21 April 2015 EY Tax Alert Delhi High Court declines to interfere with order of lower authorities rejecting Taxpayer s tax holiday claim that units approved under a single license are distinct Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of the Delhi High Court (HC) in the case of HCL Technologies (Taxpayer) [1] where, having regard to the factual findings of lower authorities that the units in question were only an extension of the existing unit, the HC declined to examine the Taxpayer s claim for grant of tax holiday benefit on the basis of the Taxpayer s contention that units approved under a single regulatory license were separate and independent. 1 [TS-195-HC-2015(DEL)]
Background and facts: Various benevolent sections in the Indian Tax Laws (ITL) confer income-linked tax holiday benefit to a taxpayer in respect of profits derived from a unit or undertaking set up for manufacturing of goods or articles or software development, subject to the fulfilment of specified conditions. For the software development sector, the ITL conferred tax holiday benefit for 10 years to an eligible taxpayer in a Software Technology Park (STP) in respect of profits and gains derived from a unit set up for the development and export of computer software. Such a unit in an STP needed to be registered with the STP Authority before commencement of operations. A taxpayer can hold multiple units under different licenses issued by the STP Authority or it can, under a single license, hold multiple units/locations maybe, within the same STP area. In the present case, the Taxpayer, a software development company, claimed tax holiday deduction in the earlier years, as also in the original return of income for the relevant tax year 2004-05, by considering 13 mother licenses issued by the STP Authority as 13 eligible units. Later, the Taxpayer filed revised return of income enhancing the claim of deduction to 31 eligible units, contending that each of the 31 units set up at different points in time and registered under 13 mother licenses qualified for tax holiday on an individual basis as independent and separate units. The Tax Authority rejected the claim for additional deduction on the ground that the said 31 units were not independent and separate, but represented only an expansion of the existing 13 units. The Tax Authority observed that no separate license was issued in respect of many units, but, existing licenses were endorsed as an expansion of locations. The Tax Authority further held that the claim was raised belatedly (in some cases, units were in the fifth/seventh/tenth year of the tax holiday period) and not in the year of formation, making it impossible to verify the claim. The Tax Authority, therefore, restricted deduction to income from 13 units having 13 mother licenses, instead of considering 31 units as separate units. The Taxpayer objected to the Tax Authority s order before the Dispute Resolution Panel which confirmed the Tax Authority s decision. On further appeal, the Delhi Income Tax Appellate Tribunal (Tribunal) held that the Taxpayer, having itself taken the position in the earlier years that the units in question were as a result of extension of the existing units and not new undertakings, cannot be permitted to depart therefrom in the current year. The Tribunal also endorsed the Tax Authority s order on merits and further observed that the very fact that the STP Authority had endorsed on the existing licenses that additional units constituted expansion of existing units, supported the claim of the Tax Authority. Aggrieved, the Taxpayer appealed to the HC. Questions raised before the HC Whether the Taxpayer is estopped under law from claiming benefit under the ITL by treating 31 units as separate and distinct, as opposed to the claim in the past by treating the units as part of 13 mother undertakings. On facts, whether the Taxpayer s contention that the new units are separate and distinct units for incentive deduction is correct. Taxpayer s contentions: Merely because, in the earlier years, deduction was claimed on the basis of number of licenses does not, in law, operate as an estoppel precluding the Taxpayer from correctly computing and claiming deduction by treating each of
the 31 units as separate and independent. The ITL does not require, as a condition precedent, that each unit should possess a separate license or approval. The manner of approval would not be determinative, if the unit otherwise qualifies as an independent and separate unit. Each unit was set up as an independent viable unit, with investment of fresh capital, having a separate identifiable workforce and, thus, constituted a separate and independent viable unit. The Taxpayer relied on the Supreme Court (SC) ruling in the case of Textile Machinery Corporation Ltd [2]. In support of its contention, the Taxpayer submitted, for each of the 31 units, evidence in the form of application to and the approval from the STP Authority, lease deed for the new premises, list of additions of plant and machinery, list of imported plant and equipment made available by the customers, custom bond register, number of employees, organizational hierarchy chart, audited Profit & Loss account and certificate in the prescribed form. There were concurrent findings of the Tax Authority and the Tribunal on consideration of evidence that 31 units were not separate and independent but represented mere extension of the existing 13 units. Even in the earlier year, the Tribunal had rejected claim for separate and distinct units. HC s ruling Taxpayer s right to lodge claim for the first time: The HC referred to various judicial rulings and reiterated the settled principle that there can be no estoppel against law and where a taxpayer is entitled to benefit under the provisions of law, such claim cannot be denied on the ground that the taxpayer had not claimed such benefit in the past or that the taxpayer took a different position in the past on the same set of facts. On the basis of the above principles, the HC held that, in the facts of the case, if the Taxpayer is able to establish that 31 units constitute separate undertakings, it would be entitled to grant of additional deduction as claimed in the revised return. The Taxpayer relied on the assessment order in its own case for an earlier year to contend that, in that year, the Tax Authority had accepted more than one undertaking comprised in the license as separate and distinct units. Tax Authority s contentions: The Taxpayer cannot be allowed to resile from its own position adopted earlier in availing deduction only with respect to 13 units. On merits: The HC ruled in favor of the Tax Authority. The HC noted concurrent findings of facts by lower authorities to the effect that the material furnished by the Taxpayer was insufficient to treat each of the 31 units as an independent and separate undertaking. On the basis of such finding of facts, the HC declined to interfere with the matter. The HC extensively extracted finding of facts from the Tax Authority s order, which were endorsed by the Tribunal. Some significant facts and features referred to in these orders and noted in the HC ruling are: 2 [107 ITR 195 (SC)] The Taxpayer s submission of documents, such as lease deed for new premises or custom bonding
certificates did not, per se, establish emergence of a new and distinct unit. These requirements were necessary even in the case of application for expansion of the existing units. There was no evidence to suggest that the Taxpayer had maintained a separate bank account and separate books of account for 31 units since inception of the units. The Taxpayer did not furnish any evidence of unit-wise capital investment or profits in support that the so-called units existed in earlier years. Profits and capital investments of 31 units were carved out only for the current year out of accounts for the original 13 units. undertaking depends upon the peculiar facts and circumstances of each case and no hard and fast rule can be laid down with regard thereto. In the case of the Taxpayer, lower authorities had concluded the issue against the Taxpayer based on an adequate examination of facts. Comments Based on concurrent findings of lower authorities that 31 units of the Taxpayer were not separate and distinct units, the HC declined to interfere with the conclusion of lower authorities. All 31 units had the same activities as were executed by the 13 original units. The STP Authority did not issue any fresh license, but existing licenses were endorsed as an extension of the premises. Despite the opportunity being made available, the Taxpayer did not furnish a copy of the application to the STP Authority from which an inference could be drawn that the application was for setting up of a new unit and not for expansion of an existing unit. This also supports that it was a case of mere expansion and not formation of a new unit. As regards the Taxpayer s reliance on the assessment order in its own case for an earlier year, the HC held that, contrary to the Taxpayer s claim, the Tax Authority had, in that year, categorically stated that unit-wise break up of profits was not provided by it. While dealing with the Taxpayer s reliance on the SC ruling in Textile Machinery case, the HC observed that the SC itself had held that the answer as to whether a unit is a separate There has been a controversy as to whether tax holiday benefit is attached to license issued by the Authority (regardless of number of units as may be approved within one license) or it is available for each unit comprised in the license so long as such unit represents a separate and distinct unit. In a case where formation of a separate unit can be established, the tax holiday period will be reckoned with reference to the year of set-up of each such unit and not with respect to the year of issuance of license for the first unit comprised in the license. As it appears, in the present case, the HC refused to intervene in the issue of whether separate and distinct undertakings had emerged under the same license, as claimed by the Taxpayer. The HC based its decision in this regard on the finding recorded by the Tribunal that there was inadequate evidence to support the claim of the Taxpayer. In delivering its ruling, the HC does not appear to have answered the legal proposition
of whether addition of a location to an existing license would always constitute expansion of an existing undertaking and, consequently, cannot be treated as a separate and distinct undertaking.
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