 66D(a) of the Finance Act, 1994.
2.		Fees is different from tax, as fees is generally charged for providing any service.
3.		Regulation of market is apparently not a service, but if fees is only a consideration for granting access to foreign market and is not incidental to governmental function, it is a service. Facts and treatment in foreign law are to be analysed prior to making any decision in this regard.

In view of the above, prima facie, impugned fees is not liable to service tax and, accordingly, there is no question of reverse charge applying.

However, if the provisions of foreign law suggest that the fees is paid as a consideration for any activity carried out by the foreign government, then it would be a service liable to service tax and the recipient would be liable to pay service tax under reverse charge.

The treatment under foreign tax laws may guide the treatment under the Indian tax laws but will not be decisive.

CLEANING OF HOSPITALS - TAXABILITY

2. A client was providing cleaning and housekeeping service mostly to government hospitals which was non-commercial or industrial building, which was not subject to service tax till 30-6-2012. What is present position after new law of negative list regime ? Is it still not subject to service tax ?

If the government hospital is run as a department/part of government (i.e., not as an entity separate from the government), then cleaning service provided to hospital, would be provision of cleaning service to the government.

Though the same is a service within the meaning of section 65B(44) and is liable to service tax under Section 66B, yet, certain exemptions are granted to repair and maintenance service under Entries 12 to 14 of Notification No. 25/2012-ST, dated 20-6-2012. The said exemptions must be looked into.

In fact, Entry No. 12(c) exempts services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a structure meant predominantly for use as : (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment.

Apparently, mere cleaning may not be exempt; but, repair and maintenance followed by cleaning would be exempt.

WEATHER STATION - ERECTION, ETC. - LIABILITY TO SERVICE TAX

3. Please consider the following :

(a)		An automatic weather Station is made up of three components-Censors, data loggers & Solar Panels.
(b)		Mr. A takes three components on-site and installs it as an automatic Weather Station.
(c)		The installation is done after doing some cementing and it is affixed two feet down the ground & its intent is to permanently keep the weather station there itself.
(d)		If for any reason the Weather station is to be removed, then to avoid the risk of damage, firstly, the wiring is disconnected and then the censors are removed, then solar panels are removed and then cementing is removed.
(e)		Is this installation manufacture or is it Immovable property ?

Prima facie, censors, data loggers and solar panels make up an automatic weather station and become a new product named 'weather station' having distinct name, character and use from the components. The assembly of three, therefore, appears to amount to manufacture.

Moreover, since point (d) of the query specifically provides that weather station can be assembled and removed from the site without damage by following specified steps, the weather station never becomes immovable property; it is merely attached to immovable property but is not permanently joined therewith.

The process, prima facie, amounts to manufacture of goods.

[Note : In absence of full facts, prima facie view could only be expressed.]

RADIO TAXI - MEANING OF - NEGATIVE LIST

4. As per State transport authorities radio taxi permit is given only if :

a.		*Cabs are purchased and not hired by the operator.*
b.		*GPS/GPRS system is installed in the cabs and is monitored by the controller.*

Negative list contains an entry as regards radio taxi under Section 66D(o) but radio taxi is not defined in the Finance Act, 1994.

Should we consider meaning of radio taxi as follows: —

♦		**a taxi approved by the State transport authorities, which satisfies all the above conditions, or**
♦		*as the common understanding goes, any taxi in which the dispatcher of the taxi has to be contacted for availing of the taxi facility.*

In absence of any definition under the Finance Act, 1994, the expression 'radio taxi' carries its natural meaning and would, therefore, mean a call-taxi. While the aforesaid analysis holds its field, ground reality is that no radio taxi can operate without a permit. If no radio taxi can operate without a permit, any radio taxi operating would be having the permit as well and would, therefore, fall under the negative list.

RENT-A-CAB - ABATEMENT UNDER NOTIFICATION NO. 26/2012

5. In the article reported in [2013] 38 STT 50 (Mag.) [Example No.1/Pg 52], the author has expressed her views that in case where charges for private taxis/cars are collected on per Km. basis, exemption Notification No. 26/2012-ST cannot be availed, as the service does not fall under rent-a-cab service. However, the said abatement Notification No. 26/2012-ST, S. No. 9, grants exemption/abatement for service provided by way of renting of any motor vehicle designed to carry passengers and it is not limited to rent-a-cab service. Kindly substantiate.

First of all the views expressed by the author in the above-referred to article are her personal views and the same has been a made specifically clear in her analysis of the issue.

So far as Entry No. 9 of Notification No. 26/2012-ST is concerned, it clearly states that "Renting of any motor vehicle designed to carry passengers" will be eligible for abatement; no matter whether such renting is on per Km. basis or hourly basis or otherwise or whether such renting is renting of cab or otherwise.

Therefore, we, personally agree with your view.

TRANSPORT v. TOUR - DIFFERENCE BETWEEN

6. What is the basic difference between 'transportation of passengers' and 'conducting tour' ? Whether they are one and the same or are treated differently. Some authors say that, they are same, while as some others are saying that, they are different. If I go through the abatement exemption Notification No. 26/2012-ST, then it seems that tour operator's service is also service of transportation of passengers. What are your views on the issue ?

'Transport' of passengers and 'Tour' are different inasmuch as :

1.		Transport means : to move something or somebody around, usually over long distances; move while supporting, either in a vehicle or in one's hands or on one's body, or basically taking from one place to another place.
2.		Tour means : A guided visit to a particular place, or virtual place. Tour means conceptualization/planning, etc., of a visit of a place, of which transport is a part.

For example, Delhi-Jaipur Volvo Bus provides mere transportation service. However, where a special bus carries passengers from Delhi-Jaipur with sightseeing purpose visits to various places, etc., it becomes a tour.

The fact that there is a difference cannot be outweighed by minuteness of the difference.

Broadly, service element is more in tour.

So far as 'conducted tour' is concerned, Entry 23(b) of Notification No. 25/2012 exempts transport of passengers, with or without accompanied belongings, by a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire.Thus, it is clear that tour involves transport, but every transport is not a tour. If transport results in tour, it is not exempt under Entry 23(b). In fact, 'conducted tour' means 'tour' conducted in buses, etc., for various passengers who can come and take a tour on payment of fee. The tour plan is already fixed - just like restaurant menu.

RESTAURANT/CATERING SERVICES - SCOPE OF :

7. As per section 66E(i), the following constitute declared services, namely : service portion in an activity wherein goods being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. Whether this provision will make the following a declared service :

(a)		*Supply of food in a Non-A/C Dhaba*
(b)		*Supply of food in a AC Restaurant [whether supplying liquor or not]*
(c)		*Supply of food in a Banquet Hall [marriage/function booking]*
(d)		*Supply of food in a Hotel [Room rented and breakfast free]*
(e)		*Supply of food in a Hospital [Room given to patient + food supplied]*

Service means an activity carried out for consideration, excluding deemed sale transactions referred to in Article 366(29A).

The various issues raised in your query can be replied as follows:

Issue	Reply
(a) Supply of food at Non-A/C Dhaba; and (b) Supply of food at AC Restaurant (whether supplying liquor or not)	As per Article 366(29A)(f) and judgments in K. Damodarasamy Naidu & Bros. v. State of Tamil Naidu [2000] 117 STC 1 (SC) and recent Judgment of the Kerala High Court in Kerala Classified Hotels & Resorts Association v.Union of India [2013] 40 STT 253/35 taxmann.com 568 (Ker.), restaurant transactions are fully sales and no part of the price charged for food is liable to service tax. Only service charges over and above the price charged for food can be subjected to service tax.
(c) Supply of food by Banquet Hall (marriage/function booking]	In this case, the service involves catering as well as renting and is a composite supply. The same is not excluded from the definition of service and is liable to service tax. The taxability is as per the abatement contained in Entry 4 of the Notification No. 26/2012-ST. If only catering services are provided without renting, then, it will fall under section 66E(i) and value will be determined as per Rule 2C of the Service Tax (Determination of Value) Rules, 2006.
(d) Supply of food by Hotel [Room rented and breakfast free]	The benefit of Entry 4 of the Notification No. 26/2012-ST cannot be claimed, as the condition "specially arranged for organizing a function" contained therein is not fulfilled. The essential character is renting and, therefore, the service appears to fall under Section 66E(a) and eligible for abatement under Entry 6 of the Notification No. 26/2012-ST.
(e) Supply of food by Hospital [Room given to patient + food supplied]	The service of supplying food and hiring out room are incidental to the principal service of health care, which itself is exempt under Entry 2 of the Notification No. 25/2012-ST. Accordingly, this portion of the service will also be exempt from service tax.

REVERSE CHARGE - DIRECTORS OF BANKS/CO-OPERATIVE BANKS

8. Please clarify whether bank/co-operative bank is liable to pay service tax on sitting fees paid to directors and other members ?

As per Rule 2(1)(d) of the Service Tax Rules, 1994, read with Notification No. 30/2012-ST, in case of services provided by director to the company, the company is the person liable to pay service tax. The word 'company' is not defined in the Finance Act, 1994 or in the Service Tax Rules, 1994. However, it appears from the language used that the word 'company' should posses meaning assigned to it in the Companies Act, 1956.

Accordingly, directors of the co-operative bank would be outside the scope of reverse charge and would be liable to service tax accordingly.

However, if the word 'company' is interpreted in general sense, the 'banking companies' would also fall within the scope of reverse charge and would be liable to pay service tax on sitting fees, etc. paid to its directors, who are not employees.

[Note : It is strange that the word 'company' has been used within the meaning of the word 'person' under Section 65B(37) and not defined in the Act itself.]

REVERSE CHARGE - PRINTING/PHOTOCOPY/BINDING

9. We are running a company and are getting our project reports printed, bound and photocopied from an outside agency (who is a non-corporate entity). For this purpose, we provide only soft copy of report to the outside agency through e-mail. The outside agency is charging Printing, photocoping and binding charges plus State VAT. Please suggest whether we should pay service tax as a service recipient under works contract service under Section 68(2) of the Finance Act, 1994, read with Notification No. 30/2012-ST ? Please clarify with reason.

It must be noted that in Mahim Patram (P.) Ltd. v. Union of India [2007] 7 STT 136 (SC) the assessee was engaged in printing of questions papers for examination boards, competitive examination boards, recruitment boards and various universities and boards. On these facts, it was held (in para 2) that the assessee had carried on a highly specialized and secretive work. Therefore, the said activities of the assessee admittedly amounted to a "works contract". By analogy, therefore, printing of reports and consequent supply of printed paper, after binding, amounted to a 'works contract'.

However, in Graphic Procédé v. French Ministere Budget [2012] 37 STT 719/28 taxmann.com 105 (ECJ), assessee carried on reprographic activities involving production, using its own materials, copies of documents, files and maps at request of customers. It was held that said activities amounted to supply of goods upto extent they were limited to mere reproduction of documents on materials, where ownership had been transferred to customer. However, they amounted to 'supply of services' when they involved services such as advice and adapting, modifying and altering original according to customer's wishes, which were predominant in relation to supply of goods and which constituted an aim in themselves for recipient.

In the Indian context, the printing and binding of books/documents/reports amounts to 'manufacture of goods' and even if it is a service, it is covered under negative list entry under Section 66D(f), read with section 65B(40) of the Finance Act, 1994.

If printing is carried out as an intermediate production process, then, printing is exempt from service tax under Entry 30 of Notification. No. 25/2012-ST and binding would also be exempt being a part of bundle, whose essential character is printing.

REVERSE CHARGE - SERVICE TAX WRONGLY PAID BY SERVICE PROVIDER - CAN BE DEMANDED AGAIN FROM SERVICE RECIPIENT

10. Despite being covered under reverse charge, security company charged and collected 100% service tax from service receiver till 31-3-2013 and thereafter, paid to the government. From April, 2013, the company is charging 25% service tax and balance 75% is being paid by service receiver. Will there be any liability on service receiver for the period upto March 2013. If yes, what remedial action can be taken ?

The security services are chargeable to service tax and, hence, tax paid, if any, cannot be regarded as paid without charge.

The service tax is payable by the person who is liable to pay service tax as per section 68 and the person so liable to pay service tax falls within the definition of an 'assessee'.

Therefore, all obligations under the service tax law are to be complied with by the person liable to pay service tax (registration, payment, returns, etc.).

A person other than 'person liable to pay service tax' can be regarded as an assessee only if such person is the agent of the person liable to pay service tax.

In CST v. Landmark Automobiles (P.) Ltd. [2013] 31 taxmann.com 168 (Ahd. - CESTAT), it was held that in case of reverse charge service provider's defence that liability to pay service tax is on service recipient is sufficient to set aside demand against service provider.

Thus, as per law, payment by a person other than person liable to pay service tax can be regarded as good payment only if such person is the agent of the person liable to pay service tax, i.e., you must be able to furnish proof that payment was made by you as an agent of the service recipient and registration must be sought/returns must be filed accordingly in the name of the service recipient.

However, since payment has been made wrongly by you and there is no revenue loss, a certificate from service provider to service recipient to this effect may avoid double payment, subject to due verification by the Department.

In case of full reverse charge, it must be noted that the said service doesn't amount to an output service as per Rule 2(p) of the CENVAT Credit Rules, 2004, for the service provider. Accordingly, any wrong payment of service tax by service provider out of the Cenvat credit availed would be treated as contrary to law and the Cenvat credit in relation to those services would be denied.

REVERSE CHARGE - TRANSPORT OF EMPLOYEES - CENVAT CREDIT AVAILABLE

11. A company enters into a contract with an individual vehicle owner to transport the its (i.e., company's)employees to and fro the office of the company. Will the company be liable to service tax under reverse charge ?

Renting of motor vehicle designed to carry passengers, to any person who is not engaged in a similar business, by an individual to a business entity registered as a body corporate, located in the taxable territory, falls under the reverse charge provisions. Therefore, if motor vehicle has been hired by the company, the company would be liable to pay service tax under reverse charge.

However, the tax leviable on such services would be available as the Cenvat credit as transport of employees is an input service, the same cannot be regarded for 'personal use or consumption' of any employee.

REVERSE CHARGE - FIRM INCLUDES LLP

12. Ours isa limited liability partnership firm. We are the persons liable to pay freight in respect of service of transport of goods by road. Are we covered under reverse charge and liable to pay service tax on freight ?

As per Rule 2(1)(cd) of the Service Tax Rules, 1994, 'partnership firm' includes a limited liability partnership. Hence, for the purpose of rule 2(1)(d) of the Service Tax Rules, 1994 specifying person liable to pay service tax, the word 'partnership firm' shall include 'LLP'.

Since a partnership firm is covered under reverse charge, the LLP is also covered under the reverse charge. Accordingly, you are liable to pay service tax under reverse charge.

REVERSE CHARGE - MANPOWER SUPPLY SERVICES

13. Ours is a software developer firm and have employed our staff at client's premises for development of software. The staff works under superintendence and control of the firm (i.e. software firm). Whether services provided by us amount to 'manpower supply' for the purpose of reverse charge ? At times, we also charge consideration for helping our client's in recruitment process of employees by supplying manpower. What will be the status of such services ?

As per Rule 2(1)(g) of the ST Rules, 1994, supply of manpower means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control. It must be noted that the word "his" means the person to whom manpower is provided.

Therefore, staff employed onsite for development of software and working under your superintendence and control, continue to be your employees and it would not amount to "supply of manpower" to client and, thus, reverse charge would not be attracted.

However, 'recruitment fee' charged for supply of manpower (where such manpower works as an employee of the client under superintendence and control of client) is governed by reverse charge provisions.

REVERSE CHARGE - GOODS TRANSPORT AGENCY - REVERSE CHARGE APPLICABLE IF CUSTODIAL RIGHTS TRANSFERRED

14. We are receiving good transport service from local Individual Truck Owners, TATA ace and Auto Owners. These transporters issue only the bills, which contain details like "from —— to" (source and destination) and amount of freight charged. Please clarify whether the bills would amount to consignment note ? Are we liable to service tax under reverse charge, if the services are not exempt ?

The issue involves an interpretation of Section 65B(26) vis-à-vis Rule 4B of the Service Tax Rules, 1994, which are logically inconsistent. In Birla Ready Mix v. CCE [2013] 39 STT 257/[2012] 28 taxmann.com 201 (New Delhi - CESTAT), it was held as under

♦		Section 65B(26) defines GTA (goods transport agency) to mean a person issuing consignment note and Rule 4B provides that consignment note is to be issued by GTA. Thus, prima facie, both provisions logically refer to each other for their meaning. However, it is not true.
♦		Section 65B(26) is a parent law and, therefore, the word .consignment note. in definition of Goods Transport Agency u/s 65B(26) is to be interpreted in general sense and doesn't carry meaning thereof under rule 4B of the Service Tax Rules, 1994. The service would be GTA service only if there is transfer of custodial rights and only in that case, the issue of consignment note would arise.
♦		A transport service can fall under Goods Transport Agency's services only if custodial rights or documents of title to goods are handed over by the assessee to operators of transport vehicles. Where no custodial rights are granted, there is no need for issuance of any consignment note. Accordingly, the activity cannot amount to Goods Transport Agency's services.
♦		Custodial rights mean right to custody of goods being transported. Such rights must be with the GTA, then only the service will be liable to service tax under this category.

Apparently, in this case the custodial rights are transferred to the vehicles owners and, therefore, the service would become a goods transport agency's service, where issuance of consignment note is mandatory. Therefore, you are liable to pay service tax thereon under reverse charge as applicable.

WORKS CONTRACT SERVICES - BENEFIT OF ABATEMENT UNDER ENTRY 12 CANNOT BE AVAILED

15. We are works contract service providers. Can we avail of the benefit of abatement under Entry No. 12 of the Notification No. 26/2012-ST. Please clarify with reasons.

Entry 12 of the Notification. No. 26/2012-ST uses the particulars "Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority", which is identical to the expression employed under section 66E(b) of the Finance Act, 1994. Thus, Entry 12 refers to section 66E(b), viz., construction services and not works contract services.

If the services are works contract services falling under Section 66E(h) of the Finance Act, 1994, the service will be valued as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006 mandatorily [Two options : Actual basis under Rule 2A(i) and Deemed Basis under Rule 2A(ii)].

In other words, if VAT is leviable on supply of goods portion, the service would be classified under section 66E(h) and value will be determined as per Rule 2A.

A works contract service provider cannot, therefore, avail of the benefit of Entry 12 of Notification. No. 26/2012-ST.

However, if VAT is not leviable on construction work, then service will fall under section 66E(b) and benefit of Entry 12 of Notification No. 26/2012-ST would be available.

WORKS CONTRACT - SALE PORTION CANNOT CONTRACT BE REGARDED AS TRADING/EXEMPTED SERVICE - CENVAT RULE 6 NOT APPLICABLE

16. We are works contract service providers. We pay service tax on actual basis as per Rule 2A(i) of the Service Tax(Determination of Value) Rules, 2006 and claim credit of inputs relatable to service portion, credit of input services and capital goods as well. Our consultant has expressed that credit of inputs is not available and, further, we are liable to reverse pro rata credit of input services relatable to sale element regarding it as 'exempted service'/ 'trading of goods' falling under Section 66D(e) of the Finance Act, 1994. Please clarify.

Your query can be replied in following parts -

Part I - Input credit is available for inputs consumed in provision of service portion

Rule 2(k), read with Rule 2(l) of the CENVAT Credit Rules, 2004 denies Cenvat credit of input/input services used for —

(a)		construction or execution of works contract of a building or a civil structure or a part thereof; or
(b)		laying of foundation or making of structures for support of capital goods, except for providing construction or works contract services.

Therefore, if input/input services are used otherwise than for building/civil structures, then credit is available even if it amounts to works contract.

Moreover, even if input/input services are used for building/civil structures, credit is available if they are used for providing construction services or works contract services.

In case of works contract services, the value of services is determined as per Rule 2A of the Service Tax (Determination of Value) Rules, 2006. The provisions in relation to taking credit are as follows —

♦

Cenvat Credit on inputs :

-		Contractors falling under Rule 2A(i) : Rule 2(l) of the CENVAT Credit Rules, 2004, allows credit of inputs used in service portion of works contract services. As far as Rule 2A(i) is concerned, there is no bar and credit of inputs used in service portion is available (i.e., credit of inputs used in sale portion of works contract is not available).
-		Contractors falling under Rule 2A(ii) :Explanation 2 to Rule 2A(ii) specifically provides that the service provider is not entitled to the credit of excise duty paid on inputs used in providing the services. Therefore, no credit of excise duty paid on the inputs can be availed by the service provider opting for valuation under Rule 2A(ii).

♦

Cenvat credit on input services and capital goods : Service provider will be entitled to the credit of excise duty paid on capital goods and service tax paid on input services.

The Explanation 2 to Rule 2A(ii) relates only to Rule 2A(ii) and not to Rule 2A(i), otherwise, provisions of Rule 2(k) would becomeotiose, as Rule 2(k), which allows credit of inputs used for works contract services would go contrary to the Explanation 2 to Rule 2A(ii), which disallows credit of inputs.

Moreover, the fact that Explanation 1 defines 'total amount' used in Rule 2A(ii), Explanation 2 belongs to Rule 2A(ii) only.

Therefore, input credit for inputs consumed in providing service portion under a works contract would be available to you, as you are paying service tax under Rule 2A(i) [Actual basis] of the Service Tax (Determination of Value) Rules, 2006.

Part II - Sale portion is not 'service' and will not be 'trading of goods'

It must be noted that section 65B(44) excludes 'deemed sale' falling under Article 366(29A). Therefore, sale value of a works contract will not fall within the definition of 'service'. Since it is not service, it cannot be excluded from charge of service tax vide negative list entry 66D(e) ['trading of goods'].

As per Rule 2(e) of the CENVAT Credit Rules, 2004, "exempted service" means a -

(1)		taxable service which is exempt from the whole of the service tax leviable thereon; or
(2)		service, on which no service tax is leviable under section 66B of the Finance Act; or
(3)		taxable service whose part of value is exempted on the condition that no credit of inputs and input services used for providing such taxable service shall be taken.

The sale portion of works contract is not a service, hence, it will not fall under clause (2) as well and cannot, therefore, be regarded as an exempted service.

Accordingly, Rule 6 of the CENVAT Credit Rules, 2004 cannot be pressed into service.

Part III - Services used for sale portion are not input services

As per Rule 2(l) of the CENVAT Credit Rules, 2004, input service means a service used by a provider of output service for providing an output service.

As per Rule 2(p) of the CENVAT Credit Rules, 2004, "output service" means any service provided by a provider of service located in the taxable territory.

Since sale portion of works contract is not a service, it cannot be an output service and, therefore, there is no question of any availment of input service credit in respect of services used for such sale portion.

If any such credit is availed, the only recourse open to Department is to seek reversal [Pro rata or otherwise] under Rule 2(l), read with Rule 3 of the CENVAT Credit Rules, 2004.

The provisions of Rule 6 of the CENVAT Credit Rules, 2004 cannot be made applicable.

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

O/o The Principal Accountant General

Ahmedabad, Gujarat

M. No. 9825829075

Reply, Reply All or Forward | More

Pavan Singla

To It_law_reported@yahoogroups.com

Nov 9 at 7:45 PM

REVERSE CHARGE - FEES PAID TO FOREIGN GOVERNMENT

The following may please be noted -

1.		Government doesn't include foreign government as per the General Clauses Act; hence, the services provided by foreign government cannot fall under negative list entry under Section 66D(a) of the Finance Act, 1994.
2.		Fees is different from tax, as fees is generally charged for providing any service.
3.		Regulation of market is apparently not a service, but if fees is only a consideration for granting access to foreign market and is not incidental to governmental function, it is a service. Facts and treatment in foreign law are to be analysed prior to making any decision in this regard.

In view of the above, prima facie, impugned fees is not liable to service tax and, accordingly, there is no question of reverse charge applying.

The treatment under foreign tax laws may guide the treatment under the Indian tax laws but will not be decisive.

CLEANING OF HOSPITALS - TAXABILITY

Apparently, mere cleaning may not be exempt; but, repair and maintenance followed by cleaning would be exempt.

WEATHER STATION - ERECTION, ETC. - LIABILITY TO SERVICE TAX

3. Please consider the following :

(a)		An automatic weather Station is made up of three components-Censors, data loggers & Solar Panels.
(b)		Mr. A takes three components on-site and installs it as an automatic Weather Station.
(c)		The installation is done after doing some cementing and it is affixed two feet down the ground & its intent is to permanently keep the weather station there itself.
(d)		If for any reason the Weather station is to be removed, then to avoid the risk of damage, firstly, the wiring is disconnected and then the censors are removed, then solar panels are removed and then cementing is removed.
(e)		Is this installation manufacture or is it Immovable property ?

The process, prima facie, amounts to manufacture of goods.

[Note : In absence of full facts, prima facie view could only be expressed.]

RADIO TAXI - MEANING OF - NEGATIVE LIST

4. As per State transport authorities radio taxi permit is given only if :

a.		*Cabs are purchased and not hired by the operator.*
b.		*GPS/GPRS system is installed in the cabs and is monitored by the controller.*

Negative list contains an entry as regards radio taxi under Section 66D(o) but radio taxi is not defined in the Finance Act, 1994.

Should we consider meaning of radio taxi as follows: —

♦		**a taxi approved by the State transport authorities, which satisfies all the above conditions, or**
♦		*as the common understanding goes, any taxi in which the dispatcher of the taxi has to be contacted for availing of the taxi facility.*

RENT-A-CAB - ABATEMENT UNDER NOTIFICATION NO. 26/2012

First of all the views expressed by the author in the above-referred to article are her personal views and the same has been a made specifically clear in her analysis of the issue.

Therefore, we, personally agree with your view.

TRANSPORT v. TOUR - DIFFERENCE BETWEEN

'Transport' of passengers and 'Tour' are different inasmuch as :

1.		Transport means : to move something or somebody around, usually over long distances; move while supporting, either in a vehicle or in one's hands or on one's body, or basically taking from one place to another place.
2.		Tour means : A guided visit to a particular place, or virtual place. Tour means conceptualization/planning, etc., of a visit of a place, of which transport is a part.

The fact that there is a difference cannot be outweighed by minuteness of the difference.

Broadly, service element is more in tour.

RESTAURANT/CATERING SERVICES - SCOPE OF :

(a)		*Supply of food in a Non-A/C Dhaba*
(b)		*Supply of food in a AC Restaurant [whether supplying liquor or not]*
(c)		*Supply of food in a Banquet Hall [marriage/function booking]*
(d)		*Supply of food in a Hotel [Room rented and breakfast free]*
(e)		*Supply of food in a Hospital [Room given to patient + food supplied]*

Service means an activity carried out for consideration, excluding deemed sale transactions referred to in Article 366(29A).

The various issues raised in your query can be replied as follows:

Issue	Reply
(a) Supply of food at Non-A/C Dhaba; and (b) Supply of food at AC Restaurant (whether supplying liquor or not)	As per Article 366(29A)(f) and judgments in K. Damodarasamy Naidu & Bros. v. State of Tamil Naidu [2000] 117 STC 1 (SC) and recent Judgment of the Kerala High Court in Kerala Classified Hotels & Resorts Association v.Union of India [2013] 40 STT 253/35 taxmann.com 568 (Ker.), restaurant transactions are fully sales and no part of the price charged for food is liable to service tax. Only service charges over and above the price charged for food can be subjected to service tax.
(c) Supply of food by Banquet Hall (marriage/function booking]	In this case, the service involves catering as well as renting and is a composite supply. The same is not excluded from the definition of service and is liable to service tax. The taxability is as per the abatement contained in Entry 4 of the Notification No. 26/2012-ST. If only catering services are provided without renting, then, it will fall under section 66E(i) and value will be determined as per Rule 2C of the Service Tax (Determination of Value) Rules, 2006.
(d) Supply of food by Hotel [Room rented and breakfast free]	The benefit of Entry 4 of the Notification No. 26/2012-ST cannot be claimed, as the condition "specially arranged for organizing a function" contained therein is not fulfilled. The essential character is renting and, therefore, the service appears to fall under Section 66E(a) and eligible for abatement under Entry 6 of the Notification No. 26/2012-ST.
(e) Supply of food by Hospital [Room given to patient + food supplied]	The service of supplying food and hiring out room are incidental to the principal service of health care, which itself is exempt under Entry 2 of the Notification No. 25/2012-ST. Accordingly, this portion of the service will also be exempt from service tax.

REVERSE CHARGE - DIRECTORS OF BANKS/CO-OPERATIVE BANKS

8. Please clarify whether bank/co-operative bank is liable to pay service tax on sitting fees paid to directors and other members ?

Accordingly, directors of the co-operative bank would be outside the scope of reverse charge and would be liable to service tax accordingly.

[Note : It is strange that the word 'company' has been used within the meaning of the word 'person' under Section 65B(37) and not defined in the Act itself.]

REVERSE CHARGE - PRINTING/PHOTOCOPY/BINDING

REVERSE CHARGE - SERVICE TAX WRONGLY PAID BY SERVICE PROVIDER - CAN BE DEMANDED AGAIN FROM SERVICE RECIPIENT

The security services are chargeable to service tax and, hence, tax paid, if any, cannot be regarded as paid without charge.

The service tax is payable by the person who is liable to pay service tax as per section 68 and the person so liable to pay service tax falls within the definition of an 'assessee'.

Therefore, all obligations under the service tax law are to be complied with by the person liable to pay service tax (registration, payment, returns, etc.).

A person other than 'person liable to pay service tax' can be regarded as an assessee only if such person is the agent of the person liable to pay service tax.

REVERSE CHARGE - TRANSPORT OF EMPLOYEES - CENVAT CREDIT AVAILABLE

REVERSE CHARGE - FIRM INCLUDES LLP

Since a partnership firm is covered under reverse charge, the LLP is also covered under the reverse charge. Accordingly, you are liable to pay service tax under reverse charge.

REVERSE CHARGE - MANPOWER SUPPLY SERVICES

REVERSE CHARGE - GOODS TRANSPORT AGENCY - REVERSE CHARGE APPLICABLE IF CUSTODIAL RIGHTS TRANSFERRED

♦		Section 65B(26) defines GTA (goods transport agency) to mean a person issuing consignment note and Rule 4B provides that consignment note is to be issued by GTA. Thus, prima facie, both provisions logically refer to each other for their meaning. However, it is not true.
♦		Section 65B(26) is a parent law and, therefore, the word .consignment note. in definition of Goods Transport Agency u/s 65B(26) is to be interpreted in general sense and doesn't carry meaning thereof under rule 4B of the Service Tax Rules, 1994. The service would be GTA service only if there is transfer of custodial rights and only in that case, the issue of consignment note would arise.
♦		A transport service can fall under Goods Transport Agency's services only if custodial rights or documents of title to goods are handed over by the assessee to operators of transport vehicles. Where no custodial rights are granted, there is no need for issuance of any consignment note. Accordingly, the activity cannot amount to Goods Transport Agency's services.
♦		Custodial rights mean right to custody of goods being transported. Such rights must be with the GTA, then only the service will be liable to service tax under this category.

WORKS CONTRACT SERVICES - BENEFIT OF ABATEMENT UNDER ENTRY 12 CANNOT BE AVAILED

15. We are works contract service providers. Can we avail of the benefit of abatement under Entry No. 12 of the Notification No. 26/2012-ST. Please clarify with reasons.

In other words, if VAT is leviable on supply of goods portion, the service would be classified under section 66E(h) and value will be determined as per Rule 2A.

A works contract service provider cannot, therefore, avail of the benefit of Entry 12 of Notification. No. 26/2012-ST.

However, if VAT is not leviable on construction work, then service will fall under section 66E(b) and benefit of Entry 12 of Notification No. 26/2012-ST would be available.

WORKS CONTRACT - SALE PORTION CANNOT CONTRACT BE REGARDED AS TRADING/EXEMPTED SERVICE - CENVAT RULE 6 NOT APPLICABLE

Your query can be replied in following parts -

Part I - Input credit is available for inputs consumed in provision of service portion

Rule 2(k), read with Rule 2(l) of the CENVAT Credit Rules, 2004 denies Cenvat credit of input/input services used for —

(a)		construction or execution of works contract of a building or a civil structure or a part thereof; or
(b)		laying of foundation or making of structures for support of capital goods, except for providing construction or works contract services.

Therefore, if input/input services are used otherwise than for building/civil structures, then credit is available even if it amounts to works contract.

Moreover, even if input/input services are used for building/civil structures, credit is available if they are used for providing construction services or works contract services.

♦

Cenvat Credit on inputs :

-		Contractors falling under Rule 2A(i) : Rule 2(l) of the CENVAT Credit Rules, 2004, allows credit of inputs used in service portion of works contract services. As far as Rule 2A(i) is concerned, there is no bar and credit of inputs used in service portion is available (i.e., credit of inputs used in sale portion of works contract is not available).
-		Contractors falling under Rule 2A(ii) :Explanation 2 to Rule 2A(ii) specifically provides that the service provider is not entitled to the credit of excise duty paid on inputs used in providing the services. Therefore, no credit of excise duty paid on the inputs can be availed by the service provider opting for valuation under Rule 2A(ii).

♦

Cenvat credit on input services and capital goods : Service provider will be entitled to the credit of excise duty paid on capital goods and service tax paid on input services.

Moreover, the fact that Explanation 1 defines 'total amount' used in Rule 2A(ii), Explanation 2 belongs to Rule 2A(ii) only.

Part II - Sale portion is not 'service' and will not be 'trading of goods'

As per Rule 2(e) of the CENVAT Credit Rules, 2004, "exempted service" means a -

(1)		taxable service which is exempt from the whole of the service tax leviable thereon; or
(2)		service, on which no service tax is leviable under section 66B of the Finance Act; or
(3)		taxable service whose part of value is exempted on the condition that no credit of inputs and input services used for providing such taxable service shall be taken.

The sale portion of works contract is not a service, hence, it will not fall under clause (2) as well and cannot, therefore, be regarded as an exempted service.

Accordingly, Rule 6 of the CENVAT Credit Rules, 2004 cannot be pressed into service.

Part III - Services used for sale portion are not input services

As per Rule 2(l) of the CENVAT Credit Rules, 2004, input service means a service used by a provider of output service for providing an output service.

As per Rule 2(p) of the CENVAT Credit Rules, 2004, "output service" means any service provided by a provider of service located in the taxable territory.

If any such credit is availed, the only recourse open to Department is to seek reversal [Pro rata or otherwise] under Rule 2(l), read with Rule 3 of the CENVAT Credit Rules, 2004.

The provisions of Rule 6 of the CENVAT Credit Rules, 2004 cannot be made applicable.

CX - Manufacture of e-bikes on job-work basis - in another case Revenue denied credit lying in account when e-bikes were exempted - in that case Tribunal ordered pre-deposit and same was paid - since credit so denied is out of credit sought to be denied in present case, pre-deposit made is sufficient: CESTAT

By TIOL News Service

NEW DELHI, NOV 09, 2013 : M/s. Hero Exports imported e-bikes in CKD condition as also parts of e-bike. The same were cleared on payment of duty under the scheme DEEC, FMS and FPS as also OGL. The said imported goods were sent by them directly from the Customs to the factory of Hero Ecotech Ltd for conversion into e-bikes on job work basis. The completely manufactured e-bike was cleared by Hero Ecotech Ltd. on payment of duty.

The dispute in the present appeal relates to CENVAT credit of duty of customs paid by M/s. Hero Exports and availed by Hero Ecotech Ltd.

The adjudicating authority has disallowed the credit on the ground that same is availed on the basis of endorsement on the bill of entry of Hero Exports . Another ground taken by the adjudicating authority is that the duty stands paid under various schemes by debiting the scrips and as such, in terms of notification 53/03-Cus and 90/06-Cus, the credit can be availed by the importer and not by job worker. It is also held that name of M/s. Hero Ecotech Ltd was not shown as supporting manufacturer in the license issued by DGFT. The plea of limitation was also not accepted.

On the various grounds on which the adjudicating authority confirmed the demand, the Bench took the following view -

+ The technical/procedural objections raised by the Revenue as regards the endorsement on bills of entry by M/s. Hero Exports instead of issuing separate invoices does not advance Revenue's case. Endorsements made by M/s. Hero Exports on the reverse of bill of entry clearly give all the particulars as also the specifications etc. which are necessary for the purpose of availment of credit.

+ Even if the Revenues' stand as regards the violation of notification No.53/03-Cus and 90/06-Cus are accepted at this prima facie stage, we are of the view that availment of credit by Hero Ecotech Ltd. would be violation of those customs notifications and cannot have any reflection on availment of credit by the manufacturer who has admittedly paid the duty on the final product.

+ The period involved in the present appeal is from February 2007 to August 2009 whereas the show cause notice was issued on 12.8.10 in one of the cases. This covers the order confirming the demand of duty of Rs.4.89 crores. We find that e-bikes which are dutiable during the relevant period were specifically exempted vide notification No.25/08-CE with effect from 29.4.08. At that point of time, appellant was having credit in their credit account, for which the Revenue raised the SCN dated 8.5.09 seeking reversal of such credit. As such, it becomes clear that Revenue was aware of the availment of credit in respect of part of the e-bikes as early as 08.05.09 when it issued the SCN for reversal of credit on the final product becoming exempted. As such, it can be prima facie concluded that SCN issued on 12.8.10 invoking the longer period of limitation was barred by limitation.

+ SCN for reversal of credit on e-bike becoming exempted with effect from 29.4.08 was adjudicated by the Commissioner confirming the demand of duty of Rs.2.69 crores and in appeal, Tribunal vide its stay order dated 30.5.11 directed the appellant to deposit a part amount of Rs.one crore which stands deposited. Admittedly such reversal of credit in terms of Tribunals' stay order is out of credit so availed by the assessee which is now being sought to be denied.

Holding that the deposit of Rs. One croremade in the referred case can be deemed to be a deposit out of total CENVAT credit involved and denied in the present case, the Bench held that the appellant is entitled to unconditional stay in the matter.

(See 2013-TIOL-1668-CESTAT-DEL)

2013-TIOL-872-HC-KERALA-IT

IN THE HIGH COURT OF KERALA

ITA.No. 92 of 2012

MAMATHA MOTELS

THE ASSISTANT COMMISSIONER OF INCOME TAX, THRISSUR

Manjula Chellur and A M Shaffique, JJ

Dated : October 3, 2013

Appellant Rep. by : Sri T M Sreedharan, Sr Adv, Smt Nisha John, Sri V P Narayanan, Smt Boby M Sekhar
Respondent Rep. by : Sri Jose Joseph, SC, Income Tax

Income Tax - Sections 132, 158BC, 253(1)(b) - Whether an order passed by the Tribunal can be challenged, even when sufficient opportunity to prove its bonafide has been given to the assessee - Whether High court can re-appreciate facts on its own, in case previous order by Tribunal has been passed after apposite consideration of documentary evidence.

Assessee is a firm running bar attached Hotel and Restaurant. Pursuant to search at the business premises, its assessment was completed u/s 158BC fixing the undisclosed income for the AYs 1993-94 to 1997-98 as Rs.1 ,06,62,370 /-. On appeal Tribunal set aside the block assessment and ordered with a direction to consider the matter afresh after giving an opportunity to the erstwhile partners of the firm. Thereafter, a fresh assessment was made for the block period as per order dated 25.3.2002 undisclosed income was determined at Rs.1 ,06,62,370 /-. Assessee preferred an appeal before the Tribunal, who had directed AO to allow deduction of Rs.3 lakhs in respect of Bar licence fee from the undisclosed income determined. In respect of the AY 1994-95, determination of undisclosed income was set aside and the issue was remitted to AO. In respect of AY 1995-96 and 1996-97, the same direction was issued. In respect of AY 1997-98, determination of undisclosed income was confirmed. The AO thereafter made fresh assessments pursuant to the directions contained in appellate order for the AYs 1993-94, 1994-95, 1995-96 and 1996-97 and determined the undisclosed income for the block period as Rs.91,04,290/-. Assessee preferred an appeal before the Tribunal, who had sustained the disputed additions.

It was argued the assessee's counsel that in respect of AY 1993-94, there had been a mistake in recording the figure of purchase and its income. In fact, AO had computed the income for the year on the basis of the seized material, i.e. the profit and loss account for the period from 12.10.1992 to 31.3.1993. With reference to AY 1994-95, AO had estimated the assessee's income as Rs.4 ,00,000 /-. In the order dated 28.3.2007 of the Tribunal, it was found that no opportunity was given to cross examine the previous partner of the firm. The Tribunal found that when the assessee had challenged the assessment based on evidence found during search and further materials in relation to that evidence and having ignored the profit and loss account as being not reliable for the purpose, AO thus had no option other than to make the best assessment. It was further found that the computation of undisclosed income had necessarily to be on the basis of evidence found as a result of search and other materials or information available with the AO in relation to the said evidence. It was found that the firm did not file any ROI with the Income-tax Department upto the date of search, that is for the assessment years 1992-93 to 1994-95, even when it was assessed to sales tax and was also paying excise duty as well as Bar licence fee for those years. Its first return was filed for the assessment year 1995-96 only on 22.02.1996 showing a loss of Rs.56,330/-. Even thereafter no returns were filed by the assessee. It was found that the undisclosed income for all the years including AY 1995-96 had been arrived at primarily on the basis of the assessee-firm's profit and loss account compiled from the seized documents, viz. day book and ledger. In respect of AY 1995-96, though the assessee had shown the net profit as Rs.15,59,869/-, it was found that there were several mistakes in the statement and finally the undisclosed income was quantified at Rs.18,11,480/-. In regard to AY 1996-97 also, it was found by AO that the undisclosed income would come to Rs.32 ,51,910 /. That finding was confirmed by the Tribunal in its order dated 28.3.2007 which had become final. The matter was remanded only for limited purpose of claiming deduction of the license fee. Therefore, the Tribunal accepted the finding of the AO in this regard.

Held that,

++ having gone through the orders passed by the Assessing Officer and the Tribunal on different occasions, we do not think that none of the questions of law raised by the counsel for the appellant arises for consideration. The jurisdiction of the Assessing Officer to make block assessment for the undisclosed income cannot be found fault with. The assessments were made based on the materials seized during search and seizure. That apart as far as two assessment periods are concerned, the assessment orders had become final even when the Tribunal has passed the order on 28.3.2007. The entire matter had been fairly considered on the basis of evidence on record and the Tribunal has reconsidered the entire issue and confirmed the view expressed by the Assessing Officer. Though the counsel for the appellant has raised several contentions based on the questions of law formulated, we do not think that any of the questions of law arises for consideration. The Assessing Officer and the Tribunal have passed orders purely on the basis of the material on records. It being a consideration based on facts, this Court cannot re-appreciate such facts to render a different finding. In that view of the matter, we do not think that any interference is called for with reference to the order passed by the Tribunal. Accordingly the appeal is dismissed.

Assessee's appeal dismissed

JUDGEMENT

Per : A M Shaffique :

This is an appeal filed by the assessee challenging the order passed by the Income Tax Appellate Tribunal with reference to block assessment for the period from 01.04.1986 to 12.12.1996.

2. The appellant is a firm running Bar attached Hotel and Restaurant. A search was conducted under Section 132 of the Income Tax Act at the business premises of the appellant on 12.12.1996. Thereafter, the assessment proceedings were initiated under Section 158BC of the Income Tax Act for the block period from 1.4.1986 to 12.12.1996. The assessment was completed for the said period as per order dated 26.08.1998 fixing the undisclosed income for the assessment years 1993-'94 to 1997-'98 as Rs.1,06,62,370/-. The matter was taken in appeal before the Income Tax Appellate Tribunal, Cochin Bench by way of first appeal as per the relevant law for appeal prevailing at the time of search by virtue of Section 253(1)(b) of the Income Tax Act as the search was before 1st January 1997. The Appellate Tribunal set aside the block assessment order with a direction to consider the matter afresh after giving an opportunity to the erstwhile partners of the firm. Thereafter, a fresh assessment was made for the block period as per order dated 25.3.2002 and determining the undisclosed income at Rs.1,06,62,370/-. Annexure A is the assessment order dated 25.3.2002. The appellant preferred an appeal before the Appellate Tribunal. The Appellate Tribunal directed the assessing officer to allow deduction of Rs.3 lakhs in respect of Bar licence fee from the undisclosed income determined. In respect of the assessment year 1994-95, determination of undisclosed income was set aside and the issue was remitted to the Assessing Officer. In respect of assessment year 1995-96 and 1996-97, the same direction was issued. In respect of assessment year 1997-98, the determination of undisclosed income was confirmed. Annexure B is the said order. The Assessing Officer thereafter made fresh assessments pursuant to the directions contained in Annexure B appellate order for the assessment years 1993-94, 1994-95, 1995-96 and 1996-97 and determining the undisclosed income for the block period as Rs.91,04,290/-. Annexure C is the said order dated 11.12.2007. The appellant preferred an appeal before the Income Tax Appellate Tribunal and the Tribunal sustained the disputed additions as per order dated 9.12.2011 and produced as Annexure-D.

3. It is, inter alia, contended by the appellant that the Appellate Tribunal did not appreciate and consider the grievance of the appellant in the light of the facts brought on record as per the original assessment order and the previous orders of the Appellate Tribunal. It was contended that the Appellate Tribunal should have found that the quantification of Rs.4 lakhs is not on the basis of any material or seized document. That apart, it is contended that the Tribunal ought to have found that the estimate of undisclosed income in the block assessment order was not legal and not sustainable under the provisions of the Act. The appellant raised the following questions of law:

i) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in its impugned order ignoring the directions as per the previous appellate orders of the Income Tax Appellate Tribunal and contrary to the directions therein?

ii) Is the Appellate Tribunal justified in ignoring the findings in the assessment order with regard to the assessment year 1993-94 that the computation of undisclosed income furnished by the appellant based on the seized materials was to be adopted as against the estimate made by the assessing officer?

iii) Is not the Appellate Tribunal unjustified in confirming the estimate of undisclosed income for the assessment year 1994-95 and computation of undisclosed income for the assessment years 1995-96 and 1996-97 included in the block assessment without reference to the seized documents and the evidence on record. Are not the estimates of undisclosed income made for these years arbitrary and unjustifiable and unsupported by any material?

iv) Should not the appellate Tribunal have set aside the additions which are contrary to the statutory provisions and unsupported by seized material?

v) Is not the contrary decision taken by the Appellate Tribunal unsustainable?
vi) Is the order of the Appellate Order legal, valid and sustainable in law?

4. The main contention urged by the learned counsel for the appellant was the manner in which the assessment had been made by the Assessing Officer. It is clear that in respect of assessment year 1993-94, the contention raised by the assessee was that there has been a mistake in recording the figure of purchase and its income. In fact, the Assessing Officer computed the income for the year on the basis of the seized material, i.e. the profit and loss account for the period from 12.10.1992 to 31.3.1993. The purchase of liquor debited to the said account is at Rs.12,50,865/- when total amount comes to Rs.13,93,882/- as evident from the copy of the ledger account. After referring to the Tribunal's order dated 28.3.2007, it is found that the Tribunal has confirmed the assessment and the remand was only to consider the transaction with reference to the payment of licence fee of Rs.3,00,000/- and whether it would be deducted or not. In other words, as far as the determination of total income for the assessment year 1993-94 is concerned, Rs.7,23,754/- was declared as undisclosed income. Therefore, we do not think that there is any further matter to be considered as far as the assessment year 1993-94 is concerned.

5. With reference to assessment year 1994-95, the assessing officer has estimated the assessee's income as Rs.4,00,000/-. In the order dated 28.3.2007 of the Tribunal, it was found that no opportunity was given to cross examine Smt.E.L.Gracy, who was the previous partner of the firm. After remand, the assessee was permitted to cross examine Smt.E.L.Gracy, the Ex-Managing Partner from whose residence profit and loss account was seized. She confirmed her earlier statement dated 12.2.1996 and 15.02.2002 confirming the said account to be that of the assessee and further clarifying that she has signed the statement only after reading the contents thereof. The Tribunal found that when the assessee has challenged the assessment based on evidence found during search and further materials in relation to that evidence and having ignored the profit and loss account as being not reliable for the purpose, the assessing officer thus had no option other than to make the best assessment. The Tribunal further found that the computation of undisclosed income has necessarily to be on the basis of evidence found as a result of search and other materials or information available with the Assessing Officer in relation to the said evidence. It was found that the firm did not file any return of income with the Income-tax Department upto the date of search, that is for the assessment years 1992-93 to 1994-95, even when it was assessed to sales tax and was also paying excise duty as well as Bar licence fee for those years. Its first return was filed for the assessment year 1995-96 only on 22.02.1996 showing a loss of Rs.56,330/-. Even thereafter no returns were filed by the assessee. It was found that the undisclosed income for all the years including assessment year 1995-96 has been arrived at primarily on the basis of the assessee-firm's profit and loss account compiled from the seized documents, viz. day book and ledger. The same were found and seized from the residence of Smt.E.L.Gracy, its Managing Partner for the relevant years. She confirmed the same as being the full account of the firm's business for the relevant years, though not disclosed to the Department. This fact was not disputed. The assessee also had admitted the same and even adopted the entire net profit as disclosed thereby as representing the firm's income. There was also material to show that there is no discrepancy with regard to the primary facts and the sales as well as the profit for the assessment year matches with that of the preceding and succeeding years. Therefore, it was found that even going by the adopted turnover of Rs.18.79 lakhs, there has been an omission to disclose the same to the Revenue. Hence, the suppression of sales for the year at least to the extent of Rs.18.79 lakhs, was proved which came to surface only as a result of search. Therefore, the Assessing Officer could not be faulted for estimating the undisclosed income for the year at Rs.4 lakhs, (computed at 21.29%) which works out to less than the ratio of net profit as found to have been earned for the other years, which stand assessed and in fact accepted. The assessee has not brought any material on record to show that it had not earned its normal average ratio of profit (which varies from 22% to 36%). Having regard to the aforesaid facts and circumstances, the Tribunal also concurred with the view expressed by the Assessing Officer in restricting the profit at Rs.4 lakhs as against Rs.14.85 lakhs as reflected from P & L account statement.

6. In respect of assessment year 1995-96, though the assessee had shown the net profit as Rs.15,59,869/-, it is found that there were several mistakes in the statement and finally the undisclosed income was quantified at Rs.18,11,480/-

7. In regard to the assessment year 1996-97 also, it is found by the Assessing Officer that the undisclosed income would come to Rs.32,51,910/. That finding is confirmed by the Tribunal in its order dated 28.3.2007 which has become final. The matter was remanded only for limited purpose of claiming deduction of the licence fee. Therefore, the Tribunal accepted the finding of the Assessing Officer in this regard.

8. Having gone through the orders passed by the Assessing Officer and the Tribunal on different occasions, we do not think that none of the questions of law raised by the learned counsel for the appellant arises for consideration. The jurisdiction of the Assessing Officer to make block assessment for the undisclosed income cannot be found fault with. The assessments were made based on the materials seized during search and seizure. That apart as far as two assessment periods are concerned, the assessment orders had become final even when the Tribunal has passed the order on 28.3.2007. The entire matter had been fairly considered on the basis of evidence on record and the Tribunal has reconsidered the entire issue and confirmed the view expressed by the Assessing Officer. Though the learned counsel for the appellant has raised several contentions based on the questions of law formulated, we do not think that any of the questions of law arises for consideration. The Assessing Officer and the Tribunal have passed orders purely on the basis of the material on records. It being a consideration based on facts, this Court cannot reappreciate such facts to render a different finding.

In that view of the matter, we do not think that any interference is called for with reference to the order passed by the Tribunal. Accordingly the appeal is dismissed.

2013-TIOL-866-HC-KERALA-IT

IN THE HIGH COURT OF KERALA

ITA.No. 248 of 2013

M/s OBERON TRADING CORPORATION

THE INCOME TAX OFFICER
WARD-1(2), THIRUVANANTHAPURAM

Manjula Chellur, CJ and A M Shaffique, J

Dated : October 8, 2013

Appellant Rep. by : Sri J R Prem Navaz, Sri R Sreejith
Respondent Rep. by : Sri Jose Joseph, SC for Income Tax

Income Tax - partnership firm - retirement - profits - Whether money paid as transfer of goodwill to a retiring partner, can be claimed as depreciation by the partnership firm - Whether in case of retirement of a partner, there is a transfer of entire business to the new partner.

Assessee, is a partnership firm, involved in the business of pharmaceutical distribution. During the course of its business new partners were introduced and all partners, one after the other, retired from the partnership firm in the successive years commencing from AY 2004-2005. Assessee firm claimed depreciation on transfer of so called goodwill paid to the partner, who was retiring in that particular AY. Though it was allowed initially, subsequently the assessment was reopened u/s 263. According to appellant assessee, in each assessment year whatever amount payable to the retiring partner as a goodwill claimed as depreciation has to be allowed and Tribunal was not justified in opining that there is no question of payment of any goodwill to a retiring partner, as the partnership continues to be a firm carrying on the business without any change in the nature of business by using the earlier name.

Before HC, assessee's counsel had contended that Tribunal was not justified in disallowing such claim opining that under common law, partnership firm may not be a legal entity, though under the Income Tax Act it is an independent and separate assessable unit. The question is whether the previous owner has transferred goodwill to the appellant assessee and the benefit derived from the appellant assessee is retention of continued trust of the customers, who were customers of the previous owners.

Held that,

++ when one partner retires from the business, there is no severance of status so far as the partnership is concerned, as the retiring partner would take his capital investment and retire from partnership and the others continue to carry on the business. By adopting this method, four partners, who decided to go out of the business, have not transferred the entire business concern to the new partners, but have chosen to continue for some time and at their leisure, they retired from partnership one after the other. Therefore, the assets and liabilities of the firm continued as such without any change including tangible and intangible. Share of the capital came to be paid to the retiring partner and it cannot be treated as cost paid to the retiring partner towards acquisition of any right from him. Partner who retire from the partnership firm takes its initial investment and profit, if any, payable to him. Similarly, if he is accountable for any loss in a particular assessment year, that would also be worked out at the time of retiring from partnership business. In that view of the matter, there is no transfer of any interest and the money paid is only towards the share of the capital invested by that partner along with some profit, if any, and nothing beyond that. Therefore, the question of each year some money paid towards the goodwill would not arise in the facts of the present case, therefore, the Income Tax Appellate Tribunal was justified in disallowing goodwill claimed by the appellant assessee.

Assessee's appeal dismissed

JUDGEMENT

Per : Manjula Chellur :

Heard learned counsel for the appellant. We have also gone through the orders of the Income Tax Appellate Tribunal.

2. Appellant, a partnership firm, involved in the business of pharmaceutical distribution, filed these two appeals. According to appellant firm, long back the firm came to be established. During the course of its business new partners were introduced and all partners, one after the other, retired from the partnership firm in the successive years commencing from the assessment year 2004-2005. Appellant firm claimed depreciation on transfer of so called goodwill paid to the partner, who was retiring in that particular assessment year. Though this came to be allowed, subsequently the assessment came to be reopened under Section 263 of the Income Tax Act. But it got reopend suo motu by the Commissioner of Income Tax under Section 263 of the Act.

3. The only question that needs our attention in the present appeal is whether money paid as transfer of goodwill to a partner, who was retiring, could be claimed as depreciation in that assessment year by the partnership firm? According to learned counsel for the appellant, Tribunal was not justified in disallowing such claim opining that under common law, partnership firm may not be a legal entity, though under the Income Tax Act it is an independent and separate assessable unit. Facts in the present case are to the effect that initially four partners constituted the partnership firm in the business of pharmaceuticals and continued so. Later, three partners entered and the partnership consisted of seven partners. Subsequently, in four consecutive assessment years earlier four partners one by one retired from the partnership firm. According to appellant assessee, in each assessment year whatever amount payable to the retiring partner as a goodwill claimed as depreciation has to be allowed and Tribunal was not justified in opining that there is no question of payment of any goodwill to a retiring partner, as the partnership continues to be a firm carrying on the business without any change in the nature of business by using the earlier name. The learned counsel places reliance in the case of B.Raveendran Pillai v. The Commissioner Of Income Tax (332 ITR 531). On perusal of the above case, we note that so far as the present case and the case referred to by the learned counsel, the facts are entirely different because the entity that was transferable in that case was a proprietary concern and not a partnership. Similarly, the entity came to be transferred to new proprietary without retaining the same name of the old proprietary concern, i.e., the hospital. Apart from the said fact, one has to see difference in the facts of the present case. We are not concerned with the partnership firm where there is no transfer of interest in the partnership firm entirely to the new partners at a time. It is a case where four partners constituted the partnership firm initially and added three more partners and then continued partnership firm with seven partners and later on in each successful assessment year one after the other the initial four partners came to retire from the business and at the end of the fourth year, only three new partners continued to run the business of pharmaceuticals. The question is whether the previous owner has transferred goodwill to the appellant assessee and the benefit derived from the appellant assessee is retention of continued trust of the customers, who were customers of the previous owners. When one partner retires from the business, there is no severance of status so far as the partnership is concerned, as the retiring partner would take his capital investment and retire from partnership and the others continue to carry on the business. By adopting this method, four partners, who decided to go out of the business, have not transferred the entire business concern to the new partners, but have chosen to continue for some time and at their leisure, they retired from partnership one after the other. Therefore, the assets and liabilities of the firm continued as such without any change including tangible and intangible. Share of the capital came to be paid to the retiring partner and it cannot be treated as cost paid to the retiring partner towards acquisition of any right from him. Partner who retire from the partnership firm takes its initial investment and profit, if any, payable to him. Similarly, if he is accountable for any loss in a particular assessment year, that would also be worked out at the time of retiring from partnership business.

4. In that view of the matter, there is no transfer of any interest and the money paid is only towards the share of the capital invested by that partner along with some profit, if any, and nothing beyond that. Therefore, the question of each year some money paid towards the goodwill would not arise in the facts of the present case, therefore, the Income Tax Appellate Tribunal was justified in disallowing goodwill claimed by the appellant assessee.

Accordingly, the appeal is dismissed.

2013-TIOL-959-ITAT-DEL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'H' NEW DELHI

ITA No.5084/Del/2012
Assessment Year: 2004-05

2013-TIOL-867-HC-KERALA-IT

IN THE HIGH COURT OF KERALA

WA.No. 817 of 2010

1. ASST COMMISSIONER OF INCOME TAX, CALICUT
2. THE COMMISSIONER OF INCOME TAX, CALICUT

M/s KERALA TRANSPORT CO

Manjula Chellur, CJ and A M Shaffique, J

Dated : October 8, 2013

Appellant Rep. by : Sri Jose Joseph, SC, Income Tax
Respondent Rep. by : Sri S Arun Raj, Adv

Income Tax - Sections 140A, 144, 154, 156, 244A (1) - refund - demand - interest - self assesssment - Whether in case, it is found subsequentally that self-assessed tax paid and adjusted against the demand, was to be refunded in that case assessee will be entitled to get interest u/s 244A (1)(b).

Assessee concern had paid taxes after making self assessment for the AY 1990-91. The assessment was completed u/s 144. While making self assessment, assessee had paid a sum of Rs.13,94,620/-. An additional amount of Rs.4,34,349/- was raised based on assessment order. The same was collected on 16.08.1993. After a series of appeals preferred by petitioner, assessment was revised to give effect to the order of ITAT thus setting off the loss determined for the earlier year. An order was passed by ACIT u/s 154 fixing the revised total income at Rs.39,56,950/- and tax at Rs.10,10,521/-. Since the petitioner had paid excess tax, ACIT again passed an order determining the excess tax paid by the petitioner amounting to Rs.9,40,669/- and classifying excess tax paid under two categories. Rs.5,06,320/- paid as self-assessed tax u/s 140A and Rs.4,34,349/- as tax paid vide notice u/s 156. It had also allowed interest u/s 244A on the excess tax of Rs.4,34,349/- paid on 16.08.1993 and held that no interest u/s 244A was payable by the department on tax paid by way of self-assessed tax and there was no provision for the same. Against the said order, a revision petition was filed by the assessee, which the CIT had dismissed. Thereafter, assessee had filed a writ petition seeking a declaration that it was entitled to get interest u/s 244A (1) on the balance refund amount of Rs.5,06,320/- and for a direction to the respondents to pay the interest on the said amount, where it was found that it was clear from Section 244A(1)(b) and the explanation that the department cannot dispute that the assessee was entitled to interest on refund of all payments of tax in excess of actual tax found due. It was found that if any self-assessed tax paid and adjusted against the demand was later found to be refunded, then the assessee will be entitled to get interest u/s 244A (1) (b) on such excess tax adjusted against demand. Accordingly, the writ petition was allowed.

Held that,

++ counsel for the appellants based on the explanation to Section 244A would contend that as far as self-assessment is concerned, there cannot be any refund under the normal circumstances. Such a procedure is not taken care of under Section 244A (1) (b) is concerned. The argument is that going by the explanation to Section 244A (1) (b) the liability to pay interest is only in respect of the tax paid after a demand is made u/s 156. We do not think that such a differentiation can be made to the aforesaid provision and explanation does not give a different meaning at all. Any amount due to the assessee under the Act mentioned in section 244(1) clearly takes in all forms of refund, either self assessed tax or tax paid as per notice u/s 156. As far as the explanation is concerned it only indicates the date on which the interest is liable to paid. That being the position, we do not think that there is any illegality or perversity in the judgment of the Single Judge.

Revenue's appeal dismissed

JUDGEMENT

Per : Shaffique :

This appeal is filed by the revenue against the judgment of the learned Single Judge allowing the writ petition to the extent of modifying Ext.P4 order declining interest on refund of self-assessed tax and directing the Assessing Officer to grant eligible interest on refund of excess self-assessed tax paid from the date of first regular assessment and adjustment till date of refund at the rate provided under Clause (b) of Section 244A (1) of the Income Tax Act. (hereinafter referred as the Act. 2. The facts involved in the above writ petition would disclose that with reference to assessment year 1990-91 the Assessee paid tax after making a self-assessment. The assessment was completed under Section 144 of the Act on 23.03.1993 as per Ext.P1. While making self assessment the assessee had paid a sum of Rs.13,94,620/-. An additional amount of Rs.4,34,349/- was raised based on Ext.P1 assessment order. The same was collected on 16.08.1993. After a series of appeals preferred by the petitioner the assessment was revised to give effect to the order dated 30.01.2002 of the ITAT thus setting off the loss determined for the earlier year. An order was passed by the Assistant Commissioner of Income Tax under Section 154 of the Act fixing the revised total income at Rs.39,56,950/- and tax at Rs.10,10,521/-. Since the petitioner had paid excess tax, the 1st respondent again passed an order dated 18.12.2002 determining the excess tax paid by the petitioner amounting to Rs.9,40,669/- and classifying excess tax paid under two categories. Rs.5,06,320/- paid as self-assessed tax under Section 140A and Rs.4,34,349/- as tax paid vide notice under Section 156 of the Act. The 1st respondent also allowed interest under Section 244A on the excess tax of Rs.4,34,349/- paid on 16.08.1993 and held that no interest under Section 244A is payable by the department on tax paid by way of self-assessed tax and there is no provision for the same. Ext.P3 is the said order. Aggrieved by Ext.P3 the petitioner preferred a revision and the 2nd respondent rejected the same as per Ext.P4 order. The petitioner had filed the writ petition seeking a declaration that he is entitled to get interest under Section 244A (1) of the Act on the balance refund amount of Rs.5,06,320/- and for a direction to the respondents to pay the interest on the said amount. 3. The learned Single Judge found that it is clear from Section 244A(1)(b) and the explanation that the department cannot dispute that the assessee is entitled to interest on refund of all payments of tax in excess of actual tax found due. It is found that if any self-assessed tax paid and adjusted against the demand was later found to be refunded, then the assessee will be entitled to get interest under Section 244A (1) (b) of the Act on such excess tax adjusted against demand. Accordingly, the writ petition was allowed as stated above.4. The learned counsel for the appellants based on the explanation to Section 244A would contend that as far as self-assessment is concerned, there cannot be any refund under the normal circumstances. Such a procedure is not taken care of under Section 244A (1) (b) of the Act is concerned. Section 244A (1) (b) and explanation reads as under:

"244A. (1) Where refund of any amount becomes due to the assessee under this Act, he shall, subject to the provisions of this section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely:- (a) ....... (b) in any other case, such interest shall be calculated at the rate of one half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted.

Explanation:- For the purposes of this clause, "date of payment of tax or penalty" means the date on and from which the amount of tax or penalty specified in the notice of demand issued under Section 156 is paid in excess of such demand."

The argument is that going by the explanation to Section 244A (1) (b) the liability to pay interest is only in respect of the tax paid after a demand is made under section 156 of the Act. We do not think that such a differentiation can be made to the aforesaid provision and explanation does not give a different meaning at all. Any amount due to the assessee under the Act mentioned in section 244(1) clearly takes in all forms of refund, either self assessed tax or tax paid as per notice under Section 156 of the Act. As far as the explanation is concerned it only indicates the date on which the interest is liable to paid. That being the position, we do not think that there is any illegality or perversity in the judgment of the learned Single Judge.

Accordingly, this appeal is dismissed.

INCOME TAX OFFICER
WARD-16(3), ROOM NO 143, C R BUILDING,
I P ESTATE, NEW DELHI-110001

TIRUPATI CYLIDNERS LTD
D-14, 2ND FLOOR, PREET VIHAR,
NEW DELHI
PAN NO: AAACT4801H

J Sudhakar Reddy, AM And Chandra Mohan Garg, JM

Dated: June 28, 2013

Appellant Rep by: Shri Amit Goel
Respondent Rep by: Shri Tarun Seem, Sr. (DR)

Income Tax - Section 148 - Whether the notice issued u/s 148 is valid when the approval was not granted by Jt. Commissioner or Addl. Commissioner and instead it was taken from the CIT.

In the assessment order passed u/s 143(3)/147, the AO specifically mentioned that no notice u/s 143(2) was served to the assessee within the statutory time limit during the original assessment proceedings. The AO issued a notice u/s 148 to the assessee calling upon the assessee to file a return of income for the year under consideration. The AO made addition of Rs.10 lakh u/s 68 in the reassessment proceedings. The CIT(A) held reassessment was not in accordance with the provisions of the Act and, accordingly, reassessment was held to be null and void.

On Appeal before the Tribunal the DR submitted that submitted that the AO rightly assumed jurisdiction to initiate proceedings u/s 147 and to issue notice u/s 148. The AR submitted that the AO himself mentioned in the reassessment proceedings that as a matter of precaution, the permission of the CIT was obtained because the AO himself was not sure as to whether a scrutiny assessment was passed in this regard. The AR further submitted that the CIT(A) rightly noted that there was no order u/s 143(3) in the assessee's case for the impugned A.Y.

Having heard the parties, the Tribunal held that,

++ admittedly, there was no order u/s 143(3) during the original assessment proceedings for the year under consideration. It is worthy to take note of the observations and findings of the Jurisdictional High Court of Delhi in the case of CIT vs. SPL'S Siddartha Ltd. wherein it has been held that u/s 151, it was only the Jt. Commissioner or Addl. Commissioner who could grant the approval of the issue of notice u/s 148. If the approval was not granted by Jt. Commissioner or Addl. Commissioner and instead it was taken from Commissioner of Income Tax, then the same was not irregularity curable u/s 292B and the High Court held that the notice u/s 148 was not valid. Respectfully following the above judgment, we hold that the CIT(A) rightly decided the issue in favour of the assessee and held that the reopening of assessment was not in accordance with the provisions of the Act and was liable to be quashed.

Revenue's Appeal dismissed

Case Followed:

C.I.T. vs S.P.L's Siddhartha Ltd. (2011-TIOL-810-HC-DEL-IT).

ORDER

Per: Chandra Mohan Garg:

This appeal has been preferred by the revenue against the order of the CIT(A)-XIX, New Delhi dated 20.07.2012 in Appeal No.223/2011-12 for AY 2004-05.

2. The sole ground raised by the revenue in this appeal reads as under:-

"Ld. Commissioner of Income Tax(A) erred in law and on the facts and in the circumstances of the case, the ld. CIT(A) has erred in of the case in quashing the reopening of the assessment and holding the assessment to be null and void. He failed to appreciate that when Addl.C.I.T. records his satisfaction then only he forwards the propose to the C.I.T. Just because the C.I.T. has also given his approval it does not become illegal."

3. Briefly stated, the facts giving rise to this appeal are that originally assessee filed a return declaring income of Rs.9,95,040 on 31.08.2004 and the same was processed u/s 143(1) of the Income Tax Act (for short the Act). In the assessment order passed u/s 143(3)/147, the Assessing Officer specifically mentioned that no notice u/s 143(2) of the Act was served to the assessee within the statutory time limit during the original assessment proceedings. The Assessing Officer issued a notice u/s 148 of the Act to the assessee on 28.3.2011 calling upon the assessee to file a return of income for the year under consideration. The assessee replied that letter dated 9.4.2011 may be treated as return in response to the notice. The Assessing Officer made addition of Rs.10 lakh u/s 68 of the Act in the reassessment proceedings.

4. Being aggrieved by the above assessment order, the assessee filed an appeal before the Commissioner of Income Tax(A) which was allowed by holding that reassessment was not in accordance with the provisions of the Act and, accordingly, reassessment was held to be null and void. The aggrieved revenue has filed this appeal against the above impugned order of Commissioner of Income Tax(A) which allowed the appeal of the assessee. Ld. DR submitted that the Assessing Officer rightly assumed jurisdiction to initiate proceedings u/s 147 of the Act and to issue notice u/s 148 of the Act. Ld. DR also contended that the Commissioner of Income Tax(A) erred in law and on the facts and circumstances of the case in quashing reopening of the assessment and holding that the assessment was null and void because the Commissioner of Income Tax(A) failed to appreciate the fact that when the ACIT records his satisfaction, then only he forwards the proposal to Commissioner of Income Tax(A). In this legal situation, just because the Commissioner of Income Tax(A) has also given his approval, the reassessment proceedings does not become null and void/illegal.

5. Replying to the above, the assessee's representative submitted that the Assessing Officer himself mentioned in the reassessment proceedings that as a matter of precaution, the permission of Commissioner of Income Tax(A) was obtained because the Assessing Officer himself was not sure as to whether a scrutiny assessment was passed in this regard. The AR further submitted that the Commissioner of Income Tax(A) rightly noted that there was no order u/s 143(3) of the Act in the assessee's case for the impugned assessment year. The AR placed his reliance on the judgment of Hon'ble Jurisdictional High Court of Delhi in the case of C.I.T. vs S.P.L's Siddhartha Ltd. (2012) 345 ITR 223 (Del) = (2011-TIOL-810-HC-DEL-IT) and submitted that the reopening was not in accordance with the provisions of the Act and was liable to be quashed.

6. On careful consideration of above submissions, contentions and material placed on record by both the parties, we observe that admittedly, there was no order u/s 143(3) of the Act during the original assessment proceedings for the year under consideration. In the case of Commissioner of Income Tax vs SPL's Siddhartha Ltd. (supra), the Hon'ble Jurisdictional High Court observed and held as under:-

"6. It is relevant to point out that sub-section (1) and sub'-section (2) of section 151 of the Act are two independent provisions. The definition of Joint Commissioner is contained in section 2(28C) and the definition of Commissioner given in section 2(16), which are as under:

''Joint Commissioner' means a person appointed to be a Joint Commissioner of Income-tax or an Additional Commissioner of Income tax under subsection (1) of section 117. 'Commissioner' means a person appointed to be a Commissioner of Income-tax under sub-section (1) of section 117."

Section 116 of the Act also defines the income tax authorities as different 7 authorities. Such different and distinct authorities have to exercise in accordance with law as per the powers given to them in specified circumstances. If powers conferred on a particular authority are arrogated by other authority without mandate of law, it will create chaos in the administration of law and hierarchy of administration will mean nothing. Satisfaction of one authority cannot be substituted by the satisfaction of "authority. It is trite that when a state requires, a thing to be done in a certain manner, it shall be done in that manner alone and. the court would not expect its being done in some other manner. It was so held in the following decisions :

(i) C.I.T. v. Naveen Khanna (dated November 18, 2009 in I. T. A. No. 21 of 2009 (Delhi) ;
(ii) "State of Bihar v. J. A. C. Saldanha, AIR 1980 SC 326 ; and

(iii) State of Gujarat vs Shantilal Mangaldas, AIR 1969 SC 634.
Thus, if authority is given expressly by affirmative words upon a defined 8 the expression of that condition excludes the doing of the Act under other circumstances than those as defined. It is also principle of law that if a particular authority has been designated to record his/her satisfaction on any particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and further mandatory condition is that the satisfaction recorded should be "independent" and not "borrowed" or "dictated" satisfaction. Law in this regard is now well-settled. In Sheo Narain Jaiswal v ITO (1989) 176 ITR 352 (Patna), it was held:

"Where the Assessing Officer does not himself exercise his jurisdiction u/s 147 but merely acts at the behest of any superior authority, it must be held that assumption of jurisdiction was bad for non-satisfaction of the condition precedent."

The apex court in the case of Anirudhsinhji Karansinhji Jadeja v. State of Gujarat [1995] 5 SCC 302 has held that if a statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion. If discretion is exercised under the direction or in compliance with some higher authorities instruction, then it will be a case of failure to exercise discretion altogether.

We are, therefore, of the opinion that the Tribunal has rightly decided the legal aspect, keeping in view well established principles of law laid down in a catena of judgments including that of the Supreme court."

7. From the impugned order, we observe that the main contention of the assessee, inter alia, on the issue of reopening was that since the reopening notice has been issued after expiry of four years from the end of relevant AY, then the Assessing Officer must seek approval of the Joint/Addl.CIT in terms of section 151 of the Act as there was no scrutiny assessment u/s 143(3) of the Act earlier to the issuance of notice u/s 148 of the Act.

8. On behalf of the assessee, it was also contended that the Assessing Officer has taken permission from the Commissioner of Income Tax instead of Joint/ACIT, therefore, the reopening of assessment was not in accordance with the provisions of the Act and was liable to be quashed.

9. From a careful reading of the operative para of the impugned order, we observe that the Commissioner of Income Tax(A) has decided the issue in favour of the assessee with following observations:-

"As seen from the record there is no evidence to show that there was scrutiny assessment u/s 143(3) in the appellant's case for the impugned 8sessment year earlier to issue of notice u/s 148. Hence, since notice was issued beyond 4 years from the end of asst year, the AO should have obtained the permission of Joint/Additional Commissioner of Income tax in terms S. 151. In this case, the permission was obtained from Commissioner of Income tax in contravention to the provisions of S.151 of the Act. The main contention of the AR, in such a case, is that the reassessment should be held invalid. The provisions of S. 151 are as under:

"151. Sanction for issue of notice.
(1) In a case where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment year, no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Assistant Commissioner or Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice:

Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice.

(2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Joint Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the Joint Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice."

On similar factual matrix, the Hon'ble Delhi High Court in the case of CIT vs. SPL'S Siddartha Ltd., (supra) has upheld the cancellation of assessment. The head note in the said case reads as under:

"When a statute requires a thing to be done in a certain manner, it shall be done in that manner alone and the court would not expect its being done in some other manner, Section 116 of the Income-tax Act, 1961, defines the income-tax authorities as different and distinct authorities. Such different and distinct authorities have to exercise their powers in accordance with law as per the powers given to them in specified circumstances. If a statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion; he has to exercise it according to its own discretion. If discretion is exercised under the direction or in compliance with some higher authorities instruction, then it will be a case of failure to exercise discretion altogether.

Held, that under section 151 of the Act, it was only the Joint Commissioner or Additional Commissioner, who could grant the approval for issue of notice under section 148. The approval was not granted by the Joint Commissioner. Instead, it was taken from the Commissioner of Income-tax. This was not an irregularity curable under section 292B. The notice was not valid."

The AO himself mentioned that as a matter of precaution the permission of CIT was obtained as he, admittedly, was not sure as to whether a scrutiny assessment was passed in this case. As seen from the record there is no order u/s 143(3) in the appellant's case for the impugned assessment year. After careful consideration of the facts and decision of jurisdictional High Court as mentioned above, the reopening is not in accordance with the provisions and is liable to be quashed. In view of the above discussion, the reassessment is not in accordance with the provisions of Act and accordingly, the reassessment is held to be null and void.

Accordingly, Ground Nos. 1 and 2 are allowed."

10. At this juncture, it is worthy to take note of the observations and findings of Hon'ble Jurisdictional High Court of Delhi in the case of CIT vs. SPL'S Siddartha Ltd. wherein it has been held that u/s 151 of the Act, it was only the Jt. Commissioner or Addl. Commissioner who could grant the approval of the issue of notice u/s 148 of the Act. Their lordships further held that if the approval was not granted by Jt. Commissioner or Addl. Commissioner and instead it was taken from Commissioner of Income Tax, then the same was not irregularity curable u/s 292B of the Act and Hon'ble High Court held that the notice u/s 148 was not valid. Respectfully following the above judgment, we hold that the Commissioner of Income Tax(A) rightly decided the issue in favour of the assessee and held that the reopening of assessment was not in accordance with the provisions of the Act and was liable to be quashed. We have no reason or any other valid ground to take a different view in this regard. Accordingly, the sole ground of the revenue being devoid of merits is dismissed.

11. In the result, the appeal of the revenue is dismissed.

(Order pronounced in the open court on 28.6.2013)

2012-TIOL-197-ITAT-INDORE-SB

(Also see analysis of the Order )

IN THE INCOME TAX APPELLATE TRIBUNAL
SPECIAL BENCH, INDORE

(SPECIAL BENCH)

ITA Nos. 777/Ind/2004 and 295/Ind/2006
(assessment years 2001-02 & 2002-03)

MARAL OVERSEAS LTD
MARAL SAROVEAR
KHALBUJURG, KASRAWAD, KHARGONE
PAN - AACCM0230B

ADDITIONAL COMMISSIONER OF INCOME-TAX
RANGE 5, INDORE

ITA Nos. 900/Ind/2004 & 356/Ind/2006
A.Ys. 2001-02 & 2002-03

ADDITIONAL COMMISSIONER OF INCOME-TAX
RANGE 5, INDORE

MARAL OVERSEAS LTD
KHARGONE

G E Veerabhadrappa, President, Shri. G C Gupta, VP And Shri. R C Sharma, AM

Dated: March 28, 2012

Appellants Rep by: Shri Ajay Vohra and Shri Ajay Tulsiyan
Respondent Rep by: Shri Keshav Saxena, CIT DR

Income tax - Sections 10B(1), (3) & (4), Circular 564 of 1990 - Whether when the undertakings of the assessee were eligible for Sec 10B benefits prior to 1.4.1999 when the period of tax holiday was extended to 10 years, the assessee can continue to claim extended exemption for the old as well as new but independent units - Whether the new units of the assessee cannot be construed as independent units merely because the assessee was merely granted permission for enhanced capacity - Whether for the purpose of claiming benefits it was necessary for the assessee to obtain new certificate of approval rather than an amendment in the existing approval certificate.

Assessee is a company engaged in the manufacture and mainly export of cotton yarn, grey & finished knitted cotton fabrics & readymade garments. During the assessment year 2001-02, the assessee claimed income exempt u/s 10B of I.T. Act for three units namely original unit which started production from A.Y. 1992-93, spinning unit no. III which started production from A.Y. 1996-97 and spinning unit no. IV which started production from A.Y. 1999-2000. During the course of assessment, the Assessing Officer observed that the first year of operation of original unit was assessment year 1992-93 and as there was loss, as per provisions of Section 10B(3), the assessee company exercised its option not to avail exemption u/s 10B of Income-tax Act, 1961, for assessment years 1992-93, 1993-94 and 1994-95. As such, the first year of its claim u/s 10B was assessment year 1995-96 and the same was admissible up to assessment year 1999-2000 only since the assessee was entitled for deduction only for five consecutive years out of eight years. As per the Assessing Officer, the assessee went ahead further and claimed exemption u/s 10B for assessment year 2000-01 and assessment year 2001-02 also. As per the Assessing Officer, the assessee company exceeded its claim beyond permissible limit of 5 consecutive years out of eight years. He further held that this claim was overstitched to separate Units III and IV set up in assessment year 1996-97 and 1999-2000 resulting into extended claim up to assessment year 2005-06 and 2008-09 respectively. As per the Assessing Officer, the unit Nos. III and IV were interdependent and complementary to each other, therefore, those could not be held to be independent new units entitled for claim of exemption u/s 10B of Income-tax Act, 1961. Thereafter, relying upon the decision of Kolkata Tribunal in Tata Tea Limited v. Jt. CIT, the Assessing Officer concluded that the assessee company was entitled for exemption up to assessment year 1999-2000 only and its claim of exemption in subsequent years was not tenable and, therefore, the same was rejected.

On appeal, the CIT(A) allowed assessee's claim of deduction u/s 10-B. On Revenue's appeal to the Tribunal, the issue was finally referred to the Special Bench as a consequence of difference of opinion.

Having heard parties in details, the Special Bench held that,

++ the first issue relates to assessee's eligibility to claim exemption u/s 10-B for the enhanced period of ten years in terms of amended provisions of law, which came into effect from assessment year 1999-2000. In the instant case, the assessee is a 100 % E.O.U. which commenced its commercial production on 1st February, 1992, i.e. during the previous year 1991-92, relevant to the assessment year 1992-93. The assessee was entitled to claim exemption in any five consecutive assessment years falling within the period of eight years beginning with the assessment year in which the undertaking begins to manufacture or produce articles, at the option of the assessee, as per the provisions of erstwhile Section 10B(3) as applicable up to assessment year 1998-99. Since there was loss, the assessee did not claim any deduction in the first three assessment years i.e. 1992-93, 1993-94 and 1994-95. The exemption u/s 10-B was claimed and allowed to the assessee for the first time in assessment year 1995-96. Accordingly, the assessee was eligible for exemption u/s 10-B in respect of profits of its EOU up to the assessment year 1999-2000. With effect from 1.4.1999 the period of exemption prescribed u/s 10B(3) of five years was substituted by ten years by the Income Tax Second Amendment Act, 1998. And accordingly, the assessee became entitled for exemption u/s 10-B for a further period of two years i.e. assessment year 2000-01 and 2001-02. Thereafter, with effect from 1.4.2001, the entire section 10B has been substituted by the Finance Act, 2000, sub section (1) of which provides for deduction of profits for 100 % EOU for a period of 10 consecutive years beginning with the assessment year relevant to the previous year in which the undertaking starts its production;

++ prior to amendment by Income Tax (Amendment) Act, 1998, the assessee was eligible for deduction u/s 10B of the I.T. Act for five consecutive years out of 8 years beginning with the assessment years in which undertaking began manufacturing i.e. from A.Y. 1992-93. From 1 April, 1998 the law was amended and 8 years were substituted by 10 years, in section 10B(3) of the I.T. Act. The restraint of exemption upto 8 years was also withdrawn. The only question which is to be answered is whether amendment of Finance Act, 1998 will apply to new units established after 01.04.1998 or they will apply to existing E.O.U.s also. To put it differently whether the Finance Act has given benefit to those units which will come into existence after 01.04.1998 or it also wanted to boost the export of exiting units. The Finance Minister stated in income Tax (second amendment) Bill, 1998 that he wanted to extend the 5 years tax holiday to E.O.U.s, to 10 years u/s 10B of the I.T. Act;

++ in the assessee's case, the amended law became applicable during the period in which the assessee was otherwise eligible for claiming deduction under section 10B of the Act under the pre-amended law. Thus, as a necessary corollary and applying the amended law, the assessee was clearly eligible for deduction under section 10B of the Act for the extended period;

++ as per settled law, as the period of ten years from the year of start of manufacture has not expired as on the date when the amended provision came into force, the assessee is entitled to the benefit of tax holiday for the remaining period of ten years. It is pertinent to mention here that in the aforesaid decision, the Karnataka High Court went on to hold that even if the period of five years has expired as on the date of amended provisions but the period of ten years is still running, the assessee cannot be denied the benefit. Thus, the issue raised before this Special Bench is squarely covered by the aforesaid decision of the High Court of Karnataka. Since this is the only decision of the High Court on the issue, the same is binding on the Special Bench in view of the settled principle of judicial proprietary;

++ the assessee has set up two new spinning units (Unit III and Unit IV) on 1.6.1995 and 19.8.1999, respectively, as a separate, independent and distinct unit. During the relevant assessment year, under consideration, the assessee has claimed deduction in respect of profits of spinning Unit Nos. 3 and 4, which was declined by the Assessing Officer by holding that the spinning units III and IV could not be treated as new industrial undertaking and that the assessee was only granted certificate for enhanced capacity and not for the new industrial undertaking and that permission for enhancement of the capacity was merely by way of amendment of the original certificate and not in the form of any new permission/certificate. The Assessing Officer also observed that the deduction is granted to an industrial undertaking and a new line of production set up and named as separate unit cannot be treated as new industrial undertaking. The objection of the Assessing Officer was that even though the assessee had carried out capacity expansion, but such expansion could not be regarded as separate industrial undertaking in order to be independently eligible for deduction u/s 10B of the Act. By the impugned order, the learned CIT(A) after giving detailed finding, allowed the assessee's claim by holding that all the conditions u/s 10B were satisfied as there was substantial investment of fresh capital in the new unit set up and employment of the requisite labour. The learned CIT(A) also recorded a finding to the effect that separate and distinct industrial unit was set up by the assessee. It was also held that there was no requirement of obtaining separate and distinct industrial licence as a condition precedent to claim of deduction u/s 10B of the Act so long as the new unit set up was approved as an EOU by the designated authority;

++ we can safely hold that in the assessment year 1999-00 when the period of exemption was extended from five years to ten years, all the three units of the assessee were eligible for deduction u/s 10B of the Act. Each of the units were eligible for exemption under section 10B of the Act, both under the pre-amended law when the exemption was available for five years out of eight years as well as under the amended law when the exemption was extended to ten consecutive assessment years. As the amendment came into force in the assessment year 1999-00, the amended laws became applicable to the assessee according to which all the three eligible units of the assessee became entitled for deduction for a period of ten consecutive assessment years from the date of commencement of manufacture/production by the said eligible undertaking;

++ there is no question of claiming the provision of section 10B to be prospective or retrospective since what the assessee is simply claiming is that the exemption should be allowed as per the provisions of section 10B of the Act as applicable in the relevant assessment year. Once that is done, no question arises for denying exemption to the assessee during the relevant assessment years under consideration. It is pertinent to mention here that in the assessment year 1999-00 the assessee was duly allowed deduction as per the then applicable law whereunder the eligible undertaking is allowed such deduction for a period of ten consecutive years. Now in the assessment year 2000-01 the assessee had claimed deduction in respect of its eligible units which was also not disputed by the Assessing Officer. The Assessing Officer in his order for the assessment year 2000-01 has given a finding that Unit Nos. III and IV were entitled for exemption upto the assessment year 2005-06 and 2008-09 respectively;

++ as per our considered view, deduction u/s 10B of the Act is allowable in respect of profits of 100% export oriented undertaking. The expression "undertaking" has not been defined u/s 10B of the Act. The said expression has been explained by the Courts in the context of similar other provisions of IT Act viz. section 15C of 1922 Act, section 80J, 80HH, 80I, 80IA and 80IB of 1961 Act. We can safely hold that an undertaking means a unit/business which has a separate and independent existence distinct from the other units/business; having independent infr-structure, separate plant and machinery being set up with substantial capital investment and having an identifiable output and the profits attributable thereto can be determined;

++ we find that all the conditions are satisfied in the two new spinning units viz. Unit Nos. 3 and 4, which were set up by the assessee as a separate and independent production units, by making substantial investment in new building, plant and machinery, etc. wherein distinct and marketable produce are manufactured. In respect of unit no. 3 we find that it was set up in a newly constructed building by installing additional 16224 spindles which enhanced the total capacity to 38400 spindles from the existing 22,176 spindles. All these documentary evidences clearly establish that the assessee has undertaken substantial expansion by setting up new units viz. Unit Nos. 3 and 4 which were separate and independent production units eligible for claim of deduction u/s 10B for ten years from the year of start of production in each of the units;

++ in this regard the contention of the CIT DR was that the assessee had just carried out capacity extension which could not be regarded as a separate industrial undertaking for making it eligible for the claim of deduction u/s 10B insofar as the assessee was only granted certificate for enhanced capacity and not for the new industrial undertaking. The objection of the learned CIT DR was also that the permission for enhancement of capacity was merely by way of amendment in the original certificate and not in the form of any new permission/certificate. In this regard we find that section 10B does not stipulate for issue of separate approval for each unit from the competent authority. The only requirement under the said section is that the undertaking should be approved;

++ we hold that the undertaking existing prior to 1.4.1999 claiming exemption u/s 10B of the Act would be entitled to exemption for the extended period of ten years and deduction under the said sections would be admissible in respect of unit no. 3 and unit no. 4 as well for ten years from the year of start of production in these new units since these units were separate and independent production units. Thus, the first question referred to the Special Bench is answered in the affirmative;

++ the second question referred to the Special Bench pertains to eligibility of deduction in respect of export incentives received by the assessee in terms of the provisions of section 10B(1) read with section 10B(4) of the Act. During the year, the assessee was in receipt of export entitlement of Rs. 1.65 crores and special import licence of Rs. 4.47 lacs. The Assessing Officer declined the claim of deduction by holding that such income was not derived from 100% export oriented undertaking, therefore, not eligible for claim of deduction u/s 10B(1) read with section 10B(4) of the Act. The learned Commissioner of Income Tax (Appeals), by following the order of the Tribunal in the assessee's own case, held that the assessee was eligible for exemption in respect of export entitlement and special import licence as the income of EOU eligible for exemption u/s 10B of the Act. From record we find that the export entitlement was allotted by the competent authority in respect of export undertaken by the assessee during the year. The assessee off-loaded the entitlement which was unusable and bought quota/entitlements which was required for procuring the required material necessary for its production purpose;

++ special import licence was allotted to the assessee by the designated authority as per Export Import Policy And Procedure 1997 – 2002. Income arising out of sale of export entitlement and special import licence was assessed as income from business. However, on such business income, the assessee is entitled to claim of deduction u/s 10B in respect of such income. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Act.

Questions answered in favour of Assessee

Cases followed:

Patni Computer Systems Ltd. v. DCIT (2007-TIOL-272-ITAT-PUNE)

Tech Books Electronics Services (P) Ltd vs. ACIT (2006-TIOL-107-ITAT-DEL)

P.R. Prabhakar (2006-TIOL-81-SC-IT)

ORDER

Per: Bench:

This Special Bench is constituted by Hon'ble President under section 255(3) of the Income Tax Act, 1961 for deciding the following questions of law:-

1. "Whether, an undertaking claiming exemption u/s 10B of the Income-tax Act, 1961, as it existed prior to 1.4.1999 would be entitled for exemption/deduction u/s 10B for extended period of ten years as per the amended provisions of law brought on statute with effect from 01.04.1999 ?"

2. "Whether, in the facts and circumstances of the case, the undertaking is eligible for deduction on export incentive received by it in terms of provisions of Section 10B(1) read with Section 10B(4) of the Act ?"

2. Brief facts of the case are that the assessee is a company engaged in the manufacture and mainly export of cotton yarn, grey & finished knitted cotton fabrics & readymade garments. During the assessment year 2001-02, the assessee has claimed income exempt u/s 10B of I.T. Act for three units namely original unit which started production from A.Y. 1992-93, spinning unit no. III which started production from A.Y. 1996-97 and spinning unit no. IV which started production from A.Y. 1999-2000. This is given below in tabular form:-

E.O.U.	Date of Commercial Production	Relevant Assessment Year	Exemption u/s 10B claimed up to AY
A. Original Unit	01.02.1992	1992-93	2001-02
B. Spinning Unit No. III	01.06.1995	1996-97	2005-06
C. Spinning Unit No. IV	19.08.1998	1999-00	2008-09

3. During course of assessment, the Assessing Officer observed that the first year of operation of original unit was assessment year 1992-93 and as there was loss, as per provisions of Section 10B(3), the assessee company exercised its option not to avail exemption u/s 10B of Income-tax Act, 1961, for assessment years 1992-93, 1993-94 and 1994-95. As such, the first year of its claim u/s 10B was assessment year 1995-96 and the same was admissible up to assessment year 1999-2000 only since the assessee was entitled for deduction only for five consecutive years out of eight years. As per the Assessing Officer, the assessee went ahead further and claimed exemption u/s 10B for assessment year 2000-01 and assessment year 2001-02 also. As per the Assessing Officer, the assessee company exceeded its claim beyond permissible limit of 5 consecutive years out of eight years. He further held that this claim was overstitched to separate Units III and IV set up in assessment year 1996-97 and 1999-2000 resulting into extended claim up to assessment year 2005-06 and 2008-09 respectively. As per the Assessing Officer, the unit Nos. III and IV are interdependent and complementary to each other, therefore, those could not be held to be independent new units entitled for claim of exemption u/s 10B of Income-tax Act, 1961. Thereafter, relying upon the decision of Hon'ble Kolkata Tribunal reported in Tata Tea Limited v. Jt. CIT, 87 ITD 351 (Kol), the Assessing Officer concluded that the assessee company was entitled for exemption up to assessment year 1999-2000 only and its claim of exemption in subsequent years was not tenable and, therefore, the same was rejected.

4. By the impugned order, the ld. CIT(A) allowed assessee's claim of deduction u/s 10-B after observing that the case of Tata Tea is related to assessment year 1998-99, whereas Section 10B was amended w.e.f. 1.4.99, thereby extending the period of exemption from 5 years to 10 years and accordingly benefit of 10 year exemption is available from assessment year 1999-2000 onwards only and not from assessment year 1998-99 as claimed by Tata Tea. Tata Tea had already exhausted benefit of 5 years exemption on the basis of relevant and operative provisions before assessment year 1998-99. The CIT(A) also observed that the facts in the case of Tata Tea Limited were as under :-

"The assessee-company had an EOU known as 'Instant Tea Division' in respect of which exemption u/s 10B was claimed for the year 1998-99, even though the assessee had already availed of the benefit of Section 10B for five consecutive years in terms of Section 10B(3) as it stood in the said relevant assessment year. The assessee's claim was that in view of amendment in Section 10B with effect from 1.4.1999, the benefit was available for ten consecutive years and since the assessee had completed only five years of exemption u/s 10B, the assessee was also eligible for further exemption for next five years. That claim was declined by the Assessing Officer by observing that the amendment, enhancing the number of eligible assessment years to 'ten' did not provide for retrospective operation and, accordingly, the benefit of ten years could not be granted in the assessment year in question."

The CIT(A) further stated that in the light of the above facts, the Hon'ble I.T.A.T. has concluded as under :-

"In view of the above discussion, we see no merit in assessee's grievance. In our considered view, the assessee having already availed Section 10B benefit of 5 consecutive assessment years, was not eligible for exemption u/s 10B, any further, so far as assessment year 1998-99 is concerned. Accordingly, we confirm the conclusions arrived by the authorities below and decline to interfere in the matter."

As per the CIT(A), the verdict in the case relied on by the Assessing Officer has been restricted to assessment year 1998-99, to which the provisions of pre-amended Section 10B applied. The learned Commissioner of Income Tax (Appeals) further stated that it has also been observed by the Hon'ble Bench that the question of extending the tax holiday period can only be examined in the year in which the amended law is to take effect i.e. assessment year 1999-2000 or thereafter. This observation restricts the applicability of the said judgment specifically for the assessment year 1998-99. He further observed that the case of the present assessee before him is that of assessment year 2001-02 to which the provisions of substituted Section 10B apply. The Hon'ble I.T.A.T., Kolkata Bench had no occasion to discuss the newly substituted S. 10B as applicable for the assessment year 2001-02, which is the relevant year in this case and it had discussed only the amendments made effective from 01.04.1999 which are not relevant for the assessment year under consideration.

5. The learned Commissioner of Income Tax (Appeals) further observed that the law as applicable to any particular assessment year can only be applied for that assessment year, nothing is to be read in, and nothing is to be implied. The appellant company has not claimed that the provisions of substituted Section 10B are retrospective in nature. The amended provisions are applicable w.e.f. 01.04.1999 and those substituted are applicable w.e.f. 01.04.2001 and the appellant's claim under the said Section is as per these amended/substituted provisions, as applicable to the respective assessment year. There is no restriction on the existing units for claiming the exemption for a period of ten years. On the contrary the first proviso to the newly substituted Section 10B(1) categorically allows exemption to the existing units for the unexpired period of ten years. Even the Explanatory note relating to the said enactment (245 ITR St 34) states that an undertaking set up before 31.03.2000 shall be entitled to the deduction for a period of ten years. Though this amendment is effective from 01.04.2001, it specifically allows exemption to existing unit for a period of ten years.

6. After analyzing the provisions of section 10B from the year of its inception till the year under consideration, the learned Commissioner of Income Tax (Appeals) concluded as under :-

2.4. As per the clear, plain and unambiguous language of Section 10B, as applicable to this relevant assessment year the appellant is entitled to claim exemption for a period of ten consecutive assessment year, beginning with the assessment year relevant to the previous year in which the unit began to manufacture or produce. That the facts in the case of Tata Tea Limited are different and clearly distinguishable from those in the case of this appellant. I, therefore, adjudicate ground no.1 and ground no. 1(a) in favour of the appellant and direct the AO to allow exemption u/s 10B in respect of the normal computation as well as the computation u/s 115JB, for all the eligible units of the EOU, for a period of ten years, starting from the assessment year in which the respective unit started production. In result all the units of the EOU of the appellant are eligible for exemption u/s 10B, for the year under appeal, which the AO is directed to allow."

The CIT(A) further discussed that the entire Section 10B has been substituted by the Finance Act 2000 w.e.f. 01.04.2001. Section 10B(1) as substituted by the Finance Act 2000 w.e.f. 01.04.2001 and as applicable for the year under consideration reads as under:-

"Subject to the provisions of this Section a deduction of such profits and gains as are derived by a 100 % Export Oriented Undertaking from 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee."

The first proviso to sec 10B(1) reads as under :-
"Provided that wherein in computing the total income of the undertaking in any assessment year, its profits and gains had not been included by application of the provisions of this Section as it stood immediately before its substitution by the Finance Act 2000, an undertaking shall be entitled to the deduction referred to in this sub Section only for the unexpired period of aforesaid ten consecutive assessment years."

It will not be out of place to mention here the sequence of amendments/substitutions made to Section 10B which was initially inserted by the Finance Act, 1988, w.e.f. 1.4.89 to provide for a complete tax holiday to 100 % Export Oriented Undertakings for a period of five consecutive assessment years falling within the block of eight assessment years, subject to fulfillment of certain conditions.

(a) The Finance Act 1993 amended Section 10B(4)(iii) with retrospective effect from 01.04.91 to provide that an undertaking availing of the benefits of deductions u/s 10B shall not be eligible to claim deduction u/s 80IA.

(b) By the Finance Act, 1994, the tax holiday u/s 10B was restricted to the EOUs exporting at least 75% of their turnover. Such restriction was specifically and prospectively made applicable to 100% EOUs which commenced production on or after 1st April 1994. It is pertinent to note here that a specific mention was made that the said restriction will apply only to new units coming into existence after 1.4.94.

(c) Another major amendment was made by the Income Tax (Amendment) Act 1998 w.e.f. 1.4.1999, wherein the period of benefit of five years out of eight years was extended to a period of ten years out of ten years. It is worth while to note that proviso to Section 10B(3) was specifically omitted by the Income Tax (Amendment) Act 1998 w.e.f. 01.04.1999, which read as under :-

"Provided that nothing in this sub-section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years."

Had it been the intention of the law makers to not to allow the benefit of extended period to the existing units, the above proviso would not have been omitted and would have been made applicable to existing units. Similarly, explanation (ii) defining the term "relevant assessment years" was also substituted w.e.f. 0.04.1999, which is reproduced here under :

Erstwhile explanation applicable up to 31.3.99.
(ii) "relevant assessment year means the five consecutive assessment years specified by the assessee at his option under sub Section (3) of sub Section (5) as the case may be".

The substituted explanation w.e.f. 01.04.1999
(ii) "relevant assessment years" means the ten consecutive assessment years referred to in sub Section (3)"

This substitution lays down the clear intention of the legislature to provide the benefit of extended period of ten years to all the units, existing or new. When this amendment was brought into effect, the appellant was still eligible for exemption u/s 10B for two assessment years and as such qualified for exemption for the unexpired period of ten years.

6. It is a settled rule of interpretation that no words can be read into a provisions that did not exist. It is for the Parliament to legislate and for the judiciary to interpret the law as enacted by the Parliament. This view gets support from the following decisions :-

A. CIT v. Ajax Products Ltd., (55 ITR 741, 747)(S.C.) = (2002-TIOL-132-SC-IT)

B. CIT v. Shahzadanand & Sons and Others, (60 ITR 392, 400) ( S.C).
C. Smt. Tarulata Shyam v. CIT, (IT 108 ITR) 345, 357) (S.C.).

Had it been the intention of the law makes to restrict the tax holiday period to five years in respect of the existing undertakings, the same would have been brought out in the Section clearly and specifically as had been done earlier in Section 80HH(2)(1), 80HHA, 80I(IA), 80IB etc. If any particular amendment is intended to be made applicable only for specific units, such intention is always clearly spelled in the statute, as is also evident from sub Section (2)((ia) appearing in the old sec10B which was applicable specifically to units commencing production on or after 01.04.1994. 'Statement of Objects and Reasons' as reported in 245 ITR (Statutes) page 34 with specific reference to clauses 15.3 and 15.14 of Circular No. 794 dated 9th August, 2000, reads as under :-

"…. thus an undertaking set up on or before 31.03.2000 shall be entitled to the deduction for a period of ten years, that set up during the period 01.04.2000 to 31.03.2001 for a period of nine years, that set up in 2001-02 for a period of eight years and so on. The existing units will get the deduction for the unexpired period of ten years only……."

"15.14 The provisions of newly substituted section 10B shall apply mutatis mutandis in respect of 100% Export Oriented Units."

It is obvious from the above 'Statement of Objects and Reasons' given at the time of enacting amendment to Section 10B, the law had very clear intention to give the benefit of extended period of ten years to the existing units as well. It is important to note that extension is possible only in the case of existing units and if it had been the intention of the legislature to give benefit to new undertaking than word 'extend the period of tax holidays' would not have found place in the objects and reasons of the earlier amendment in 1999."

7. The Department filed appeal before the Tribunal against the above order of CIT(A). As different view has been taken by the Coordinate Bench, Kolkata, in the case of Tata Tea Limited, the Bench referred above question of law for consideration by the Special Bench.

8. Shri Keshav Saxena, CIT DR, appeared on behalf of the Revenue and argued that the assessee is eligible for deduction u/s 10B of the I.T. Act upto A.Y. 1999-2000 i.e. 8 years beginning with the assessment years in which undertaking began manufacturing i.e. from A.Y. 1992-93. From 1 April, 1998 the law was amended and 8 years were substituted by 10 years, in section 10B(3) of the I.T. Act. The restraint of exemption upto 8 years were also withdrawn. The only question which is to be solved is whether amendment of Finance Act, 1998 will apply to new units established after 01.04.1998 or they will apply to existing E.O.Us also.

9. The learned CIT DR placed reliance on the decision of Tata Tea Limited, 87 ITD 351, and contended that this decision replies two issues namely amendments in statutes are prospective and not retrospective and amended provision does not say that extended period of exemption of 10 years instead of 8 years is applicable to existing units as well. The ld. CIT DR further submitted that the assessee has claimed income exempt u/s 10B of I.T. Act for three units namely original unit which started production from A.Y. 1992- 93, spinning unit no. III which started production from A.Y. 1996-97 and spinning unit no. IV which started production from A.Y. 1999-2000. This is given below in tabular form:-

E.O.U.	Date of Commercial Production	Relevant Assessment Year	Exemption u/s 10B claimed up to AY
A. Original Unit 01.02.1992	01.02.1992	1992-93	2001-02
B. Spinning Unit No. III 01.06.1995	01.06.1995	1996-97	2005-06
C. Spinning Unit No. IV	19.08.1998	1999-00	2008-09

10. Learned CIT DR further submitted that crucial question is whether the assessee as an undertaking which has started production in A.Y. 1992-93 can get benefit upto 10 years i.e. upto A.Y. 2001-02 or it can extend that period beyond 10 years as a result of some expansion in its production capacity by way of establishing unit III & IV. Section 10B of I.T. Act do not provide for any exemption beyond 10 years to the same undertaking. The new units no. III and IV are not registered as new undertaking, but merely an expansion of old undertaking. In present case undertaking came into existence and started production in A.Y. 1992-93. The same undertaking cannot be stated to start once again in A.Y. 1996-97 and again in A.Y. 1999-2000 in respect of unit no. III and IV, respectively, merely because of some expansion in its production capacity.

11. With regard to eligibility of two new units under section 10B of the Act, contention of the learned CIT DR was that assessee has claimed deduction u/s 10B of I.T. Act for three units namely original unit which started production from A.Y. 1992-93, spinning unit no. III which started production from A.Y. 1996-97 and spinning unit no. IV which started production from A.Y. 1999-2000. Contention of the learned CIT DR was that two subsequent units are mere expansion of original undertaking and they were not separate undertakings so as to enable the assessee to claim deduction of their income u/s 10B of the Act. As per the learned CIT DR it is only a case of expansion of undertaking because even after expansion of 1995 and 1998 total export was of Rs. 206. 95 crores in A.Y. 2002-03. The export of original unit of 1992 was Rs. 133.41 crore and export from other two spinning units III & IV established in 1995 & 1998 combined together was only Rs. 73.54 crores. Besides mere expansion was permitted by Ministry of Industry to the existing undertaking as per the approval letter.

12. The ld. CIT DR further argued that in the decisions mentioned below expansion of the industrial undertaking is considered only with reference as to whether it constitutes reconstruction or not as provided u/s 80J (4) of I.T. Act which is similar to section 10B(2) of the I.T. Act :-

"State of Gujarat v. Saurathstra Cement & Chemical Industries (2003) 260 ITR 181 (SC):-

So called new unit is thus not totally independent of assets of existing unit-physical identity with old unit is preserved and the new unit is an expansion of the existing undertaking-Respondent therefore not entitled to exemption."

The Hon'ble Apex Court observed in Para 10 that respondent was having two kilns and third is added. This leads to inevitable conclusion that new unit is an expansion of existing undertaking. Once it is held to be a case of expansion, the claim of exemption from electricity duty set up by the respondents, completely falls to the grounds.

13. In present case also assessee initially established spinning unit in A.Y. 1992-93 and one more spinning unit was added in each of two years namely A.Y. 1996-97 & A.Y. 1999-2000. There was no change in the product line of manufacturing. The assessee company had not got permission to set up a new industrial undertaking but the permission was granted for increase in capacity from 39088 spindles to 89088 spindles.

14. Reliance was also placed on decision of Hon'ble Kerala High Court in the case of Canara Wire & Wire Products Limited, (1992) 196 ITR 426 (Ker). He submitted that in this case deduction u/s 80J of the I.T. Act was denied on the ground that industrial unit set up must be new and though new plant & machinery are erected for producing either same commodities or some distinct commodities, it should not be a case of reconstruction of old business. It is not sufficient that assessee has invested large amounts & new installations have contributed to increase production capacity of the assessee. Most of cases decided are on section 80J which is materially different from section 10B. Section 80J says:-where gross total income of an assessee includes any profits and gains derived from an industrial undertaking………………, a deduction from such profits and gains of so much of amount thereof as does not exceed the amount calculated at rate of 6% per annum on the capital employed in industrial undertaking. ………….

15. He further argued that the contention of assessee that huge capital is invested for installing new units is not material for claim of exemption in respect of three new units. The learned CIT DR further argued that if we examine the issue objectively the industrial undertaking came into existence in A.Y. 1992-93 and started business of manufacturing and export of yarn & other textile products. The permission was granted to it in A.Y. 1996-97 & 1999-2000 by Under Secretary, Ministry of Industry only to enhance capacity of existing unit. In view of this it cannot be said that a new undertaking came into existence as no permission for any new unit was granted by competent authority. Mere enhancement of capacity for same products could not be termed as bringing new unit in existence. Yarn manufacturing is different from steel or cement manufacturing and single unit can be sufficient for producing yarn, but that does not make it separate & independent industrial undertaking, especially when marketing and administration are the same for old undertaking and new spinning divisions.

16. As per ld. CIT DR, provision of section 10B(3) prohibits claim u/s 10B beyond 10 year period for an undertaking as reproduced below:-

"The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any [ten] consecutive assessment years, [* * *] beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things."

He further argued that any expansion or addition/alteration of same undertaking will not entitle it for a benefit u/s 10B beyond 10 years, unless the Competent Authority approves it as a new undertaking or a new EOU which is not the case with assessee. As per the learned CIT DR, answer is required to the question as to whether assessee Maral Overseas Ltd. is eligible for claim u/s 10B upto 8 years only or it is eligible upto extended period of 10 years or the claim u/s 10B can be extended even beyond 10 years. Since both issues of allowances of deduction u/s 10B beyond 8 years to the undertaking established in 1992 and the issue of allowance of section 10B to the spinning unit III & IV established in 1996 & 1999 are to be answered by application of section 10B(3) of the IT Act. As per the learned CIT DR, the Tribunal has to decide both of them together u/r 12 of the ITAT rule, 1946 as held in the case of Hukumchand Mills Ltd. 63 ITR 232 (SC) = (2002-TIOL-755-SC-IT-LB).

17. With regard to the eligibility of assessee for deduction on export incentive received by it in terms of provisions of Section 10-B(1) read with Section 10-B(4) of the Act, the contention of ld. CIT DR was that Section 10B of the I.T. Act uses the words "derived". However, export incentives cannot be said to be derived from the assessee's undertaking.

18. The ld. CIT DR placed reliance on the decision of Hon'ble Supreme Court in the case ofLiberty India, 317 ITR 218 = (2009-TIOL-100-SC-IT), wherein Hon'ble Supreme Court defined the term 'derived' in para 14 by using the expression 'derived from' Parliament intended to cover sources not beyond the first degree.

19. He further contended that the issue of import license sale was considered by Hon'ble Apex Court in Sterling foods 237 ITR 579 (SC) = (2002-TIOL-222-SC-IT) and it was decided that same cannot form part of export turnover for calculation of deduction u/s 80HHC.

20. Reliance was also placed on the observation of Madras High Court in the case of India Cement International v. ITO 304 ITR 322 (Mad) = (2007-TIOL-515-HC-MAD-IT), wherein it was held that interest received on export profits deposited with bank does not qualify for relief u/s 10A of Income-tax Act, 1961, as there is no direct nexus between interest income and industrial undertaking. Reliance was also placed on the decision of I.T.A.T. Chennai Bench in the case of California Software Co. Ltd., wherein it was held that definition of "export turnover" in Section 10B is more or less similar to the one that appears in Section 80HHC and that quantum of relief to be allowed to an exporter is to be based on "net inflow of foreign exchange". He further contended that the decision of Hon'ble Supreme Court in the case of B. Deshraj, 301 ITR 439are distinguishable on facts.

21. The learned CIT DR further submitted that application of circular no. 621 of CBDT was prospective and not retrospective. Prior to its application "commission" was a part of "profits of the business" for which reliance may be placed on the decision of Special Bench in case ofInternational I Research Park Laboratories Ltd. [1995J 212 ITR (AT) 1.

22. In view of the above submissions, the learned CIT DR vehemently argued that the assessee was not eligible for claim of deduction u/s 10B with reference to the amended provision of law which are prospective in nature.

23. With regard to the decision of Hon'ble Karnataka High Court in case of M/s. DSL Software Ltd. in ITA No. 462 of 2007 dated 12.10.2011 cited by assessee, contention of the ld. CIT DR was that when assessee already enjoyed benefit of 5 years u/s 1OB of the IT. Act upto A.Y. 1997-98, how the amended provisions of section IOB, which were amended from 01.04.1999 could be retrospectively applied to assessee to give it a benefit of deduction from A.Y. 1993-94 to A.Y. 2002-03, is an issue not even considered by Hon'ble Karnataka High Court.

24. Shri Ajay Vohra appeared on behalf of the assessee and submitted that the assessee is 100% export oriented unit which was eligible for deduction u/s 10B in respect of its Sarovar Division and two separate and independent spinning units. He submitted that initially under the provisions of section 10B exemption was available for five consecutive years out of eight assessment years beginning with the assessment year in which the eligible undertaking begins to manufacture or produce article. Thereafter IT Amendment Act, 1998 extended the period of benefit from five years to ten years with effect from 1.4.1999. Proviso to section 10B(3) was also omitted which stipulated that the period of five assessment years shall not be extended to cover any period after the expiry of the said period of eight years. Since the assessee has not claimed any deduction in the initial three assessment years, for the first time it started claim of deduction with effect from the assessment year 1995-96 till 1999-00. Since the amendment was made with effect from 1.4.1999, all the three units of the assessee became entitled to the benefit of section 10B for ten years starting from the year of commencement of production. Our attention was invited to Circular No. 794 dated 9.8.2000 containing explanatory notes to the amendment brought by the Finance Act, 2000 which clarified that an undertaking set up before 31st March, 2000 shall be entitled to deduction for a period of ten years from the year in which the undertaking begins manufacture or produces articles or things. He further submitted that applying the aforesaid settled legal position, once in the assessment year 1999-2000, the amended law became applicable, the assessee could have only been allowed exemption/deduction under the amended law and not under the pre-amended law. In the assessment year 1999-2000, there was no way to go back to the nonexistent/ pre-amended law so as to either allow higher/lower deduction or to deny the same altogether. He further submitted that one of the example of amended law being applicable is the second proviso inserted in section 10B(1) of the Act by the Finance Act, 2002, w.e.f. 1.04.2003. The said proviso provided that for the assessment year 2003-04, deduction under section 10B of the Act would be allowed @ 90% and not 100%. The said amendment governed all the assessee claiming deduction under that section in the assessment year 2003-04, irrespective of the date of setting up of the unit. Reliance was placed upon the decision of the Karnataka High Court in the case of DSL Software Limited; Income-tax Act, 1961, No. 462 of 2007 wherein the assessee had commenced production in year 1993-94 and claimed benefit und section 10B till assessment year 1997-98. In view of the amended provision the assesese became entitled to benefit from assessment years 1993-94 to 2002-03. The assessee accordingly claimed benefit for three more years from assessment years 1999-00 to 2001-02. The benefit for assessment year 2001-02 was denied by the assessing officer.

25. The High Court held that in terms of amendment carried out in the year 1999, the tax holiday benefit stood extended for a period ten consecutive assessment years. It was held that on 01.04.1999, when the amended provision came into force by virtue of said provision, the assessee would be entitled to the benefit of tax holiday for 10 consecutive years from the date of production and if the assessee already availed the benefit under the unamended provision and the 10 consecutive years would fall prior to 01.04.1999, then the assessee would not be entitled to the said benefit. It was thus, held that if the said 10 consecutive years from the date of production have not expired prior to 01.04.1999, for the remaining unexpired period, the assessee could be entitled to benefit.

26. In view of the above decision, if the period of ten years from the date of manufacture has not expired as on the date when the amended provision came into force the assessee is entitled to the benefit of tax holiday for period of ten years. Infact, in the aforesaid decision the Court went on to hold that even if the period of five years has expired as on the date of amended provisions but the period of ten years is still running, the assessee cannot be denied benefit.

27. As per the Ld. Counsel for the assessee, the aforesaid solitary/only decision of the Hon'ble Karnataka High Court is binding on the Hon'ble Special Bench in view of the settled principles of judicial propriety discussed infra. Further reliance was placed on the following decisions:

"The Mumbai Bench of the Tribunal in the case of Consindia (P) Ltd in ITA No. 8270/Mum/2004, similarly held that the assessee was eligible for deduction under section 10A of the Act for the extended period of ten years. In that case, the eight year period expired in the assessment year 2000-01."

The Delhi Bench of the Tribunal in the case of Tech Books Electronics Services (P) Ltd v. ACIT: 100 ITD 125 = (2006-TIOL-107-ITAT-DEL) held likewise. In that case, again, neither the five year period nor the block period of eight year had expired before the amended provisions became applicable and accordingly the Tribunal was pleased to hold that the assessee was eligible for deduction for the extended period as per the amended law.

28. As per the Ld. Counsel for the assessee, in the assessment year 1999-2000, when the period of exemption was extended from 5 years to 10 years, all the three units were eligible for deduction under section 10B of the Act as under:

EOU	Date of commercial production	A/Y	Year of exemption in A.Y 1999- 2000
Original Unit	01.02.1992	1992- 93	5th year (out of 8 years)
Spinning Unit III	01.06.1995	1996- 97	4th year
Spinning Unit IV	19.08.1998	1999-00	1st year

Thus, each of the aforesaid units were eligible for exemption under section 10B of the Act, both under the pre-amended law (when exemption was available for 5 out of 8 years) as well as under the amended law (when exemption was extended to 10 consecutive assessment years).

29. In the assessment year 1999-2000, the amended law became applicable to the assessee, whereunder all the three eligible units of the assessee became entitled to deduction for a period of 10 consecutive assessment years from the date of commencement of manufacture/production of article or thing by the said eligible undertaking.

30. The Ld. Counsel for the assessee further submitted that the decision of Kolkata Bench of the Tribunal in the case of Tata Tea Ltd: 87 ITD 351 relied upon by the assessing officer is clearly distinguishable as in that case the exemption was claimed for assessment year 1998-99, which was the 5th consecutive year of deduction. The assessee had thus, already exhausted the five years exemption period in the assessment year 1998-99 and was no longer eligible to claim deduction under the then applicable law. In these facts and circumstances the Tribunal held that exemption could not be allowed to the assessee in the A.Y. 1999-00, since the assessee had already exhausted its eligibility period.

31. Reliance was placed on the following decisions wherein it has been held that various Benches of the Tribunal (whether Special or Division), being lower in judicial hierarchy, are bound to follow the decisions of the High Court:

- Kamlakshi Finance Corporation Limited: AIR 1992 SC 711 = (2002-TIOL-484-SC-CX-LB)

- Khalid Automobiles v. UOI [1995] 4 SCC (Supl) 653

- Jain Exports v. UOI [1988] 3 SCC 579 = (2002-TIOL-241-SC-CUS)

- Berger Pains India Limited: 266 ITR 99 (SC)
- Asst. CCE v. Dunlop India Ltd.: 154 ITR 172 (SC) = (2002-TIOL-156-SC-CX).

- Aggarwal Warehousing & Leasing Limited: 257 ITR 235 (MP)
- CIT v. Akshay Kumar Jain: 281 ITR 431(MP)

- SAE Head Office Monthly Paid Employees Welfare Trust: 271 ITR 159 (Del)
- Bank of Baroda v. H.C. Shrivatsava: 256 ITR 385 (Bom)

- Voesta- Alphine Ind. Gmbh v. ITO: 246 ITR 745 (Cal.)
- Nikko Corporation Ltd. v. CIT 251 ITR 791 (Cal.)

- KN. Agrawal v. CIT: 189 ITR 769 (All.)
- CIT v. Sarabhai Sons Ltd.: 143 ITR 473, 486 (Guj)

- L.G. Ramamurthi: 110 ITR 453 (Mad.)
- CIT v. S. Devraj: 73 ITR 1 (Mad.)

- Pearl Polymers Limited: 80 ITD 1 (Del.) (SB): If subsequent to SB there is some decision of the High Court or the Supreme Court, then Division Bench would be at liberty to take an independent view.

32. In support of the proposition that spinning units III and IV were also eligible for claim of deduction u/s 10B reliance was placed upon the decision of the Hon'ble Supreme Court in the case of Textile Machinery Corporation Limited; 107 ITR 195 wherein it was held "The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct."

33. Our attention was also drawn to page 206 of the judgment where the Supreme Court summarized the requirements to be satisfied by a new industrial undertaking to enjoy the tax holiday as under:

"……… The fact that the assessee is carrying on the general business of heavy engineering will not prevent him from setting up new industrial undertakings and from claiming benefit under section 15C if that section is otherwise applicable. However, in order to be entitled to the benefit under section 15C, the following facts have to be established by the assessee, subject always to time-schedule in the section:

(1)investment of substantial fresh capital in the industrial undertaking set up,

(2) employment of requisite labour therein,
(3) manufacture or production of articles in the said undertaking,

(4) earning of profits clearly attributable to the said new undertaking, and
(5) above all, a separate and distinct identity of the industrial unit set up.

We may add that there is no bar to an assessee carrying on a particular business to set up a new industrial undertaking on account of which exemption of tax under section 15C may be claimed."

34. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Indian Aluminium Limited; 108 ITR 367 wherein the assessee made extensions to its existing factories at Belur and Alupuram in the accounting year relevant to the assessment year in question. In the assessment year 1960-61, the respondent claimed relief under section 15C of the Indian Income-tax Act, 1922, in respect of the additional investments in the form of extensions to the existing factory premises, installation of new plant and machinery, etc., at Belur and Alupuram. The assessing officer refused to allow the relief and the Commissioner of Income Tax (Appeals) dismissed the respondent's appeal. On further appeal, the Tribunal noted that (i) during the previous year, production of aluminium ingots went up by double, that the additional units set up by the respondent cost over Rs. 50 lakhs at Belur and about the same figure or a little more, at Alupuram, (ii) in view of the nature of the substantial investments, it could not be said that the units were not new industrial units by themselves. The Tribunal held that these units had been set up side by side with the old ones and had added to the respondent's total output of aluminium ingots. The Tribunal, accordingly, held that the respondent was entitled to the relief under section 15C of the 1922 Act. The Supreme Court following the law laid down in the decision in the case of Textile Machinery (supra) upheld the aforesaid findings of the Tribunal.

35. He further submitted that the principle that emerges from the aforesaid decisions is that an undertaking means a unit/business which has -

(a) separate and independent existence, separate and distinct from other units/ business.

(b) independent infrastructure, separate plant and machinery, etc., employed therein;

(c) been set up with substantial capital investment;
(d) new employees; and

(e) identifiable output (even though same product) and the profits attributable thereto can be determined.

It is totally irrelevant that such new unit may come into existence by way of undertaking substantial expansion and/ or the new/ expanded unit manufactures different or the same product.

36. As per the ld. Counsel for the assessee, all the aforesaid conditions are satisfied in the present case of the assessee as elaborated infra.

37. The aforesaid two units, viz. Unit III and Unit IV, were set up by the assessee as separate and independent production units by making substantial investment in new building, plant and machinery, etc., wherein distinct and marketable products are manufactured. As regards Unit III, by referring pages 34-51 of the paper book, it was submitted that:

1. New unit was set up in a newly constructed building by installing additional 16224 spindles, which took the total installed capacity to 38400 spindles from existing 22176 spindles.

2. Four new knitting machines were installed against the existing 13 knitting machines.

3. Facilities to manufacture additional 6 lakh p.a pieces of garments were put in place as against earlier installed capacity of 13.6 lakh garments p.a.

4. Turnover of company almost doubled to Rs. 121.72 crores during that year from rs. 67.26 crores in the immediately preceding year and profits before depreciation also took quantum leap of Rs. 3.37 crores.

5. Around 800 workers and staff were recruited during the financial year 1995-96 .

38. As regards Unit IV, the ld. Counsel for the assessee submitted that :-

1. Additional 16128 spindles were installed taking the total installed capacity to 54528 spindles.

2. The company imported and installed twelve circular knitting machines.
3. The company set up a power plant of 4.25 MV capacity.

4. Readymade garment manufacturing facilities were set up to manufacture additional 6 lacs garments per annum.
5. New unit resulted in total addition to gross block of fixed assets by Rs. 69.43 crores as against 121.01 crores at opening of year.

6. Turnover of company increased to Rs. 224.5 crores as against Rs. 158.37 crores in preceding year.
7. Around 570 workers and staff were recruited during the financial year 1998-99

39. As per the Ld.Counsel for the assessee the new units were duly approved as 100% EOUs by the competent authorities. The permission dated 31.03.1995 bearing No. 141/EOB/61/95 issued by the Ministry of Industry, Department of Industrial Development, Government of India was received for setting up new unit. However, due to certain discrepancies in the permission dated 31.03.1995 the assessee, vide letter dated 27.04.1995, pointed out the same, necessary corrections whereof were carried out vide letter dated 31.05.1995. Thereafter, the assessee filed request letter dated 14.04.1998 before the competent authority for enhancement of licensed capacity which was granted vide letter dated 02.06.1998.

40. Reliance was also placed decision of the Pune Bench of the Tribunal in the case of Patni Computer Systems Ltd. v. DCIT: ITA NO. 426 and 1131/PN/06 = (2007-TIOL-272-ITAT-PUNE), wherein the assessee, a company engaged in business of development and export of computer software, claimed deduction under section 10A of the Act in respect of three units. The claim of the assessee was disallowed on the ground that three units were not new units but mere expansion of existing unit on the basis of approval letters received from STPI. The Tribunal while deciding in favour of the assessee held that the manner of granting approval was not relevant for adjudicating the claim of deduction under section 10A.

41. Reliance was also placed the decision of the Pune Bench of the Tribunal in the case of ACIT v. Symantec Software India P. Ltd.: ITA No. 787/PN/09. In that case the assessee had claimed deduction under section 10A in respect of its unit set up in terms of STPI approval, which was treated by the assessee as separate undertaking. The claim of the assessee was disallowed on various grounds including, interalia, that the undertaking was merely expansion of existing undertaking and that the STPI permission obtained in October, 2003 was for expansion of business and not for starting new business. The Tribunal while following the decision of Patni Computer Systems (supra) held that merely because the new permission contained reference to the original licence could not be considered as conclusive that the new unit was not a separate or independent unit.

42. With regard to the assesee's eligibility for claiming deduction u/s 10B in respect of export entitlement and special import licence, the contention of the Ld.Counsel for the assessee was that deduction u/s 10B of the Act is clearly allowable in view of specific provisions contained u/s 10B(4) of the Act which provided a specific formula for computing profits derived by the undertaking from the export. He further emphasized that that sub-section (4) of section 10B of the Act mandates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover to the total turnover. Thus, even though sub-section (1) of section 10B of the Act refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section (4) of that section.

43 He further invited our attention to the finding recorded by the Assessing Officer to the effect that the aforesaid income was treated as business income of the assessee on which deduction u/s 10B cannot be denied in view of the provisions of section 10B(1) read with section 10B(4) of the Act.

44. He further submitted that the decision of the Supreme Court in the case of Liberty India and others v. CIT: 317 ITR 218 = (2009-TIOL-100-SC-IT) relied upon by Revenue is not applicable to the facts of the present case. In that case, the issue before the Supreme Court was with regard to the eligibility of duty drawback for claiming deduction under section 80IB of the Act. The Supreme Court, making a reference to its own decision in the case of Sterling Food (supra), held that duty drawback could not be held to be income "derived from" the specified business and was therefore, not eligible for deduction under section 80IB of the Act. 45. As noticed above, there is no similar formula prescribed in sections 80IA/80IB to arrive at the profits derived from the business of eligible undertaking and therefore, the aforesaid decision rendered in context of section 80IB would not be applicable in case of deduction under sections 10A/10B of the Act.

46. In view of the above discussion, he submitted that both the questions referred to the Special Bench are to be answered in the affirmative.

47. We have considered the rival contentions, carefully gone through the orders of the authorities below and also deliberated on the case laws cited by the ld. Authorized Representative and the ld. CIT DR during the course of hearing before us as well as case laws referred by lower authorities in their respective orders, in the context of factual matrix of the case. We have also perused the relevant pages in the paper book to which our attention was invited by the ld. Authorized Representative and ld. CIT DR during the course of hearing before us.

48. First issue which was referred to the Special Bench relates to assessee's eligibility to claim exemption u/s 10-B for the enhanced period of ten years in terms of amended provisions of law, which came into effect from assessment year 1999-2000. In the instant case, the assessee is a 100 % E.O.U. which commenced its commercial production on 1st February, 1992, i.e. during the previous year 1991-92, relevant to the assessment year 1992-93. The assessee was entitled to claim exemption in any five consecutive assessment years falling within the period of eight years beginning with the assessment year in which the undertaking begins to manufacture or produce articles, at the option of the assessee, as per the provisions of erstwhile Section 10B(3) as applicable up to assessment year 1998-99. Since there was loss, the assessee did not claim any deduction in the first three assessment years i.e. 1992-93, 1993-94 and 1994-95. The exemption u/s 10-B was claimed and allowed to the assessee for the first time in assessment year 1995-96. Accordingly, the assessee was eligible for exemption u/s 10-B in respect of profits of its EOU up to the assessment year 1999-2000. With effect from 1.4.1999 the period of exemption prescribed u/s 10B(3) of five years was substituted by ten years by the Income Tax Second Amendment Act, 1998. And accordingly, the assessee became entitled for exemption u/s 10-B for a further period of two years i.e. assessment year 2000-01 and 2001-02. Thereafter, with effect from 1.4.2001, the entire section 10B has been substituted by the Finance Act, 2000, sub section (1) of which provides for deduction of profits for 100 % EOU for a period of 10 consecutive years beginning with the assessment year relevant to the previous year in which the undertaking starts its production. As the relevant provisions of exemption u/s 10-B, had undergone various changes, it is worthwhile to narrate the relevant provisions of law as applicable from the year in which this Section was brought into statute.

(a) Section 10B was initially inserted by the Finance Act, 1988, w.e.f. 1.4.1989 to provide for a complete tax holiday to 100 % E.O.U. for a period of five consecutive assessment years falling within the block of eight assessment years, subject to fulfillment of certain conditions.

(b)The Finance Act 1993 amended Section 10B(4)(iii) with retrospective effect from 01.04.91 to provide that an undertaking availing of the benefits of deductions u/s 10B shall not be eligible to claim deduction u/s 80IA.

(c) By the Finance Act, 1994, the tax holiday u/s 10B was restricted to the EOUs exporting at least 75 % of their turnover. Such restriction was specifically and prospectively made applicable to 100 % EOUs which commenced production on or after 1st April 1994. It is pertinent to note here that a specific mention was made that the said restriction will apply only to new units coming into existence after 1.4.94.

(d) Another major amendment was made by the Income Tax (Amendment) Act 1998 w.e.f. 1.4.1999, wherein the period of benefit of five years out of eight years was extended to a period of ten years out of ten years. It is worth while to note that proviso to Section 10B(3) was specifically omitted by the Income Tax (Amendment) Act 1998 w.e.f. 01.04.1999, which read as under :-

"Provided that nothing in this sub-section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years."

Had it been the intention of the law makers to not to allow the benefit of extended period to the existing units, the above proviso would not have been omitted and would have been made applicable to existing units. Similarly, explanation(ii) defining the term "relevant assessment years" was also substituted w.e.f. 0.04.1999, which is reproduced here under :

Erstwhile explanation applicable up to 31.3.99.
(iii) "relevant assessment year means the five consecutive assessment years specified by the assessee at his option under sub Section (3) of sub Section (5) as the case may be".

The substituted explanation w.e.f. 01.04.1999
(iii) "relevant assessment years" means the ten consecutive assessment years referred to in sub Section (3)"

This substitution lays down the clear intention of the legislature to provide the benefit of extended period of ten years to all the units, existing or new. When this amendment was brought into effect, the appellant was still eligible for exemption u/s 10B for two assessment years and as such qualified for exemption for the unexpired period of ten years.

5. The law as applicable to any particular assessment year can only be applied for that assessment year, nothing is to be read in, and nothing is to be implied. The appellant company has not claimed that the provisions of substituted Section 10B are retrospective in nature. The amended provisions are applicable w.e.f. 01.04.1999 and those substituted are applicable w.e.f. 01.04.2001 and the appellant's claim under the said Section is as per these amended/substituted provisions, as applicable to the respective assessment year. There is no restriction on the existing units for claiming the exemption for a period of ten years. On the contrary the first proviso to the newly substituted Section 10B(1) categorically allows exemption to the existing units for the unexpired period of ten years. Even the Explanatory note relating to the said enactment as reported at 245 ITR St 34 states that an undertaking set up before 31.03.2000 shall be entitled to the deduction for a period of ten years. Though this amendment is effective from 01.04.2001, it specifically allows exemption to existing unit for a period of ten years."

49. Applying the relevant provisions as discussed above, prior to amendment by Income Tax (Amendment) Act, 1998, the assessee was eligible for deduction u/s 10B of the I.T. Act for five consecutive years out of 8 years beginning with the assessment years in which undertaking began manufacturing i.e. from A.Y. 1992-93. From 1 April, 1998 the law was amended and 8 years were substituted by 10 years, in section 10B(3) of the I.T. Act. The restraint of exemption upto 8 years was also withdrawn. The only question which is to be answered is whether amendment of Finance Act, 1998 will apply to new units established after 01.04.1998 or they will apply to existing E.O.U.s also. To put it differently whether the Finance Act has given benefit to those units which will come into existence after 01.04.1998 or it also wanted to boost the export of exiting units. The Finance Minister stated in income Tax (second amendment) Bill, 1998 that he wanted to extend the 5 years tax holiday to E.O.U.s, to 10 years u/s 10B of the I.T. Act.

50. During the year under consideration, the assessee has claimed income exempt u/s 10B of I.T. Act for three units namely original unit which started production from A.Y. 1992-93, spinning unit no. III which started production from A.Y. 1996-97 and spinning unit no. IV which started production from A.Y. 1999-2000. This is given below in tabular form:-

E.O.U.	Date of Commercial Production	Relevant Assessment Year	Exemption u/s 10B claimed up to AY
A.Original Unit	01.02.1992	1992-93	2001-02
B.Spinning Unit No. III	01.06.1995	1996-97	2005-06
C.Spinning Unit No. IV	19.08.1998	1999-00	2008-09

In the assessee's case, the original unit started commercial production during the previous year relevant to the assessment year 1992-93. No deduction was claimed in the first three assessment years 1992-93 to 1994-95. Deduction under section lOB of the Act was claimed for the first time in the assessment year 1995-96 and accordingly under the pre-amended law the assessee was entitled to deduction upto assessment year 1999S2000. In the assessment year 1999-2000, before expiry of the original time limit of five consecutive assessment years for which deduction was available as per then applicable law, the amended law became applicable and the assessee was accordingly eligible for deduction for the extended period of 10 years, as against 5 years allowed under the pre-amended law.

51. In the assessee's case, the amended law became applicable during the period in which the assessee was otherwise eligible for claiming deduction under section lOB of the Act under the pre amended law. Thus, as a necessary corollary and applying the amended law, the assessee was clearly eligible for deduction under section lOB of the Act for the extended period.

52. We now discuss the facts in the case of Tata Tea Limited as relied on by the Assessing Officer.

53. The facts in the case of Tata Tea Limited (supra) were that the assessee had started eligible unit in assessment year 1989- 90. Deduction under section 10B of the Act was availed by the assessee for five consecutive years i.e. assessment years 1992-93 to 1996-97. The assessee had exhausted its five year tax holiday period available for claiming exemption under section 10B of the Act in the assessment year 1996-97. In the appeal for the assessment year 1997-98, the assessee, however, sought to claim deduction under section 10B of the Act by relying upon the provisions of the said section as amended subsequently by Income-tax (Second Amendment) Act, 1998, w.e.f. 1.4.1999. It was the contention of the assessee that the law, as amended by the I.T. (Second Amendment) Act, 1998 extending the period of tax holiday from five years to ten years, was merely c1arificatory in nature and also applied to the assessee, even though the assessee admittedly and undisputedly had already exhausted its tax holiday period available under the pre-amended law and prior to the amendment, which was, in any case not applicable to the year under appeal.

54. Disagreeing with the aforesaid contention of the assessee, the Tribunal, while upholding the order of the CIT(A) and the Assessing Officer denying deduction under section 10A of the Act, for the assessment year 1997-98, held that since the assessee had already exhausted the tax holiday period and the assessee been allowed deduction for five consecutive assessment years, as per the applicable law, the assessee was not eligible for deduction for the extended period in view of the amendment which was effective w.e.f. 01.04.1999 which was even otherwise not retrospective in operation. The pertinent observations of the Tribunal are reproduced hereunder:

"24. As per the earlier provision the assessee was entitled to have the deduction for five consecutive assessment years in the eight years from the date when it began to manufacture or produce the articles or things. The assessee opted for availing the benefit of deduction in the last five years out of the eight years and the said period terminated in asst. yr. 1996-97. In other words the assessee had completely availed the benefit of deduction as per the provisions of law existing at the material time. Sub-sec (3) was amended with effect from asst. r. 1999-2000 for allowing deduction in ten consecutive assessment years. When the amendment was carried out the assessee had completely exhausted the benefit of deduction available as per law. We are dealing with the asst. yr. 1997-98 which is the ninth year beginning with the assessment year relevant to the previous year in which the industrial undertaking began to manufacture. How an amendment carried out after two years of the cessation of benefit can be said to have application on earlier years is any body's guess. It is more so for the reason that the period of eight years expired in asst. yr. 1996-97 and thereafter the assessee's unit became taxable under the regular provisions of the Act. It is still further noted that even the period of ten consecutive assessment years from the beginning of the year in which the industrial undertaking begins to manufacture or produce articles was also over in the asst. yr. 1998-99 whereas the amendment was carried out w.e.f. 1st April, 1999. The order relied by the learned Authorised Representative in Consindia (P) Ltd. is not applicable inasmuch as in that case the period of eight years expired in asst. yr. 2000-01, whereas the amendment was carried out w.e.f. 1st April, 1999. We therefore hold that the learned CIT(A) was justified in denying the benefit of deduction under s. 10A."

On perusal of the aforesaid, it may be noticed that in the aforesaid case-

(i) the assessee had claimed and been allowed deduction for five consecutive assessment years, viz, assessment years 1992-93 to 1996-97.

(ii) even the eight years block period for claiming tax holiday for a continuous period of five years had already exhausted in the assessment year 1996-97.

(ii) the amendment in section lOB was applicable from the assessment year 1999-2000 and not retrospectively.

55. It is in these circumstances, that the Tribunal held that the assessee was not eligible for claiming tax holiday for the extended period of ten years. It is, however, important to note that in the aforesaid decision the Tribunal also observed that had it been a case where the five years period had not expired at the time of applicability of the amended law, the assessee would have been entitled to deduction for the larger period under the amended law. The pertinent observations of the Tribunal are reproduced hereunder:

" ....... Obviously the amendment so made to sub-so (3) .... of section 10B is substantive as it has expanded the period of deduction from the earlier five years to ten years. There is nothing like giving any clarification for the earlier provision or laying ......... down any procedure in respect of the existing provision. A new extended benefit was conferred for the first time. By no stretch of imagination it can be said to be clarificatory or procedural so as to make it applicable retrospective. It is, indeed a substantive amendment and will hold the field from the date when it has been made applicable from, which in the present case is asst. yr. 1999-2000. The position would have been different if the period of five years had not yet expired and the amendment had come in between; In that case the assessee would have been entitled to deduction for the larger period as per the amendment."

56. The issue before the Tribunal is squarely covered by the decision of the Hon'ble Karnataka High Court in the case of DSL Software Limited; ITA No. 462/07 = (2011-TIOL-787-HC-KAR-IT), wherein it was held by the Hon'ble High Court that in terms of amendment carried out in the year 1999, the tax holiday benefit stood extended for a period of ten consecutive assessment years. It was also held that on 1.4.1999, when the amended provisions came into force by virtue of the said provision, the assessee would be entitled to the benefit of tax holiday for ten consecutive years from the date of production and if the assessee had already availed the benefit under the un-amended provision and the ten consecutive yeas would fall prior to 1.4.1999 then the assessee would not be entitled to the said benefit. It was further held that if the said ten consecutive years from the date of production have not expired prior to 1.4.1999, for the remaining un-expired period, the assessee could be entitled to the benefit. The relevant observation of the Court was as under :-

"8. From the aforesaid object behind the amendment, it is clear that the period of 5 years is extended to 10 years in order to give added thrust to exports. It is because the Parliament felt that the tax holiday of 5 years is not having the desired result and therefore, they extended the benefit of tax holiday from 5 years to 10 years. If it is a case of extension from 5 years to 10 years, the unit, which had the benefit of 5 years automatically, should get the benefit of 10 years if other conditions are fulfilled. The other condition to be fulfilled is ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture. Therefore, the object with which this amendment was introduced is to extend the benefit of tax holiday for a period of 10 consecutive years from the date of commencement of manufacture or production. Before an assessee can claim the benefit of tax holiday, the said law governing the tax holiday should be in force on the first day of the relevant year. Then only he would be entitled to the said benefit. On 01.04.1999 when the amended provision came into force by virtue of said provision the assessee would be entitled to the benefit of tax holiday for 10 consecutive years from the date of production. If the assessee already availed the benefit under the unamended provision and the 10 consecutive years would fall prior to 01.04.1999, then the assessee would not be entitled to the said benefit. If the said 10 consecutive years from the date of production has not expired, prior to 01.04.1999, for the remaining unexpired period, he would be entitled to the benefit. On the ground that he had the benefit of unamended provision and the 5 years period has expired on the day amended provision came into force, he cannot be denied the benefit. If that is done, it would run counter to the intention with which the amended provision was brought on the statute book. It would negate the amended provision.

9. In the instant case, the assessee has commenced production in the year 1993-94. He enjoyed the benefit of 5 years from 1993-94 to 1997-98. The amended provision came into force on 01.04.1999. He is entitled to the tax holiday under the amended provision I.e. from 1993-94 to 2002-03. He claimed benefit from 1999-2000, 2000-01 and 2001-02. It is for the period 2001-02, the benefit is denied. The said denial of the benefit runs counter to the spirit of section 10B and it would negate the object with which the amended provision was brought in. The assessee is entitled to the benefit of extension from 5 years to 10 years tax holiday as provided under the amended provision for 10 consecutive years from the date of commencement of production. In that view of the matter, the order passed by the Tribunal as well as the First Appellate Authority is strictly in accordance with law and do not suffer from any legal infirmity, which calls for interference. No substantial question of law arises for consideration in this appeal."

57. Applying the proposition of law laid down by the above decision to the facts of the instant case, as the period of ten years from the year of start of manufacture has not expired as on the date when the amended provision came into force, the assessee is entitled to the benefit of tax holiday for the remaining period of ten years. It is pertinent to mention here that in the aforesaid decision, the Hon'ble Karnataka High Court went on to hold that even if the period of five years has expired as on the date of amended provisions but the period of ten years is still running, the assessee cannot be denied the benefit. Thus, the issue raised before this Special Bench is squarely covered by the aforesaid decision of the Hon'ble High Court of Karnataka. Since this is the only decision of the Hon'ble High Court on the issue, the same is binding on the Special Bench in view of the settled principle of judicial proprietary, as laid down in following cases :-

Supreme Court in the case of Dunlop India Ltd: 154 ITR 172 @ 181 = (2002-TIOL-156-SC-CX) :

"We desire to add and as was said in Cassell and Co. Ltd. v. Broome [1972] AC 1027 (HL), we hope it will never he necessary for us to say so again that " in the hierarchical system of courts " which exists in our country, " it is necessary for each lower tier ", including the High Court, "to accept loyally the decisions of the higher tiers". " It is inevitable in a hierarchical system of courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary ...... But the judicial system only works if some one is allowed to have the last word and that last word, once spoken, is loyally accepted " (See observations of Lord Hailsham and Lord Diplock in Broome v. Cassell). The better wisdom of the court below must yield to the higher wisdom of the court above. That is the strength of the hierarchical judicial system. In Cassell v. Broome [1972] AC 1027, commenting on the Court of Appeal's comment that Rookes v. Barnard [1964] AC 1129, was rendered per incuriam, Lord Diplock observed (p. 1131).

"The Court of Appeal found themselves able to disregard the decision of this House in Rookes v. Barnard by applying to it the label per incuriam. That label is relevant only to the right of an appellate court to decline to follow one of its own previous decisions, not to its right to disregard a decision of a higher appellate court or to the right of a judge of the High Court to disregard a decision of the Court of Appeal."

The Delhi High Court in the case of All India Lakshmi Commerical Bank Officers Union V. UOI: 150 ITR 1, held that the income tax authorities acting anywhere in India have to respect the law laid down by a High Court, whether of the State in which they are functioning or of a different State, in the absence of any contrary decision of any other High Court.

Similar view has been taken in the following cases holding that the Tribunal had to follow the law laid down by a non-jurisdictional High Court where there is no judgement of a jurisdictional Court;

• CIT v. Godavari Devi Saraf : 113 ITR 589 (Bom)
• Highway Construction: 217 ITR 234, 240 (Gau.)

• CIT vs. Smt. Nirmalabai K. Darekar: 186 ITR 242 (Bom)
• CIT vs. Maganlal Mohanlal Panchal: 210 ITR 580 (Guj).

58. Similar view has been taken by the I.T.A.T., Mumbai Bench in the case of Cons India Private Limited in ITA No. 8270/Mum/2004 wherein it was held that the assessee was eligible for deduction u/s 10A of the Act for the extended period of ten years. In this case also eight years expired in the assessment year 2000-01.

59. Reference in this regard may also made to the decision of the Delhi Bench of the Tribunal in the case of Tech Books Electronics Services (P) Ltd vs. ACIT: 100 ITO 125 = (2006-TIOL-107-ITAT-DEL). In that case, again, neither the five year period nor the block period of eight year had expired before the amended provisions became applicable and accordingly the Tribunal was pleased to hold that the assessee was eligible for deduction for the extended period as per the amended law. The pertinent observations of the Tribunal are reproduced hereunder:

"10.8 In the case of the assessee, neither the period of five years nor the block period of eight years expired when the amendment replacing the word 'ten' for 'five' was introduced by Income-tax (Second Amendment) Act, 1998 with effect from 1-4-1999. Since the assessee was entitled to exemption in the year in which amendment became effective and operative, the assessee will be entitled to the extended period of exemption because the period of five years had not exhausted up to assessment year 1999-2000. Since the right of the assessee was continuing in the year of amendment and was not lost on the date when the amendment came into existence, the view taken by the learned CIT(A) cannot be upheld."

10.9 So far as the objections of the learned CIT(A) regarding conduct of the assessee-firm in not claiming the exemption in earlier year is concerned, the approach of the learned CIT(A) raising this objection, cannot be legally justified because if the assessee is entitled to any benefit under any statutory provision then the past conduct cannot be relevant particularly when reference to such conduct is not made in the Act. The eligibility of the assessee has to be seen in the year in which the claim is preferred and if in earlier years the assessee waived his right then he cannot be stopped in claiming the benefit in the subsequent years.

10.10 The learned CIT(A) has also observed that the assessee did not file declaration exercising option prior to the due date for filing of return but filed it along with the return and, therefore, the assessee is disqualified from claiming exemption on this ground also. We do not find any force in such objection because this objection is merely of super-technical nature. In view of the above, we are unable to concur with the finding of learned CIT(A) and set aside the same. Consequently, we allow the ground of appeal taken by the assessee and direct that the assessee shall be entitled to claim exemption under section lOB in the assessment year under consideration."

60. From record we find that the assessee has set up two new spinning units (Unit III and Unit IV) on 1.6.1995 and 19.8.1999, respectively, as a separate, independent and distinct unit. During the relevant assessment year, under consideration, the assessee has claimed deduction in respect of profits of spinning Unit Nos. 3 and 4, which was declined by the Assessing Officer by holding that the spinning units III and IV could not be treated as new industrial undertaking and that the assessee was only granted certificate for enhanced capacity and not for the new industrial undertaking and that permission for enhancement of the capacity was merely by way of amendment of the original certificate and not in the form of any new permission/certificate. The Assessing Officer also observed that the deduction is granted to an industrial undertaking and a new line of production set up and named as separate unit cannot be treated as new industrial undertaking. The objection of the Assessing Officer was that even though the assessee had carried out capacity expansion, but such expansion could not be regarded as separate industrial undertaking in order to be independently eligible for deduction u/s 10B of the Act. By the impugned order, the learned CIT(A) after giving detailed finding, allowed the assessee's claim by holding that all the conditions u/s 10B were satisfied as there was substantial investment of fresh capital in the new unit set up and employment of the requisite labour. The learned CIT(A) also recorded a finding to the effect that separate and distinct industrial unit was set up by the assessee. It was also held that there was no requirement of obtaining separate and distinct industrial licence as a condition precedent to claim of deduction u/s 10B of the Act so long as the new unit set up was approved as an EOU by the designated authority.

61. Applying the relevant provisions of law as applicable during the years, under consideration, and also the judicial pronouncements, as discussed above, we can safely hold that in the assessment year 1999-00 when the period of exemption was extended from five years to ten years, all the three units of the assessee were eligible for deduction u/s 10B of the Act. Each of the units were eligible for exemption under section 10B of the Act, both under the pre-amended law when the exemption was available for five years out of eight years as well as under the amended law when the exemption was extended to ten consecutive assessment years. As the amendment came into force in the assessment year 1999-00, the amended laws became applicable to the assessee according to which all the three eligible units of the assessee became entitled for deduction for a period of ten consecutive assessment years from the date of commencement of manufacture/production by the said eligible undertaking. Furthermore, there is no question of claiming the provision of section 10B to be prospective or retrospective since what the assessee is simply claiming is that the exemption should be allowed as per the provisions of section 10B of the Act as applicable in the relevant assessment year. Once that is done, no question arises for denying exemption to the assessee during the relevant assessment years under consideration. It is pertinent to mention here that in the assessment year 1999-00 the assessee was duly allowed deduction as per the then applicable law whereunder the eligible undertaking is allowed such deduction for a period of ten consecutive years. Now in the assessment year 2000-01 the assessee had claimed deduction in respect of its eligible units which was also not disputed by the Assessing Officer. The Assessing Officer in his order for the assessment year 2000-01 has given a finding that Unit Nos. III and IV were entitled for exemption upto the assessment year 2005-06 and 2008-09 respectively, which was as under :--

"The assessee's one of the undertakings, situated at Khalbujurg, referred to as Sarover Division is 100% Export Oriented Unit engaged in manufacturing of Cotton yarn, Fabric and Garments. A copy of Green Card No. 113 dated 30.07.1993, valid til 29.07.98 and renewed Green card No. 471 dated 13.07.1998 valid upto 31.03.2003 have already been furnished earlier. The original unit of this undertaking is entitled for exemption u/s 10IB upto A.Y. 2001-02 whereas unit III and Unit IV of this undertaking are entitled for exemption under section 80B upto Assessment years. 2005-06 and 2008-09 respectively. For the year under consideration, the assessee is eligible for exemption under section 80B in respect of all its units of this undertaking situated at Khalbujurg District Khargone."

We also find that the CIT has revised the above order of the Assessing Officer by exercising his power under section 263 of the Act on the issue of allowability of deduction under section 10B on the aforesaid units. This order of the CIT was quashed by the Tribunal and subsequently appeal filed by the revenue was also dismissed by the High Court.

62. We have considered in detail the submissions of the learned CIT DR and the ld. counsel for the assessee. We have also deliberated on the case laws cited by both the parties in the context of factual matrix of the case. As per our considered view, deduction u/s 10B of the Act is allowable in respect of profits of 100% export oriented undertaking. The expression "undertaking" has not been defined u/s 10B of the Act. The said expression has been explained by the Courts in the context of similar other provisions of IT Act viz. section 15C of 1922 Act, section 80J, 80HH, 80I, 80IA and 80IB of 1961 Act. Hon'ble Supreme Court in the case of Textile Machinery Corporation Limited v. CIT: 107 ITR 195 held that the true test is whether the unit claiming deduction is a new and identifiable undertaking separate and distinct from the existing business. It was further held that manufacture or production of articles yielding additional profit attributable to the new outlay of capital is a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability. Following observations of the Court are very much pertinent :-

" The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct.

It is clear that the principal business of the assessee is heavy engineering in the course of which it manufactures boilers, wagons, etc. If an industrial undertaking produces certain machines or parts which are by themselves, identifiable units being marketable commodities and the undertaking can exist even after the cessation of the principal business of the assessee, it cannot be anything but a new and separate industrial undertaking to qualify for appropriate exemption under section 15C. The principal business of the assessee can be carried on even if the said two additional undertakings cease to function. Again, the converse is also true. The fact that the articles produced by the two undertakings are used by the boiler division of the assessee will not weigh against holding that these are new and separate undertakings. On the other hand, the fact that a portion of the articles produced in these two new industrial undertakings had been sold in the open market to others is a circumstance in favour of the assessee that the new industrial units can function on their own. Use of the articles by the assessee is not decisive to deny the benefit of section 15C. "

"One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognizable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of section 15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned."

63. At page 206 the Hon'ble Supreme Court has summarised the requirements to be satisfied by a new industrial undertaking to enjoy the tax holiday as under :-

" However, in order to be entitled to the benefit under section 15C, the following facts have to be established by the assessee, subject always to time-schedule in the section:

(1)investment of substantial fresh capital in the industrial undertaking set up,

(2) employment of requisite labour therein,
(3) manufacture or production of articles in the said undertaking,

(4) earning of profits clearly attributable to the said new undertaking, and
(5) above all, a separate and distinct identity of the industrial unit set up.

It is clear from the above that the Hon'ble Supreme Court has pointed out that new industrial undertaking should emerge as physically separate industrial unit which may exist on its own as a viable unit and the commodity so produced or the results achieved should be commercially tangible products and the undertaking should be carried on separately without completed absorption and losing the identity of the existing business unit; the mere fact that the new unit produces same/similar products would not constitute valid reason to decline the claim of deduction to the new unit.

64. Hon'ble Supreme Court in the case of Indian Aluminium Limited 108 ITR 367 held that where the assessee made extensions to its existing factories, the claim of deduction u/s 15C of the 1922 Act in respect of the additional investment in the form of extension of the existing factory premises, installation of new plant and machinery, etc. cannot be denied.

65. The Hon'ble jurisdictional High Court in the case of Bhilai Engg. Corporation Private Limited; 133 ITR 687, after following the decision of the Hon'ble Supreme Court in the case of Textile Machinery Corporation Limited (supra) held that relief u/s 80J could be obtained when new plant and machinery were erected for producing the same commodity which the assessee was producing earlier.

66. In view of the above discussion, we can safely hold that an undertaking means a unit/business which has a separate and independent existence distinct from the other units/business; having independent infr-structure, separate plant and machinery being set up with substantial capital investment and having an identifiable output and the profits attributable thereto can be determined.

67. Applying the above proposition to the facts of the instant case, we find that all the aforesaid conditions are satisfied in the two new spinning units viz. Unit Nos. 3 and 4, which were set up by the assessee as a separate and independent production units, by making substantial investment in new building, plant and machinery, etc. wherein distinct and marketable produce are manufactured. In respect of unit no. 3 we find that it was set up in a newly constructed building by installing additional 16224 spindles which enhanced the total capacity to 38400 spindles from the existing 22,176 spindles. We also find that four new knitting machines were installed. The facilities to manufacture additional 6 lacs per annum pieces of garments were put as against earlier installed capacity of 13.6 lacs garments per annum. The turnover of the company reached to Rs. 121.72 crores from Rs. 67.26 crores in the immediately preceding year and the profits before depreciation took quantum leap of 3.37 crores. In Unit No. 4, additional 16128 spindles were installed which enhanced the installed capacity to 54528 spindles. 12 circular knitting machines were imported and installed. A power plant of 4.25 MV capacity was set up. The facilities to manufacture readymade garments were set up to manufacture 6 lacs additional garments per annum and the new unit resulted into total addition of gross block of fixed assets by Rs. 69.43 crores as against 121.01 crores at the beginning of the year. The turnover of the company also increased to Rs. 224.5 crores as against 158.37 crores in the preceding year. Thus, on the facts of the case, both the new spinning units of the assessee have their independent and separate existence which is evident from the copy of invoices along with packing list placed in the paper book which shows that identifiable and marketable products were manufactured by these units. The raw material issue slips also show that the raw material is issued and recorded unitwise. The wage registers also show that separate workers were engaged and wages were paid and recorded separately. The flow chart of spinning process clearly indicates that each unit is separately set up. The loan sanction letters issued by bank also evidenced sanction of separate term loan to show that the funds were borrowed for new units and the assessee has maintained separate books of accounts for each unit. All these documentary evidences clearly establish that the assessee has undertaken substantial expansion by setting up new units viz. Unit Nos. 3 and 4 which were separate and independent production units eligible for claim of deduction u/s 10B for ten years from the year of start of production in each of the units.

68. In this regard the contention of the learned CIT DR was that the assessee had just carried out capacity extension which could not be regarded as a separate industrial undertaking for making it eligible for the claim of deduction u/s 10B insofar as the assessee was only granted certificate for enhanced capacity and not for the new industrial undertaking. The objection of the learned CIT DR was also that the permission for enhancement of capacity was merely by way of amendment in the original certificate and not in the form of any new permission/certificate. In this regard we find that section 10B does not stipulate for issue of separate approval for each unit from the competent authority. The only requirement under the said section is that the undertaking should be approved. The definition of "100% export undertaking" as provided in clause (iv) of Explanation 2 to section 10B provides as under:-

"(iv) "hundred per cent. export-oriented undertaking" means an undertaking which has been approved as a hundred per cent. exportoriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act;"

69. From record we find that the new spinning unit set up by the assessee was duly approved as 100% EOU by the concerned Government department. The relevant permission dated 13.3.1995 bearing no. 144/EOB/61/95 issued by the Ministry of Industries, Department of Industrial Development, Government of India, was received for setting up new unit. Necessary corrections in the permission dated 13.3.1995 were also carried out by the Ministry vide letter dated 31.5.1995. The assessee had also filed letter dated 14.4.1998 before the competent authority for enhancement of the licence capacity which was also granted on 2.6.1998. In view of these documentary evidences, we hold that fresh permission was granted for a new unit where the competent authority extended the benefit available to 100% export oriented unit for substantial extension of the existing undertaking.

70. The decision relied upon by the learned CIT DR in the case of State of Gujarat vs. Saurashtra Cement & Chemical Industries; 260 ITR 181 is distinguishable on facts insofar as it was held by the Hon'ble Supreme Court that admittedly the alleged new unit was using the existing crushers, grains, raw mills, packing machines and old cement mils to complete the process of manufacture of cement. It was thus held that new unit was not totally independent viable unit, therefore, not eligible for claim of exemption from electricity duty u/s 3(2)(vii)(b) of the Bombay Electricity Duty Act, 1958. However, in the instant case before us, the aforesaid two units viz. unit no. 3 and 4 were separate and independent production units wherein by making substantial investment in new building, plant and machinery, etc., the assessee was manufacturing distinct and marketable products. Unit 3 was set up in newly constructed building by installing additional spindles, new knitting machines which resulted into substantial increase in the installed capacity and turnover of the company. Similarly, in unit 4, the assessee has installed 16,128 spindles, 12 circular knitting machines, power plant of 4.25 MV capacity. Thus, the unit resulted into total addition to gross block of fixed assets by Rs. 69.43 crores as against 121.01 crores. The turnover of the company also increased to Rs. 224.5 crores as against Rs. 158.37 crores in the preceding year.

71. The decision relied upon by the learned CIT DR in the case of Canara Wire Products Limited; 196 ITR 426 is also distinguishable on facts insofar as the claim of deduction u/s 80J was declined on the plea that the assessee has undertaken reconstruction of old business. It was held that whenever an assessee claims relief u/s 80J, the assessee will have to plead and establish that a new unit has come into existence, which independently produces articles of whatever nature and this new unit is not dependent upon old existing unit. However, in the instant case before us, the two units were separate and totally independent wherein substantial investment in new building, plant and machinery was done, therefore, the case law relied upon by the learned CIT DR is of no help to the revenue for declining the claim of deduction u/s 10B in respect of its new unit nos. 3 and 4.

72. Now coming to the objection of the learned CIT DR to the effect that the assessee was only granted certificate for enhanced capacity by way of amendment of the original certificate and not a fresh sanction letter in the form of certificate, therefore, the assessee's claim of deduction u/s 10B of the Act cannot be granted. This objection of the learned CIT DR is not tenable insofar as manner of granting approval/licence for new unit is not relevant and even the endorsement on the existing licence/approval would be sufficient for considering the unit as distinct and separate undertaking, since the assessee fulfilled all the conditions, namely,

a) Business has separate and independent existence, separate and distinct from other units/business

b) employment of independent infrastructure and separate plant and machinery etc.
c) substantial capital investment

d) new employees and
e) Identifiable output (even though same product) and profits thereto can be determined.

73. Similar issue has been dealt with by the I.T.A.T., Pune Bench, in the case of Patni Computer Systems Ltd. v. DCIT: ITA No. 426 and 1131/PN/06 = (2007-TIOL-272-ITAT-PUNE), wherein assessee's claim for deduction under section 10A of the Act in respect of three units was disallowed by the Assessing Officer on the ground that three units were not new units but mere expansion of existing unit on the basis of approval letters received from STPI. The Tribunal held that the manner of granting approval was not relevant for adjudicating the claim of deduction under section 10A. The relevant observations and findings of the Tribunal were as under :-

"41. The only plea of the Revenue is that in the approvals granted by the STPI, the three units have been referred to as an expansion of the corresponding old units. The moot question is as to whether such a plea of the Revenue is potent to effect the assessee's entitlement for deduction under section 10A of the Act. Similar plea of the Revenue in the context of section 10B of the Act was a subject matter of consideration by our coordinate Bench in the case of Jayant Agro Organics Ltd. Akhandanad, (supra) wherein following discussion is worthy of notice:

"8. Revenue has vehemently contended that there is no independent Government approval of the new unit and all that the Government has permitted is enhancement in capacity of the existing unit. As evident from the land allotment letter dated 19th July, 1995 issued by the Gujarat Industrial Development Corp. Ltd. it is clear that the land allotted for the new unit is plot #624/1 and 2, and 625 to 627 whereas the existing plant was in plot 3 602. The production of 12 Hydroxy Stearic Acid is authorized by the letter dt 27th January 1995 which states that the Government has taken note of assessee's wish to manufacture Hydroxy Stearic Acid also by way of forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that "Govt also approves of your request for the import of additional capital goods worth Rs 550 lakhs for the project". That clearly demonstrates that the production of Hydroxy Stearic Acid of 12,000 MT was viewed by the Government as an independent project. It was not a case for purchase of addition capital goods for the existing project. The assessee is irrespective of the number of units, is one of artificial juridical person. Therefore, a combined permission, which involves setting up for different units, is quite in order. The fact of amendment of earlier permission or of grant of separate permissions, is not really relevant. What is really to be examined is whether the units are independent of unit and whether the units are covered by the permission or not. In our humble understanding it meets both the tests. We have also noted that it is not an statutory requirement that there has to be separate permission for each unit and therefore just because the permission is granted by the Government by way of amending the original permission letter does not affect the eligibility for deduction u/s 10B in any manner."

74. In view of the above discussion, the co-ordinate Bench held that the manner in which the approval has been granted is not relevant to examine the assessee's eligibility for claim of deduction u/s 10A of the Act in respect of three units. What is really to be examined is as to whether the three units are independent units and that they fulfill the conditions prescribed u/s 10A(2) of the Act. It was, therefore, held that the mere fact that the requisite permissions from STPI refer them as expansions of the existing units would not dis-entitle the assessee from the claim of deduction under section 10A of the Act.

75. In view of the above decision of the coordinate Bench, the plea of the learned CIT DR will not dis-entitle the assessee from claiming deduction u/s 10B in respect of two new units since these units were set up in a newly constructed building by installing additional spindles, new plant and machinery, new power plant and new manufacturing facilities which resulted into increased turnover by almost double, recruitment of new manpower/employees, manufacturing of new identifiable and marketed products, maintenance of separate books of account for each unit, obtaining separate approvals for new spinning units and permission for enhanced capacity. It is pertinent to mention here that new, separate and independent units were set up which were distinct from other existing unit eligible for deduction u/s 10B of the Act.

76. In view of the above discussion, we hold that the undertaking existing prior to 1.4.1999 claiming exemption u/s 10B of the Act would be entitled to exemption for the extended period of ten years and deduction under the said sections would be admissible in respect of unit no. 3 and unit no. 4 as well for ten years from the year of start of production in these new units since these units were separate and independent production units. Thus, the first question referred to the Special Bench is answered in the affirmative.

77. The second question referred to the Special Bench pertains to eligibility of deduction in respect of export incentives received by the assessee in terms of the provisions of section 10B(1) read with section 10B(4) of the Act. The facts, in brief, are that during the year, the assessee was in receipt of export entitlement of Rs. 1.65 crores and special import licence of Rs. 4.47 lacs. The Assessing Officer declined the claim of deduction by holding that such income was not derived from 100% export oriented undertaking, therefore, not eligible for claim of deduction u/s 10B(1) read with section 10B(4) of the Act. The learned Commissioner of Income Tax (Appeals), by following the order of the Tribunal in the assessee's own case, held that the assessee was eligible for exemption in respect of export entitlement and special import licence as the income of EOU eligible for exemption u/s 10B of the Act. From record we find that the export entitlement was allotted by the competent authority in respect of export undertaken by the assessee during the year. The assessee off-loaded the entitlement which was unusable and bought quota/entitlements which was required for procuring the required material necessary for its production purpose.

Similarly, special import licence was allotted to the assessee by the designated authority as per Export Import Policy And Procedure 1997 – 2002. Income arising out of sale of export entitlement and special import licence was assessed as income from business. However, on such business income, the assessee is entitled to claim of deduction u/s 10B in respect of such income. The relevant provisions of section 10B read as under :-

"[Special provisions in respect of newly established hundred per cent export-oriented undertakings

10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years :

[Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this subsection shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:]

Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2012] and subsequent years :

[Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under subsection (1) of section 139.]

(2) This section applies to any undertaking which fulfils all the following conditions, namely :-
(i) it manufactures or produces any articles or things or computer software;

(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 reestablishment, reconstruction or revival by the assessee of the business of any such undertaking 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 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

Explanation 1.- For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.

Explanation 2.- The sale proceeds referred to in this subsection shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.

[(4) For the purposes of sub-section (1), 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.]

xxx xxx
xxx xxx
Explanation 2.-For the purposes of this section,-
(i) "computer software" means-

(a) any computer programme recorded on any disc, tape, perforated media or other information storage device;
or
(b) any customized electronic data or any product or service of similar nature as may be notified by the Board,

which is transmitted or exported from India to any place outside India by any means;
(ii) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force;

(iii) "export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with subsection (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;

(iv) "hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act;

(v) "relevant assessment years" means any assessment years falling within a period of ten consecutive assessment years, referred to in this section.]

[Explanation 3. - For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.]

[Explanation 4. - For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi-precious stones.]"

It is clear from the plain reading of section 10B(1) of the Act that the said section allows deduction in respect of profits and gains as are derived by a 100% EOU. Further, section 10B(4) of the Act stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the provisions of sub-section (4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section (1) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section (4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10B of the Act. We cannot ignore sub-section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India, the Hon'ble Supreme Court has dealt with the provisions of section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub-section (4) of section 10B while computing the profits derived by the undertaking from the export. Thus, the decision of the Hon'ble Supreme Court is of no help to the revenue in determining the claim of deduction u/s 10B in respect of export incentives.

78. Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. The formula is as under :-

Profit of the business of the Undertaking X Export turnover / Total turnover of business carried out by the undertaking

79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not-with-standing the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the "profits of the business" eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories vs. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar; 284 ITR 584 = (2006-TIOL-81-SC-IT) had approved the principle laid down in the Special Bench decision in International Reserarch Park Laboratories vs. ACIT (supra). In the assessee's own case the I.T.A.T. in the preceding years, after considering the decision in the case of Liberty India held that provisions of section 10B are different from the provisions of section 80IA wherein no formula has been laid down for computing the eligible business profit.

80. In view of the above discussion, question no. 2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Act.

Order pronounced in the open Court on 28.3. 2012.

--
Regards,

Pawan Singla

BA (Hon's), LLB

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Chartered Accountant Finance

Saturday, November 9, 2013

[aaykarbhavan] Judgments and Service Tax Q & A.

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