TMI Blog2016 (1) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the ultimate production, considering the inherent complexities of the processes involved and the value of the outcome as such. It will not be a reason to say that assessee was being compensated only for the research, irrespective of the final outcome. Thus not only was there exports but the exports were of articles or things produced by the assessee. We are alive to the fact that assessee had in its own books demarcated its receipts into two classes, one for research and other for sale of molecules. But this demarcation will not take away the sheen of its argument that the export earnings were only for the results of the research and this fell with in the meaning of production of an article or thing. In any case it is trite law that accounting entries are not decisive in determining the question of eligibility for a claim of deduction or exemption Thus in our opinion assessee was eligible for claiming the benefit of Section 10B of the Act. Ld CIT was justified in directing so - Decided in favour of assessee. - 1-2. I.T.A Nos.1106 & 1107/Bang/2012, 3-4. Cross Objection Nos.40 & 41/Bang/2013 - - - Dated:- 16-9-2015 - ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied were only the result of such research, in the opinion of the Ld. AO. According to him earnings were not for exports of the compounds, but for entire research work including the intellectual property embedded therein. As per the AO unless the export profits were derived from manufacture of articles or things, an assessee would not be eligible for claiming deduction u/s.10B of the Act, and the only exception was with regard to computer software. 04. When the line of approach mentioned above was put to the assessee, its reply was that unit-II was a separate facility established in a different location, namely, Bommasanda Industrial area, Bangalore. Assessee pointed out that the second unit had got approval from Special Economic Zone (SEZ) and fulfilled all conditions u/s.10B(2) of the Act. An alternate claim was also made by the assessee that if deduction u/s.10B of the Act was not allowed, it should be given deduction u/s.80IB(8A) of the Act. Assessee also pointed out that it was having necessary approval from Department of Scientific Research as required under the latter section. 05. However, AO was not impressed by the above reply. According to him, three conditions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the first unit. 07. Vis-a-vis alternate claim put forward by the assessee that it would be eligible for deduction u/s.80IB(8A) of the Act, AO was of the opinion that assessee was not able to demonstrate as to how it fulfilled the conditions set out in the said section for being eligible for such a claim. Further according to AO, assessee could not be allowed to put forth alternate claims according to its will and convenience. Thus he rejected the claim of deduction u/s.10B of the Act, as well as the alternate claim u/s.80IB(8A) of the Act. 08. Aggrieved, assessee moved in appeal before the CIT (A). First argument of the assessee was that unit-II was not formed by splitting up of the business already in existence. Relying on the judgment of Hon ble jurisdictional High Court in the case of T. Satish U Pai v. CIT [(1979) 119 ITR 877], assessee argued that for a split up to take place some assets of an existing business had to be divided and transferred to the new unit. Or in other words, as per the assessee it should be breaking up of the very same business. Assessee also pointed out that it had substantial turnover in its old unit even after establishment of the new unit. Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cles. Assessee relied on the preamble to the agreement entered by it with one M/s. Davoo Chemical Corporation, dt.11.07.2003 which inter alia stated that assessee was having facilities and experience to develop and custom manufacture pharmaceutically active ingredients, intermediaries and starting chemicals. Assessee also relied on an agreement dt.14.11.2003 with M/s. Zoegene Corporation which specified the purity and parameters of the compounds ordered by them. Argument of the assessee was that the ultimate compounds transferred to the parties were technologically different and superior to the raw materials used, whether the raw materials were sourced by the assessee or received from the customers. Further as per the assessee, assuming its supplies to its customers as not falling within the meaning of article , it did fall within the meaning of thing . Relying on the judgment of Hon ble Rajasthan High Court in the case of CIT v. Trinity Hospital [(1997) 225 ITR 178] and Hon ble Madras High Court in the case of I. Devarajan and Others v. Tamil Nadu Farmers Service Cooperative Federation and Others[(1981) 131 ITR 506], assessee submitted before the CIT (A) that the word thing co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y claimed deduction U/S-10B of the Act and those claims were allowed by the Department. Only in respect of Unit-II the claim of the appellant U/S-10B of the Act was denied though the activities carried on at Unit-I and Unit-II are identical. iii. I am in agreement with the stand taken by the A.R of the appellant that the output generated by the appellant in the form of research out put and chemical compounds is in the nature of manufacture or production of articles or things as prescribed U/S-10B of the Act. The appellant had satisfied all the conditions for being eligible for deduction U/S-10B of the Act in respect of Unit-II, as the appellant made exports of chemical compounds and research output and brought foreign exchange into the country. iv. Section lOB is a beneficial provision enacted by the Parliament to encourage investment and generation of employment and is a part of the broad economic development policy of the Government of India. Therefore, I am of the opinion that while examining the allowability of the deduction in the hands of the appellant one has to see whether the country is benefited by the investment made by the appellant in the said unit. On care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. As per the Ld. AR on 16.03.2007, such approval was renewed by CSEZ. Attention of the bench was drawn to paper book page 127, which was a contract research agreement dt.17.09.2003 with one M/s. Davoo Chemical Company, USA. As per the Ld. AR, the agreement mentioned that assessee s services were to perform research and provide compounds to the customers. Stressing his contention that assessee was into manufacture, Ld. AR referred to the project technical plan contained in one of the agreements placed at paper book pages 509 and 540. As per the Ld. AR the operations that were to be done on various raw materials, formed the building blocks for various drugs. Structures of the compounds which were proposed were set out therein and assessee was to do the necessary processes so that the proposed structures were achieved and resultant compounds were transferred to the clients including the process knowhow. As per the Ld. AR the value of the molecules were enhanced and what were supplied to the customers were different end products. Placing reliance on the judgment of Hon ble Kerala High Court in Girnar Industries v. CIT [ (2011) 338 ITR 277], Ld. AR submitted that definition of manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years : Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this subsection shall be ninety per cent. of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. (2) This section applies to any undertaking which fulfils all the following conditions, namely :- (i) it manufactures or produces any articles or things or computer software ; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E to perform chemistry services, including chemical synthesis, chemical process research, analytical methods development, and other related services, as agreed upon in writing from time to time by the parties and set forth in appendices, commencing with Appendix 1. DOW will define the parameter of the Projects and define the time frame in which the services are to be provided as requested. B. Specific Duties of SYNGENE : In assuming responsibility for undertaking this Agreement, SYNGENE will: (a) Perform chemistry consulting, synthetic chemical research, hit/lead evolution and optimization chemistry, process development and process optimization studies, and manufacturing of specialty chemicals for any Projects entered into: (b) Provide technical consultation; technical assistance and product development assistance, as defined, for any Projects entered into. (c) Develop or utilize existing analytical methods which will allow determination of the identity and quantification of the purity of any compounds delivered. (d) Provide compounds as expeditiously as possible. (e) Provide to DOW Certificates of Analysis to include, as appropriate, elemental analysis, optic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Agreement, and it will not and will not permit any of its employees, consultants or representatives to, publish or submit for publication said information without DOW's prior approval. For the avoidance of doubt. SYNGENE shall not publish or permit to be published any data, information, reports, inventions, discoveries, know-how, improvements, processes, formulas, procedures, designs, apparatus or products, whether patentable or not, made, obtained, conceived or first reduced to practice by SYNGENE, its employees or agents (e.g. non-employees used by SYNGENE to perform it work or any part of it) either solely or jointly with others in the course of or as a result of SYNGENE's services for DOW without the prior written consent of DOW which may be withheld in DOW's sole discretion. SYNGENE's obligation with regard to confidential information shall continue for a period of ten (10) years from the date such confidential Information is disclosed or available to SYNGENE and will survive, without limitation, the expiration or earlier termination of this Agreement. The foregoing obligation shall not apply to information which is or lawfully becomes generally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Project(s) for fifteen (15) months. The remittance will be due upon receiving the invoice. SYNGENE will provide the details of the wire transfer account. G. Assignment: DOW may assign this Agreement in whole or in part without SYNGENE's consent; provided that no such assignment will expand the scope of SYNGENE's services hereunder without the prior written consent of SYNGENE. This Agreement may not be assigned or otherwise transferred by SYNGENE without the prior written consent of DOW. Any permitted assignee shall assume all obligations of its assignor under this Agreement. H. Entire Agreement : (a) This Agreement represents the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior understandings and agreements with respect thereto. The Confidential Disclosure Agreement remains in effect with regard to any information disclosed prior to the effective date of this Agreement. (b) No change or modification of the provisions of this Agreement shall be effective unless it is in writing and signed by a duly authorized officer of SYNGENE and DOW. I. Project Ownership and Retention of Records: (a) All materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts on this property. Upon request of DOW and at its expense, SYNGENE shall assist DOW in prosecuting such applications and execute and deliver any and all instruments necessary to prepare, file and prosecute all such applications, divisions, continuations, substitutions, extensions, reexamination or reissues thereof. For the avoidance of doubt, SYNGENE, its employees and non-employees used by SYNGENE to perform its work agree to cooperate with DOW in taking all steps which DOW believes necessary or desirable to secure its rights on this property. (e) During the term of this Agreement, SYNGENE shall maintain all written materials and all other data obtained or generated by SYNGENE in the course of providing the services performed under this Agreement in a secure area reasonably protected from fire, theft and destruction. At the expiration or termination of this Agreement, all written materials and all other data and information obtained or generated by SYNGENE in the course of providing the services will, at DOW's option, be (a) delivered to DOW or its designee in such form as is then currently in the possession of SYNGENE, (b) retained by SYNGENE for DOW for a period of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to lack of required properties (iii) No compound but only certain research documentation in the nature of experimental records and laboratory notebooks, showing the results of the research which in turn show what has been empirically achieved. In respect of the first two scenarios, doubtlessly there is a production or manufacture in the nature of compounds. The compounds may be useful or useless but it is an end result of the process of research undertaken by the assessee. Such compounds, irrespective of its ultimate utility, was something different from the ingredients which were used to create it. That for the purpose of Section 10A, definition of the term manufacture is having a much wider ambit than its normal connotation and takes its colour from Chapter IX of Exim Policy is clearly brought out by Hon Kerala High Court in the case of Girnar Industries vs CIT (338ITR277). This view has been affirmed by Hon Jurisdictional High Court in the case of Tata Elxsi vs ACIT (ITA number 411/2008 dated 20th October 2014). 20. However the third scenario requires a deeper analysis. To decide whether the research documentation can be said to be the result of production and whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing or article was produced as such. The Tribunal, in appeal, however, reversed the aforesaid finding and allowed the relief in favour of the assessee by holding that the activity of the assessee was such that it would fall within the purview of the expressions manufacture or production and that the ultimate photographs which came to be produced as a result of the business activity of the assessee came within the expressions article or thing . This view was upheld by Hon Calcutta High Court. 23. Research conclusions can be considered as documentations of the analysis and steps done during the research process. Or in other words the end result is the analysis and presentation of data in a desired format. Hon Madras High court had an occasion to consider the issue as to whether data processing done with the help of computer resulting in end product which was analysis and presentation of data in prescribed format was a product of new article in the case of CIT vs Comp-Help Services Pvt Ltd (2000) 246 ITR 722. Claim of the assessee was for investment allowance. Their Lordships held as under at paras 4 to 9 of the judgement. 4. When data is processed with the aid of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be understood in the sense in which the word is ordinarily understood. The term industry is a term of wide amplitude. Industry as used in s. 32A refers to the industries which are engaged in the manufacture or production of goods or articles or things. The balance sheets and other documents obtained as a result of the operation of the data processing system being articles which are obtained by processing amounts to production. The data processing company must be held to be an industrial company engaged in the production of articles. 7. In the case of CIT vs. IBM Word Trade Corporation (1981) 130 ITR 739 (Bom) : TC 28R.211 the Bombay High Court elaborately examined as to what a computer is and what is does, for the purpose of deciding as to whether it is merely an office machine or some thing more. The Court held that in view of the varied functions which the computer system is capable of performing data processing machines, cannot be classified as office appliances and are eligible for development rebate under s. 33(1) of the IT Act. 8. In the case of CIT vs. Datacons (P) Ltd. (1985) 47 CTR (Kar) 162 : (1985) 155 ITR 66 (Kar) : TC 24R.231 the Karnata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble and usable data in the form of logs is provided to technical experts to determine the potentiality and other technical and commercial characteristics of the oil well. Can we say, when a latent physical property of the rocks, which was otherwise unreadable and thus unusable, has been changed by way of sophisticated scientific tests and calculations into scientific data which subsequently has been further changed into logs printed on the papers or recorded on the magnetic tapes, that the character and identity of end product and final product is not distinct. We are unable to uphold such a proposition. It is a clear case where the legal proposition that If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of the word 'manufacture' applies. At this juncture, we re-emphasize on the observations made by his Lordship S.H. Kapadia, J. (as his Lordship was then) in CIT vs. Oracle Software India Ltd. (supra) that the Department needs to take into account the ground realities of the business and sometimes over simplified tests create confusion, particularly, in modern times when tech ..... X X X X Extracts X X X X X X X X Extracts X X X X
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