The main legal point established in the judgment is that the setup of a business depends on the presence of necessary infrastructure and the integral activities required for the business, such as training of employees.

Sanjiv Khanna, J. (Oral):

1. This appeal by the assessee pertains to assessment year 2005-06 and was admitted for hearing vide order dated 19th October, 2012, on the following substantial question of law:-

“Did the Tribunal fall into error in holding that the assessee had setup its business w.e.f. 1.6.2004 and not w.e.f. 1.4.2004, as held in the impugned order.”

2. The appellant-assessee was incorporated on 19th March, 2004, as a subsidiary of one M/s Omniglobe International, USA, as a business process service provider. The appellant-assessee had claimed deduction under section 10B, of the Income Tax Act (“Act”, for short), for a period commencing from 1.4.2004 to 31.5.2004, contending that it had obtained approval as a 100% Export Oriented Unit under STPI scheme and had commenced operations from 1.4.2004. The Assessing Officer as well as the Tribunal have held that the appellant assessee had commenced its operations only from 1.6.2004, i.e. the date on which the appellant assessee entered into “service agreement” with its parent company and, therefore, the expenditure incurred between 1.4.2004 to 31.5.2004 should be capitalised. Tribunal, in its impugned order had also observed that the appellant assessee had entered into a lease agreement and had hired premises as its office, only on 15.6.2005. Commissioner of Income Tax (Appeals), however, had decided the issue/question in favour of the respondent assessee.

3. In order to determine and decide the controversy, we must examine the nature of the business activity undertaken by the appellant-assessee and the operation/activities between 1.4.2004 to 31.5.2004, when the expenditure of Rs 59,02,448/- was incurred.

4. The appellant-assessee, as recorded above, was in the business of voice activation and local number portability, i.e. Business Process Outsourcing (BPO) services, which were made available to M/s Omniglobe International, USA. The Activities fall in the category of ‘service industry’. The appellant-assessee had placed on record, before the Commissioner of Income Tax (Appeals), a copy of the agreement dated 30th March, 2004, between M/s Agilis Information Technologies International Pvt. Ltd (“M/s Agilis”, for short) and the appellant company. Under the said agreement, the appellant assessee was entitled to use to use the premises taken on lease by M/s Agilis, during 2000 hrs to 0800 hrs. It stipulated that the appellant assessee was entitled to use personal computers of M/s Agilis or install their new personal computers in the premises, but upon termination of the agreement, personal computers belonging to the assessee would be removed. The appellant-assessee could use furniture and fixtures of M/s Agilis. However, the appellant asseessee was to pay on pro rata basis, charges for water, electricity, energy, or power consumed. Lastly, it was agreed that the appellant-assessee would not use the internet facility of the provider, i.e. M/s Agilis, but would install a separate internet link from an internet service provider.

5. The break-up of the amount of Rs.59,02,448/-, which was disallowed as revenue expenditure but capitalised, is as under:-

“S.No. Expenses Head Amount

1 Salary & Wages 2283936

2 Employer Contribution to PF 46658

3 Employer Contribution to ESI 46919

4 Admin Charges PF/EDLI 4316

5 ESLI Charges 1943

6 Medical Expenses 151

7 Books & Periodicals 986

8 House Keeping Expenses 42493

9 Generator Running Maintt. 25121

10 Employee Activities 13200

11 Uniform expenses 324692

12 Profession Charges 935308

13 Projector Hire Charges 3000

14 Electricity Charges/water/Sewerage Charges 92070

15 Recruitment charges 447646

16 Computer hire charges 244355

17 Bank charges 50

18 Filing charges 100

19 Computer maintenance 2740

20 Pantry Charges 170485

21 Printer Cartridge 22800

22 Office Maintenance 23724

23 Transporation charges 628284

24 Stationery 18375

25 Lease Line Charges 274331

26 Telephone Expenses 68182

27 Printing Charges 7350

28 Travelling Expenses International 7732

Total expen Exp