Hinduja Ventures Ltd, Mumbai vs Assessee

BEFORE : SHRI R.C.SHARMA, AM & SHRI VIVEK VARMA, JM ITA No.6394/Mum/2014 ( Assessment Year : 2005-2006) Hinduja Ventures Ltd., 49/50, In Vs. DCIT, Cir-8(2), Mumbai Centre, MiDC, 12th Road, Marol, Andheri (East), Mumbai-400 093 PAN/GIR No. : AAACH 2058 N ( Appellant) .. ( Respondent)

/Assessee by : Shri S.M.Lala, Sh.Harsh Shah & Shri Paras Savla /Revenue by : Shri Kishan Vyas Date of Hearing : 29th Oct.2014 Date of Pronouncement : 21/01/2015

ORDER

PER R.C.SHARMA (A.M.) :

This is an appeal filed by the assessee against the order of CIT(A),

dated 25-8-2014 for assessment year 2005-06, in the matter of order

passed u/s. 143(3) r.w.s.254 of the I.T. Act.

2. The grievance of the assessee relates to disallowance of claim of

deduction u/s.10A in respect of Unit No.2 & 3. The assessee is also

aggrieved for the disallowance made u/s.14A.

3. Rival contentions have been heard and record perused. Facts in

brief are that in the return of income, the assessee claimed that it has four

units engaged In the business of Information Technology (IT) and I.T.

enabled services. In respect of income of Unit-I and Unit-IV, the assessee

did not claim any . deduction u/s.10A of the Act whereas it' has claimed 2 ITA No.6394/14

deduction u/s.10A of the Act in respect of income of Unit-II & III. The

assessee claimed that Unit-I is engaged in IT services. Unit-II is engaged

in IT enabled business of insurance claim processing, Unit-III is engaged

in the business of call center and Unit-IV is engaged in domestic call

center. As per Audit Report in Form No.56F under Rule 160 relating to

Unit-II is stated to be set up at 1st & 2odfloor, HTMT House, 614,

Vajpayee' Nagar, Bommanahalli, Housr Road. Bangalore-50 068. The

date of initial registration with the Software Technology. Park is stated to

be on 22.07.1992 whereas the date of commencement of manufacture or

production of computer software is claimed to be in June 2000 .. Further.

as per Audit Report in Form NO.56F relating to Unit-III, Unit-III is stated

to be set up at Ground and 3rd Floor, HTMT House, 614, Vajpayee

Nagar, Bornmanahatti, Hosur Road, Bangalore-560 068. The date of

initial registration with the Software Technology Park is 'stated to be on

22.07.1992 whereas the date of commencement of manufacture or

production of computer software is claimed to be on 19.11.2001.

4. The facts as reported in the audit report for unit -II are as under: .

"It is claimed that "unit +Il" is set up at 1st & 2nd floor, HTMT House, 614, Vajpayee Nagar, Bommanahalli, Hosur Road, Bangalore -560068. It is certified that unit -II is registered with Software Technology Parks of India, Bangalore and quantified the admissible deduction u/s. 10A of the Act at a sum of Rs. 12, 41,79, 095/-. Nature of the business of the unit is stated to be insurance claim processing. The date of initial registration with the Software Technology Park is stated to be on 22.07.1992. It is claimed that the unit started the manufacture or production of computer Software in June 2000 and it is 5th year of the deduction u/s10A. The total turnover of the undertaking/unit was quantified at a sum of Rs. 55. 96 Cr and the total turnover of the business was quantified at a sum of Rs. 166.13 Cr. The total profits derived by the undertaking / unit was quantified at a sum of Rs. 13.24 Cr and the total profit derived by the business was quantified at a sum of Rs. 74 Cr.

3 ITA No.6394/14 3.3 The facts as reported in the audit report in respect of unit -III are as under:

It is claimed that unit -III was set up at Ground & 3rd floor, HTMT House, 614, Vajpayee Nagar, Bommanahalli, Rosur Road, Bangalore -560068. It is certified that unit -III is registered with Software Technology Parks India, Bangalore and quantified the admissible deduction at a sum of Rs. 38,32,05,319/-. u/s lOA of the Act. Nature of the business of the undertaking is stated to be a call center. The date of initial registration in the Software Technology Park is stated to be on 22.07.1992. It is claimed that the unit started the manufacture or production of computer Software on 19th November 2001 and it is 4h year of the deduction u/s 10A. The total turnover of the undertaking / unit was quantified at a sum of Rs. 69. 87 Cr and the total turnover of the business was quantified at a sum of Rs. 166.13 cr. The total profits derived by the undertaking was quantified at a sum of Rs.38.86 crores and the total profits derived by the business was quantified at a sum of Rs.74 cr. The total export turnover of the business was a sum of Rs.118.98 cr. From the audit report it can be seen that the assessee had obtained the initial registration of Unit-II & Unit- III under the STP scheme on 22. 7.1992.

5. The AO observed that Initially, assessee's name was Hinduja

Finance Corporation Ltd. Later on changed its name into Hinduja TMP Ltd

and presently known as Hinduja Ventures Ltd. The assessee has

demerged its IT business to HTMT Global solutions Ltd. with effect from

1.10.2006. There was an associated company with the name Ashok

Leyland Information Technology Ltd. (hereinafter known as ALIT). That

this company was amalgamated with Hinduja Finance Corpn. Ltd w.e.f.

1st July,1999. The AO further stated that claim of assessee is that Unit

No. II and Unit No. III have begun the production of computer software in

June, 2000 and November, 2001 respectively. The AO stated that letter

dt. 25.11.2008 was addressed to the Director, Software Technology Parks

of India, Bangalore (hereafter known as STPI). The Director of STPI

furnished various details and documents relevant to deduction u/s.10A

vide letter dt. 10.12.2008. It was stated that initially STPI accorded 4 ITA No.6394/14

permission in the name of AL Information Tech Ltd. vide approval number

15(63)/92SDA dt. 22.7.1992. On the application of ALIT under Software

Technology Park Scheme, Inter Ministerial Standing Committee of

Department of Electronics had approved the setting up of 'Unit' at a total

foreign exchange outflow of US$ 81.76 lakhs over the five years of

project. ALIT had executed a legal undertaking of its unit with STPI on

28th September, 1992 which is valid for a period of 10 years i.e. upto

21.7.2002 for carrying out development and 100% export of software

using Data Communication Link or in the form of Physical export. The Unit

of ALIT had stated operating under customs bonded warehouse licence

No. 10/93 (customs) dt. 22.4.1993, which was valid upto 22.7.2002. The

AO further stated that in response to letter dt. 25th November, 2008,

Director STPI vide her letter dt. 10.12.2008 has categorically stated that

Unit-II & III are not separate units under the STP Scheme and they were

only the expanded locations of the initial letter of permission dt. 22.7.1992

and no separate STPI registration was accorded. The AO has stated that

Director, STPI, categorically stated that assessee has made or converted

the initial unit as Unit-II & III for the 'operational ease' and such bifurcation

by assessee as Unit-II & III should not be construed as two separate

units. AO stated that Director, STPI also clarified that assessee expanded

its existing STPI facility and therefore no separate registration under STPI

scheme is required for the expanded locations, unless it claims that a

separate unit is formed. Considering these facts, the AO held that

assessee is not entitled to deduction u/s.10A of the Act in respect of Unit-

II & III and accordingly disallowed claim of assessee.

6. By the impugned order, the CIT(A) confirmed the action of the AO. 5 ITA No.6394/14

7. We have considered rival contentions and found from the record

that assessee company is engaged in the business of providing IT and IT

enabled services, Finance/Investment activities and consultancy services.

The assessee executes a BPO (insurance claim processing) Project

handling various types of claims. The assessee has also diversified into

Call Centre business and handles billing and marketing related calls and

service calls. Besides having IT as its core business it has different

subsidiaries in media and telecom business. The assessee filed its return

of income on 31-10-2005 declaring total income of Rs.99,81,560/-. The

AO framed assessment u/s.143(3) of the Act determining income of the

assessee at Rs.74,30,55,780/-. .Thereafter, the assessee filed an appeal

before CIT(Appeals) where the assessee got relief on two grounds of

Capital Gains from sale of shares wrongly treated as Business Income

and' adjustments in international transactions but did not succeed in

respect of the other two grounds of claiming exemption u/s 10A &

disallowance u/s 14A. Against the order of CIT(Appeal), both the

assessee Company and the department filed an appeal before Hon'ble

ITAT and ITAT has disposed both the appeals under combined order

dated 31st January 2012. The Tribunal has dismissed the appeal filed by

the department on the grounds of Capital Gain on sale of shares and

adjustment in International transactions, and sent the matter back to the

files of AO in regard to the appeal filed by the assessee Company, with

the direction to re-examine the issues pertaining to exemption u/s 10A

and disallowance u/s 14A. The main issue in appeal was rejection of the

claim of the assessee u/s.10A of the Income-tax Act on the ground that

the two units being Unit II and Unit III were not independent units but were 6 ITA No.6394/14

units construed as split up of the existing Unit 1 based on the

correspondence raised by the AO from STPI which used the word

expansion in the letter submitted to the AO dated 10/12/2008. We found

that the Tribunal in its order after observing that there is a substance in

the submission of Ld. AR that AO has not examined as to whether Unit

Nos. II & III set up by assessee are independent units or expansion of

existing undertaking of assessee, set aside the orders of authorities below

and restore the matter to file of AO for the limited purpose to re-examine

as to whether Unit Nos. II & III set up by assessee are independent units

to the existing undertaking or merely an expansion of the existing

undertaking in the light of principles laid down by Co-ordinate Bench

decision in the case of Patni Computers Ltd. (supra) and also in the light

of letters including letter dt. 10.12.2008 issued by Director STPI and also

on the basis of such evidences as may be filed by assessee after giving

due opportunity of hearing.

8. In the set aside proceedings, the assessee filed complete detail

before the AO and also relied on the decision of M/s Mara Overseas Ltd.

and M/s Jayant Agro Organic Ltd. However, the AO has not considered

the same and after reproducing the decision of his predecessor came to

the conclusion that assessee was not entitled deduction u/s.10A in

respect of Unit No.II & III. We found that on the evidence available on

record and as called for by the Ld.AO during the course of the

examination of the facts, the Ld.AO observed that Unit-Il and III have

been set up with fresh investment in plant and machinery, furniture and

fixtures, etc. as can be seen from the tax audit reports for Financial Years

2000-01 and 2001-02. Separate books of accounts have been maintained 7 ITA No.6394/14

by each unit. The activities carried out by all the units of the appellant is a

different from each other, the customer of each units are completely

different or unrelated and the employees of each unit are also different.

The Ld.AO also examined the various letters addressed by the appellant

to the Director, STPI ,viz; letter dated 20-07-2000 addressed vide which

the appellant intimated that it had entered into an agreement to process

insurance claims in India and the processing of the claim will be carried

out at Unit II. Further, in respect of Unit III, filed letter dated 31- 08-2000

addressed to Director, STPI, the appellant intimated that it had entered

into an agreement to set up a call centre known as Unit III. The appellant

submitted copy of the STPl letter dated 24-12-2008 recording the

establishment according the establishment of unit II& III. The Ld.AO

observed that it is therefore, evident that the appellant has commenced

business activity in respect of unit II & III during the previous year relevant

to the assessment year commencing on or after the first day of April,

1994. Therefore, the first condition was fulfilled. After obtaining permission

from the STPI Authorities vide letter dated 12.09.2001, Unit No.3 was

started at Bangalore for carrying on the business of an International Call

Centre. The name of the assessee thereafter changed to HTMT Ltd and it

is now known as Hinduja Ventures Ltd. on demerger. The company

Hinduja TMT Ltd. w.e.f. 01.10.2006 demerged the IT / lTES business

undertakings to Hinduja Global Solutions Ltd (Formerly HTMT Global

Solutions Ltd). The Company has intimated STPI on 19/03/2007 for

transfer of the License and change of name to HTMT Global Solutions

Limited, which is confirmed by STPI on 09/04/2007 and the same has

been changed on Green card also on 04/09/2007. Vide letter dated 8 ITA No.6394/14

19.07.2000 permission was sought to start Unit No.2 at Bangalore for

carrying out the business of processing Insurance claims. Vide letter date

26.07.2000 the STPI Authorities at Bangalore granted the said permission

to start a BPO for claim processing. Unit 3 was granted permission vide

letter dated 12.09.2001 to do the business of International Call Centre.

The Company has from time to time taken specific permission for

additional premises (termed as expansion) for Unit -Il and taken approval

for custom bonding of these locations, as under:

a) No. A206, 1st Floor, KSSIDC Complex, Block No.3, Electronic City, Bangalore- 561229- Unit II

b) No. 614, First Floor & Second Floor, Vajpayee Nagar, Bomannhalli, Hosur road, Bangalore-68 - Unit 11

c) No. 115, First, Second and Third Floor, 11th Mile, Garvebhavi Palya, Begur Hobli, Hongasandra, Bangalore. - Unit II

d) No. 614, Ground Floor & Third Floor, Vajpayee Nagar, Bomannhalli, Hosur road, Bangalore-68 - Unit III

e) 49/50, MIDC, 12th Road, Marol, Andheri (E), Mumbai - 400 093

9. From the record we found that on 28/10/2003 the Company i.e

Hinduja TMT Limited has taken a separate registration with STPI, Mumbai

for BPO Call Processing activity at Bangalore for the purpose of back end

data backup. The first year of the claim of the appellant was for the Asst.

Year 2001-02 which was allowed after a scrutiny assessment. Similarly

the claims for the Asst. Years 2003-04 and 2004-05 were also allowed

after a scrutiny assessment. For the Asst. Year 2005-06 the Assessing

Officer however took a different stand and rejected the claim and

thereafter reopened the assessments of the previous year as well. From

the record we found that assessee is engaged in the business of IT

Enabled services. In its computation of total income for the Asst. Year 9 ITA No.6394/14

2005-06, the it had claimed the exemption under section 10A of Rs

124,179,095 for Unit II and of Rs 383,205,319 for Unit III. No exemption

has been claimed in respect of Unit 1. Unit-2 is engaged in non-voice

BPO business (Insurance claim processing) whereas Unit-3 is engaged in

voice BPO (Call Center). Units 2 and 3 were set-up in June 2000 and

November 2001 respectively and accordingly the assessee started

claiming exemption under section 10A in respect of each of these units

from AYs 2001-02 and 2002-03 respectively. We also found that during

the appellate proceedings, the CIT(A) has called a remand report from the

AO, wherein the AO has categorically observed that assessee was

engaged in its business activity in respect of its Units No.2 & 3 during

previous year relevant to assessment year commencing on or after 1st

April, 1994, therefore, the condition was fulfilled. The AO also observed

that the Unit No.II & III have not been formed by splitting up or

reconstruction of an existing business and are not formed by the transfer

to a new business of machinery or plant previously used for any purpose.

It is crystal clear from the remand report of AO that the units II and III

fulfilled all the conditions prescribed under the relevant provisions of

section 10A of the Act. The precise conclusion of the AO in his remand

report dated 7-6-2014 was as under :-

"4.4 in view of the above, it is noticed that units II and III have been set up with fresh investments in plant and machinery, furniture and fixtures, etc. as can be seen from the tax audit reports for F.Y.rs. 2000-01 and 2001-02. Separate books of account have been maintained by each unit. The activities carried out by all the units of the assessee are different from each other. The customers of each unit are completely different or unrelated and the employees of each unit are also different.

4.5 As per the provisions of section 10A(2) of the Act, in order to claim exemption u/s.10A of the Act, any undertaking has to fulfill the following conditions :-

10 ITA No.6394/14 (i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year

(a) commencing on or after the 1st day of April,1981 in any Free Trade Zone; or

(b) commencing on or after 1st day of April, 1994 in any Electronic hardware technology park or software technology park; or

(c) commencing on or after 1st day of April,2001, in any Special Economic Zone;

(ii) it is not formed by the splitting up or the reconstruction of a business already in existence except in the circumstances and within the period specified in section 33B of the Income-tax Act;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

4.6 As discussed above paragraphs, vide letter dated 20.07.2000 addressed to Director, STPI the assessee intimated that it had entered into an agreement to process. the insurance claims in India and the processing of the claims will be carried out as Unit-ll Further. In respect of Unit-III. vide letter dated 3108.2000 addressed to Director. STPI, the assessee intimated that it had entered into an agreement to set up a call centre known as Unit-III. The assessee submitted copy of STPI letter dated 24.12.2008 recording the establishment of Units II and III. Thus, it is evident that the assessee has commenced its business activity in respect of Units II and III during the previous year relevant to the assessment year commencing on or after 1st day of April, 1994. Therefore, the condition was fulfilled. Further, perusal of the documents filed by the assessee as enumerated in 43 above that the unit nos.II & III have not been formed by splitting up or reconstruction of an existing business and are not formed by the transfer to a new business of machinery or plant previously used for any purpose. Thus, the units II and III fulfill all the conditions prescribed under the relevant provisions of section 10A of the Act."

10. We have carefully gone through the letter from Director, STPI

issued to the AO dated 10-12-2010; letter to Director, STPI intimating

formation of Unit II; letter to Director, STPI seeking permission for bonding

facility for Unit II; approval from Director, STPI for Unit II; letter to Director,

STPI intimating formation of Unit III; letter to Director STPI seeking

permission for bonding facility for Unit III and approval from Director, STPI

for Unit III as placed on record. After considering the correspondence

through above letters with Director STPI and conclusion drawn by the AO

in his remand report and after applying the proposition of law laid down in 11 ITA No.6394/14

the judicial pronouncements referred by ld. AR during the course of

hearing before us, the irresistible conclusion is that assessee is eligible for

claim of deduction u/s.10A in respect of Unit II & II. Accordingly, we direct

the AO to allow assessee's claim for deduction u/s.10A(2) of the Act in

respect of Unit II and III.

11. The assessee is aggrieved for disallowance of expenses u/s.14A.

The contention of ld. AR was that total expenditure claimed by assessee

was Rs.13 lakhs, however, the AO has made disallowance of about Rs.16

lakhs. He further contended that Rule 8D is not applicable for the relevant

assessment year under consideration. Accordingly, he requested for

modifying the direction given by the CIT(A) with regard to computation of

disallowance u/s.14A of the Act.

12. After considering the rival contentions, we direct the AO to compute

the disallowance u/s.14A, in terms of directions issued by the Tribunal in

assessee's own case vide order dated 31-1-2012, wherein the tribunal

has directed the AO to consider all the materials placed by the assessee

before it while computing disallowance u/s.14A of the Act. We direct

accordingly.

13. In the result, appeal of the assessee is allowed in part.

Order pronounced in the open court on this 21/01/2015.

/01/2015

Sd/- Sd/- ( ) ( ) (VIVEK VARMA) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER Mumbai; Dated 21/01/2015 /pkm, PS 12 ITA No.6394/14

Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. / The CIT(A), Mumbai. 4. / CIT 5. / DR, ITAT, Mumbai

6. Guard file.

//True Copy// / BY ORDER,

(Asstt. Registrar) / ITAT, Mumbai