TaxTMI 
TaxTMI 
2019 (2) TMI 1781
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....development which distinguishes it from other companies as the benefit of the expenditure would accrue for many years. 3. The DRP erred in directing to provide working capital adjustment without appreciating the fact that when companies have multiple segments providing working capital adjustment would result in factually incorrect results and that it would not be feasible to accept the figures at face value as appearing in the balance sheet in the absence of precise characterization as there is no uniformity in respect of the definition of receivables and payables as these are categorized differently by each company. 4. The DRP erred in directing to provide working capital adjustment without appreciating the fact that according to the OECD commentary working capital benefit cannot be given automatically but only in situations where there is a greater chance of increasing the comparability levels. 5. The DRP erred in directing to provide working capital adjustment without appreciating the fact that in the absence of exact details of debtors, creditors and inventory which are the sin-qua-non for working capital adjustment, the working capital adjustment cannot be arrived at ....
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....#39;ble Court has laid emphasis on CBDT circular clarifying deduction u/s 10B wherein it is mentioned that the approval granted by the Development Commissioner in the case Of an 1000/0 EOIJ will be considered valid, once such an approval is ratified by the BOA for EOLJ Scheme and in the instant case of the assessee company, since no such ratification was received during the F.Y under consideration, the assessee company was not eligible to claim deduction u/s 10B w.r.t. F. Y. 2010-11. Grounds of appeal raised by the Assessee for AY 2009-10 : Transfer pricing 2. That on the facts and in circumstances of this case and in law, the learned AO and the learned Panel erred in not following the ruling of the Honble Income Tax Appellate Tribunal ("ITAE) in the case of Apotex Research Private Limited (ITA No.918/Bang/2011) for Assessment Year ("AV) 2007-08, which squarely applies to the Appellant's matter. 3. That on the facts and in circumstances of this case and in law, the learned AO and the learned Panel erred in upholding the learned Transfer Pricing Officer's ("TPO") approach of rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant. 4. That....
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....t claimed by the assessee is supported by the computation methodolog,' provided as per the provisions of law. 5.3. That on the facts and in circumstances of this case and in law, the learned AO and learned Panel erred in concluding that the Appellant's claim of deduction under section 10B of the Act is not appropriately supported by the Accountant's Report in Form 56G. 5.4. Without prejudice to the above, the learned AO and learned Panel erred in disallowing the deduction under section 10B of the Act on the manufacturing services carried out by the Appellant. 6. That on the facts and in circumstances of this case and in law, the learned AO and learned Panel erred in holding out that deduction under section 10B of the Act is to be allowed after setting off the brought forward losses and unabsorbed depreciation. 7. That on the facts and in circumstances of this case and in law, the learned AO and the learned Panel erred in consequently levying interest under section 234B of the Act amounting to INR 3,188,655. 8. That on the facts and in circumstances of this case and in law, the learned AO erred in reducing the credit for taxes deducted at source to INR 384....
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...., development and preparation of Drug Master Filed (DMF's), and analytical services like stability studies, validation studies, analytical method development. Hence, the assessee rendered R & D services in this segment. 04. The TPO determined the TP adjustment u/s.92C as under : The arithmetic mean of the Profit Level Indicators is taken as the arms length margin. Based on this the arms length price of the research and development services rendered by the taxpayer is computed as under: Arithmetic mean PLI 28.35% on cost Operating Cost Rs. 292887269 Arms Length Margin 28.35% of the Operating Cost Arms Length Price (ALP) @128.35% of operating cost Rs. 375920809/- Price Received vis-å-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under. Arms Length Price @128.71% of operating cost Rs. 375920809/- Price shown in the international transactions Rs. 33,24,01767/- Shortfall being adjustment u/s 92CA Rs. 4,35,19,043/- 05. Besides that in the draft assessment order, the assessee was denied the deduction u/s.10B of the Act, Assessee raised objections before th....
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....under:- "15. It can thus be seen from the above that the activities of the assessee in the present case and that of Tevapharm Pvt. Ltd. are identical, i.e., both the companies carried out analytical research and stability testing services to its AEs. In the case of Tevapharm Pvt. Ltd., the TPO had selected Engineering India ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs and Mindtree Ltd., as comparable. The Tribunal examined the comparability of these companies to a company engaged in contract research & development and came to the following conclusion:- "1. ......... 3. IDC (India) Limited (IDC): IDC primarily undertakes research and survey services for products. IDC research documents cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile Usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requirements and buying patterns. Further, the areas of research include Communication Services Broadband Business, Network Services, IP based services, residential small busi....
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....so says that Oil Field's real time gas evaluation systems offer considerable accuracy that help in taking critical on site drilling decisions. It is rugged and field proven equipment, used in Exploration, Production and Refinery Sectors. Oil field provides Gas Detection like Hydrocarbon Detector, Carbon Dioxide Detector, Hydrogen Sulphide Detector, Higher Hydrocarbons Detector, Nitrogen Detector, Sulphur Dioxide Detector, Oxygen Detector, Carbon Monoxide Detector, Hydrogen Detector, etc. The extracts of the functional profile of Oil Field from its website as given above and the information in the annual report of Oil Field on the nature of assets employed such as outer shell of mud logging units, sensors and other instruments clearly demonstrate the disparity between Oil Field's and Assessee's operations. As discussed earlier the functional profile of Assessee is in the nature of providing - Contract Research and testing services. Oil field does not carry out any of these stipulated activities and accordingly Oil field ought not to be considered a comparable. (emphasis supplied) 5. Celestial Labs Limited (Celestial Labs): According to assessee Celestial Labs as a comparable h....
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....s). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh." According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparab....
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....aring with regard to admissibility of deduction u/s 10B in respect of profits derived from R&D services purportedly carried out by the above assessee from its SEZ unit and the relevant provisions of the SEZ Act. In compliance thereto, the following submissions are made for kind consideration of the Hon'ble Bench : 1) The learned AR heavily relied on the jurisdictional ITAT's decision in the case of DClT vs Syngene International Ltd [2015] 64 taxmann.com 222 (Bangalore-Trib.) to argue that the assessee is eligible for deduction u/s 10B which the AC has denied for various reasons. The undersigned, besides highlighting the reasons elaborated by the AO in the assessment order for denial of deduction u/s 10 and making arguments in support thereof, made submissions distinguishing the facts of the assessee's case from that of the case of Syngene. Those submissions in brief are that in the case of Syngene, specific terms of R&D agreement clearly lay down that Syngene shall provide chemical research analysis, manufacturing of speciality chemical products or related services and that Syngene shall develop and provide/ship the compounds[refer page 9 of ITAT's order supra, a....
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....on 15 of the SEZ Act 2005, any unit intending to set up the unit in a SEZ shall submit a proposal to the concerned DC who shall put it up to the Approval Committee and upon approval by the Committee, grant a Letter of approval specifying the authorised operations. As per rule 19 of SEZ Rules also, the DC shall specify the items of manufacture or particulars of service activity. The Letter of Approval assumes significance because any person running an approved unit within SEZ can only conduct authorised operations viz., items of manufacture specified therein so as avail the benefits under various acts. Viewed from this angle, the Letter of Approval dated 31.08.2004 cannot be interpreted to mean that approval was given for a new activity i.e. R&D services as being claimed by the assessee. The amendment letter cannot add a totally new activity without even specifying terms and conditions for that activity. Secondly, the definition of the manufacture given in clause (r) of section 2 of the SEZ Act does not envisage R&D services of the nature that are being rendered by the assessee. The mention of R&D centre in the amended letter can be reasonably understood as that the assessee has bee....
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.... then it is clear that the R & D expenditure at a percentage of the total turnover was only 4.40% and the balance was on account of various heads mentioned under the expenditure mentioned at page 683 of the paper book. Moreover if we look into the profile of Celestial Labs Ltd, then it is clear that this company is into development of molecule to treat Leucoderma and was in the process of filing IPR for the said research. Thus this company is not only into R & D, but is also into development of various IPRs, whereas the assessee is only into R & D of pharmaceutical products and is not into development of IPRs on research done by it. We also find that this company Celestial Labs Ltd, has also entered into technology transfer agreement with IMTECH, Chandigarh to manufacture market to namely Alpha Amylase and Alkaline Protease in India and overseas. On the basis of the above it can be safely deduced that Celestial Labs Ltd, is having multifaceted activities and is into R & D, manufacture market and also owning IPR. Thus in our view the functional profile of this company is not matching with that of the assessee. Hence this company is required to be excluded from the list of comparable....
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....this company from the list of comparables. 13. Ground no.2 of the Revenue appeal pertains to the inclusion of Max Neeman Medical Intl. Ltd. It was the case of the Ld. DR that the TPO has excluded this comparable on the ground that this company has been incurring loss at the enterprise loss and is a consistent loss making company. Therefore it was submitted that the DRP had erred in taking it on the basis of the segmental results / profit shown by this company for one year. 14. Per contra, the Ld. AR had submitted that there is no reason to exclude this company as the finding recorded by the TPO is incorrect as even at the enterprise level this comparable had made profit of Rs. 1.2 crore and further for the segmental it had made profit of Rs. 1.08 crores. 15. We have heard the rival contention of the parties and perused the record. At page 239 of the paper book the table is given where the profit for FY 2007-08 was mentioned as 12.96% and for FY 2008-09, it was mentioned as 9.03% and for AY 2009-10 it is mentioned as 22.32%. In view of the above the finding recorded by the TPO is factually incorrect. However we find that the other aspect whether this company is functionally co....
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....26.33 lacs after claiming deduction under section 10B of the Act amounting to INR 119.45 lacs for both the manufacturing activities and the R&D activities. Further, the Appellant also recorded income f am other sources (consisting of interest on deposits) amounting to INR 19.31 lacs. The net taxable income of the Appellant was arrived at INR 38.58 lacs after set-off of brought forward losses. In the revised return filed by the Appellant, the deduction under 10B of the Act was calculated by taking 'manufacturing' and 'R&D' activities as separate business undertakings. The deduction was calculated by applying the formula of profits to export turnover and total turnover of the individual segment. The case was picked up for scrutiny assessment proceedings. Notices were issued by the Deputy Commissioner of Income-Tax, Circle - II(i) ('the AO'), under section 143(2) & 142 (i) of the Act. During the course of assessment proceedings, the Appellant submitted a revised computation of income to the AO vide submission dated March 11, 2013, filed on March 12, 2013. As per the revised computation of income submitted to the Learned AO, the Company claimed a deduction of IN....
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....ttempted by bringing the non-eligible business profits into the fold of eligible profits. The assessee has gone to such an extent that even though the F.56G does not support this illegal claim, the assessee has revised the return seeking the extra, undue claim. 5.8 The Board's Approval submitted by the assesee was closely scrutinized. It is seen that the date of issue of the Approval was 25/03/2011. To put things in perspective, effectively only from the FY 2011-12 (AY 2012-13) the assessee would be eligible for the claim of deduction. However the assessee has made the claim in the AY 2009-10. Although in the approval the date 16.04.2004 is mentioned, it cannot be construed that it is the date of approval by the Board. It is important to note that for the claim u/s lOB, the approval by the Board is required. The Board has to be constituted under the Industries Development and Regulation Act, 1951(IDRA). The Certificate by the authorities of the SEZ does not amount to Approval by the Board. A separate ratification is needed in such cases. It is also observed that the approval has been granted only for the products manufactured. It has not been given for the R & D Services.....
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....eliance upon clause (h) of Explanation 2 to section 10B is Far-fetched and cannot be accepted. Further, the activities carried on the assessee clearly fell within two distinct business segments - one is Manufacturing of APIs and the other is contract R&D services. Just because the APIs were manufactured for the Apotex Group and also at the same time the R&D services were provided to this group on contract basis, the two segments cannot be considered together as to have constituted a coherent or integral whole so as to qualify for deduction of profits and gains of both the segments under section 1OB of the Act. We find sufficient force in the findings recorded by the AO in denying (he claim for deduction tinder section 10B of the Act. In the result, we confirm the action of the AU and the assessee's grounds of objections (a) to (g) are, therefore, rejected. On the basis of the above, the DRP denied the benefit of deduction u/s.10B to the assessee : 25. Following the direction of the DRP, the AO has passed the order denying the benefit u/s.10B of the Act, against which the assessee is in appeal before us. 26. In the written submissions, the Ld. AR at para 2.1 to 2.1.7 had m....
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....d (ITA No. 1072 of 2011), held that the approval granted by the SEZ Development Commissioner which was subsequently ratified by the board was valid for the purpose of claiming deduction under Section 10B of the Act. 2.1.6 Further, in subsequent assessment year (i.e. AY 201011, 2011-12), the Commissioner of Income Tax (Appeals), after relying on the above judicial precedents has allowed deduction u/s.10B of the Act. 2.1.7 Considering the above judicial precedents, the Appellant submits that the denial of deduction u/s. ioB (w.r.t. Manufacturing and R&D activities) on the ground of delayed ratification by the hoard is unjustified. It is the case of the assessee before us that initially the EOU approval was granted to the assessee on 16.04.2004 vide LOP1/19/2004, by the Development Commissioner (DC for short) of the written submissions 27. Thereafter the assessee vide application dt.16.08.2004 has sought to amend the approval granted on 16.04.2004 and sought to include the R & D Centre with Associate Production facilities into the LOP. Vide letter dt.31.08.2004, the DC had granted such permission thereby including the R & D Centre : FOR : ITEM OF MANUFACTURE : Chloro Benz....
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....t of section 10B or not. 2.2. Denial of deducton /s.10B of the Act w.r.t R & D activities 2.2.1 On the ground that the same does not amount to manufacturing or producing of articles or things: R&D amounts to manufacturing or producing of articles or things i) At the outset, we invite Your Honours attention to Section 10B (i) of the Act which is reproduced below: "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 previous 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." ii) As can be seen from above, the provisions of Section 10B of the Act require the assessee to export and manufacture or produce article or things or computer software. iii) Though the term manufacture is defined in Section 2(29BA) of the Act, production is not defined anywhere in the Act and therefore, one may refer....
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.... the high court while dealing with issue of allowability of investment allowances with respect to x-ray machine has held that the graphs obtained from these machines, which are the result of efforts or activity, could be said to be a 'thing'. vi) In view of the above, the Appellant submits that the research documentations/ reports are produced by the efforts put in by the employees of the Appellant and hence, same amounts to manufacture/ producing of article/things and therefore, the same is eligible for deduction u/s. 10B of the Act. vii) Now, the Appellant invites Your Honours attention to the services provided under R&D agreement entered with the AE: 2.1 From time to time, APIPL shall diligently provide Apotex with professional research and development services, which may include, without intimation, development of synthetic chemical process in the field of active pharmaceutical ingredients, development and preparation of DMFs, analytical services (stability studies, validation studies, analytical method development), vendor qualification services and manufacture of related compounds and metabolites ("Research")" viii) On perusal of the above clause in the ag....
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....product which was analysis and presentation of data in prescribed format was a product of new article in the case of CIT vs CompHelp Services Pvt Ltd (2000) 246 ITR 722. Claim of the assessee was for investment allowance................................ 25. The assessee here had done research using sophisticated machinery and the end product was either research documents in the nature of experimental records or compound. Just because these were intermediary things which would find use only in later stages of development of industrially useful chemicals and formulations would not disentitle the assessee from saying that it was producing an article or thing. The agreement entered by the assessee with its customers clearly show that the parties expected definite results, be it in the nature of new or improved compounds or in the nature 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 manh....
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....ount to manufacturing/ producing of article / things. xvii) In view of the above, the Appellant most humbly submits that deduction u/s. 10B w.r.t. R&D activities be granted to Appellant. 31. On the other hand the Ld. DR relied upon the decision of the DRP reproduced herein above and sought to distinguish the decision in the matter of DCIT v Syngene International Ltd, [ITA Nos.1106 & 1107/Bang/2012] which was relied upon by the Ld. AR in support of his contentions. During the course of argument, we have also directed the Ld. DR to produce the policy guidelines with respect to grant of approval by the DC, SEZ. 32. We have gone through the record and heard the rival submissions as also the orders passed by the lower authorities as well as the written submissions. 33. The predecessor of the assessee, namely Brantford Chemicals P. Ltd had filed an application for setting up EOU at SEZ by depositing a draft on 30.03.2004 in respect of plot No.1A vide application of even date and in the said application, the (page 502 of paper book), the items of manufacture / service were mentioned as under : 34. Along with the application, the assessee had also filed sketch showing th....
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....re and mining; 2 (z) "services" means such tradable services which,- (i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organisation concluded at Marrakes on the 15th day of April, 1994; (ii) may be prescribed by the Central Government for the purposes of this Act; and (iii) earn foreign exchange; 15. (1) Any person, who intends to set up a Unit for carrying on the authorised operations in a Special Economic Zone, may submit a proposal to the Development Commissioner concerned in such form and manner containing such particulars as may be prescribed: Provided that an existing Unit shall be deemed to have been set up in accordance with the provisions of this Act and such Units shall not require approval under this Act. Setting up of Unit. (2) On receipt of the proposal under sub-section (1), the Development Commissioner shall submit the same to the Approval Committee for its approval. (3) The Approval Committee may, either approve the proposal without modification, or approve the proposal with modifications subject to such terms and conditions as it may deem fit to impose, or reject the proposal in ....
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.... or setting up and operation of units; (c) prescribe a single form for furnishing returns or information by a Developer or an entrepreneur under one or more Central Acts. 20. Notwithstanding anything contained in any other law for the time being in force, the Central Government may, by notification, specify any officer or agency to carry out surveys or inspections for securing of compliance with the provisions of any Central Act by a Developer or an entrepreneur, as the case may be, and such officer or agency shall submit verification and compliance reports, in such manner a....... SEZ RULES 2006 19. Letter of Approval to a Unit.- (1) On approval of a proposal under rules 18 and 19, Development Commissioner shall issue a Letter of Approval in Form G, for setting up of the Unit. (2) The Letter of Approval shall specify the items of manufacture or particulars of service activity, including trading or warehousing, projected annual export and Net Foreign Exchange Earning for the first five years of operations, limitations, if any on Domestic Tariff Area sale of finished goods, by-products and rejects and other terms and conditions, if any, stipulated by the Boar....
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....five years from the date of commencement of production, the Development Commissioner may, at the request of the Unit, extend validity of the Letter of Approval for a further period of five years, at a time. (7) If an enterprise is operating both as a Domestic Tariff Area unit as well as a Special Economic Zone Unit, it shall have two distinct identities with separate books of accounts, but it shall not be necessary for the Special Economic Zone unit to be a separate legal entity: Provided that foreign companies can also set up manufacturing units as their branch operations in the Special Economic Zones in accordance with the provisions of Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000 as amended from time to time. From the above said provisions, rules and forms, it is clear that the assessee or any applicant is required to make a detailed project report in respect of various activities in respect of which the assessee is required to register itself under the SEZ Act as per rule 17 of SEZ rules 2006. 39. The definition of 'manufacture' clearly postulates the manufacture of any article, thing or softwar....
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....ting the contention of the assessee is that vide letter dt.16.8.2004, the assessee has sought issuance of amendment / addendum to the approval letter mentioning therein the items of manufacture as R & D Centre with Associated Production of chlorobenzene and other chemicals. In our understanding, the Amendment of the item of manufacture is different than the Addition of item of manufacture. For addition of manufacture, as mentioned herein above a separate project report is required to be given mentioning the items sought to be manufactured / services to be rendered. Further a dedicated earmarked place is required to be given for that purpose. As reproduced herein above, it is incumbent upon the DC for the purposes of granting the permission under the Act, to give specific things / article sought to be manufactured ( Rule 19) and also there is a statutory requirement to mention the area where the said manufacturing activity was sought to be carried out. In the present case, neither the separate activities / things / article sought to be manufactured were mentioned in the project report, nor a separate ear marked place was mentioned at the time of seeking the amendment to the order. H....
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....nt Centre with an associated production facility of Chloro Benzene and other chemicals. Thus it is clear that the activity undertaken by the assessee under the SEZ was only one i.e., R & D Centre and there were two separate independent activities which were permitted to be undertaken, viz., production of medical formulas and secondly for R & D related to the medical formula. In fact the DRP had given a cogent and robust finding, reproduced hereinabove, where the DRP has upheld the finding of the AO by recording that R & D services and manufacturing of items are two different segments and cannot be considered to be a coherent and integral part of the same activity. Further we are of the opinion that the amendment of the item of manufacture provided u/s.2 of the SEZ Act, prima facie do not cover the rendition of R & D services. We do not feel that the decision of the Tribunal in Syngene International Ltd (supra) is of any help to the assessee as in the said case, there was a stand-alone permission granted by the DC of the Board for that purposes, whereas there is no such specific permission granted by the Board. Moreover, we are of the opinion that for the purposes of adjudicating ....