TaxTMI 
TaxTMI 
2019 (4) TMI 272
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....M/s. Life Technologies Corporation, USA. 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 ....
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....ted hereunder: 3.1 Assessment Year 2008-09 3.2 Assessment 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 t....
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....s: The objective of these processes is to find new and improved ways of developing 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....
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.... SO 890(E) dated 26.09.2000. 4.3.5 It was further submitted that in terms of CBDT Circular No.1 of 2013, it has been clarified that Research and Development (R&D) activities pertaining to Software Development would be covered under the definition of "computer software" 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 wh....
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....omputers and other lab equipment, generation of reports also been delivered through computers and internet, this unit would be eligible for deduction under section 10B of the Act". From the above, we find a contradiction in the submissions made by the assessee before the AO in the mode of 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. Fe....
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....use 8 of the Agreement titled "Inventions", all the work products and writings generated as a result of the services are the property of the AE and not of the assessee. Therefore, even if any reports are generated, as claimed by the assessee, the reports belong to the AE and hence, the question of export of 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 submissio....
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....gned order or even in the DRP order in the case on hand for Assessment Year 2010-11, relied on by the CIT(A) to allow the assessee's claim. There is also no discussion in the aforesaid orders of the AO/CIT(A)/DRP on the contradictions between the assessee's submission before the authorities below and in the recitals 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 el....
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....e jurisdictional High Court of Karnataka in the case of CIT v Tata Elxsi Ltd (349ITR98) (Kar) has held that when certain expenses are excluded from the export turnover for the purposes of computing deduction admissible under the Act; like u/s.10Aof the Act, such expenses are also to be excluded from total turnover, as export turnover 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 ....
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....lution Panel in the case of assessee for AY 2010-11 without appreciating the fact that the same has not become final as the appeal against the same is pending before the Hon'ble ITAT. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to allow the deduction u/s 10B to the assessee without appreciating the fact that the assessee is not engaged in the activity of Research & Development pertaining to Software Development, rather, engaged in the R&D activity in the field of biological sciences by employing highly qualified people in life sciences as opposed to software engineers required for Software Development. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to allow the deduction u/s 10B to the assessee without giving any cogent finding but only accepting the submissions of the assessee on its face value. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to allow the deduction u/s 10B to the assessee without appreciating the fact that the AO has elucidated numerous strong reasons for den....