TaxTMI 
TaxTMI 
2016 (1) TMI 114
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....contract research related activities, had filed its return declaring income of Rs. 8,07,40,434/- and Rs. 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 synthetic chemistry. Assessee had categorised its receipts under two heads, namely, contract research fee and sale of compounds. Contract research fee received for A. Ys. 2005-06 and 2006-07 were Rs. 55,67,99,000/- and Rs. 75,18,14,000/- respectively. Receipt on account of sale of compounds for these years were Rs. 9,49,83,000/- and Rs. 21,38,62,000/-. Assessee had two units. It was claiming deduction u/s.10B of the Act in respect of unit-I in earlier years, but the period for which 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 ....
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....omers. Production of compounds was only incidental to such research work. AO also noted that there was nothing regarding sale of any compound in the agreements except for a clause regarding shipment of the compounds. Payment terms as per the agreement was based on man-hours utilised for the research 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 not be considered as a unit independently set up. According to him unit-II was formed by splitting up of the business which was already in existence. For coming to this conclusion AO gave the following three reasons : (a) New unit was doing the same research work as was being done in the unit already in existence ; (b) the customers of both the old unit and the new unit were more or less the same....
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....facture, 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 the opinion that export did not mean sale alone. It was not necessary that articles or things manufactured had to be sold abroad. Only requirement was that the profits should be derived by export. As per the assessee, it had sold both the chemical compounds and technical documentation and the title had passed on to its customers. Though in some cases customers had provided some of the chemicals, in many of the cases assessee had sourced the materials used by itself. In any case, as per the assessee 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 pro....
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....red as a mere service provider. Finally the assessee argued that Section 10B of the Act had to be beneficially interpreted so as to advance the 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 premises, substantial amount was invested in establishing the new Unit and customers of the new Unit are different from that of the Unit-I. On examination of a number of documents produced by the A.R of the appellant before me, I am convinced that Unit-II is a new Unit established by the appellant, therefore I am unable to agree with the stand taken by the A.O that Unit- II was established by splitting up of the existing Unit-I. ii. It is noticed that in respect of Unit-I, initially the appellant claimed deduction U/S-80HHC of the IT Act 1961 and s....
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....as manufacture or production. Ld. DR submitted that the agreements entered by the assessee which were reproduced by the AO went to show that the payments made to the assessee by its customers were for the research done on contract basis. Entire intellectual property was owned by the customers. Thus according to him, assessee could not be considered as a manufacturer of article or thing for claiming deduction u/s.10B of the Act. 14. Per contra Ld. AR strongly supporting the order of CIT (A) submitted that AO himself had admitted the assessee to be engaged 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 on approval granted to it by SEZ on 24.08.2001 placed at paper book page 520 which mentioned the items of manufacture and the annual capacity....
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....IT (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 such profits and gains as are derived by a hundred per cent. export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the pervious year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking 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 entitle....
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....t. 17, 2003, by and between The Dow Chemical Company, 2301 Brazosport Blvd, B-3827. Freeport, TX 77541, U.S.A. (herereinafter "Dow") and SYNGENE INTERNATIONAL PVT. LTD., 20 K.M. Hosur Road', Electronic City P.O., Bangalore 560100, India, (hereinafter: "SYNGENE"). WHEREAS, DOW is engaged in the development of catalyst for olefins polymerization ; and, WHEREAS, SYNGENE is engaged in the 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 for the specific purpose of providing chemical research, analysis, manufacturing of specialty chemical products or related services which SYNGENE may offer. NOW, THEREFORE, IT IS AGREED AS FOLLOWS: A. SYNGENE Services: DOW hereby retains SYNGENE to perform chemistry services, including chemical synthes....
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....egrated 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 or is marked to be confidential, including, but not limited to, chemical synthesis or process data, proprietary chemicals, or other test data, product registration data and program results or any other information or data acquired or generated by SYNGENE as a result of this Agreement or from performance of the services to be rendered hereunder. SYNGENE agrees that it will not, and will not permit any of its employees, consultants or representatives (e.g. non-employees used by SYNGENE to perform 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, c....
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....s mail or courier, addressed to the respective parties as follows: To SYNGENE: Dr. Goutam Das C.O.O. Syngene International Pvt. Ltd. 20 K.M. Hosur Road Electronic City P.O. Bangalore 561100, INDIA To DOW: Dr. Harold W. Boone The Dow Chemical Company 2301 Brazosport 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 constitute the equivalent of one chemist working on a full time basis consistent with SYNGENE's normal practice. (ii) Invoicing of Payment. By September 30, 2003 DOW shall pre-pay SYNGENE as set forth in an invoice forwarded to DOW an amount equal to USD for the cost of one FTE working on the Project(s) for fifteen (15) months. The remittance will be due upon receiving the invoice. SYNGENE will provide ....
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....NGENE 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 and deliver to DOW all writings and do all such things as may be required to vest in DOW as its exclusive property the entire right, title and interest in and to this property. To the extent that an employee of SYNGENE is an inventor of all or part of the Service Information, he or she shall be so named in any patent application. Inventorship shall be determined in accordance with U.S. law. SYNGENE shall not be entitled to any further compensation or consideration for performance of the obligations 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 execute....
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....President, Polyolefins R&D Date : Sept. 18, 2003 19. A reading of the above agreement does show that there was substantial 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 only based on the contractual expectation of the end result is clear form clause....of the agreement reproduced above. The end result of the research work done by the assessee could be one among the following three alternatives (i) A speciality compound which is useful and to be used by the clients as a building block for other compounds of use in industry (ii) A speciality compound which turns out to be no good, due to lack of required properties (iii) No compound but only certain research documentation in the nature of experimental records and laboratory notebooks, showin....
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....search documentation. Such products were different from the ingredients that went to its making. 22. Though the term produce gets color of the term manufacture as held by Hon apex court in the case of Budhiraja and Co(supra), the question is whether all the ingredients that are necessary to constitute manufacture should necessarily be there for production also. The obvious answer is no, since otherwise legislature would not have wasted their energy by adding that term in juxtapostition with the term manufacture. This 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 business no 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 ....
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....ion 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 initially fed into the computer though based upon the data so fed in. The use to which end-product is put is different from the one to which raw data is put at the time it is fed into a computer. The end-product obtained as a result of data processing such as balance sheets etc. are therefore, capable of being regarded as new articles. 6. The data processing activity is an organised activity. The machines have to be operated by employing persons trained for that purpose. The employee and employer relationship 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 industr....
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....vs Oracle Software India Ltd 320 ITR546 "31. Having analyzed the submissions of learned counsel of both the parties and the material available for our perusal 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 characteristic which is available and readable without conducting highly technical scientific tests and calculations down inside the borehole. Even after the geophysical and petro-chemical properties of the rocks have been measured, further scientific processing is required to be done by dedicated softwares on the computers. It is only after the abovesaid process, the readable 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....