M/S. SYNGENE INTERNATIONAL LIMITED,BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE- 6, BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is against the order of CIT(A) dated 29.11.2019 for the assessment year 2010-11. The grounds of appeal raised by the assessee are as under:-

“Based on the facts and circumstances of the case, Syngene International Limited (hereinafter referred to as "the Appellant"), respectfully submits the following grounds in respect of the order passed by the Learned Commissioner of Income-tax (Appeals) - 10 [“CIT(A)"] under section 250 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"):

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Page 2 of 29 1.Disallowance of relief claimed under section 10B of the Act

1.1 The Learned CIT(A) has erred in law arid in fact in disallowing the relief claimed under section 10B of the Act; 1.2 The Learned CIT(A), having accepted the Appellant's submission on being engaged in the business of manufacturing, has erred in law and on facts, in denying the relief claimed under section 10B of the Act on the contention that the renewal of licenses were not in place without appreciating that the renewal of licenses were in place.

2.1 The Learned CIT(A) has erred in law and on facts in disallowing the relief claimed under section 10AA of the Act.

2.2 The Learned CIT(A), having accepted the Appellant's submission on being engaged in the business of manufacturing or production of article or thing or rendering of services, has erred in law and on facts, in denying the relief claimed under section 10AA of the Act merely stating that Units were formed by split-up and reconstruction without appreciating the fact that there was no split-up and reconstruction of existing units. 2.3 The Learned CIT(A) has erred in law and on facts in disregarding the Appellant submission that the test of split-up and reconstruction needs to be undertaken only in the year of formation of the Unit based on the decision of the Jurisdictional Karnataka High Court in the case of CIT vs Nippon Electronics India Private Limited [1990] 181 ITR 518 and other judicial precedents.

2.4 Without prejudice to the above, the Learned CIT(A) has erred in law and on facts in not considering that the provisions of SEZ law would prevail over the provisions of the Act and the reconstruction of SEZ Units would not lead to denial of deduction under section 10AA of the Act.

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Page 3 of 29 3. Alternative claim of deduction under section 80-IB(8A) of the Act

3.1 Without prejudice to the above, the Learned CIT(A) has erred in law and on fact in not allowing the Appellant's alternative claim of deduction under section 80-IB(8A) of the Act.

3.2 The Learned CIT(A) has erred in law and on facts in not discussing the ground of appeal filed by the Appellant regarding allowability of deduction under section 80-IB(8A) of the Act while passing the order.

4.1 The Learned CIT(A) has erred in law and on facts in not allowing the additional depreciation on plant and machinery as claimed by the Appellant.

4.2 The Learned CIT(A) having accepted the Appellant's submission on being engaged in the business of manufacture, has erred in law and on facts, in denying the claim of additional depreciation merely stating that relevant details in respect of the claim were not furnished.

4.3 The learned CIT (A) has failed to take note of the details of additional depreciation schedule submitted during the appellate proceedings and in the course of the assessment proceedings, which substantiates the claim of additional depreciation under section 32(1)(iia) of the Act.

5 Addition under section 14A of the Act

5.1 The Learned CIT(A) has erred in law and on facts in making an addition under section 14A of the Act by applying Rule 8D of the Income-tax Rules, 1962 ("the Rules")

5.2 The Learned CIT(A) has erred in law and on facts in disregarding the submission made by the Appellant that it had not incurred any expense in connection with the exempt dividend income earned during the year.

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Page 4 of 29 5.3 The Learned CIT(A) has erred in law and on facts in concluding that the Appellant had not apportioned expense towards exempt income without identifying any incorrectness in the books of the Appellant. 5.4 The Learned CIT(A) has erred in confirming the disallowance under section 14A of the Act which is high and arbitrary.”

2.1 The facts of the case are that the assessee has challenged the disallowance of relief claimed u/s 10B of the Income-tax Act,1961 ['the Act' for short]. The facts mentioned by the AO in the assessment order are that the company had shown revenues under the heads 'research fees' and 'sale of R&D products' for the unit claiming the above deduction. It had taken a plea that it is manufacturing synthetic compounds for international clients. The agreements with its major clients were obtained and analyzed. They showed that the assessee is engaged in doing certain research activities as per their specifications/directions and the products developed as a result of research should be dispatched to them. However, the agreement terms never spoke of sale of compound developed as a result of such research activity. Such claim of deduction u/s 10B of the Act was being denied in all the years on the ground that the assessee is only providing research help but not engaged in manufacturing activity. Also, in one of the AYs, further analysis of the business was made from the agreement terms and it was concluded that sale of compounds does not arise in this business. One of the terms stated that the compounds developed or the know-how/intellectual property

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Page 5 of 29 right on research findings exclusively belong to the company, the question of selling it to the client does not arise and there is no meaning in the client purchasing such compound when it itself is the owner of that compound.

2.2 The said deduction was also disallowed for the reason that the assessee is stated to have been claiming this deduction u/s 10B of the Act for the 8th consecutive year as per its Form 56G. However, while submitting the approval letters, the assessee has only submitted the copy of approval letter dated 24.8.2001 which was valid only for 5 years from the date of commencement of commercial production, as provided at para 2(i) of the said letter. The assessee has not produced any letter for having sought extension/renewal of the same. Thus, the approval granted to the assessee also has expired and along with the above reasons this also became an additional ground for denial of deduction u/s 10B of the Act to the assessee.

2.3. The Ld. CIT(A) observed that assessee is in the business of manufacture of articles or things and eligible for deduction u/s 10B of the Act. However, EO Unit-2 does not have an approval from the Development Commissioner. The Unit has approval letter dated 24.8.2001 valid for 5 years and that the assessee did not produce a letter for extension or renewal. Against this, assessee is in appeal before us.

2.4. We have heard the rival submissions and perused the materials available on record. In this case, approval was given for EO Unit-2 was valid from 24.8.2011 to 31.3.2007. This was extended for a further period of 5 years from 31.3.2007 to 31.3.2012 by Development Commissioner, Cochin SEZ Sub Office for 100% EOU’s

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Page 6 of 29 vide letter dated 16.3.2007. Further, vide letter dated 19.3.2012, the approval was further extended for a period of 5 years from 31.3.2012. This is evident from the copy of letter dated 16.3.2007 placed at page Nos.269 to 272 of assessee’s paper book. This approval of EO Unit was in force during the relevant previous year 2009-10 corresponding to assessment year 2010-11. In view of the above, there is no merit in the contention of Ld. CIT(A) that the approval of EO Unit-2 has not produced before him. Accordingly, we vacate those findings of Ld. CIT(A) on this issue in denying the exemption u/s 10B of the Act. Accordingly, we remit this issue to the file of AO for the purpose of quantification of deduction of exemption u/s 10B of the Act.

3.1 Facts of the case are that the assessee has challenged the disallowance of the claim of deduction u/s 10AA of the Act. During the AY 2011-12 the assessee has claimed deduction u/s 10AA of the Act amounting to Rs.22,07,03,938/- which was disallowed by the AO. The reasons mentioned by the AO for the disallowance of the claim u/s 10AA of the Act are as below: i. First reason mentioned by the AO is that the deduction u/s 10AA of the Act is denied because of the same reason for which deduction u/s 10B of the Act was denied, i.e. the business of the assessee was not manufacture of articles and things. ii. Second reason mentioned was that the line of business the assessee is into does not fall in the category of service. iii. Another reason was that the assessee has violated the pre conditions for approval of commencing the production within one year of the date of approval. The approval was

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Page 7 of 29 given on 23.08.2007 and the operations were to be started by 23.08.2008 whereas the assessee started its operations on 01.01.2009. This was a violation of a SEZ Act. In this regard, the observation of the AO is reproduced below: (e) “it is seen from the letter of approval dated 23.08.2007, granted by the 0/o the Development Commissioner, Biocon Special Economic Zone, Cochin, dated 23.08.2007, that one of the pre-required condition mentioned at para (vi) has been violated by the assessee. The said para (vi) reads as under: "...(vi) This letter of approval is valid for a period of any year from its date of issue. You shall implement the project and commence production within one year period or within such period.." Going by the above condition, the assessee should have started its operations by 23.08.2008 whereas, the assessee has started its pperations on 01.01.2009. This is a clear violation of the SEZ act also. (f) The assessee, as on date, has shown totally 6 units- being an EOU Unit-1 (tax holiday period over) EOU Unit-2 (108 unit) and 4 other SEZ 10AA units. All such 10AA units are all situated at- Biocon Park, Plot No.2 & 3, Bommansandra Industrial Area IV Phase, ligani Link Road, Bommasandra Bangalore- 560099. Also, it is observed that while giving approval for starting its operation, the ;prescribed authority has given approval for separate category for separate unit. The purpose for the approval granted by the Competent Authority is summarized as under:

SI. Approval obtained for undertaking Date of Date of operations of- commencemen approval t of operation 01.04.2002 24.08.2001 Research obtained in Biotechnology 1. projects for novel compounds for new drugs 15.04.2007 Manufacture a export of contract 04.09.2006 2. research service in the field of Biotechonolgy including synthetic chemistry, molecular biology and custom synthesis.

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Page 8 of 29

Research Services 23.08.2007 01.01.2009 3. 23.08.2007 19.06.2009 Research Services- Critical 4. pharmacokinetics and testing of toxicity parameters of test molecules on small rodents Kilo Lab facility to carry out 23.08.2007 13.04.2009 5. custom synthesis project- inorganic • compounds

(f) It is relevant to mention that in the note submitted on nature of activities of the assessee, the main activities of the assessee, the main activity of the assessee company appears to be 'helping its clients on research work on contract' by entering into agreements with the clients.

Such nature of activity has been clearly discussed in the foregoing paragraph and hence it is not possible to conclude that the activities approved and activities carried are on the same footing. iv. Yet another reason for the disallowance of the claim of deduction u/s 10AA of the Act was that the main business conducted at EOU Unit 1 at 20KM Hosur Road, Bangalore was split up into different units. Hence, they were formed by splitting of the existing units for which the tax holiday scheme had already expired. Relevant portion of the AO’s observations reproduced below:- “From the above, it can be clearly construed that the assessee's main business which was being conducted at the EOU unit No.1 at 20th KM, Hosur Road, Bangalore, has been split into and the same has been allocated to different units which have been formed now. This clearly is a case of splitting of the existing unit for which the tax holiday scheme has since long been expired and the-assessee was not claiming deduction u/s 108 from AY 2004-05. Even while disallowing the assessee's claim for deduction u/s 108 for the second EOU unit in earlier assessment years, it was proved that the unit was formed after splitting of the first unit. Likewise, even the units which are claiming deduction u/s 10AA have been formed by splitting of the original business already in existence. The same is not allowed as per Section 10AA (4)(ii) of the Income Tax Act, 1961. Also, as could be seen from the unit wise P & L a/c., the

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Page 9 of 29 turnover shown against DTA unit ie., the above stated first unit, is considerably less as compared to the other units. This goes to prove that the business has been shifted from this unit to other new units. For comparison, the turnover reported by the other units in comparison with the said first unit is given as under : Income DTA- EOU-II SEZ-S2 SEZ-S11 SEZ-S12 SEZ-S-14 EOU-I CRF* 42500608 563966007 519080374 951389951 61995063 63962141 R&D* 1436474 94362017 235001749 12864392 92663056 *CRF- Contract Research fees **R&D- R & D Exports. The above explanation goes to prove that this is a clear case of splitting of the existing business.”

3.2. On appeal, Ld. CIT(A) observed that assessee has not been able to prove the main business conducted at EO Unit-1 at 20th KM, Hosur Road, Bengaluru which has not been split up and reconstructed resulting into formation of different unit for the purpose of claiming deduction u/s 10AA of the Act. In view of this, Ld. CIT(A) confirmed the order of AO. Against this, assessee is in appeal before us.

3.3 For the year under consideration, the assessee had claimed a deduction of Rs. 22,07,03,938 for SEZ Unit S11 under section 10AA of the Act. In the assessment order under section 143(3) of the Act, the impugned deduction was denied for the following reasons mentioned therein:

i) The assessee was not engaged in manufacture or production of articles or things.

ii) The assessee was not engaged in 'service.' iii) The claim of deduction in respect of S-11 was made only in the revised return and not in the original return of income.

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Page 10 of 29 iv) The assessee has not furnished details of plant and machinery as required by 10AA(2)(b) of the Act. v) The letter of approval is said to be valid for one year and it required the assessee to commence production within such one-year period. The assessee's one-year time elapsed on 23.8.2008; however, the unit started operations in 1.1.2009. Thereby, provisions of SEZ Act were violated. vi) The SEZ units are formed by splitting up and reconstruction of the existing business in EOU Unit 1. The AO observes that the main business is being carried out by EOU Unit 1 and the same is allocated to other units. vii) The assessee had submitted that the claim of deduction wider section 10AA was allowed in the AY 2009-10 and therefore should be allowed in the year under consideration (being the second year of operation). Such submission of the assessee was rejected on the ground that each assessment year is unique.

CIT(A) proceedings: 3.4 With respect to points (i) and (ii) above, the CIT(A), based on the ITAT orders referred to in the context of claim under 10B herein above, concluded that the assessee is engaged in business of manufacture or production of articles or things and in service. The Department is not in appeal against the aforesaid findings of the CIT(A). With respect to points (iii) to (v) above, the submissions of the Appellant are summarized below:

Point (iii) — Claim not made in the original return

3.5 Ld. A.R. submitted that in the original return, income of all SEZ units were computed collectively. The profits of SEZ Unit S

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Page 11 of 29 11 was computed after setting off losses of other units. This was rectified in the revised return and filed within 139(5) timelines. The Hon’ble Karnataka High Court in CCIT (Admn) v Machine Tools Corporation of India Limited [1993] 201 ITR 101 (Kar) has held that once a revised return is filed, it substitutes original return. The original return had been filed within the due date as per section 139(1) of the Act. The claim of deduction under section 10AA of the Act in the revised return of income is therefore correct and cannot be denied on this ground. Regarding non-compliance with the requirements of section 10AA(2)(b) of the Act it was concluded that the assessee has not furnished details of plant and machinery as required by 10AA(2)(b) of the Act. It was submitted that the provisions of section 10AA(2) of the Act are applicable only for last 5 years of deduction out of total 15 years. As the year under consideration was the 2nd year of claim, this requirement is thereby not relevant in the present case. Therefore, this condition for denial of deduction under section 10AA of the Act is not correct. Regarding delay in commencement of business it was stated by the Ld. A.R. that the delay in commencement of business was intimated to SEZ authorities and the same was accepted. It was submitted that there was therefore no violation of SEZ provisions. The letter so written without any adverse remarks from the regulator is to be regarded as a tacit acceptance of the request made. There was no cancellation of SEZ approval granted to SEZ Unit S11. It was further submitted that there is no pre-condition of commencement of business in section 10AA of the Act. Accordingly, the commencement of business within the extended period requested should not impinge the claim of deduction under section 10AA of the Act. The above submissions were reproduced by the Ld. CIT(A) in the order dated 29.11.2019. However, no specific findings were recorded by the Ld. CIT(A) with regard to points (iii) to (v) and (vii). On a consideration of

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Page 12 of 29 the submissions, points (i) to (v) of the AO in denying the deduction under section 10AA of the Act above do not survive and the submission made in point (vii) remains undisturbed. With respect to point (vi) above, it was concluded that the assessee was not able to prove that the main business conducted at EOU Unit 1 has not been split up and reconstructed resulting in the formation of different units for the purpose of claiming deduction under section 10AA of the Act. This aspect that it was EOU Unit 1 which was being split out and reconstructed has been outlined by the lower authorities at Para 3.2.3 of the assessment order under section 143(3) and at Para 5.3.1 at Pg.20 of the CIT(A) order. Accordingly, the deduction claimed under section 10AA of the Act was disallowed. Contentions before the ITAT:

3.6 There is no splitting up or reconstruction of business. The following factual aspects demonstrate the independence of SEZ Unit S11:

3.7 Physical location: The EOU unit 1 was situated at 20th KM, Hosur Road whereas the SEZ unit — S 11 is situated at Biocon SEZ, Bommasandra - Jigani Link Road, Bangalore. These two units are situated at different physical locations. 3.8 Approval from SEZ authorities: Separate approvals exist for both the Units. [Copies of the approval letters at PB — Pg.147-148 and 155-169] The approval granted by Development Commissioner is a valid approval for claim of section 10AA deduction. Reliance in this regard is placed on: CIT v Socidade De Fomento Industrial Pvt Limited (No.1) i. (2020) 429 ITR 207 (Born) [CLC-III Pg.466-486]

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Page 13 of 29 CIT v Enable Exports (P.) Ltd. (2012) 17 taxmann.com ii. 182 (Del) [CLC-III Pg.487-489] ' 3.9 Turnover criterion: The turnover of EOU unit 1 during the FY 2008-09 amounted to Rs. 3,40,09,343 and this was increased to Rs. 4,39,37,082 during the FY 2009-10. In view of the increase in the turnover, there is no merit in the contention that SEZ unit S 11 was formed by splitting up of EOU unit 1. 3.10 Investment in plant and machinery in S11: S11 was formed in the financial year 2008-09 with new investment in building, plant and machinery, furniture and fixtures, computers etc. The WDV of assets in EOU unit 1 as on 31.3.2009 and 31.3.2010 amounted to Rs. 4,62,54,473 and Rs. 3,97,30,816 respectively. On the other hand. new investments in building, plant and machinery, furniture and fixtures and computers during the FY 2008-09 in Sll totally amounted to Rs. 113,06,13,780. Investments during the FY 2009-10 in S 11 totally amounted to Rs. 10 88,77 341. These investments are tabulated below:

AY 2009-10 AY 2010-11 Foreign Net additions Additions Additions exchange Block of assets impact 23,21,35,932 2,81,42,953 16,753 2,81,26,199 Building 52,37,048 Plant and machinery 86,92,88,750 7,83,12,033 7,30,74,985 1,00,40,833 1,24,956 1,24,956 Furniture and fixtures 22,97,400 Computers 1,91,48,265 22,97,400 52,53,801 10,88,77,342 10,36,23,540 Total 1,13,06,13,780

3.11 The-following Fixed Assets schedule of EOU-I for AY 2009-10 and AY 2010-11 demonstrates that no plant and machinery was transferred from EOU-I to SEZ Units. Assessment year 2009- 10 12

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Page 14 of 29 Written Depreciable value Rate of Depreciation for down BloCk of assets of assets as at depreciation the year value as at March 31, 2009 31/03/2009 70,90,150 Building 7,87,795 10% 78,77,945 15% 3,98,06,151 59,70,923 3,38,35,228 Plant & machinery 20% - - Additional Depreciation Furniture and fixtures 10% 51,80,091 5,18,009 46,62,082 2,82,352 15% 3,32,179 49,827 Vehicles 60% 9,61,651 5,76,990 3,84,661 Computers 5,41,58,017 79,03,544 4,62,54,473 Total Assessment Year 2010-11

Depreciable Written down value of assets as Description of block Rate of Depreciation value as at at March 31, for the year of assets depreciation 31/03/2010 _ 2010 63,81,135 10% 70,90,150 7,09,015 Building 3,38,35,228 50,75,284 2,87,59,944 Plant & machinery 15% 20% - Additional • Depreciation 41,95,874 Furniture and fixtures 10% 46,62,082 4,66,208 15% 2,82,352 42,353 2,39,999 Vehicles 2,30,796 1,53,865 60% 3,84,661 Computers Total 4,62,54,473 65,23,656 3,97,30,817

3.12 Thus, the decrease in the value of the closing WDV of assets is only on account of depreciation and there is no transfer of assets in EOU Unit 1. 3.13 Employee benefit cost: The following table demonstrates that the employee benefit cost of EOU-I was not affected by the formation of new units

AY of Unit commencement of A Y 2008-09 A Y 2009-10 A Y 2010-11 Operations SEZ - S2 (Unit - I) 2008-09 25.15 20.76 13.92 SE' - Si! (Unit - II) 2009-10 - 2.63 18.81 SEZ - S14 (Unit - III) 2010-11 - - 1.12

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Page 15 of 29 SEZ - S12 (Unit - IV) 2010-11 - - 1.97 EOU I 9 1999-2000 1.61 1.77 1.60 EOU II 2003-04 21.14 23.14 ' 22.36 Total , 36.67 52.70 66.63 Increase in employee 16.02 13.93 cost - % of increase in 44% 26% employee cost - 3.14. Clientele: The following table demonstrates that the clientele of EOU-I is different from that of Unit S-11:

SI. No. Name of the Client Country EOU — I SEZ - S11 Assessment year of commencement of operations 1998-99 2009-10 - 1 Astrazeneca Pharmaceuticals LP USA 1,08,44,625 2 - Dupont Crop Protection USA 1,76,41,508 - 3 Nikem Research SRL Italy 55,23,210 4 Bristol-Myers Squibb Co. USA - 18,78,31,181 Total 3,40,09,343 18,78,31,181 3.15 The above facts demonstrate beyond doubt that the formation of the SEZ Unit S-11 was independent of any existing unit. It was in no way carved out of any existing business. There has thus been no splitting up or reconstruction of any existing unit. Ruling of the High Court in the Appellant's own case: The assessee further places reliance on the decision of the Hon’ble Karnataka High Court in its own case [I.T.A No. 184 of 2016 dated 2.12.2020, where the Court had an occasion to review the aspect of splitting up and reconstruction of EOU Unit-1 (CLC II Pg. 422-441]. It concurred with the view that a distinct unit in a separate premises, having new customers, with substantial in plant and machinery of the new unit cannot be said to have been established by splitting up or any existing unit. It further observed that a unit cannot be held to be formed by split up or reconstruction in the absence of any finding to substantiate the same. This finding was reiterated by the High Court in the orders for other years i.e, AY 2003-04 to 2004-05,

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Page 16 of 29 2006-07 to 2009-10. The decisions of the High Court for the other years are placed at Pg. 442-459 of CLC-II. 3.16 For the present case also, the assessee has factually demonstrated the independence of SEZ Unit S-11. No contrary finding has been recorded by the Revenue. The denial of section 10AA deduction on grounds of reconstruction or splitting up is a routine reiteration of the attempts of the Revenue in the earlier years. Applying the rationale laid down by the Hon'ble High Court, it can be concluded that there has been no split up or reconstruction in the present case. 3.17 In view of the above and the factual submissions in the present case, it is clear that SEZ Unit S-11 is not formed by splitting up of EOU Unit 1.

Time of examination of the aspect of 'formation':

3.18 Clauses (ii) and (iii) to section 10AA(4) require the condition of splitting up and reconstruction to be satisfied at the time of formation of a unit. It cannot be examined in a subsequent year after the formation of the eligible unit. The meaning of the term `formation' thus assumes importance. "Formation" refers to bringing into existence a new industrial undertaking. It refers to the birth or creation of a unit distinct and different from the other existing units. It should have a separate identifiable existence. The word "formed" as contained in section 10AA, refers to the point in time when the eligible unit is constituted or established. 3.19 In the present case, the SEZ Unit S 11 was formed in AY 2009-10. The deduction claimed under section 10AA for the said year has been allowed in the assessment order passed under section 143(3) of the Act. [PB Pg.275-283]. As the year under consideration is not the year of formation of SEZ Unit S-11, the condition of

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Page 17 of 29 splitting up cannot be examined. This principle is upheld in the following judicial precedents:

i. Bajai Tempo Ltd v. CIT [1992] 196 ITR 188 (SC) [CLC Pg.13-21] ii. L.G. Balakrishnan & Bros. Ltd. v. CIT [1985] 151 ITR 270 (Mad.) [CLC Pg.22-27]

iii. CIT v Nippon Electronics (India) Pvt. Ltd [1990] 181 ITR 518 [CLC Pg.28-31] iv. Sami Labs Ltd. v. ACIT [2011] 334 ITR 157 (Kar) [CLC Pg.32-50] v. Tata Communications Internet Services Ltd. v. ITO [2010] 4 ITR (Trib) 249 (Del.) [CLC Pg. 51-55]

vi. ITO v Heartland KG Information Ltd ITA No. 1884/Mds/2006 [CLC Pg.56-62] vii. CIT v Western Outdoor Interactive P. Ltd. [2012] 349 ITR 309 (Born) [CLC Pg. 63-66]

viii. CIT v. Paul Brothers [1995] 216 ITR 548 (Boni) [CLC Pg.67-69] ix. Direct Information P. Ltd. v. ITO [2012] 349 ITR 150 (Bom) [CLC Pg.70-78] x. IBM India Pvt. Ltd v ACIT IT(TP)A No.725/Bang/20I8 dated 31.07.2020

[CLC Pg.79-179]

3.20 There has been no change in the facts in the present year from those on the basis of which deduction under section 10AA had been granted for AY 2009-10. Accordingly, the deduction of Rs.22,07,03,938 claimed under section I OAA of the Act for SEZ Unit S-11 should be allowed.

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Page 18 of 29 3.21 Without prejudice, the SEZ Act does not provide for splitting up and reconstruction. Since it overrides Income-tax Act, the provisions of SEZ Act should prevail. Reliance in this regard is placed on the following: i. DCIT v. Goenka Diamond & Jewellers Ltd. (2012) 19 Taxmann.com 91 (JP) [CLC Pg.180-203]

ii. Midas DFS (P.) Ltd. v. ITO (2018) 96 taxmann.com 351 (Kol. - Trib.)

3.22 The Ld. D.R. relied on the order of the Ld. CIT(A).

3.23 We have heard the rival submissions and perused the materials available on record. The reason for disallowance of claim u/s 10AA of the Act was on the reason that assessee has not proved that it has been formed without split up and reconstruction of earlier unit. There was an amendment to section 10AA of the Act by Finance Act, 2007 with retrospective effect from 10.2.2006 and which is applicable to the present assessment year 2010-11. The contention of the Ld. A.R. is that this issue was already considered by the Hon’ble High Court of Karnataka in assessee’s own case for earlier assessment years 2003-04 to 2004-05 & 2006-07 to 2009-10. However, on perusing the judgement of Hon’ble High Court in ITA No.184/2016 dated 2.12.2020 for the assessment year 2005-06, the observation of the Hon’ble High Court is as under:-

“It is pertinent to mention that in the memo of appeal filed before the Tribunal, the revenue has not assailed the findings recorded in favour of assessee that there has been no splitting up of business, therefore, the question of remitting the matter to the Tribunal does not arise”.

3.24 However, in the present case, there is a finding by Ld. CIT(A) with regard to the fact that the assessee has not proved that

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Page 19 of 29 main business conducted at EO Unit-1 at 20Km. Hosur Road, Bangalore has not been split up and reconstructed resulting into formation of different units for the purpose of claiming deduction u/s 10AA of the Act. Being so, the judgement of Hon’ble High Court in assessee’s own case for the assessment year 2005-06 or any other assessment years cannot be applied to the facts of the present assessment year as there is a categorical finding by Ld. CIT(A). Being so, the ratio laid down in that cannot be applied to the present assessment year on present set of facts. Accordingly, in our opinion, the issue to be re-examined by AO and the assessee is liable to prove that main business conducted at EOUnit-1 at 20Km. Hosur Road, Bangalore has not been formed by split up and reconstruction of earlier units. Accordingly, this issue remitted to the file of the AO for fresh consideration.

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Page 20 of 29 Rate of depreciation (%) Depreciation (in Rs) Class of asset 15 39,21,87,233 Plant and machinery Additional depreciation 20 23,80,92,482 Vehicles 15 2,86,667 Building 10 8,51,00,156 Furniture and fittings 10 1,11,18,409 60 1,75,36,139 Computers Total depreciation 74,43,21,086

Assessment proceedings

5.2 The AO at para 4 of the order observed that the Assessee was asked to furnish unit-wise details of the additional depreciation. The Assessee has not submitted the details and thereby the additional depreciation was denied.

CIT(A) Proceedings 5.3 During the assessment proceedings, the Assessee had submitted the break-up of additions to fixed assets vide submission dated 27.8.2012 [PB — 118-121]. The Assessee also submitted installation certificates (samples) vide submission dated 8.1.2013 [PB — 124-143]. 5.4 Vide submissions dated 20.10.2014 the details of unit- wise additional depreciation following details were provided (reproduced below) [PB — 205; read with 284 and 285]:

SEZ unit S12 SEZ unit S14 Particulars EOU unit SEZ unit S2 SEZ unit Si! (7,21,21,193) 22,07,03,938 (11,18,17,607) (6,02,43,275) Income / (Loss) returned 6,13,71,327 Additional depreciation 4,32,76,661 6,09,96,372 93,97,114 11,15,78,665 1,17,96,261 disallowed ,

ITA No.147/Bang/2020 M/s. Syngene International Limited, Bangalore

Page 21 of 29 Income / (loss) after (6,85,40,946) 7,53,097 disallowance of 7,07,68,441 3,94,57,472 23,25,00,199 additional depreciation

5.5 It was also contended that assuming without admitting that additional depreciation is to be disallowed, the increase in business profits of EOU and SEZ units as a result of disallowance of additional depreciation is eligible for deduction under section 10B and 10AA.

5.6 The said submissions were not accepted by the CIT(A). At para 5.4.2 of the order, the CIT(A) concludes that the Assessee has not been able to prove that details of additional depreciation were submitted.

Contentions before the ITAT

5.7 Factually, the details sought in regard to additional depreciation were duly submitted. The details filed have been completely ignored. The facts to support the eligibility to additional depreciation were on record before the lower authorities.

5.8 Even otherwise, if depreciation under section 32(1)(i) of the Act is allowed, then additional depreciation under section 32(1)(iia) should automatically be allowed. Since the depreciation under section 32(1)(i) is allowed in the present case, the claim of additional depreciation should naturally be allowed.

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Page 22 of 29 5.9 Without prejudice, if the said disallowance is sustained, alternate relief under section 10AA should be allowed to the Assessee. Judicial precedents have held that deduction under section 10A/10B is to be allowed in respect of disallowances made during assessment proceedings. Reliance is placed on the following decisions [PB — 205 read with CLC — 212 to 244]: • Bearing Point Business Consulting Private Limited v DCIT MP No. 47/B/2013 dated 5.7.2013 ITAT Bangalore

• CIT v Gemplus Jewellery India Ltd (2010) 330 ITR 0175 (Boni)

• ITO v Sahasra Electronics P Ltd 2010-TIOL-89-ITAT-DEL

• International Gold Co. Ltd v ITO ITA NO.597/MUM/2010 (Mum-ITAT)

• Patni Telecom Solutions Pvt. Ltd v ITO ITA No. 1404/Hyd/2010

5.10 Ld. D.R. relied on the order of the Ld. CIT(A). 5.11 This claim of additional depreciation has been disallowed as the assessee not filed necessary documents to justify the claim of additional depreciation. On the other hand, Ld. A.R’s contention is that the assessee has furnished all details in the first year itself and this is the second year of claim. As such, there is no necessity of furnishing of further details. He also argued that once the normal depreciation has been granted in this assessment year, granting of additional depreciation is automatic and relied on various judgements. In our opinion, it is the duty of the assessee to furnish the necessary details as called for by the authorities, so as to claim

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Page 23 of 29 the deduction. In the absence of such details, the lower authorities have no other option to deny the deduction claimed by assessee. Accordingly, in the interest of justice, we remit this issue to the file of AO with the direction to the assessee to furnish the necessary details as required by the authorities. The AO has to examine the same and decide accordingly. This issue is remitted back to the file of AO for fresh consideration.

SI Opening Closing Divi- No Balance Balance Fund /Scheme purchase Redemption dend%, 28Q ICICI Prudential -Flexible 1 Income Plan Dividend-Daily- 17,06,63,229 51,75,33,379 69,03,87,379 - 21,90,771 reinvest dividend 32ISD ICICI Prudential Institutional - _ _ 2 Liquid Plan - Super Institutional 28,00.00,000 28,00,33,379 33,379 Daily Div 1524 ICICI Prudential Flexible 3 Income Plan Premium - Daily - - 42,54,02,820 42,62,34,092 8,31,271 Dividend 1564 ICICI Prudential Institutional 4 Liquid Plan - Super Institutional - - 44,00,00,000 44,00,43,411 43,411 Daily Div ., 5 TLSDO1 TATA Liquid Super High - - Investment Fund - Daily Dividend 9,50,00,000 9,50,08,006 8,006 TFLD TATA Floater Fund - Daily 5,50,74,643 - Dividend , 7,00,06,165 12,54,40,037 3,59,229 6 7 KOTAK Liquid (Institutional) - - Growth . 2,00,00,000 2,00,01,768 1,768 8 KOTAK Liquid (Institutional - - Premium) - Growth 6,00,00,000 6,00,06,140 6,140 9 KOTAK Liquid (Institutional - - Premium) - Daily dividend 15,80,00,000 15,80,13,944 13,944

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Page 24 of 29 10 KOTAK Flexi Debt Scheme - Institutional - Daily Dividend 23,80,21,852 13,00,00,000 10,87,10,06 6,88,210 HDFC Cash Management Fund- 11 Treasury advantage Plan - 19,68,687 17,09,29,428 50,50,20,077 67,79,18,192 - Wholesale -Daily Dividend 12 HDFC Liquid Fund -Dividend - - - Daily Reinvest 24,25,00,000 24,25,20,077 20,077 13 B332DD Birla Sun Life Savings - _ Fund -Instl -Daily Div re-investment 18,50,16,103 18,52,70,580 2,54,477 14 B502DD Birla Sun Life Cash PlusInstl - - -Daily Div re-investment 2,00,00,000 2,00,01,555 1,555 B503DD Birla Sun Life Cash Plus - Instl Prem.- Daily Div - 15 - - 16,50,00,000 16,50,14,548 14,548 Reinvestment Total 3,71,58,93,108 10,87,10,06 39,66,67,299 3,42,15,00,397 64,35,473 1

Assessment proceedings 6.2. Vide notice under section 142(1) dated 30.1.2013, the Assessee was asked to show cause as to why disallowance under section 14A read with rule 8D should not be made in respect of the dividends received during the year. The assessee vide written submissions dated 13.2.2013 explained that the dividends were received from mutual funds which are managed by third party service providers. It was submitted that the third- party service provider does not charge any fees for managing the mutual funds and there are directly remunerated by the mutual fund companies in the form of commission. Copy of the letter issued by M/s B&K Securities, the third-party service provider to the Assessee that they don't charge any fees from the assessee was also submitted to the learned AO. [Pg. 172 of the PB] The said submission was not accepted and AO disallowed Rs. 12,63,443 under section, 14A read with rule 8D(2)(iii). The said disallowance was appealed before the CIT(A).-

CIT(A) proceedings:

ITA No.147/Bang/2020 M/s. Syngene International Limited, Bangalore

Page 25 of 29 6.3 Aggrieved by 'the said disallowance, the Assessee made the following submissions before the CIT(A) to contend that the impugned disallowance is bad in law: (a) No disallowance can be made in the absence of any expenditure incurred for earning the exempt income (b) Notional amount cannot be disallowed under section 14A in the absence of an expenditure incurred in relation to an exempt income (c) The AO should indicate cogent reasons for rejecting the claim of the assessee with regard to expenditure or no expenditure as the case may be in relation to exempt income

(d) The Supreme Court in CIT v Walfort Share and Stock Brokers P. Ltd [2010] 326 ITR 1 has held that for attracting section 14A there has to be a proximate cause for disallowance, which is in relationship with the tax exempt income. In the present case, there being no expenditure incurred for earning dividend and no proximate cause in relationship with the tax-free dividend, no disallowace under section 14A is warranted. The aforesaid submissions were not accepted. The CIT(A), at para 5.5.2 of the order observed as under:

The Assessee has not been able to prove that no (a) expenditure was incurred.

(b) Section 14A requires the assessee to maintain proper books of account in regard to investment made from which income is tax exempt. In the present case, the Assessee has not maintained a separate account in this regard. In the absence of accounts maintained by Assessee, the AO cannot examine the claim of the assessee.

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Page 26 of 29 (c) 'The incurrence of establishment expenses, other administrative and general expenses cannot be ruled out in regard to maintaining of investment portfolio, management of investment and earning the tax-free income. Thus, there is no merit in Assessee argument.

Contentions before the ITAT: 6.4 There is no statutory mandate in section 14A to make disallowance on expenditure incurred for earning tax free income in cases where assessees (like the present assessee), did not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income. This issue is now settled by the Apex Court in South Indian Bank Ltd. v CIT (2021) 438 ITR 1 (SC). 6.5 As per sub-section (1) to section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. 'Incurring of expenditure' in relation to exempt income is thus an indispensable requirement to invoke section 14A. As per the Supreme Court in CIT v. Walfort Shares & Stock Brokers P. Ltd [2010] 326 ITR 1 (SC), where no proximate expenditure is incurred in relation to exempt income, there canny be any disallowance under section 14A. Section 14A concerns itself with proximate expenditure and not any other expenditure howsoever remote and distant. This proposition is affirmed by the following judicial precedents: • CIT v Socidade De Fomento Industrial Pvt Limited (2020) 429 ITR 358 (Born) [CLC-III Pg.490-501]

• Canara Bank v ACIT [2014] 52 taxmann.com 162 (Karnataka) [CLC Pg.324-341]

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Page 27 of 29 • CCI Ltd v JCIT [2012] 250 CTR 291 (Kar) [CLC Pg. 316- 318] • Maxopp Investment Ltd v CIT (2011) 203 Taxman 364 (Delhi) [CLC Pg. 245265]

• CIT v Hero Cycles Ltd (2010) 323 ITR 518 (P&H) [CLC Pg.266-268] • Godrej & Boyce Mfg. Co. Ltd v DCIT (2010) 328 ITR 81 (Born) [CLC Pg.269-315]

• CIT v Deepak Mittal [2014] 361 ITR 131 (P&H) [CLC Pg.319-323] • Justice Sam P. Bharucha v. ACIT (2012) 53 SOT 192 (URO) / 25 taxman.com 381 (Mum.)(Trib.) [CLC Pg.324- 341] • Biocon Research Ltd. v. ACIT (2017) ITA Nos. 1250 & 1251/Bang/2016 (Bang.-Trib) [CLC-III Pg.502-567] 6.6 Sub-section (2) to section 14A permits the assessing officer to determine the expenditure incurred in relation to exempt income. To determine the expenditure incurred in relation to exempt income, the assessing officer should be satisfied that the expenditure incurred in relation to exempt income, if any, as claimed by the assessee, is incorrect. Section 14A(2) does not enable the assessing officer to apply the method prescribed by Rule 8D without determining in the first instance the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the Same. This was the view held in the following decisions: • Bharatiya Reserve Bank Note Mudran P Ltd v DCIT ITA No. 650 (BNG) 2011 decision dated 7.12.2012 and MP

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Page 28 of 29 Nos. 43 and 51 of 2013 decision dated 31.5.2013 — ITAT Bangalore [ CLC Pg.347-3581 • Rajshri Production P Ltd v Ad. CIT — ITA No. 5983/Mum/2011 decision dated 13.11.2013 — ITAT Mum [CLC Pg.359-363] • CIT v Walfort Share and Stock Brokers P. Ltd [2010] 326 ITR 1 [CLC Pg.364-77] • Minda Investments Ltd v DCIT (2010) (Delhi) dated 16.07.2009 [CLC Pg.378-381] 6.7 No such findings are in evidence in the present case. Accordingly, no additions can be made under section 14A read with Rule 8D. Even otherwise, in the Appellant's own case for AY 2012-13, the Tribunal, under similar facts and circumstances, held that it was not practicable to apply the provisions of Rule 8D(2)(iii) of the Rules. Administrative expenses were estimated at Rs.10,000 and disallowed. [PB Pg.683-686] 6.8 Having regard to the above, the impugned addition of Rs. Rs. 12,63,443 under section 14A read with rule 8D(2)(iii) is bad in law.

6.9 The Ld. D.R. relied on the order of the lower authorities.

6.10 We have heard the rival submissions and perused the materials available on record. With regard to invoking provisions of section 14A r.w. Rule 8D(2)(iii) of the Act is for administrative and company expenses when the assessee derives exempted income. In the instant case, the assessee made huge investments which is given rise to exempted income. Investment decisions are very complex and strategic and obviously, the assessee would have incurred certain administrative expenses such as salary, general expenses, printing

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Page 29 of 29 and stationery, therefore, it cannot be said that no expenditure was incurred for making the said investments. Hence, we confirm the disallowance made by the AO by invoking the provisions of section 14A of the Act r.w. Rule 8D(2)(iii) of the Act. However, it cannot exceed the exempted income. With this observation, we allow this ground taken by the assessee.

Sd/- Sd/- (George George K.) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 13th June, 2022. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.