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Income Tax Appellate Tribunal - Vizag
Sri Lakshmi Comptech , ... vs Assessee on 18 July, 2011

ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

IN THE INCOME TAX APPELLATE TRIBUNAL

VISAKHAPATNAM BENCH, VISAKHAPATNAM

BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND

SHRI BR BASKARAN, ACCOUNTANT MEMBER

ITA No.537/Vizag/2009

Assessment Year:2006-07

M/s Sri Lakshmi Comptech, ITO Ward-1 Visakhapatnam Srikakulam Vs.

(Appellant) (Respondent) PAN No:AASRS 7353 Q

Appellant By:Written submission filed by

Shri Y.A.Rao, C.A.

Respondent By: Smt. D. Komali Krishna, Sr.DR

ORDER

Per Shri B. R. BASKARAN, Accountant Member:

The appeal of the assessee is directed against the order dated 26.10.2009 passed by learned CIT(A), Visakhapatnam and it relates to the assessment year 2006-07.

2. The grounds of appeal raised by the assessee are related to the following two issues:

(a) Disallowance of exemption claimed under section 10A of the Act - Rs.34,61,390/-.

(b) Disallowance of salary - Rs.72,000/-

3. The facts relating to the case are stated in brief. The assessee is a partnership firm engaged in the business of development and export of software. It filed its return of income for the year under consideration declaring NIL income after claiming its entire income of Rs.44,65,591/- as exempt. During the course of assessment proceeding, the Additional CIT, Range-4 Visakhapatnam issued directions under section 144A of the Act and

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

based upon such directions, the Assessing Officer completed the assessment by restricting the exemption under section 10A to Rs.10,04,201/- . The Assessing Officer also disallowed salary expenses to the tune of Rs.72,000/- treating the same as bogus claim. The assessee challenged both the issues before the learned CIT (A) but did not get relief. Hence the assessee is in appeal before us.

4. The assessee has filed written submissions and the same was taken on record. We also heard the learned Departmental Representative on the impugned issues.

5. The first issue relates to the disallowance of part of exemption claimed under section 10A of the Act. The facts relating to the said issue are stated in brief. The assessee was registered with STPI as a 100% EOU under the STP Scheme. Accordingly it claimed exemption of its entire income under section 10A of the Act. During the course of assessment proceedings, a reference was made to the Director STPI, Hyderabad under section 133(6) of the Act soliciting certain information relating to the firm. In response to the same the Jt. Director STPI, Hyderabad, vide letter dated 19.12.2008, confirmed that the assessee firm was a 100% EOU under STP scheme and the same was approved vide letter No. STPH/IMSC/2000- 2001/771/3024 dated 18th July, 2000. He also stated that the assessee commenced the commercial production on 31st July, 2000 and the Unit got expired on 30th July, 2005, i.e., the registration granted under STP scheme to the assessee got expired on 31st July, 2005. The said date falls in the middle of the previous year under consideration. Hence the Assessing Officer analysed the details of export invoices raised by the assessee. The details of the said invoices and the date of receipt of sale proceeds are given below:

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

S.No Date of Invoice Amount (in Rs.) Inward Remittance date

1 28-06-05 1053761 02-08-05 2 28-09-05 1337258 09-01-06 3 28-12-05 565888 02-05-06 4 28-01-06 434268 15-05-06 5 28-03-06 1424967 20-10-06 TOTAL 4816142

Since the Jt. Director STPI informed that the assessee firm (Registration) got expired on 30th July, 2005, the Assessing Officer sought to restrict the deduction under section 10A only to the invoice raised prior to the date, i.e. only to the invoice raised on 28.6.2005. In addition to the above, the Assessing Officer also noticed that the invoice of Rs.14,24,967/- raised on 20.3.2006 was realized on 20.10.2006 i.e. beyond a period of 6 months from the end of the previous year. It is pertinent to note here that as per the provision Sec.10A(3) the exemption is available only if the sale proceeds are received in or brought into India in convertible foreign exchange within a period of 6 months from the end of the previous year, or within such further period as the competent authority may allow in this behalf. The assessee had claimed an exemption of Rs.44,66,951/- under section 10A of the Act on the total sale amount of Rs.48,16,142/-, cited above and the said claim constituted 92% of the total sales. Applying the same ratio, the Assessing Officer concluded that 92% of Rs.37,62,381/- i.e. (Rs.48,16,142 - Rs.10,53,761) amounting to Rs.34,61,390/- is not eligible for the claim of exemption under section 10A of the Act. Thus, out of the total claim of exemption of Rs.44,65,591/- the Assessing Officer disallowed Rs.34,61,390/- and allowed Rs.10,04,201/- only.

5.1 Before the learned CIT (A), the assessee submitted that the exemption under section 10A is available for a period of 10 consecutive assessment years beginning with the year in which production is started. Accordingly it was contented that there is no provision that the deduction would be available for a period of 5 years only and renewal of registration is

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

required for further period of 5 years. In view of the said contentions, the learned CIT (A) directed the Assessing Officer to get the relevant information from the Director, Software Technology Parks India (STPI), Hyderabad. In response to the query raised, the Jt. Director, STPI, vide his letter dated 29.5.2009 clarified as under:

"M/s Sri Lakshmi Comptech is an 100% EOU under the STP Scheme approved vide letter No.STPH/IMSC/2000- 2001/771/3024, dated 18-July-2000. The Unit has executed the Legal Undertaking on 31-Jul-2000 and started their commercial production on 31-Jul-2000. The unit got expired on 30-Jul-2005.

As per Hand Book of procedure 6.3.9, on completion of approval period as provided for in paragraph 6.6 of FTP, it shall be open to unit to continue under scheme or opt out of scheme. If no information in this regard is received from unit within a period of six months of expiry of approval period, jurisdictional Director will take action, suo moto, to cancel approval under EOU scheme and take further action in this regard. Where unit opts to continue, Jurisdictional Director concerned will extend approval period".

5.2 Before the learned CIT (A), the assessee submitted that it deposited a fee of Rs.15,000/- for the financial year 2005-06 with the STPI and the same has been accepted, which imply that the approval granted initially to the assessee firm has not been withdrawn. Thus the assessee, on the basis of certain circumstantial evidences, contended that the registration should be deemed to have been continued. The assessee also wanted to submit certain documents before the learned CIT (A) to prove that the STPI was accepting them even after 31.7.2000. The first appellate authority was not convinced with the contentions of the assessee and accordingly confirmed the order of the Assessing Officer on this issue with the following observations:

"4.3 I have carefully examined the facts of the case and the submissions made on behalf of the appellant firm. The basis condition for allowing exemption under section 10A of the Act is that the concerned unit must begin to manufacture/produce articles or things or computer software

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

at Free Trade Zones, Electronic Hardware Technology Park, Special Economic Zone or Software Technology Park. In the instant case, the appellant firm was under the STPI Scheme. This fact is clear from the approval letter dt. 18-07-2000 of STPI, Hyderabad vide which approval was given to the appellant firm for establishing a 100% EOU under the STP Scheme at SSML Complex, Rajam, Srikakulam, Andhra Pradesh. This fact was also corroborated by the letter of the Jt. Director, STPI, Hyderabad dt. 19-12-08. Para-2(ii) of the approval letter reads as under:

"You shall undertake to export the entire production (100%) excluding projects not exceeding 5(five) per cent and the DTA sales as per entitlement for a period of 5 years and you shall undertake to fulfill the export obligation as per the Export- Import Policy in force. For this purpose, you will furnish the requisite legal agreement. After the export obligation period is over, the unit shall be allowed to produce for domestic market in the light of industrial policy in force at the time in relation to the manufacture of items reserved for small scale sector".

Therefore, the period of operation under the scheme is initially for a period of five years from the date of commercial production. This period may be extendable further five years at a time. After completion of the initial period of five years, it is open to the unit either to opt out of the scheme or to continue for another period of five years and a request has to be made accordingly to STPL. This fact has been elaborated by the Joint Director, STPI, Hyderabad vide his letter dated 29-05-2009. In the instant case, the commercial production of the appellant firm started on 31-07-2000. Therefore, the period of five years was over on 31-07-2005. As per the letter of the Jt. Director, the appellant firm has not applied for continuation in the STP Scheme. This implies that the appellant firm has opted out of the said scheme. The letter of the Jt. Director, dt. 29-05-09 was specifically confronted to the appellant firm in course of the appeal proceedings. The appellant firm instead of giving any specific reply regarding steps taken to continue in the STPI scheme, submitted certain documents like Form No.B pertaining to agreement entered into by the appellant company with some foreign company after the date of expiry of approval period, performance report submitted to the Jt. Director, STPI, Hyderabad and pleaded that such additional evidence be accepted. However, these documents do not prove anything with regard to the extension of period of operation under the

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

STPI Scheme which was granted to the appellant company for a period of five years from the date of commercial production started on 31-07-2000 to 31-07-2005. Therefore, the appellant's request for accepting the additional evidence is rejected. Under the circumstances, I hold that when the appellant firm is not under STPI Scheme after 31-07-2005, the question of allowing exemption under section 10A of the Act after the date does not arise. This ground of appeal stands dismissed".

6. In the written submissions filed before us, the assessee has submitted as under:

"8. The appellant would like to submit that the Registration granted originally to the appellant would continue till the Jt. Director, STPI cancel the registration, suo moto, in the absence of the renewal or until the Appellant Unit exist from the purview of STPI as provided in Para 6.1.8(a) foreign trade policy 2004-09. In fact the appellant has sent a letter dt. 14- 09-2007 for debonding and as such the unit shall continue till then i.e. up to 14-09-2007.

9. The appellant would like to submit that in the Letter Dt. 29.05.2009 issued by the Jt. Director, STPI, it was clearly mentioned regarding the effect on account of non renewal of registration" as per Hand Book of Procedure 6.3.9, on completion of approval period as provided for in paragraph 6.6 of FTP, it shall be open to unit to continue under scheme or opt out from the scheme. If no information in this regard is received from unit within a period of six months of expiry of approval period, Jurisdictional Director will take action, suo moto, to cancel approval under EOU scheme and take further action in this regard". The appellant wish to submit that till the Jt. Director, STPI take action to cancel, suo moto, the registration shall continue and benefits also would accrue to the Appellant Unit as per procedure 6.3.9 of Hand Book, which was clearly referred in the Jt. Directors Letter Dt. 29- 05-2009 (Vide Page 22 of the Paper Book). The appellant is required to apply for renewal by 30-11-2005.

10. The appellant would like to draw kind attention of Hon'ble Members of the Tribunal to the last agreement entered by the appellant with Soft Path OY.FIN.Helsinki, Finland, which was sent and which was approved by the Jt. Director, STPI on 18- 07-2005 just before the expiry of 5 years from the date of registration i.e.30-07-2005 and the appellant has brought on

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

record all the evidences to support the claim that the various documents along with Letter Dt. 16-01-2006 were filed on 24- 01-2006 (Receipt No.23594) vide page 46 to 59 of Paper Book) before the Jt. Director, STPI after the expiry of registration period and Jt. Director, STPI also accepted the fees payable for the year 2005-06 vide Receipt Dt. 24-01- 2006 (vide page 59 of the Paper Book).

11.The appellant would like to submit that the authorities below have not appreciated the evidences brought on record in support of the claim that the benefits of registration would continue till the date of cancellation, suo moto, by the Jt. Director, STPI as clearly mentioned in the Letter Dt.29-05- 2009. The appellant would like to submit that the Jt. Director, STPI has not mentioned in the letter dt. 19-12-08 (referred by Assessing Officer in the order) about the actual date, on which Jt. Director resorted to cancellation as provided under procedure 6.3.9 referred i.e. 11-09-2007.

12. The appellant would like to submit that representations were made before the Jt. Director, STPI Hyderabad vide Letters dt. 25-01-2009 & 24-04-2010 with a request to confirm the facts available on records regarding receipt of documents subsequent to expiry of registration and of renewal fees for year 2005-06 and the facts regarding cancellation of registration as provided under the procedure 6.3.9.

13. The appellant has pursued the matter with the Jt. Director, STPI who always informed orally that a letter will be issued clarifying the position, but in fact no letter was issued by Jt. Director, STPI which would have enable the appellant to bring on record, confirmation of above facts and actual date of cancellation of approval etc.,

14. The appellant would like to submit that the Jt. Director, STPI orally confirmed that as per the records of STPI, a letter dt. 11-09-2007 was issued regarding suo moto cancellation of the registration of unit and also further informed that the Jt. Director, STPI has accepted the application filed by the appellant vide letter dt. 28-09-2007 to exit from the STPI as provided Para 6.18(a) of F.T. Policy 2004/09. The appellant submits that unfortunately the said letters were not received by the appellant and as such the appellant was unable to produce the same before the Tribunal".

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With these submissions, the assessee has requested that the issue may be set aside to the file of the Assessing Officer with a direction to consider the evidences brought on record and also to obtain clarification/confirmations from the Joint Director, STPI on the submissions made particularly regarding the cancellation of registration.

7. We have perused the written submissions and also the record. We also heard the Learned D.R on this issue. The sub. Sec. (1) of sec. 10A allows deduction of such profits and gains as are derived from the export of articles or things or computer software for a period of ten consecutive assessment years. However the said sub-section is "subject to the provisions of other sub-sections". Hence, one cannot read sub-section (1) independently, as claimed by the assessee in its written submissions. As per sub.sec.(2), the section applies only to those undertaking which commences production after a prescribed date, inter alia, in any software technology park. The assessee has claimed exemption under the category that it commenced production in a "Software Technology Park". Thus it can be seen that the exemption is available under section 10A only if the production is carried out in certain "specified areas", which include a "Software Technology ParK'.. Hence, in our view, the tax authorities are right in holding that the exemption under section 10A would available only if the undertaking is producing software in a software technology park.

8. As stated earlier, during the course of assessment proceeding, the Addl. Director sought certain information from the Director, Software Technology Parks of India (STPI), Hyderabd regarding registration and other details of the assessee firm. In response to the same, the Jt. Director, STPI submitted a reply dted 19-12-2008 which read as under: "M/s Sri Lakshmi Computech is an 100% Export Oriented Unit under the STP Scheme approved vide letter no.STPH/IMSC/2000-2001/771/3024 dated 18-Jul-2000. The unit located at Sri Lakshmi Computech, SSML Complex, Rajam, Srikakulam (Dt.) Pin-532127. The unit has executed

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

the Legal undertaking on 31-Jul-2000 and the Unit has started their commercial production on 31-Jul-2000. The Unit got expired on 30-Jul-2005.

The unit has submitted all the compliance reports till the date of expiry. After the expiry, company did not turned up for renewal of STP scheme.

Another letter was addressed to the Director, STPI during the course of appellate proceedings before Learned CIT(A) and the reply dated 29-05- 2009 received from the Jt. Director, STPI is extracted in para 5.1 (Supra). Thus on the both the occasion, the STPI authorities have categorically stated that the registration of the assessee's undertaking expired by 30th July, 2010.

9. As observed by Learned CIT(A), the assessee is trying to contend that the registration continues even after 30-07-2005 on the basis of certain documents and circumstantial evidences. There cannot be any dispute that it is the responsibility of the assessee to prove that its undertaking is located in a "Software Technology Park" in order to claim exemption under section 10A of the Act. Hence it is the responsibility of the assessee to prove that the registration granted to its undertaking as "Software Technology Park" has continued during the year under consideration. Since the assessee did not prove this important fact, the tax authorities were forced to obtain the relevant information twice from the Jt. Director, STPI, who has sent his reply twice, i.e. once on 19-12-2008 and again on 29-05- 2009 and in both the replies he has categorically stated that the registration expired on 30th July 2005. Hence, we are not convinced with the plea of the assessee that the Assessing Officer should be directed to obtain the information again from the STPI. In our view, the tax authorities need not consider the issue of registration on the basis of circumstantial evidences nor, in our view, they are competent to decide the same, as it is the domain of an authority falling in some other statute. Hence, in our view, the tax authorities have to address the issue only on the basis of the certificate issued by the competent authority. It is the responsibility of the assessee

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to produce the relevant certificate in this regard before the Assessing Officer and the assessee herein has clearly failed on this matter.

10. The Assessing Officer has also observed that the assessee has violated the provisions of 10A(3) by bringing the sale proceeds of the invoice dated 28-03-2006 beyond the prescribed date of six months from the end of the previous year. It is pertinent to note that the assessee can bring in the sale proceeds after the prescribed date if the same is allowed by a competent authority. In this regard, it is submitted by the assessee that the said proceeds have been received through a competent authority, i.e. Oriental Bank of Commerce and hence there is no violation of sec. 10A(3). However, Explanation 1 to sec. 10A(3) states that 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. We find that the assessee did not furnish any evidence to show that the "Oriental bank of commerce" is also an authority authorised for the purpose of sec. 10A(3) and further the said bank has allowed the assessee to bring the sale proceeds beyond the prescribed period. Hence we do not find any merit in the said contentions of the assessee.

11. In view of the foregoing discussions, we do not find any infirmity in the order of learned CIT(A) on this issue.

12. The next issue relates to the disallowance of salary of Rs.72,000/- paid to an employee named V.Srikanth. The assessee had claimed a sum of Rs.96,000/- as the salary paid to the above said employee for the period from 1.4.2005 to 31.3.2006. The said employee was examined during the course of assessment proceedings, who stated that he worked with the assessee company only for three months from 1.4.2005 to 30.6.2006. Accordingly the Assessing Officer disallowed a sum of Rs.72,000/-, being the salary pertaining to the remaining nine months. The said disallowance

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ITA No 537 of 2009 Sri Lakshmi Comptech Visakhapatnam

was confirmed by the learned CIT(A). Before us, it is being contended that the assessee was not given an opportunity to cross examine the said employee. We find force with the said plea of the assessee. In our view, the natural justice requires that the Assessing Officer should have allowed the assessee to cross examine the employee who had deposed against the assessee. Accordingly, we set aside the order of learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer with a direction to allow the opportunity of cross examination to the assessee and then decide the issue in accordance with law.

13. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes.

Pronounced in the open Court on 18th July, 2011.

Sd/- Sd/- (SUNIL KUMAR YADAV) (B R BASKARAN) Judicial Member Accountant Member PVV/SPS

Visakhapatnam,

Date: 18-07-2011

Copy to

1 M/s Sri Lakshmi Comptech, C/o M/s Rowe & Pal, Chartered Accountant 14-36-1 Krishna Nagar, Visakhapatnam.

2 The ITO Ward-1, Srikakulam

3 The CIT -2, Visakhapatnam

4. The CIT(A),Visakhapatnam

5 The Departmental Representative, ITAT, Visakhapatnam. 6 Guard file.

By Order

Senior Private Secretary

INCOME TAX APPELLATE TRIBUNAL

VISAKHAPATNAM

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