In yet another examination of when business had commenced, this time for the purpose of availing benefit under Section 10B of the Income Tax Act, 1961 (the Act) in respect of 100% Export Oriented Unit under STPI scheme, the Delhi High Court laid emphasis also on nature of activity and distinguished between a manufacturing entity and a service provider.
Activities carried out and relevant date
The assessee, a BPO was in the business of voice activation and local number portability and had entered into a service agreement with its parent on 1-6-2004. It hired office premises on 15-6-2005. Prior to this for the period from 1-4-2004 to 1-6-2004 it had ‘set up’ business and incurred expenditure under various heads like salary and wages, electricity, stationery, PF, ESI, lease line charges and so on.
The department contended that the assessee had commenced business only from 1-6-2004 and recruitment and training cannot be said to be ‘business activity’. It argued that the expenses should be treated as pre-operative expenses. The assessee on the other hand claimed that it had commenced operations from 1-4-2004.
The High Court observed that there is distinction between ‘setting up of business’ and ‘commencement of business’ in the context when an entity is ready to do business and when it actually commences operations. It also pointed out to the use of the words ‘business or profession newly set up’ rather than date of commencement in Section 3 of the Act. Referring to decided cases as regards setting up of a factory where it had been opined that ‘unless a factory is erected and the plant and machinery installed therein, it cannot be said to have been set up’, the High Court stated that in case of service industry like BPO, the nature of activity performed has to be analysed. It was possible to have two different dates as for business to be ‘set up’ and ‘commenced’.
Rendering of service – commencement of activity
Even though the assessee rendered services to parent /third party at a later date, it had established the business in that the infrastructure was in place and employees had been recruited. The court opined that unlike the manufacturing activity, where requisite plant and machinery have to be procured, installed and then business operations start, in the BPO industry, the process starts with the recruitment of employees, who are to work in the said industry. The fact that the assessee had leased premises from its sister concern and incurred expenses was indicative of the fact that it had set up the business. Merely because the employees had to be trained, it could not be inferred that setup was incomplete.
Activity first in point of time to precede others
The court observed that when business consists of continuous course of activity, not all activities need to be carried out simultaneously to determine the time at which activity commences. Dwelling on an example related to the manufacturing sector, the court explained that one activity might precede another. Thus, when assessee had commenced business of securing orders first and then production, then activity of securing business actively commenced when steps were taken and it did not get postponed to the date of actual production.
In BPO industry, training is part and parcel of continuous business activity. In the instant case, training was post setup and the business could not exist without the said activity being undertaken both at the very initial stage and after business has commenced.
Thus, in Omniglobe Information Tech India P ltd v. CIT, judgement dated 11-8-2014, the High Court accepted the contention of the assessee that it had commenced business on 1-4-2004.