INVITROGEN BIOSERVICES INDIA PVT. LTD.,,BANGALORE vs. PR. CIT, BANGALORE

PER SMT BEENA PILLAI, JUDICIAL MEMBER:

Present appeals has been filed by assessee against order dated 30/03/2016 passed by Ld.CIT-3, Bangalore under section 263, for

ITA Nos.868 & 869(B)/2016 2

assessment years 2007-08 and 2008-09 on following grounds of appeal: ITA No.868/B/2016 (Assessment year : 2007-08) “The grounds mentioned hereinafter are without prejudice to one another. That the order passed by the learned Pr. Commissioner of Income-tax, Bengaluru — 3, Bengaluru (`CIT') is bad in law and / or void ab initio and is liable to be quashed. 2. That on the facts and circumstances of the case. the learned CIT has erred in holding that the assessment order dated October 31, 2013 passed under section 143(3) read with section 147 of the Act by the Assessing Officer (`A0'), is erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the Act. The learned CIT has erred in not appreciating the fact that the conditions as prescribed in section 263 of the Act with respect to the revision of orders which are prejudicial to the interest of the revenue (such as the Assessing Officer had conducted inadequate enquiry or there was a lack of enquiry), has not been satisfied in the instant case

The learned CIT has erred in not following the below mentioned judicial pronouncements-

Commissioner of Income-tax vs. Sunbeam Auto  Ltd. [(2011) 332 ITR 167 (Delhi High Court)] Vegesina Kamala vs. Income-tax Officer [(2016)  157 ITD 457 (Visakhapatnam - Trib.)]

ITA Nos.868 & 869(B)/2016 3

The learned CIT has erred in not appreciating the fact 5. the AO has allowed the claim of deduction under section 10B with respect to the Bioinformatics division after verifying the necessary documents and eligibility of the Appellant.

The learned CIT has erred in not considering the 6. approval obtained by the Appellant from the Office of the Development Commissioner, Cochin Special Economic Zone ('CSEZ') with respect to setting up of 100% Export Oriented Unit (`EOU') for manufacture and export of functional genomics and bioinformatics chemistry.

The learned CIT has failed to appreciate that the relevant documents (i.e. approval letter dated March 10, 2005 CSEZ and approval for license for private bonded warehouse dated April 12, 2005 issued by the office of the Deputy Commissioner of Customs) was submitted by the Appellant vide submission dated January 05, 2016

8 The learned CIT has erred in not following the decision of the Hon'ble Delhi High Court in case of CIT vs. Enable Exports [(2012) 17 taxmann.com 182 (Delhi High Court). wherein it was held that, approval granted by the Development Commissioner of EoU is valid for claiming deduction under section 10B of the Act.

ITA Nos.868 & 869(B)/2016 4

into between Invitrogen Corporation and the Appellant (`the R & D Agreement'), which provides that the Appellant is engaged in research and development activities relating to software development. 10.The learned CIT has failed to appreciate that fact that the reply provided by the CSEZ has confirmed that the Appellant is engaged in the business of R & D services in the area of Bioinformatics chemistry, which is further, established by the fact that the Exhibit A to the R & D Agreement provides that the Appellant is engaged in research and development activities relating to software development.

The learned CIT has erred in not following the 11. Circular No. 01/2013 dated January 13, 2013 issued by the Central Board of Direct Taxes. which clarifies that research and development activities relating to software development would be covered within the ambit of the definition of the term "Computer Software" and accordingly, would be eligible for deduction under section 10B of the Act.

The learned CIT has failed to appreciate the fact 12. that the result of the research and development carried out by the Appellant which is exported outside India is nothing but the software (i.e. Vector NTI advance) which is developed by the Appellant in India.

13 The learned CIT has failed to appreciate the documents (such as financial statements evidencing the fact that the earnings of the Appellant in relation to the

ITA Nos.868 & 869(B)/2016 5

sale proceeds from the export of the software during the year under consideration are in foreign currency, Foreign Inward Remittance Certificate (TIRO') evidencing the fact that the software developed by the Bioinformatics division of the Appellant during the year under consideration is exported outside India, R& D Agreement) submitted by the Appellant in support of its claim that the software developed in India is actually exported outside India. 14. The learned CIT has failed to appreciate the fact that the deduction under section 10B of the Act includes research and development activities relating to development of software which squarely applies to the research and development activities carried on by the Appellant in the field of Bioinformatics

The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided ITA No.869/B/2016 (Assessment year : 2008-09)

The grounds mentioned hereinafter are without prejudice to one another.

ITA Nos.868 & 869(B)/2016 6

That the order passed by the learned Pr. Commissioner of Income-tax, Bengaluru — 3, Bengaluru ('CIT') is bad in law and / or void ab initio and is liable to be quashed.

That on the facts and circumstances of the case, the learned CIT has erred in holding that the assessment order dated October 31, 2013 passed under section 143(3) read with section 147 of the Act by the Assessing Officer ('AO'), is erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the Act.

The learned CIT has erred in not appreciating the fact that the conditions as prescribed in section 263 of the Act with respect to the revision of orders which are prejudicial to the interest of the revenue (such as the Assessing Officer had conducted inadequate enquiry or there was a lack of enquiry), has not been satisfied in the instant case.

The learned CIT has erred in not following the below mentioned judicial pronouncements-

Commissioner of Income-tax vs. Sunbeam Auto  Ltd. [(2011) 332 ITR 167 (Delhi High Court)] Vegesina Kamala vs. Income-tax Officer [(2016)  157 ITD 457 (Visakhapatnam - Trib.)]

5 The learned CIT has erred in not appreciating the fact the AO has allowed the claim of deduction under section 10B with respect to the Bioinformatics division

ITA Nos.868 & 869(B)/2016 7

after verifying the necessary documents and eligibility of the Appellant.

The learned CIT has erred in not considering the approval obtained by the Appellant from the Office of the Development Commissioner, Cochin Special Economic Zone (`CSEZ') with respect to setting up of 100% Export Oriented Unit (EOU') for manufacture and export of functional genomics and bioinformatics chemistry.

The learned CIT has failed to appreciate that the relevant documents (i.e. approval letter dated March 10, 2005 CSEZ and approval for license for private bonded warehouse dated April 12, 2005 issued by the office of the Deputy Commissioner of Customs) was submitted by the Appellant vide submission dated March 29, 2016.

The learned CIT has erred in not following the decision of the Hon'ble Delhi High Court in case of CIT vs. Enable Exports [(2012) 17 taxmann.com 182 (Delhi High Court), wherein it was held that, approval granted by the Development Commissioner of EoU is valid for claiming deduction under section 10B of the Act.

The learned CIT has failed to appreciate the fact 9. that the Appellant is engaged in research and development activities relating to software development. The said fact is established by Exhibit A to the Research and Development Services Agreement dated January 01, 2005 read with Addendum effective

ITA Nos.868 & 869(B)/2016 8

from April 01, 2008 entered into between Invitrogen Corporation and the Appellant (`the R & D Agreement'), which provides that the Appellant is engaged in research and development activities relating to software development. 10.The learned CIT has failed to appreciate that fact that the reply provided by the CSEZ has confirmed that the Appellant is engaged in the business of R & D services in the area of Bioinformatics chemistry. which is further, established by the fact that the Exhibit A to the R & D Agreement provides that the Appellant is engaged in research and development activities relating to software development. 11. The learned CIT has erred in not following. the Circular No. 01/2013 dated January 13, 2013 issued by the Central Board of Direct Taxes, which clarifies that research and development activities relating to software development would be covered within the ambit of the definition of the term "Computer Software" and accordingly, would be eligible for deduction under section 10B of the Act. 12 The learned CIT has failed to appreciate the fact that the result of the research and development carried out by the Appellant which is exported outside India is nothing but the software (i.e. Vector NTI advance) which is developed by the Appellant in India. 13 The learned CIT has failed to appreciate the documents (such as financial statements evidencing the

ITA Nos.868 & 869(B)/2016 9

fact that the earnings of the Appellant in relation to the sale proceeds from the export of the software during the year under consideration are in foreign currency. Foreign Inward Remittance Certificate (FI RC') evidencing the fact that the software developed by the Bioinformatics division of the Appellant during the year under consideration is exported outside India. R& D Agreement) submitted by the Appellant in support of its claim that the software developed in India is actually exported outside India. 14. The learned CIT has failed to appreciate the fact that the deduction under section 10B of the Act includes research and development activities relating to development of software which squarely applies to the research and development activities carried on by the Appellant in the field of Bioinformatics. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. Brief facts of the case are as under: Assessee is 100% EOU registered with Cochin Special Economic Zone for manufacture and export of functional genomics and Bio Informatics Chemistry. Assessee for years under consideration filed

ITA Nos.868 & 869(B)/2016 10

return of income book for assessment year 2007-08 and 2008-09 on 30/09/08 declaring total income at ‘NIL’ and loss of Rs.80,48,771/-, respectively. Ld.AO observed that assessee claimed deduction under section10B amounting to Rs.92,56,242/- and Rs.1,97,61,465/- respectively for years under consideration. Return was processed under section 143(1) of the Act, and orders under section 143(3) was passed, accepting ‘NIL’ income for assessment year 2007-08, vide order dated 22/12/09 and for assessment year 2008-09, total income was assessed at Rs.4,02,970/-. 2.1 Subsequently, while assessment for assessment year 2009-10 was going on, Ld.AO had sufficient reason to believe that, assessee wrongly claimed deduction under section 10B for assessment years 2007-08 and 2008-09. 2.2 Accordingly, assessments were reopened by issuing notice under section 148 dated 25/03/13 for assessment years 2007-08 and 2008- 09. The reasons recorded for reopening of assessments for assessment year 2007-08 and 2008-09 on 11/03/13 and 15/03/13 respectively. It is observed that reasons recorded for assessment year 2007-08 is placed at page 77, and for assessment year 2008-09 the same is placed at page 91 of paper book for relevant assessment years. For sake of convenience, we reproduce reasons recorded for assessment year 2007-08; “11-03-2013 The assessee company had filed its return of income for the A.Y-2007-08 on 31.10.2007 declaring NIL total income after

ITA Nos.868 & 869(B)/2016 11

claiming deduction U/s10B of Rs.92,56,242/-. The original assessment U/s143(3) was made on 22-12-2009 by accepting the NIL income declared by the assessee company. The assessee company is registered with CSEZ as 100% EOU w.e.f. 10-03-2005 and claiming deduction U/s10B. As per certificate of CSEZ the item of production is " Functional genomics Bioinformatics Chemistry" In the course of assessment proceedings for the A.Y. 2009-10, certain documents and information has been brought on record. The information brought on records reveal that the assessee company is carrying on research and development activity in the field of functional genomics, bioinformatics chemistry on behalf of its associated enterprise in US. As per the agreement dated 25-07-2005 of the assessee company with its foreign associated (holding) company, the assessee company is termed as 'contractor' and it is being reimbursed by its holding company for all Services-related costs incurred in the provision of Services, plus a ten percent commission. The assessee company has been raising the bill/ invoices as "Research and development charges for the month of It is evident from details of plant and machinery used by the assessee company that most of the machineries used by the assessee company are lab equipments for research and development and there is very minimal use of computer hardware and software. Moreover, it is evident from the profit and loss account that the one of the major expenditure is lab consumables used to the tune of Rs.60,22,070/-. Thus, the assessee company is providing R&D facility in the field of molecular biology i.e. functional genomics and bioinformatics on behalf of its associate (holding) company and cost is being reimbursed by

ITA Nos.868 & 869(B)/2016 12

the associated company with 10% commission. Hence, there is no activity of manufacturing and export of any article or thing or computer software as claimed by the assessee company. Thus, the assessee company is engaged basically in the activity of scientific research and development work which is not relating to computer software and hence it not a part of any notified ITES. Hence, the assessee company has claimed excessive relief/deduction under the I.T.Act by way of exemption U/s10B for Rs.92,56,242/-. Further, in the in the course of original assessment proceedings, the assessee company did not disclosed nature of business activity of the company fully and truly. It was only disclosed that the assessee company is engaged in the business of research and development in the field of bioinformatics and functional genomics and there was no information to show that as to how the business activity of the company amount to manufacturing and export of computer software or product or service in the nature of notified ITEAS. Hence, the assessee's claim of deduction U/s10B was accepted by the AO. It is only now i.e. in the course of assessment proceedings for the A.Y. 2009-10, the copies of agreement and other relevant information was called for and analyzed. The fresh evidence brought on records, reveal that the R & D activity of the assessee was in fact in the field of biological science and it is not pertaining to any software development and hence, there is no activity of manufacturing or export of any computer software or providing any ITES. In view of the facts mentioned above, there is failure on the part of the assessee to disclose fully and truly all the material facts

ITA Nos.868 & 869(B)/2016 13

necessary for the assessment. Hence, I have reason to believe that the income of the assessee company chargeable to tax for the assessment year 2007-08 has escaped assessment within the meaning of section 147 of the I.T. Act. Proposal for approval of CIT is prepared and submitted to the CIT as required U/s151(1) of the IT Act, 1961”. 3. Ld. AO completed reassessment vide order dated 31/10/13 for both assessment years under consideration by denying following:  deduction under section 10B of the Act pertaining to functional genomics division.  And other miscellaneous disallowances made. Ld.AO however, allowed deduction u/s 10B of the Act, in respect of profit derived from ‘Bio-informatics’ division in both years. 3.1 Subsequently, Ld.CIT issued notice under section 263 of the Act for years under consideration, for assessment years 2007-08 and 2008-09. For the sake of convenience, notice issued for assessment year 2007-08 has been reproduced as under: OFFICE OF THE PR. COMMISSIONER OF INCOME TAX, BENGALURU-3, BMTC BUILDING,'5TH FLOOR, KORAMANGALA 80 FT. ROAD, BENGALURU -95. Telephone – 25625602 F. No.Rev.8/invitrogen/Pr.CIT/B-3/2015-16 Dated:16.12.2015 To Ms Invitrogen Bioservices Pvt Ltd., No.3 First Technology Place EPIP Whitefield Bangalore-66. Sirs, Sub: Revision u/s. 263 of the I.T. Act in your case for the A.Y. 2007-08 - issue of notice - calling for objections, if any – Reg.

ITA Nos.868 & 869(B)/2016 14

The Scrutiny assessment order U/s 143(3) r.w.s. 147 in your case, was passed on 31.10.2013 for the AY 2007-08.

On perusal of records, it is noticed that in the assessment order 2. passed u/s.143 r.w.s. 147 for the asst.year 2007-08 , the deduction u/s 10B has been incorrectly alllowed as the activities of the Bioinformatics division do not come within the meaning of the term ' export of computer software'. The deduction is allowed based on the fact that software expenses are employed in the said division. This has resulted in incorrect allowance of deduction u/s 10B to the extent of Rs.34,03,693/- .

Hence, the order passed by the AO, is erroneous & prejudicial 3. to the interest of revenue. I, therefore propose to pass an appropriate order u/s 263 of the LT Act, 1961, for the assessment year 2007-08.

3.2 Ld.CIT, after considering the submissions advanced by assessee concluded by observing as under: “5. The discussion above is concluded as follows: a) The terms of the agreement between the assessee company and its parent company clearly specifies that the assessee is carrying on

ITA Nos.868 & 869(B)/2016 15

R & D activities. The approval given by the Cochin SEZ indicates that the bioinformatics division is only carrying on R&D in bioinformatics chemistry which does not fall under the realm of Computer software. The assessee’s claim to be an exporter of software is unsubstantiated. The export invoices furnished by the company also indicate that what is being exported is not software but only R&D research since the invoice states the consideration to be received in foreign currency is for the purpose of R&D charges”. b) The assessee company has sought to correlate the export of its research & results of R&D activity to be computer software. The legislature has not provided for the deduction u/s 10B in respect of R&D related to development of software in bioinformatics. The assessee company has wrongly inferred R&D in bioinformatics to be eligible for deduction u/s 10B, wherein it is not explicitly notified by a creature of the statute. The option lies with the assessee to move the legislature to get the benefit of 10B deduction for R&D related to software development in the field of bioinformatics explicitly. In view of the above decision, the allowance of deduction u/s 10B by the AO for the profits from the bioinformatics division is erroneous and also prejudicial to the interests of the revenue. The AO is directed to withdraw the claim of deduction u/s 10B wrongly allowed to the assessee company in respect of bioinformatics division”.

ITA Nos.868 & 869(B)/2016 16 pathways development and software customization by using platforms like C++, Java etc. It was submitted that the software developed is carried on by assessee are either for its own products or independent projects, and that the independent projects relate to development of software, tools or application for external customers. It has been submitted that these projects are contractor by the parent company directly with external agencies and are billed directly to them. Assessee invoices its parent company and receives compensation for the projects on cost plus markup basis. 4.2 Ld.AR submitted that assessee in its own product category undertakes end to end development of software products, tools and application. It has been submitted that the major product released in its own products, segment includes Vector NTI which is a stand-alone text of software which allows both academicians as well as professionals to carry out detailed research in the field of genomics. It has been submitted that this software is equipped with comprehensive seaward of tools which allow mapping and analysing DNA and protein sequence, aligning different DNA and protein sequence to compare them and creating a viewing 3-D models of protein structures. 4.3 Ld.AR placed reliance upon the research and development service agreement dated 01/01/05, placed at page 118 of paper book for assessment year 2007-08, wherein the inventions created by assessee are assigned by assessee to its parent company. Further, referring to page 122 of paper book, it has been submitted that under

ITA Nos.868 & 869(B)/2016 17 Bioinformatics, segment research and development activities carried on by assessee will be in following areas: 1. development of bio informatics tools in analysing gene sequence, protein sequence Insilco cloning, gene expression profiling, pathways development and software customisation. The platforms to be used are C++, Java, Pearl, SQL. Tools will be in the Windows and UNIX. 2. Development of tools to create and manage database. 4.4 Ld.AR, thus emphasised that assessee satisfies all requirements to claim deduction under section 10B, as the software development carried on by assessee is either for its own products or independent projects which relate to development of software tools for application of external customers. It has been submitted that Ld.AO while passing order under section 143(3) read with 147 of the Act, categorically observed that assessee was carrying out software development and is eligible to claim deduction under section 10B of the Act for bio-informatics division. He submitted that on perusal of all the details filed by assessee as called upon, he disallowed the claim of deduction under section 10B under genomics division, as it has been categorically observed by Ld. AO that functions of assessee under this segment was exclusively for research and development on genetic sciences whereas the functions performed by assessee under bio-informatics segment was of development of software and computer programs.

ITA Nos.868 & 869(B)/2016 18 4.5 Ld.AR further submitted that DRP while considering assessment year 2010-11 has allowed the claim of 10B for bio-informatics division. He also placed reliance upon Circular No.1 of 2013 issued by CBDT, wherein it has been clarified that research and development activities pertaining to software development would be covered under definition of computer software stipulated under explanation 2 to section 10A and 10B of the Act. 4.6 Ld.AR thus, submitted that there has been no mistake on behalf of Ld.AO in allowing the claim of 10B deduction for bio-informatics division. He submitted that Ld.AO had called for all the necessary details and upon verifying same and allowed claim of assessee. Accordingly, he submitted that the view taken by AO in these two years on the impugned issue is one of the possible view. Accordingly, he submitted that the assessment orders cannot be termed as ‘erroneous’ an prejudicial to the interest of revenue. Ld.AR submitted that the observations of Ld.CIT is based upon the invoices placed at page 89-98 of paper book for assessment year 2007-08, wherein the description has been mentioned to be research and development charges. In support of his contention that reassessment order passed by Ld. AO is neither prejudicial nor erroneous to the interest of the revenue, Ld.AR placed reliance upon following decisions:  Malabar industrial Co Ltd vs CIT reported in (2000) 109 Taxmann 66 (SC);  CIT vs Gabriel India Ltd (1993) 203 ITR 108 (Bom);  CIT vs Sunbeam Auto Ltd (2010) 189 Taxmann 436 (Del);  CIT vs Gokuldas Exports (2012) 20 taxman.com 491 (Kar)

ITA Nos.868 & 869(B)/2016 19 4.7 Ld.AR has submitted that there has to be prima-facie material on record to show that, tax which was lawfully exigible has not been imposed or that by application of relevant statute or an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. 5. On the contrary, Ld.CIT DR, submitted that the Assessing Officer has not applied his mind to the facts of the case. She submitted that in concluding para 10 of re-assessment order, Ld.AO has observed as under: “10. As regards activity of the bio Informatics division the assessee’s claim is acceptable. The assessee company has appointed few software engineers who basically work in this division. Moreover, the classification given by the assessee about activity of bio Informatics division indicate that this division is developing applications for dissemination of R&D results of functional genomics and also this division has been maintaining and updating website facility of the company. Hence deduction under section 10 B is allowed to the profit derived from bio Informatics division.” 5.1 Ld.CIT DR submitted that this is the only relevant para observation by Ld.AO in respect of bio-informatics division and further, it does not indicate that Ld.AO has applied his mind to the documents filed by assessee, as he himself mentions that bio- informatics division indicates that this division is developing applications for dissemination of R&D results of functional genomics. 5.2 Ld. CIT DR also placed reliance upon the decision of Hon’ble

ITA Nos.868 & 869(B)/2016 20

Supreme Court in case of Malabar industrial Co Ltd vs CIT (supra), wherein Hon’ble Court emphasised as under: 7. There can be no doubt that the provisions cannot be invoked to correct each and every type of mistake or error committed by the assessing officer; it is only when an order is erroneous that the section will be attracted. An incorrect exemption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category falls orders passed without applying the principles of natural Justice or without application of mind.”

She submitted by placing reference to para 10 of assessment order that Ld.AO did not apply his mind to the facts of case, and therefore order passed by Ld.AO granting deduction under section 10 B to Bioinformatics segment, is not only erroneous but also prejudicial to the interests of revenue. 6. We have perused submissions advanced by both sides in light of records laced before us. 6.1 From reasons recorded for re-opening of assessment, it is observed that assessments were re-opened in order to verify deduction claimed by assessee u/s 10B of the IT Act, in respect of both genomics and bio-informatics divisions. Ld.CIT, has observed that while passing original assessment order in respect of both years under consideration, Ld.AO failed to verify the

ITA Nos.868 & 869(B)/2016 21 factual background and functions carried by assessee under both divisions. Ld. AO in notice/questionnaire issued called for various details calling upon assessee to establish the correctness of deduction claimed u/s10B of the Act. Assessee has been called upon by Ld.AO to explain whether assessee satisfies necessary conditions u/s 10B of the Act. 6.2 It is thus, observed that Ld.AO during reassessment proceedings has called for various details to analyse, whether assessee is eligible for deduction under section 10B of the Act, for both segments, being Functional Genomics and Bioinformatics. It is observed that Ld.AO after verification of details filed by assessee disallowed deduction u/s 10B in respect of functional genomics division. It is observed that Assessee furnished various details and/documents to establish that product developed by Bioinformatics division is software, which is available on public domain the details of which are placed in the written submissions filed by assessee before Ld.CIT vide letter dated 26/03/16 at page 116-122 of paper book assessment year 2008-09 and letter dated 05/01/2016 for assessment year 2007- 08 at page 126-131 of paper book. Ld.AO referred to agreements entered into by assessee with its parent company and has called upon details from SEZ Cochin, which is placed at page 123 of paper book. It has been submitted that all these details have been verified by Ld.AO during reassessment proceedings and it was upon his

ITA Nos.868 & 869(B)/2016 22 satisfaction that Ld.AO granted deduction for Bioinformatics division whereas denied deduction under section 10 B for Functional Genomics division. 6.3 On perusal of impugned orders for assessment years under consideration, it is observed that Ld.CIT records assessee developed software i.e Vector NTI advance. However, Ld.CIT observes that there is no mention in export of the software outside India. It appears that because the service agreement does not mention any export of software outside India, Ld.CIT held order passed by Ld.AO to be erroneous and prejudicial to interest of revenue. Ld.CIT at page 4 observes as under: “…..The assessee company developed software viz., Vector NTI Advance which is used in its research activity for analysing gene sequence, protein sequence, Salic on cloning, gene expression profiling etc by using platforms like C++, Java etc. These are and the activities of assessee company itself and software which are developed are for its own research activity and only the results of this research activities exported to the parent company. The term used in section 10 B is “export computer software”. The assessee’s claim of development of software being bio infirm at a tools for its own research and development and thereafter transferring the results of the research and development through CDs cannot be

ITA Nos.868 & 869(B)/2016 23 termed as export of computer software and is only export of results of the research and development carried out by it.” Thus, there is no denial on behalf of Ld.CIT that assessee is not involved in development of software tools. However, according to Ld.CIT, exemption should be denied because assessee is exporting results of research and development carried out by Bioinformatics division. 7. At this juncture, we deem it necessary to extract observations of DRP for assessment year 2010-11, wherein reference to Circular 1 of 2013 issued by CBDT has been made, which clarifies that even if any research and development in any field is done in process of providing notified services, in particular, services of engineering and design, the same will be covered under aforesaid CBDT notification which will be eligible for 10A/10B benefit. 7.1 We notice that, although assessee conducts research and development activities, but the same is only a process step to provide final output to its parent company. It is also observed that what is developed by assessee under this segment is a customised electronic data created through various research and development. No doubt, invoices placed in paper book mentions ‘Research and Development charges’ cannot impliedly mean that activities carried on by assessee under Bio-informatics segment does not amount manufacture computer software.

ITA Nos.868 & 869(B)/2016 24 We refer to the term computer software as defined in Explanation 2 to section 10B of the Act, to mean: “(a) any computer program recorded on any disk, tape, perforated media or other information storage devices; or (b) any customised electronic Tata or any product or service of similar nature as may be notified by the board which is transmitted or exported from India to any place outside India by any means.” A co-joint reading of definition of computer software and the CBDT Circular No.1/2013 what comes to our understanding is that assessee is developing a customised software in the form of bio- infirmatics tools using platforms like C++, Java which is used to analyse gene sequence, protein sequence in Silicon Valley owning, gene expression profiling, pathways development etc, This is what Ld. AO intend from what he mentioned in para 10 of assessment order, specifically referred to by Ld. CIT DR. In our opinion Ld.AO was satisfied upon verification of documents placed by assessee at the time of reassessment proceedings. He called upon various details to verify claim of assessee under both segments. And then allowed deduction under section 10B of the Act, restricting claim only to the extent of Bioinformatics segment. Thus, we are of the opinion, that view taken by Ld.AO is a possible view. It is well settled proposition that merely because, Ld.CIT has taken different view, assessment order cannot be termed as erroneous and prejudicial.

ITA Nos.868 & 869(B)/2016 25 7.2 For section 263 to be initiated both conditions of assessment order being erroneous as well as prejudicial to the interest of revenue must be jointly satisfied. In the facts of the present case, having regards to evidences filed by assessee as analysed by Ld.AO, view adopted by Ld.AO is one of the possible views and therefore cannot be treated as erroneous. As both conditions are not satisfied in present case, we are unable to uphold proceedings under section 263. We also refer to decision of Hon’ble Bombay High Court in case of Grasim Industries Ltd vs CIT reported in 321 ITR 92, wherein Hon’ble Court by considering ratio laid down by Hon’ble Supreme Court in case of Malabar Industrial Co Ltd (supra) observed as under: “section 263 of the income tax act, 1961 empowers the Commissioner to call for and examined the record of any proceedings under the act and, if he considers that any order passed therein, by the assessing officer is erroneous insofar as it is prejudicial to the interest of the revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The keywords that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous insofar as it is prejudicial to the interest of the revenue”. The provision has been interpreted by the Supreme Court in several judgements to which it is now necessary to turn. In Malabar industrial Co Ltd vs CIT (2000) 243 ITR 83, the Supreme Court held that the provisions “cannot be invoked to correct each and every type of mistake or error committed by the assessing officer” and “it is only when an

ITA Nos.868 & 869(B)/2016 26 order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact on an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interest of the revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What is prejudicial to the interest of the revenue is explained in the judgment of the Supreme Court opened bracket head note): “The phrase ‘prejudicial to the interest of the revenue’ has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer, cannot be treated as prejudicial to the interest of revenue, for example, when an income tax officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where 2 views are possible and the income tax officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue unless the view taken by income tax officer is unsustainable in law.” This principle which has been laid down in Malabar Industrial Co Ltd (2000) 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT vs Max India Ltd (2007) 295 ITR 282.”

In the present facts of the case, Ld.CIT has not analysed activities carried on by assessee under Bioinformatics division having regards to documents filed by assessee and Circular referred and relied upon

ITA Nos.868 & 869(B)/2016 27 by assessee, as well as considered DRP order for assessment year 2010-11, on which reliance has been placed by Ld.AR. We are thus based upon aforestated observations and respectfully following ratio is laid down by Hon’ble Supreme Court (supra), hold revision proceedings under section 263 to be bad in law and the same is quashed and set-aside. Accordingly grounds raised by assessee stands allowed. In the result appeal filed by assessee stands allowed.

Order pronounced in the open court on 31-10-2019

Sd/- Sd/- (B.R.BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 31-10-2019 *am Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File

By Order Asst. Registrar

ITA Nos.868 & 869(B)/2016 28