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TMI Blog2019 (4) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2 For Assessment Year 2008-09, the assessee filed its return of income on 30.09.2008 declaring a loss of (-) Rs. 80,48,771/- under non-EOU undertaking and claimed deduction under section 10B of the Income Tax Act, 1961 (in short 'the Act') for its EOU undertaking amounting to Rs. 1,97,61,465/-. The return was processed under section 143(1) of the Act vide order dated 31.12.2010 wherein the assessee's income was determined at Rs. 4,02,970/-. Subsequently, based on findings in the course of assessment proceedings in this case for Assessment Year 2009-10, certain information / material was brought on record to indicate that the business activity of assessee was not eligible for deduction under section 10B of the Act. Since the business activity carried out for the year under consideration i.e., Assessment Year 2008-09 was similar to that carried out by the assessee in Assessment Year 2009-10, proceedings were initiated under section 147 of the Act by the Assessing Officer (AO) and after recording reasons in this regard; that income of the assessee exigible to tax had escaped assessment due to the assessee's wrong claim for deduction under section 10B of the Act, notice under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment Year 2009-10 Ground Nos. 2 to 5 (for Assessment Years 2008-09 and 2009-10) - Deduction under section 10B of the Act - Functional Genomics Division 4.1 The basic issue for consideration before us is the eligibility of the assessee's claim for deduction under section 10B of the Act on the revenue of the Functional Genomics Division of the assessee company. 4.2.1 As per the details in the impugned orders of assessment, the assessee company is engaged in the business of carrying out R & D activity on Functional Genomics, Bioinformatics and Chemistry and also trading in biotechnology tools and instruments. The R & D undertaking of the assessee has been approved as a 100% EOU for manufacture and export of "functional genomics, bioinformatics and chemistry". As per the agreement with its AEs, the assessee company has undertaken to provide R & D services. 4.2.2 Based on the details furnished by the assessee and after analysing the agreement with its AEs and the invoices raised in this regard, the AO concluded that the basic activity of the assessee is Research & Development in the field of Functional Genomics and that all other activities of the assessee were ancillary in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloping products that are sold by the parent company. If the process of developing a product has certain inherent flaws, then this division explores new ways / methods of developing the same so that the flaws can be eliminated. (b) Process Improvements: The objective of these projects is to reduce the cost or time involved of existing product development processes carried out by the parent company. 4.3.2 It is submitted that projects entail researching existing processes to see how the product development process can be improved. After the process is completed, the Functional Genomics Division prepares the Proof of Product (POP) reports which documents the work carried out, the findings as well as the Methodology to be followed to improve the process in question. Further, where a sample product is produced, the samples are couriered through Fedex to whom an export value declaration is filed which mentioned the consignment is samples. Fedex files a shipping bill of export with nominal value. In view of this, the assessee's contention is that the research services rendered by the assessee are sent to the AE in the form of reports, which are in the form of "customized electronic dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware" stipulated under Explanation to section 10A and 10B of the Act. 4.3.6 In view of the above submissions and in support of the proposition that the reports sent by the assessee in the form of "customized electronic data" would constitute "computer software" as envisaged under section 10B of the Act and would render the assessee eligible for deduction under section 10B of the Act, reliance was placed on the following judicial pronouncements:- (i) DCIT Vs. Syngene International Ltd., (2015) (64 Taxmann.com 222) (Bang. Trib); (ii) DCIT Vs. RXMD Pharmaceutical Physicians Pvt. Ltd., (ITA Nos. 379 to 381/Mds/2015 dated 30.12.2015); (iii) Strides Shasun Ltd., Vs. ACIT (ITA No.8614/Mum/2011 dated 08.06.2018). 4.4 Per contra, the learned DR for Revenue vehemently assailed the decision of the CIT(A) in the impugned order and submitted that the CIT(A) has not considered many of the findings rendered by the AO while allowing the assessee's appeal. According to the learned DR, the CIT(A) ignored the R & D activities of the assessee in the Functional Genomics division and erroneously assumed the activities to be that of "Design and Engineering services". The learned DR also referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transmitting the research activity reports. In one place, the assessee states that the research activity reports are sent in the form of reports via e-mail and also some products are sent through courier. In another place, the assessee states that the function of the Functional Genomics Division is processing of data or development of content, thereby implying that there is no development of product. 4.5.3 In submissions put forth before the CIT(A) vide letter dated 17.08.2015, placed at pages 113 to 119 of Paper Book for Assessment Year 2008-09, it was submitted that the Functional Genomics division prepares both 'PoP' reports as well as sample products. It is mentioned that when a sample product is produced, which are in the form of cells or DNA samples, the samples are couriered through Fedex to whom a export value declaration is filed which mentions that the consignment is in samples. Fedex files a shipping bill of export with nominal value (only for customs purposes). Whatever these submissions mean, it appears therefrom that there are transmission of reports and also export of products. The sum and substance of the assessee's submissions before the CIT(A) is based on the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such reports does not arise. The payments by AE to the assessee are for reimbursement of costs incurred by the assessee while rendering of services and therefore, the question of export of such reports does not arise. The payments by AE to the assessee is only for services and not for the reports. 4.5.5 Thus, from the above observations, it is amply clear that the Research and Development Services Agreement (supra) refers / speaks only of services to be rendered by the assessee, payment / reimbursement to the assessee for cost of services and does not contain anything to support the assessee's contention / claims that it transmits 'PoP' reports or customized electronic data or computer software. Therefore, in our view, there is a wide variation seen between the recitals in the clauses of the Research and Development Services Agreement and the claims put forth in the submissions made by the assessee, both before the authorities below and before us. We observe that the CIT(A) has neither examined these aspects, as noticed by us (supra), nor rendered a finding on the functional profile of the Functional Genomics Division and the manner and character of the deliverables. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als in certain clauses of the Research and Development Services Agreement. The AO's findings / observations in this regard have been ignored by the CIT(A). In deciding the issue of the allowability of the assessee's claim for deduction under section 10B of the Act in respect of its Functional Genomics Division, the following points, in our view, are critical: (i) Whether the deliverable is a product arising out of manufacturing / production / R & D activity? This is particularly relevant in the light of the submissions put forth by the assessee before the AO and CIT(A). (ii) Whether the deliverable is in the form of 'PoP' reports, as claimed by the assessee? If so, what are the contents of the report? Does it pertain to the R & D services activity of the assessee or is it in the nature of ITES? (iii) Whether the reports qualify to be characterised as "customised electronic data" as defined for the purposes of eligibility for deduction under section 10B of the Act? (iv) Whether the consideration paid is for the delivery of the 'PoP' reports or as reimbursement of the costs incurred in generating the reports? In case the payment / consideration is for Reimbursement, as laid out i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over is a part of total turnover. The decision in the case of Tata Elxsi Ltd(supra) has also been followed by the Hon'ble Court in its order in the case of DCIT v Motor Industries Co. Ltd.,(ITANo.776/2006, 744/2007 and1155/2006 dated13.06.2014),holding that if any expenditure is sought to be removed from export turnover, then it should also be reduced from total turnover for the purposes of computing the eligible deduction u/s.10AoftheAct. This issue is no longer res integra, and has been decided in favour of the assessee and against revenue by the decision of the Hon'ble Apex Court in the case of CIT V.HCL Technologies Ltd. (2018) 93 taxmann.com 33 (SC); wherein at paras19 to 21, it has been held as under:- "19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the obj ..... X X X X Extracts X X X X X X X X Extracts X X X X
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