Tribunal decision: Revenue appeals partly allowed, 10B deduction issue remanded for examination. CIT(A)'s decision upheld.

The Tribunal partly allowed Revenue's appeals for Assessment Years 2008-09 and 2009-10, remanding the issue of deduction under section 10B back to the AO for further examination. The CIT(A)'s decision on the exclusion of expenses from turnover calculations was upheld. The Tribunal emphasized the need for a thorough examination of the facts regarding the eligibility for deduction under section 10B, highlighting inconsistencies in the assessee's submissions and the need to assess the form and character of deliverables from the Functional Genomics Division.

---

---

Issues Involved:

1. Eligibility of the assessee’s claim for deduction under section 10B of the Income Tax Act for the Functional Genomics Division.
2. Exclusion of certain expenses from Export turnover and Total turnover while computing the deduction under section 10A and 10AA of the Act.

Detailed Analysis:

1. Deduction under Section 10B of the Act – Functional Genomics Division:

The primary issue for consideration is whether the assessee's Functional Genomics Division qualifies for the deduction under section 10B of the Act. The assessee, engaged in R&D activities in Functional Genomics, Bioinformatics, and Chemistry, claimed deductions for its EOU undertaking. The AO disallowed these claims, concluding that the assessee's activities did not involve manufacturing or exporting any article, thing, or computer software, but were purely R&D services reimbursed at cost plus a commission.

The assessee argued that its activities, including the preparation of Proof of Product (PoP) reports and sample products, constituted "customized electronic data" under the definition of "computer software" in section 10B. The CIT(A) allowed the assessee's claim based on the DRP's decision for a subsequent year, which categorized the activities as Engineering and Design services under ITES.

However, the Tribunal found contradictions in the assessee's submissions and the Research & Development Services Agreement, which referred only to services and not to the production of reports or customized electronic data. The Tribunal noted that the CIT(A) failed to examine the form, content, and character of the deliverables from the Functional Genomics Division. Consequently, the Tribunal remanded the issue back to the AO for a thorough examination of the facts and proper determination of the eligibility for deduction under section 10B.

2. Exclusion of Certain Expenses from Export Turnover and Total Turnover:

The second issue pertains to the exclusion of certain expenses from both Export turnover and Total turnover while computing deductions under sections 10A and 10AA of the Act. The jurisdictional High Court in CIT v Tata Elxsi Ltd held that expenses excluded from export turnover must also be excluded from total turnover. This principle was upheld by the Supreme Court in CIT v HCL Technologies Ltd, ensuring that the formula for computing eligible deductions remains consistent and logical.

The Tribunal, following these precedents, upheld the CIT(A)'s decision to exclude the expenses from both export turnover and total turnover, dismissing the Revenue's grounds on this issue.

General Grounds:

The remaining grounds raised by the Revenue were general in nature and did not require specific adjudication.

Conclusion:

Revenue’s appeals for Assessment Years 2008-09 and 2009-10 were partly allowed for statistical purposes, with the issue of deduction under section 10B remanded back to the AO for further examination, while the CIT(A)'s decision on the exclusion of expenses from turnover calculations was upheld.

---