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Anti-abuse provision deciphered
March, 24th 2008
In a significant decision, the Chennai Tax Tribunal has made important observations with regards to applicability of the anti-abuse provisions contained in section 10A tax holiday provisions for Software Technology Parks (STP). Dismissing the appeal filed by the Revenue, the Chennai Tribunal ruled that tax holiday is available to a new unit, provided the new unit is not set up by way of splitting up or reconstruction of an existing business. 
The Tax payer was engaged in development of software for export and the local market with a unit in Chennai. Subsequently, it set up a new unit in another location and claimed the rebate. 
The Revenue denied the rebate concluding that the new unit was set up by splitting and reconstructing the existing unit at Chennai. To support its claim, the Revenue contended that the new unit rendered services to clients who were also serviced by the Chennai unit. Further, after the setting up of the Trichy unit, the Chennai unit, which had a track record of huge profits, suffered losses. 
The Revenue department conveniently chose to ignore the fact that the new STPI unit was set up with substantial investment in plant and machinery. Further, the new unit had added new exports clients to its portfolio. 
The Tribunal observed that it is well settled, that in order to hold that a business was formed by splitting up of a business already in existence, there must be material to hold that either certain assets of the existing business are diverted to the new business, or the two units were the same and the one formed was an integral part of the earlier one. 
More importantly, the Tribunal held that reconstruction of business would depend on the facts of each case. 
Placing reliance on Supreme Court and High Court decisions, rendered in the context of manufacturing concerns, the Tribunal observed that a new unit must be set up from new investments. It is immaterial whether the new unit engages in same services or those distinct from those of the existing unit. Further, having common clients would not trigger the reconstruction provisions. The Tribunal further retreated that it is a settled proposition where two views are possible, the one favourable to the tax payer should be adopted. 
The principles that emerge from the decision suggests that sufficient investment in new plant and machinery, sizeable addition to the workforce and customers are key to avoid anti-abuse provisions being triggered. The decision will go a long way in clarifying the intent of law and hopefully dissuade Revenue officers from exercising discretionary powers to disallow legitimate tax holiday claims. 
Though, the decision has been rendered in the context of tax holiday provisions applicable to STPs, arguably these principles may be equally applied to SEZ units, given that the anti-abuse provisions are identical. 
Admittedly, the decision is subject to appeal by the Revenue, yet, I believe that the observations of the Chennai Tribunal would provide logical arguments in deciphering the eligibility of new units for tax holiday, particularly where existing STP units are considering migration to SEZ. 
There is no gainsaying the fact that the decision would be welcomes by the software companies, though, it will be interesting to watch the final outcome.  
Mukesh Butani
The author is Partner, BMR & Associates. Views expressed are personal.
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