TaxTMI 
TaxTMI 
2016 (1) TMI 114
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....03. Facts apropos are that assessee engaged in 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 ....
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....ut of research and transferring the result of such research to the customers. 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 ; ....
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....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 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 ....
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....charges earned would be eligible to be considered as earnings from manufacture or production. As per the assessee, it could not be considered 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 o....
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....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 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. L....
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....as justified in giving the benefit of Section 10B of the Act to the assessee. Reliance was once again placed on the very many decisions cited 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 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 ....
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....h agreement which has been placed before us at paper book page 127 entered with M/s. Dow Chemical Company, is reproduced hereunder: CONTRACT RESEARCH AGREEMENT THIS CONTRACT RESEARCH AGREEMENT ("Agreement") is made and entered into on Sept. 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, a....
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....ts and warrants to be protected by a security system which will maintain the confidentiality and prevent the loss of records and information which SYNGENE obtains or 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 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 ....
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....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 reason, upon thirty (30) days written notice to SYNGENE. (e) Without cause on ninety (90) days written notice to SYNGENE. F. Communications and Payments: (a) Communications: All communications associated with this Agreement shall be by first class 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: (....
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...., all rights in and to all data, information, reports, inventions, discoveries, know-how, improvements, processes, formulas, procedures, designs, apparatus or products, whether patentable or not, made, obtained, conceived or first reduced to practice by SYNGENE, its agents or employees either solely or jointly with others in 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 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 accordan....
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....grees 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 All disputes arising in connection with the present Agreement shall be finally settled under the Rules of the State of Texas, U.S.A. The arbitration shall be conducted in the English language. SYNGENE INTERNATIONAL PVT. LTD. By: Sd/- Name: Goutam Das, Ph.D. Title: Chief Operating Officer Date : 21 Sept. 2013 THE DOW CHEMICAL COMPANY By: Sd/- Name: Kurt W. Swogger Title : Vice 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 ....
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....o existence new goods by a process which may or may not amount to manufacture. Testing the case before us on the touchstone of this proposition laid down by Hon Apex court the question to be answered by us is whether the compounds or research documentation 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. 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 te....
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....rved by the Court that the word "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture and that it takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. It was also held by the Court that the expressions "manufacture" and "produce" are normally associated with movables-articles and goods big and small-but they are never employed to denote construction activity 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 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 ....
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....90) 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 electrical, acoustic, radioactive and electromagnetic analysis of rock is done to assess the potentiality for oil production would tantamount to manufacture of production of articles or things. Their Lordships held as under at para 31 of the judgments after considering the Apex court judgments in the case of Budhiraja and company (supra) and CIT 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 whi....
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....ature 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 compounds and documentations. The payments effected 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 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 ....