TMI Blog2019 (4) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... of this division and to then decide on the allowability of the assessee s claim for deduction under section 10B - Ground of Revenue s appeals for both Assessment Years 2008-09 and 2009-10 treated as allowed for statistical purposes. Deduction u/s 10A 10AA computation - exclusion of certain expenses both from Export turnover as well as Total Turnover - HELD THAT:- We find no reason to interfere with or deviate from the finding rendered by the ld. CIT(A) on this issue with respect to the deduction under section 10A and 10AA of the Act, and therefore respectfully following the decision of the Hon'ble Apex Court in the case of CIT Vs. HCL Technologies Ltd. [2018 (5) TMI 357 - SUPREME COURT] we uphold the impugned order of the learned CIT (Appeals) s order allowing the assessee's claim for deduction under Section 10A and 10AA of the Act. Consequently, the grounds raised by revenue are dismissed. - IT(IT)A Nos.910 & 911/Bang/2015 - - - Dated:- 27-3-2019 - SHRI N. V. VASUDEVAN, VICE PRESIDENT And SHRI JASON P BOAZ, ACCOUNTANT MEMBER Revenue by: Shri. R. N. Siddappaji, Addl. CIT Assessee by: Shri. Sharath Rao, CA ORDER Per Jason P Boaz, Accountant M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s total claim of deduction under section 10B of the Act amounting to ₹ 197,61,465/-, the AO allowed deduction thereunder only to the extent of ₹ 75,20,924/- and thereby disallowed the deduction claimed under section 10B of the Act to the extent of ₹ 1,22,40,540/-. 2.3 For Assessment Year 2009-10 , the assessee filed its return of income on 30.09.2009 declaring total income of ₹ 24,45,582/-, after claiming deduction under section 10B of the Act amounting to ₹ 2,35,77,611/-. The return was processed under section 143(1) of the Act and the case was then taken up for scrutiny for this Assessment Year. The assessment was concluded under section 143(3) of the Act vide order dated 19.03.2013 wherein the assessee s income was determined at ₹ 3,45,94,735/-. In the order of assessment, the assessee s claim of deduction under section 10B of the Act related to the Functional Genomics Division of the assessee company was disallowed and the deduction under section 10B of the Act was allowed only to the extent of ₹ 41,52,292/-. 2.4 Aggrieved by the orders of assessment dated 31.10.2013 for Assessment Year 2008-09 and dated 19.03.2013 for Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not come under notified ITES and consequently the assessee is not eligible for deduction under section 10B of the Act in respect of its income / revenue of its Functional Genomics Division. While arriving at this conclusion, the AO observed / took note of the following points:- (i) The Functional Genomics Division of the assessee company is purely scientific research organisation in the field of Biology and is neither carrying out any manufacturing activity nor providing any ITES. This is borne out from the recitals in the Agreement with the AEs and the invoices raised for the same. (ii) The Plant and Machinery used, the profile of the employees and the lab expenses debited to the Profit and Loss account corroborate the fact that the assessee is carrying out R D activity only. (iii) The assessee is reimbursed for R D expenses at cost plus Mark up commission and not for communication of end results. Mere delivery of results in R D in electronic data cannot be considered as Software Development and ITES . (iv) Mere approval as a 100% EOU does not automatically entitle the assessee for grant of deduction under section 10B of the Act. (v) The claim that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed electronic data or any product or service of similar nature as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means; A perusal of the above definition provides that the term computer software encompasses the following: (1) Computer programmes; (2) Any customized electronic data; and (3) Any product / service notified by the CBDT. It is argued that the research reports sent by the assessee to the AEs will be covered under the term computer software and the assessee is therefore eligible for deduction under section 10B of the Act. 4.3.4 According to the learned AR, the meaning of computer software is enlarged to include customized electronic data or such other services as may be notified by the CBDT. In this regard, the following Information Enabled Product or Services were notified in Notification No.SO 890(E), dated 26.09.2000 Back- office operations; Call centres; Content Development or Animation; Data Processing; Engineering and Design; Geographic Information System Services; Human Resource Services Insurance Claim Processing; Legal Databases; Medical Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and that the assessee is reimbursed for its costs and not for payment of purchases. It was contended that the judicial pronouncements relied upon (supra) are not applicable to the facts of the assessee in the case on hand. 4.5.1 We have heard the rival contentions and perused and carefully considered the submissions made, the judicial pronouncements cited and the other material on record. The assessee is a 100% Export Oriented Undertaking (EOU) duly approved by the Cochin Special Economic Zone (CSEZ) for the manufacture and export of Functional Genomics and Bioinformatics and Chemistry. The letter of Approval issued by CSEZ dated 10.03.2005, placed at pages 140 to 144 of Paper Book for Assessment Year 2008-09 mentions functional genomics and Bioinformatics Chemistry as the item of manufacture and also states that the EOU shall export its entire production. 4.5.2 In submissions put forth before the AO dated 28.08.2013, placed at pages 94 to 104 of Paper Book for Assessment Year 2008-09, the assessee has, inter alia, submitted as under: (i) After the process is completed, the Functional Genomics division prepares proof of Product (PoP) reports which documents th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the clauses of the Research Development Services Agreement executed by the assessee with its AE (copy placed at pages 64 to 70 of Paper Book for Assessment Year 2008-09), the following points are noticed:- (i) The said agreement is titled as Research Development Services Agreement. Throughout this agreement, the deliverables are called / referred to as services. As rightly pointed out by the AO, nowhere is there any mention of manufacture / production, PoP reports, customized electronic data or computer software. Therefore, there is clearly an inherent contradiction between the submissions made by the assessee before the authorities below and the recitals in the clauses of the Research and Development Services Agreement. (ii) The agreement refers to the assessee as contractor . Nowhere in the agreement is it stated that the assessee is required to perform scientific research and submit PoP reports, as claimed by the assessee. (iii) The exclusive rights of the work product generated in performances of the services are with the AE. This indicates that, what the assessee provides is only services and not any product or reports as claimed by the assessee. (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he directions issued by the DRP under section 144C(5) of the Act on 26.11.2014 for Assessment Year 2010-11 (copy placed at pages 39 to 64 of the Case Law Compendium). After tabulating the activities of the assessee and the AE in the entire process, the DRP concluded that the activities of the Functional Genomics Division involving activities in R D, is Engineering and Design and forms part of ITES. In our considered view, this conclusion of the DRP is far fetched and erroneous. Research and Development activity, Engineering and Design Services and Engineering and Design under ITES are three different things, operating in distinctly different fields. We find that the DRP has concluded that the deliverables as PoP reports, without even examining the reports. It appears that not a single report has brought on record or examined. Even the output from the Functional Genomics Division does not appear to have been examined at all. Further, these transactions qualify as international transactions and the assessee was required to benchmark the transaction for TP analysis. In such a benchmarking, it will be useful and relevant to see whether the assessee has classified the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of being allowed deduction u/s 1B of the Act? 4.5.8 To answer the above questions, the basic form and content of the deliverables given by the assessee to the AE requires examination on the facts of the matter in the light of the recitals of the Research and Development Services Agreement entered into between the assessee and its AE and contradictory submissions put forward by the assessee before the authorities below. Such an examination has not been carried out by the authorities below. In this factual matrix of the case, as discussed above, we deem it appropriate to remand the issue back to the file of the AO for a proper, thorough and comprehensive examination of the facts related to the functions and activities of the assessee s Functional Genomics Division and also examine the form, nature and content of the deliverables of this division and to then decide on the allowability of the assessee s claim for deduction under section 10B of the Act. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to file details / submissions required in this regard, which shall be duly considered by the AO, before deciding the issue. Consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be allowed from the total turnover in same proportion as well. 21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover. 5.2.2 In this legal and factual matrix of the case, as discussed above, we find no reason to interfere with or deviate from the finding rendered by the ld. CIT(A) on this issue with respect to the deduction under section 10A and 10AA of the Act, and therefore respectfully following the decision of the Hon'ble Apex Court in the case of CIT Vs. HCL Technologies Ltd. (supra),we uphold the impugned order of the learned CIT (Appeals) s order allowing the assessee's claim for deduction under Section 10A and 10AA of the Act. Consequently, the grounds raised by revenue are dismissed. 6. Ground Nos. 1, 8 and 9 Assessment Year 2008-09 Ground Nos. 1, 6 and 7 Assessment Year 2009-10 6.1 T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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