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Deputy Commissioner of Income tax, Circle -12 (3) , Bangalore Versus M/s. Syngene International Limited

2016 (1) TMI 114 - ITAT BANGALORE

Entitlement to deduction u/s 10B - Held that:- The agreement entered by the assessee with its customers clearly show that the parties expected definite results , be it in the nature of new or improved compounds or in the nature of research documentation and each step that assessee had to take for achieving this result was also set out. Such results were to be given to its customers. The activities done by the assessee used sophisticated equipment and methodologies resulting in speciality compoun .....

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uld at the best demonstrate the difficulty in fixing the value 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 receip .....

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fit 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 Assessee : Shri. Padamchand Khincha, CA For The Revenue : Shri. Sunil Kumar Agarwal, JCIT ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : These are appeals and cross objections filed by Revenue and assessee respectively, directed against the orders .....

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or A. Y. 2006-07, it was ₹ 37,44,17,834/-. 03. Facts apropos are that assessee engaged in contract research related activities, had filed its return declaring income of ₹ 8,07,40,434/- and ₹ 9,16,05,470/- for the A. Ys. 2005-06 and 2006-07 respectively. During the course of assessment proceedings, it was noted by the AO that tax audit report filed by assessee mentioned it to be engaged in the business of providing contract research services in the field of molecular biology and .....

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hich it was entitled for such deduction stood expired. In F. Y. 2003-04 it started a second unit at a different place and from F. Y. 2004-05 was claiming deduction u/s.10B of the Act on such second unit. AO was of the opinion that deduction u/s.10B of the Act can be given only for export earnings arising out of export of articles or things which were manufactured or produced by the assessee. As per the AO assessee was doing research work on contract basis to non-resident customers and was delive .....

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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. .....

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by the splitting up, or the reconstruction, of a business already in existence : (iii) Not being formed by the transfer to a new business of machinery or plant previously used for any purpose. As per the AO, assessee did not fulfil the conditions (i) and (ii) above. AO verified the agreements entered by the assessee with its customers which were titled Contract Research Agreements . As per the AO, the agreements were similarly worded and assessee was mentioned therein as a provider of synthetic .....

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esearch work nomenclatured as FACs or in other words fully allocated chemists. After extracting the relevant parts of the agreement assessee had entered with one M/s. AB Science S. A. France, AO came to a conclusion that the manufacturing activity, if at all any carried on by the assessee from its clients were only incidental to the research work and the payments received by the assessee were predominantly for research and not for the compounds. 06. AO was also of the opinion that assessee could .....

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As per the AO, assessee itself had admitted that unit-II was created only for obtaining deduction u/s.10B of the Act, consequent to the expiry of the period of eligibility with regard to 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 .....

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i 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. Unitwise turnover reported by the assessee read as under : Turnover - year wise Unit-I (old unit) Rs. Unit-II (new unit) Rs. .....

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of the business already in existence. There was no reconstruction or split up, as per the assessee. Assessee also contended that there was no transfer of any plant and machinery from unit-I to unit-II. 09. Vis-a-vis, finding of the AO that it was not engaged in the manufacture, assessee submitted that compounds were exported and the intellectual property used for developing such compounds was the technical back-up. Courier slips evidencing the exports were filed before the AO. Assessee was of t .....

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ee what was sold clearly came within the terms of articles or things. As per the assessee, article had a much more wider meaning than goods . Term article was wide enough to cover both tangible and intangible items. Even if technical expertise was put into a physical media like drawings, maps and CDs, it constituted goods. In any case as per the assessee it had admittedly manufactured complex chemical compounds and sold it to its customers. End result of the product constituted articles. Assesse .....

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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 i .....

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or thing . There was application of various process on the raw materials. Process involved imparting treatments and manufacturing of new materials. The raw materials were transferred into a new article and the new article had a different name, character and used commercially. 11. Another submission of the assessee before CIT (A) was that even if it was considered as doing only scientific research, still it would constitute manufacture or production. Complex technical compounds evolving out of sc .....

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e object of earning foreign exchange. 12. CIT (A) was impressed by the above arguments of the assessee. According to him assessee was entitled for deduction u/s.10B of the Act. The reasons mentioned by the CIT (A) in his order for coming to this conclusion reads as under : i. Though the A.O stated that Unit-II of the appellant company was established by splitting up of the existing Unit- I, the A.O was unable to counter the claims of the appellant that Unit-II is a distinct Unit in a separate pr .....

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claimed deduction U/S-80HHC of the IT Act 1961 and subsequently 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 manufa .....

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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 careful examination of the facts of the case I am of the considered opinion that the appellant is eligible for deduction U/S-10B of the Act. He thus allowed the claim u/s.10B of the Act. Since he allowed the claim u/s.10B of the Act, alternate claim of t .....

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man hours spent by its chemists. Assessee had bifurcated its revenue into two, one as contract fee for research receipts and receipts from sale of compounds. After having itself divided its receipt under two distinct heads, as per the Ld. DR, assessee could not turn around and say that the whole of the receipts were from sale of compounds. Even such bifurcation was perfunctory as per the Ld. DR, and only an attempt to camouflage research as manufacture or production. Ld. DR submitted that the a .....

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ged in manufacture. Relying on para 5 of the Remand Report dt.13.05.2009 placed at paper book at pages 555 to 568, Ld. AR submitted that there was a clear admission with regard to production and transport of chemical compounds by the assessee. Again at para 7 of the Remand Report, AO had mentioned that there was manufacture of compounds. Thus as per the Ld. AR there was a clear admission by the AO that assessee was engaged in manufacturing goods, articles or things. Ld. AR placed strong reliance .....

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tressing 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 tr .....

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gn Trade Policy gave a very wide ambit to the term manufacture . 15. At this juncture, the bench requested the Ld. AR to produce copies of the invoices raised by it, but he stated that the such invoices were not readily available. 16. Articulating his arguments further, Ld. AR submitted that there was no splitting up of the existing business. There was no break up of unit-I to form Unit-II. Unit-II was independently established with new machinery. There were no movement of assets from unit-I to .....

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ited by the assessee before the Ld. CIT (A). 17. We have perused the orders and heard the rival submissions. The question before us is whether assessee was eligible for claim of deduction u/s.10B of the Act in the nature of business carried on by it. It is necessary to have a careful look at Section 10B of the Act, which read as under : SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABLISHED HUNDRED PER CENT.EXPORTORIENTED UNDERTAKINGS (1) Subject to the provisions of this section, a deduction of suc .....

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ing for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking 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 cen .....

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litting 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 section ; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Ex .....

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ce articles or things or computer software. As per the assessee, it was manufacturing the molecules and the research that went into manufacturing of such molecules were an embedded part of the price which it received from the clients. 18. To see how far this claim is correct, we may have to look at the agreements entered by the assessee with its clients. One such agreement which has been placed before us at paper book page 127 entered with M/s. Dow Chemical Company, is reproduced hereunder: CONT .....

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e business of providing synthetic chemical research and analysis, chemistry-consulting, chemical synthesis, manufacturing of specialty chemical products, analytical method development, and related services, and undertakes such as an independent company, understanding that neither SYNGENE nor its employees nor agents shall be considered an employee of DOW: nor a participant in any programs, insurance or other benefits extended to DOW 's employees and, WHEREAS, DOW proposes to retain SYNGENE f .....

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endix 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 co .....

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ovided. (f) Provide to DOW from time to time, but no less frequently than once each month, a statement setting forth the services performed and the time expended during the period covered. SYNGENE shall also submit a final report of all services performed and time expended during the entire term of this Agreement (the Final Report ). SYNGENE shall maintain records for three years from performance of all time and work under this Agreement. (g) On request by DOW, SYNGENE shall provide to DOW all e .....

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r develops under this Agreement. C. DOW's Obligations: DOW will: (a) Provide appropriate technical assistance such as is deemed appropriate in the conduct of a fully integrated research project team effort. (b) Provide written commentary on research reports. (c) Agree to pay SYNGENE for the services to be performed by SYNGENE as set forth in the schedule of payments in Section F. D. CONFIDENTIALITY: With respect to any and all information indicated as being or which reasonably appears to be .....

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the work or any part of it) to, use said information other than for the purposes of this Agreement, it will not, and will not permit any of its employees, consultants or representatives to, disclose any of said information to a third party except as is required pursuant to the purposes 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 avoidanc .....

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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 available to the pub .....

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hereto. Extension of this Agreement shall be subject to future written agreement. (b) This Agreement may be terminated by DOW prior to the expiration of the term under the following conditions: (c) If SYNGENE materially breaches any of the covenants and agreements under this Agreement, upon thirty (30) days written notice to SYNGENE. (d) If DOW determines that SYNGENE is substantially unable to perform assigned duties hereunder whether due to sickness, disability or incapacity, or any other rea .....

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azosport Blvd, B-3827 Freeport, TX 77541 U.S.A. The above named persons are acting on behalf of their respective organizations and may be changed on and as needed basis. (b) Payments: Unless modified by the written agreement in consideration of the services to be performed by SYNGENE under this Agreement DOW will provide the following: (i) Fee. The FTE cost to DOW shall be per year. FTE means a fully allocated chemist employed by SYNGENE and working on the Project(s) with such time and effort to .....

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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 subj .....

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ograms, syntheses and suggestions of any kind and description supplied to SYNGENE. from DOW, or generated by SYNGENE as a result of the services performed hereunder, shall be the sole and exclusive property of DOW. Any ideas, inventions, discoveries, techniques, methods, processes, Trade Secrets or other know-how, whether patentable or not that may evolve from the materials, documents, information, programs, syntheses and suggestions above described, or as a result of the services performed unde .....

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the course of or as a result of SYNGENE's services for DOW (the "Service Information") shall be and remain the exclusive royalty-free property of DOW, shall be considered trade secrets of DOW (subject to the confidential information requirement herein), and shall remain free of any claim of SYNGENE or any person deriving any rights or interest from SYNGENE and/or the work performed by SYNGENE under this Agreement. (b) At the request of DOW, and at its expense, SYNGENE shall sign an .....

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s under this Section I. (c) Upon DOW's request, SYNGENE shall transfer any technology and/or know-how used in the performance of services under this Agreement to DOW in such form as will best allow its use by DOW. (d) DOW may at its own discretion prepare, file and prosecute, in its own name and at its own expense, applications for any letters patent and/or copyrights on this property. Upon request of DOW and at its expense, SYNGENE shall assist DOW in prosecuting such applications and execu .....

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aterials 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 posses .....

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ays prior written notice of SYNGENE's intent to do so. J. Conflicts of Interest: SYNGENE represents and warrants that it has the full power and right to enter into this Agreement. To avoid potential conflicts of interest, SYNGENE agrees to strictly honor its obligation of confidentiality under Section D, particularly as concerns SYNGENE's agreements with other parties relating to the same or similar work as that to be done by SYNGENE under the Agreement. K. Terms and venue of arbitration .....

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antial research work intended by both the parties. But the question is what would evolve out of the research. Is assessee s client paying only for doing the research or for the end results? If the payments are indeed for the end results can such results be classified as manufacture or production of article or thing? There is no dispute that the billings done by the assessee on its clients were based on the manhours spent by its chemists on the job, at agreed rates. That such payments were made o .....

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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 ingredient .....

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eper analysis. To decide whether the research documentation can be said to be the result of production and whether they can fall within the meaning of an article or thing calls for a good understanding of those terms as it has come out of the judicial wisdom of higher courts . The first and foremost of these is the judgment of the Hon Apex court itself in the case of CIT vs N C Budhiraja and Co (1993) 204 ITR 412. The question before their Lordship was whether a dam can be considered as an artic .....

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umentation were produced . 21. Though the term manufacture is defined in Section 2(29BA) of the Act, production is not. According to Oxford English Dictionary, production means amongst other things, that which is produced, a thing that results from any action process or effort, a product of human activity or effort. In the case of the assessee here, there are processes of research, efforts put in by assessees scientists, and products which are in the nature of compounds or research documentation .....

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is is elucidated by the judgment of Hon Calcutta High Court in the case of CIT vs Air Survey Co. of India Ltd 232 ITR707. The question before Hon Calcutta High Court was whether business of surveying, mapping and aerial photography which resulted in photographs was production of article or thing. Revenue had rejected assessee s claim for investment allowance on the ground that the activity of the assessee could not be called as manufacture or production and that in the nature of the assessee s b .....

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". 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 .....

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roduction. It was pointed out by the Supreme Court in the case of CIT vs. N.C. Budharaja & Co. & Anr. (1993) 114 CTR (SC) 420 : (1994) 204 ITR 412 (SC) : TC 25R.185 that the word "production" has a wider connotation than the word "manufacture". While every manufacture can be regarded as production, every production need not amount to manufacture. It was further observed by the Court that the word "production" or "produce" when used in juxtaposition .....

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ivity of the nature involved in construction of a dam or a building. 5. The word "production" in s. 32A(ii) therefore, comprehends processing activity and the word "article" in that provision includes movables. The data processing computers involves processing and therefore, capable of being regarded as part of process of production. The balance sheet, sales analysis, statements, etc. obtained as a result of processing are movables and are different from the data that was ini .....

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elationship in running a data processing company inevitably exists as between those who operate the system and the company which runs the business. The term "industry" is not defined in s. 32A of the Act, and is therefore, 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 o .....

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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 Karnataka High Court held that when as a resul .....

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vs. Peerless Consultancy Services (P) Ltd. (1990) 90 CTR (Cal) 73 : (1990) 186 ITR 609 (Cal) : TC 24R.235, the Calcutta High Court also held that a data processing company is an industrial company for the purpose of Finance Act, 1981. 24. Hon Delhi High Court also had had also considered the issue whether processed data can be termed as something manufactured or produced in the case of CIT vs HLS India Ltd (2011) 335 ITR 292. The question there was whether wire line logging services, where elect .....

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and the cited case law, we find force in the submissions of Mr. Vohra, learned counsel for the assessee. No doubt, the raw material i.e. the primary input in the impugned activity is the "information" but can we equate this "information" with something which is being copied from there in toto. Whether the characteristics regarding which the information is being sent back to computers on surface from logging tools working inside the down hole can be compared to a characterist .....

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l 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 .....

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simplified tests create confusion, particularly, in modern times when technology grows each day. 25. The assessee here had done research using sophisticated machinery and the end product was either research documents in the nature of experimental records or compound. Just because these were intermediary things which would find use only in later stages of development of industrially useful chemicals and formulations would not disentitle the assessee from saying that it was producing an article or .....

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ected by the clients, though based on manhour spent were for such results. Hon Madras High court had again in the case of CIT vs N Venkatraman (2000) 245ITR73 clearly held that the nature of the state of the what is produced, ie whether an intermediary or final product, could not be criteria for deciding whether an assessee was manufacturing or producing an article or thing. 26. Billing done by the assessee on man hour basis would at the best demonstrate the difficulty in fixing the value of the .....

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