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Income Tax Appellate Tribunal, “SMC-A” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV
Per Sunil Kumar Yadav, Judicial Member
These appeals are preferred by the assessee against the respective orders of CIT(A) for the assessment years 2006-07 and 2011-12 respectively. These appeals were heard together. Therefore, these appeals are disposed off through this consolidated order. However, I prefer to adjudicate these appeals one after the other.
ITA No.1810/Bang/2017
This appeal is preferred by the assessee against the order of the CIT(A), inter alia, on following grounds:
The Order of the Learned Commissioner (Appeals) in so far as it is prejudicial to the interest of the Appellant is not justified in law and on facts and circumstances of the case. 2. As regards, reopening of assessment beyond time limit prescribed under proviso to Section 147 of the Act:
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1. The Learned CIT(A) is not justified in upholding the action of the Learned Assessing officer in reopening the assessment beyond the time limit prescribed under Section 147 of the IT Act. 2.2. The Learned CIT(A) has failed to appreciate that the assessment has been reopened on the basis of findings recorded by the Addl. CIT for the Assessment year 2009-10, which cannot be considered as a failure on the part of the assessee to disclose fully and truly all the materials facts necessary for the assessment. 2.3. The finding of Learned CIT(A) that the appellant misrepresented the facts with regard to the nature of business activities carried out by it is perverse being based on surmises and conjectures and without bringing out any evidence whatsoever against the appellant. 2.4. Without prejudice to the above, the Learned CIT(A) has failed to appreciate that even if the reassessment is initiated after the expiry of four years, it is the Assessing Officer who has to establish that there was failure on the part of assessee to disclose fully and truly all material facts for the relevant year. In the absence of the same as is clear from the reasons, reassessment proceeding is invalid. 2.5. The learned lower authorities are not justified in failing to appreciate that Section 149 governs that field which is not covered by proviso to Section 147 and therefore the time limit prescribed under Section 149(1)(b) does not apply to the case of the Appellant.
As regards Learned Commissioner (Appeals) upholding the action of the Learned Assessing Officer having no reason to believe that the income has escaped assessment: 3.1. The Learned CIT(A) is not justified in upholding the re-assessment on the basis of reasons which failed the test of 'reason to believe'. 3.2. The Learned CIT(A) has failed to appreciate that the Learned Assessing officer had recorded the nature of activity of the Appellant based on which the claim under section 10B was allowed in the assessment under section 143(3) of the Act. Such being the case the Learned CIT(A) is not justified in perversely stating that the nature of business activity was not brought on record during the proceedings under section 143(3) and in sustaining re-assessment on the basis of very same nature of activity which clearly amounted to change of opinion. 3.3. The Learned CIT(A) is not justified in upholding issue of notice under Section 148 when the reasons recorded are based on the findings and borrowed satisfaction of the Learned Addl. CIT given under Section 144A of the Act for the assessment year 2009- 10.
The Learned Commissioner (Appeals) is not justified in upholding the action of the Learned Assessing Officer in disallowing the deduction of Rs. 22,77,351/- under Section 10B:
1. The Learned CIT(A) is not justified in sustaining disallowance under Section l0B based on directions issued by the Learned Addl. CIT which were confined for the assessment year 2009-10. 4.2 The Learned CIT(A) is not justified in failing to appreciate that the nature of the activity of the Appellant constitutes export of computer software as per Explanation 2(i) to
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Section 10B read with notification No. SO 890(E), dated 26.09.2000. 4.3. The Learned CIT(A) having recorded that the Appellant is engaged in the work of engineering and development involving research and development as per the specifications provided by the clients is not justified in rejecting the claim under section 10B on the premise that the said activity does not involve manufacture/ production of computer software or providing any IT enabled services. 4.4. The Learned CIT(A) is not justified in failing to consider Board Circular No. 1/2013, dated 17.01.2013 wherein it is clarified that the 'Engineering and Design' has the in- built elements of Research and Development and that any Research and Development activity embedded in the 'Engineering and Design', would also be covered under the said Notification No. SO 890(E) for the purpose of Explanation 2 to Section l0B. 4.5. The Learned CIT(A) is not justified in perversely and contrary to records, stating that the director of the company has confirmed in the statement recorded on 1.8.2011 that the appellant's activity could not be held to be in the nature of manufacturing computer software or providing any IT enabled services 4.6. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the Appellant receives the required information, specification and data in an electronic format from clients and builds the design via the processing and management of the electronic data, which is analysed and customised in accordance with the requirement of its clients, which would also fall under the categories of 'data processing', 'computer programme', 'processing and management of electronic data', Back-office operations' 'Support centre', and 'any customised electronic data' within the meaning of 'computer software' as per Explanation 2(i) to Section 10B read with Notification No. SO 890(E) dated 26.09.2000. 4.7. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the activities carried out by of the Appellant would fall within the ambit of clause (a) of item (i) of Explanation 2 to Section 10B of the IT Act, i.e., "any computer programme recorded on any disc, tape, perforated media or other information storage device", by virtue of the extended meaning of 'computer programme' provided under Section 10BB and therefore includes the processing and management of electronic data so as to qualify to be regarded as an eligible activity for the purpose of Section 10B. The final output produced by the Appellant is in an electronic format using IT enabled devices which is capable of causing a computer to perform a particular task or achieve a particular result. 4.8. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the activities of engineering and design of the Appellant are regarded as IT enabled services by NASSCOM in its publication titled as "the IT Industry in India (Strategic Review 2002)" and "CII-KPMG study of IT enabled services in India 2002". In order to perform the activities of the business, the Appellant is required to use computers and IT enabled devices. The Appellant receives input in an electronic form from its clients, which is processed using computers/computer software. The final output is created in an electronic form and is exported in an electronic format outside India. 4.9. Without prejudice to its legal contentions taken in grounds 3 to 7 above, the Learned CIT(A) ought to have appreciated that the services rendered by the Appellant to its customers contribute to the customers' productivity/ business activities and hence support the business activities of its customers, thereby qualifying as a 'Support Centre' or 'Back Office Operations' or data processing services' within the meaning of Notification No. SO 890 (E) dated 26 September 2000 for the purpose of Section 10B of the Act. 4. 10. Without prejudice to the above, the Learned CIT(A) has erred in holding that the Appellant is not engaged in the manufacture or production of any article or thing. The
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Learned Commissioner (Appeals) has failed to appreciate that the result of the activities carried out by the Appellant arc captured in CAD and other software platforms in the form of drawings and reports, bring into existence a distinct 'article or thing' so as to be entitled to deduction under Section l0B as the export of "computer software". 4. 11. The Learned CIT(A) is not justified in failing to consider the acknowledgement issued by the Development Commissioner, Cochin, SEZ to the effect that the Appellant exported computer software. 4.12. The Learned CIT(A) is not justified in failing to appreciate that the provisions of Section l0B being beneficial provisions require to be liberally interpreted so as to achieve the object for which the said Section has been enacted and he could not have denied the benefit expressly made available by introducing artificial conditions therein, as set out in Bajaj Tempo Ltd. v. CIT [19921 196 ITR 188 (SC) and CIT v Gwalior Rayon Silk Mfg. Co. Ltd [1992] 196 ITR 149 (SC). 5. The Learned CIT(A) is not justified in upholding the levy of interest of Rs.6,43,906/- under Section 234B when the aforesaid disallowance is not legally sustainable.
During the course of hearing, the learned counsel assessee invited my attention with regard to ground No. 2 through which he assailed the validity of the reopening of the assessment. It was further contended that the assessment for impugned assessment year 2006-07 was reopened after 4 years without making out the case that income has escaped assessment on account of failure on the part of the assessee to disclose the material relevant for the assessment. Therefore, reopening is bad. In support of his contention he has placed reliance upon the order of the Tribunal in the case of M/s. DHFL Vysya Housing Finance Ltd., Vs. Assistant Commissioner of Income Tax in ITA No.1416/Bang/2010 of this Tribunal in which the Tribunal, after following the various judicial pronouncements included judgments of various High Courts and Apex Court has held that if the assessment is reopened after 4 years without pointing out that income has escaped assessment on account of failure on the part of the assessee, the reopening is bad in law, therefore, the assessment framed consequent thereto deserves to be quashed.
The learned DR on the other hand has contended that since the assessee has joined the assessment proceedings, the reopening of the assessment cannot be held to be invalid.
Having carefully examined the orders of the authorities below in the light of documents available on record, I find the assessment year involved is 2006-07 and the
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assessment was reopened under section 147 of the Act by issuing a notice under section 148 of the Act on 22.03.2013. As per provisio to section 147 of the Act where an assessment under sub section 3 of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of 4 years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to notice under sub section 1 of section 142 or section 148 or to disclose fully and truly all material facts necessary for the assessment for that assessment year. Undisputedly, for the impugned assessment year, assessment under section 143(3) was completed on 25.11.2008, therefore the assessment can only be reopened in the 4 years from the end of the relevant assessment year. The impugned assessment year is 2005-06 therefore the reopening is possible only upto 31.03.2010. If the AO is required to reopen the assessment thereafter, he has to record the reasons that income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. During the course of hearing, the learned counsel for the assessee invited my attention to reasons recorded by the AO while reopening the assessment. In the entire proceedings, the AO has not made out the case that income chargeable to tax has escaped the assessment by the reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. For the sake of reference, the reasons recorded by the AO for reopening of the assessment are extracted hereunder:
“The assessee company had filed its return of income for the AY-2006-07 on 14.11.2006 declaring total income of Rs.NIL thereby claiming deduction U/s 10B of Rs.22,77,351/- on the ground that the assessee company is a 100% EOU exporting computer software/providing notified ITES. The assessment U/s 143(3)_ was made on 25- 11-2008 by accepting the NIL income declared. Subsequently, in the course of assessment proceedings for the A.Y.2009-10 in the case of the assessee itself the case selected for directions U/s 144A. In the course of 144A proceedings the Addl. CIT had brought on records lots of information about business activity of the assessee and also a statement of one of the Directors Sri. Nishant Kulkarrni was recorded. The information brought on record subsequent to completion of the assessment for A.Y.2006-07 reveal that the business activity of the assessee was in fact research and development in the field of refrigeration engineering, mechanical engineering or electrical engineering and it had not carried out any export of computer software nor carried out any notified ITES. Hence, the
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assessee company is not eligible for deduction U/s 10B and the same is wrongly allowed in the order U/s 143(3). Hence, I have reason to believe that the income of the assessee company chargeable to tax for the assessment year 2006-07 has escaped assessment within the meaning of section 147 of the I.T. Act.”
My attention was also invited to the order of the Tribunal in the case of M/s. DHFL Vysya Housing Finance Ltd., (supra) in which the Tribunal has adjudicated the identical issue and held that in the absence of specific findings in the reasons recorded for the reopening of the assessment, the reopening can be held to be invalid. The relevant observation of the order of the Tribunal is extracted hereunder:
“10. Our attention was also drawn to the decision of the Hon'ble Karnataka High Court in the case of CIT and ACIT v. Hewelett Packard Digital Global Solutions Ltd., ITA No.406 of 2007, judgment dated 19.09.2011, wherein the Hon'ble Karnataka High Court after making a reference to the decision of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. (supra) observed as follows:- "7. It is observed in the said judgment that the reason recorded by the Assessing Officer no where state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is for the Assessing Officer to disclose and open his mind through reasons. He has to speak through his reasons. It is for the Assessing Officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the-concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose, his mind. The reasons are the manifestation of the mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The order passed by the Assessing Authority did not state anywhere that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that year. All that has been stated in the order is that the assessee has appended the note and at no point of time, the assessee has disclosed as to the nexus between the amount of Rs. 10,06,617/- and the 10A unit. The disclosure has to be full and true. Both the criteria have to be met. In the assessee's case, by failing to bring out the nexus between the 10A unit and the interest income, the assessee has not discharged its responsibility of furnishing full disclosure of facts. As set out above, the note clearly sets out the interest income earned by the STP unit and the claim of the assessee for exemption under Section 10A. It is not the requirement of law that further the assessee should show the nexus between the amount claimed and 10A unit. When he has categorically stated that the interest, which is earned from STP unit, is eligible for exemption under
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Section 10A, even that ITA No. 1416/Bang/2010 nexus is manifest. The Assessing Authority has not properly applied his mind towards the statutory provisions and has not taken into consideration that the original assessment passed under Section 143(3) which was also reopened once and adjustment was made. It is for the second time, he was raising all these objections. When admittedly the second reopening of the assessment is beyond four years, under law, it is barred by time and the findings recorded by the Tribunal is legal and valid and does not suffer from any legal infirmity. In that view of the matter, no substantial question of law arises for consideration in these appeals. Accordingly, the appeals are dismissed." 11. Besides the above, several other decisions were brought to our notice on identical proposition as laid down in the aforesaid decisions. We are not making a reference to those decisions. We would, however, make a reference to the recent decision of the Hon'ble Bombay High court in the case of Lok Housing & Construction Ltd. v. DCIT, 348 ITR 335 (Bom), wherein it was observed as follows:- "The power of the Assessing Officer to reopen beyond a period of four years is even more restricted than when the reopening takes place within a period of four years of the end of the relevant assessment year. In the case of the assessee, the condition precedent to the invocation of the jurisdiction was clearly absent since there was not even an averment to the effect that there was a failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment. Thus, the Assessing Officer had clearly acted in excess of jurisdiction in purporting to reopen the assessment, beyond a period of four years for the assessment year 2004-05 by his notice."
It was thus submitted by the ld. counsel for the assessee that reopening of the assessment should be held to be bad in law, as the AO in the present case has not recorded specifically that escapement of income ITA No. 1416/Bang/2010 was due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the A.Y. 1996-97.
The ld. DR, on the other hand, relied on the order of the CIT(Appeals) and decisions referred to by him in his order. We have already seen that the decisions referred to by the CIT(A) in his order did not deal with the proviso to Sec.147 of the Act where there is no recording in the reasons recorded before reopening that there was failure on the part of the Assessee to fully and truly disclose all facts necessary for his assessment.
We have considered the rival submissions. From a perusal of the reasons recorded by the AO before issuing notice u/s. 148 of the Act, it is clear that the AO has not, in the reasons recorded, made an allegation that income chargeable to tax has escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts necessary for his assessment for the relevant assessment year. It is not in dispute that for A.Y. 1996-97, an assessment u/s. 143(3) had already been made in the case of the assessee by an order of assessment dated 31.03.1998. Admittedly notice u/s. 148 of the Act was issued on 17.03.2003 which is beyond the period of four years from the end of the relevant assessment year (1996-97). The proviso to section 147 was therefore clearly attracted. It is clear from the decision of the Hon'ble Bombay High Court as well as the Hon'ble Karnataka High Court, referred to by the ld. counsel for the assessee before us, that there should be a specific averment in the reasons recorded that escapement of
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income chargeable to tax was by ITA No. 1416/Bang/2010 reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Such an allegation is admittedly absent in the reasons recorded. The ld. CIT(A) has in his order has attempted to give different reasons for resorting to reassessment proceedings. The law is well settled that validity of initiation of reassessment proceedings have to be judged on the basis of reasons recorded by the AO and it is not possible to substitute, delete or add anything to such reasons recorded by the AO. It is also not possible to draw any inference based on the reasons not recorded. In the light of the law as laid down in the aforesaid decisions, we are of the view that initiation of reassessment proceedings by the AO in the present case is not in accordance with the law. The order of reassessment is therefore liable to be annulled and the same is hereby annulled.”
It has been repeatedly held by various judicial authorities that in the absence of proper recording of reasons that income chargeable to tax has escaped assessment by the reasons of failure on the part of the assessee to disclose fully and truly all necessary facts relevant to the assessment, reopening of assessment after 4 years is not a valid reopening and on the basis of the assessment framed consequent to the bad reopening, the assessment can be quashed. In the instant case, since the AO has not recorded the specific satisfaction that income chargeable to tax has escaped the assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, the reopening is invalid. Therefore, the assessment framed consequent to the invalid reopening deserves to be quashed. We, accordingly, quash the assessment. Since the assessment is quashed, I find no justification to deal with the other issues on merit.
ITA No.1811//Bang/2017
In this appeal, the assessee has assailed the order of the CIT(A), inter alia, on the following grounds: 1. The Order of the Learned Commissioner (Appeals) in so far as it is prejudicial to the interest of the Appellant is not justified in law and on facts and circumstances of the case. 2. The Learned Commissioner (Appeals) is not justified in upholding the action of the Learned Assessing Officer in disallowing the deduction of Rs. 13,30,220/- under Section l0B: 2.1. The Learned CIT(A) is not justified in sustaining disallowance under Section 10B based on directions issued by the Learned
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Addl. CIT which were confined for the assessment year 2009-10. 2.2. The Learned CIT(A) is not justified in failing to appreciate that the nature of the activity of the Appellant constitutes export of computer software as per Explanation 2(i) to Section l0B read with notification No. SO 890(E), dated 26.09.2000. 2.3. The Learned CIT(A) having recorded that the Appellant is engaged in the work of engineering and development involving research and development as per the specifications provided by the clients is not justified in rejecting the claim under section 10B on the premise that the said activity does not involve manufacture/ production of computer software or providing any IT enabled services. 2.4. The Learned CIT(A) is not justified in failing to consider Board Circular No. 1/2013, dated 17.01.2013 wherein it is clarified that the 'Engineering and Design' has the in-built elements of Research and Development and that any Research and Development activity embedded in the 'Engineering and Design, would also be covered under the said Notification No. 50 890(E) for the purpose of Explanation 2 to Section 10B. 2.5. The Learned CIT(A) is not justified in perversely and contrary to records, stating that the director of the company has confirmed in the statement recorded on 1.8.2011 that the appellant's activity could not be held to be in the nature of manufacturing computer software or providing any IT enabled services 2.6. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the Appellant receives the required information, specification and data in an electronic format from its clients and builds the design via the processing and management of the electronic data, which is analysed and customised in accordance with the requirement of its clients, which would also fall under the categories of 'data processing', 'computer programme', 'processing and management of electronic data’ 'Back-office operations' 'Support centre', and 'any customised electronic data' within the meaning of 'computer software' as per Explanation 2(1) to Section lOB read with Notification No. SO 890(E) dated 26.09.2000. 2.7. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the activities carried out by of the Appellant would fall within the ambit of clause (a) of item (i) of Explanation 2 to Section 10B of the IT Act, i.e., "any computer programme recorded on any disc, tape, perforated media or other information storage device", by virtue of the extended meaning of 'computer programme' provided under Section 10BB and therefore includes the processing and management of electronic data so as to qualify to be regarded as an eligible activity for the purpose of Section 10B. The final output produced by the Appellant is in an electronic format using IT enabled devic es whic h is cap able o f c aus ing a co mp uter to pe r for m a particular task or achieve a particular result. 2.8. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the activities of engineering and design of the Appellant are regarded as IT enabled services by NASSCOM in its publication titled as "the IT Industry in India (Strategic Review 2002)" and "CII-KPMG study of IT enabled services in India 2002". In order to
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perform the activities of the business, the Appellant is required to use computers and IT enabled devices. The Appellant receives input in an electronic form from its clients, which is processed using computers/ computer software. The final output is created in an electronic form and is exported in an electronic format outside India. 2.9. Without prejudice to its legal contentions taken in grounds 3 to 7 above, the Learned CIT(A) ought to have appreciated that the services rendered by the Appellant to its customers contribute to the customers' productivity/ business activities and hence support the business activities of its customers, thereby qualifying as a 'Support Centre' or 'Back Office Operations' or data processing services within the meaning of Notification No. SO 890 (E) dated 26 September 2000 for the purpose of Section 10B of the Act. 2.10. Without prejudice to the above, the Learned CIT(A) has erred in holding that the Appellant is not engaged in the manufacture or production of any article or thing. The Learned Commissioner (Appeals) has failed to appreciate that the result of the activities carried out by the Appellant are captured in CAD and other software platforms in the form of drawings and reports, bring into existence a distinct 'article or thing' so as to be entitled to deduction under Section 10B as the export of "computer software". 2.11.The Learned CIT(A) is not justified in failing to consider the acknowledgement issued by the Development Commissioner, Cochin, SEZ to the effect that the Appellant exported computer software. 2.12. The Learned CIT(A) is not justified in failing to appreciate that the provisions of Section l0B being beneficial provisions require to be liberally interpreted so as to achieve the object for which the said Section has been enacted and he could not have denied the benefit expressly made available by introducing artificial conditions therein, as set out in Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) and CIT v Gwalior Rayon Silk Mfg. Co. Ltd [1992] 196 ITR 149 (SC). 3. The Learned CIT(A) is not justified in levying interest under Section 234B of Rs.15,300/- & Section 234D of Rs.16,938/- the aforesaid disallowance is not legally sustainable.
During the course of hearing, the learned counsel for the assessee candidly admitted that this ground is covered against the assessee by the order of the Tribunal in the case of IMI R & D Centre India P. Ltd., V. ITO in ITA Nos. 560, 561, 1749 & 1750/Bang/2013 in which the Tribunal has examined the issue of claim of deduction under section 10B of the Act. Relevant observation is extracted hereunder for the sake of reference: “ 7.2 We heard the rival submissions and gone through relevant material. For claiming the deduction u/s 10B, the assesse has to establish that it has manufactured or produced articles or things or computer software, derived profits and gains from a hundred percent export-oriented undertaking on export of such articles or things or computer software. The assessee has not produced any document to prove that it has manufactured or produced articles or things or computer software. It has also
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not produced any document, invoice or sale bill towards export of articles or things or computer software which was either manufactured by it or produced by it . The assesse also not produced any certificate from any regulatory authority who verifies and certifies export of the impugned articles or things or computer software. Thus, the assessee has not established its claim u/s 10 B at all. However, from the internal evidences, ie from the Audit report enclosed with the return and from its Profit and Loss account, it is clear that the assesse was receiving fees from collaborative Research and Development. From the portion of the extracts in pages, supra, it is clear that the assesse was doing collaborative research for its principal M/s IMI Carnelius Group to enable the discovery & development of products, methods & strategies in the following areas: • Beverage dispensing • Pneumatics & actuators • Valves & controls • Display Systems For which, the input came in the form of specification document, the assessee might have carried out the testing, validation etc and gave its output ie summarized report with recommendations. For which, it was paid service charges in billable hours. On the facts and circumstances and from the above evidences, it is clear that at best the nature of the assessee’s business can be considered as a Research Collaborator “ rendering technical services” which is not within the scope of S.10B. When the assessee has not established that its output is an independent product, it is owner of it, it has exported them and earned the impugned income, the question whether it manufactured or produced articles or things or computer software etc in accordance with the requirement of S10B is nowhere in the realm and hence its claim of deduction 10B is not allowable. 08. The assessee’s claim can be examined from another angle also. The assessee has furnished a copy of development agreement dt 08.12.2005. The relevant portion is extracted as under : “THIS AGREEMENT is made on 8th December, 2005, BETWEEN:- (1) IMI CORNELIUS INC of 101 Regency Drive, Glendale Heights, IL 60139, USA ("Cornelius"); and (2)- IMI R&D CENTRE INDIA PRIVATE LIMITED of 3W Floor Entrepreneurship Centre, Indian Institute of Science. Malleswaram, Bangalore 560 012, INDIA (Developer). RECITALS The Parties wish to document in writing that the Developer provides (A) services in the term of development work to Cornelius, and has done on a regular basis since April 1, 2005, the date of incorporation of the Developer This Agreement sets out the detail of the arrangements already in existence and includes the terms on which the costs of such services are to be calculated. Cornelius wishes to commission the Developer to carry out on (B) its behalf certain development work on the terms set out in this Agreement.
(C) The Developer agrees to undertake the development work on the terms set out herein, (D) Cornelius and the Developer agree that these terms and conditions shall apply to all work undertaken by Developer for Cornelius. IT IS AGREED as follows:-
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INTERPRETATION 1.1 In this Agreement the terms set out below shall mean:-
“Cost” As defined under schedule 3, "Foreground Information" (1) all information, data, results, know-how, discoveries, reports and all deliverables and output of a Project and (2) all IPR including without limitation in relation to the above: arising or produced during the course of a Project including without limitation such of (1) and (2) above conceived, first reduced to practice or writing or developed in whole or in part during the course of a Project whether by or on behalf of the parties; “ I P R ” a n y p a t e n t , r e g i s t e r e d d e s i g n , u t i l i t y m o d e l a n d a n y application for the foregoing, copyright (Including rights in software), rights in inventions, design right, database rights, know-how and confidential information and all similar rights arising anywhere in the world; "M ilestone(s)" a date set out in a Proj ect Proposa l under Sched ule I for the completion of a stage of a Project and/or supply of deliverables: “Project” the Project(s) that the Developer proposes to undertake for Cornelius; "Project Managers project managers are as follows: Torn Glennon for Cornelius and Santhosh Kumar for the Developer; "Proj ect Proposal" a document which set outs the scope of the Project and a ll specific details in relation t o the Project including but not limited to project specification, work programme, development fees. " P roj ec t T erm " t h e p er iod f r om t h e C om m e n c e m e n t D a t e d ow n t o the completion date of a Project set out in the Project Proposal under Schedule 1 "Technology Protocol" the terms relating to the protection of Foreground Information set out at Schedule 2; " T h ird P a rt ies " a n y p e rs on w h e t h e r inc o rp o ra t e d o r no t or ot h er recognised legal entity other than the parties including without limitation consultants, suppliers, self-employed researchers and other academics or academic organisations; 2. DEVELOPER'S OBLIGATIONS The Developer shall: 2.1 Undertake the Project(s) as identified by Cornelius and meet the Milestones, Such detail of Project(s) shall be contained in the Project Proposal under schedule 1;
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TERM 3.1 Subject to the provisions for earlier termination set out herein this Agreement, this Agreement shall remain in force until the parties mutually agree to terminate it. 4. CO-ORDINATION AND REPORTING 4.1 The work under a Project shall be carried out throughout the Project Term under the personal direction of Cornelius's and the Developer's Project Manager.
P A Y M E N T S 5.1 The total Cost for a Project shall be agreed before any work can commence. 5.2 The Cost due under a Project shall be paid by Cornelius to the Developer as invoiced on a monthly basis, subject to clause 5.3. 5.3 Where payment or part payment of the Cost is dependant upon the Developer or-their subcontractor attaining a Milestone or other tasks detailed in the relevant Project Proposal no such payment shall be made by Cornelius until such time as a Milestone or other task has been met or completed to the reasonable satisfaction of Cornelius. 5.4 The Cost shall be paid by Cornelius in $ (US Dollars). 5.5 All Cost shall be calculated as detailed under the Schedule 3 Cost. 5.6 The amounts determined in accordance with Schedule 3 are exclusive of VAT and it is the responsibility of the Developer and Cornelius to ensure that the correct VAT treatment (II applicable) is applied to any charge in respect of Project or services provided. 5.7 The Cost is exclusive of any value added (or like) tax which may be payable on them and shall be paid gross without deduction of any withholding or other income taxes, Cornelius shall ensure that such sum is paid to the Developer as shall, after deduction of such withholding or other income tax, be equivalent to the-Cost otherwise payable under the Agreement ……………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………… 7. CONFIDENTIALITY 7.1 Each party shall take all reasonable steps to keep secret and maintain in confidence all confidential information disclosed to such party by the other party during the term of this Agreement and thereafter- save that this obligation of secrecy and confidentiality shall not apply to information: - 7.1.1 which at the time of disclosure to such party is in the public domain as evidenced by printed publication or otherwise; or 7.1.2 Which after disclosure to such party falls into the public domain through no fault of the party; or 7.1.3 Which such party has received permission in writing from the other party to disclose
INTELLECTUAL PROPERTY 8.1 All Foreground Information shall vest in and be owned by Cornelius immediately on its coming into existence and full details of such Foreground Information including without limitation supporting documentation information and results shall be disclosed promptly to Cornelius by the Developer upon its coming into being in accordance with the Technology Protocol, Cornelius shall he entitled to seek protection in its own name in respect of the Foreground Information anywhere in the world as it shall decide in its sole discretion. 8.2 For the avoidance of doubt all Foreground Information is and shall be treated as Confidential Information of Cornelius notwithstanding that it is conceived, developed or reduced to practice by the Developer or a Third Party. ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………….……………………
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………………………………………………………………………………………………………………… 12. CONSEQUENCES OF TERMINATION 12.1 All rights and obligations of the parties under this Agreement shall cease to have effect immediately upon the expiry or termination of this Agreement for any reason whatsoever except that expiry or termination shall not affect 12.1.1 the accrued rights and obligations of the parties in relation to this Agreement at the date of termination; and 12.1.2 the continued existence and validity of the following clauses of this agreement: Clause 1 - Definitions Clause 7 - Confidentiality Clause 8 - Intellectual Property Clause 9 Further Assurance Clause 10 Liability Clause 12 Consequences of Termination Clauses 14.1 and 14,5 - General Clause 15 - Governing Law and Jurisdiction 12.2 Upon the expiry or termination of this Agreement howsoever occasioned: 12.2.1 the Developer shall immediately deliver up to Cornelius all output and deliverables from a Project including without limitation documents, reports, data and information (whether in hard or soft copy) and any prototypes: 12.2.2 each party shall immediately deliver up to the other all property loaned or provided by the other party for the purpose of a Project; 12.2.3 all outstanding Development Fees payable by Cornelius to the Developer shall become due and payable immediately and upon the Developer complying with its obligations under clauses 12.21 and 12.2.2 herein; 12.2.4 the Developer shall not for a period of 6 months commencing on the expiry or termination of this Agreement undertake any development programme which competes with a Project and shall not assist, authorise or enable any third party to do the same.
12.3 Upon termination of Project by clause 11.2, Cornelius agree to be responsible for any costs incurred up to termination notice and also if the Developer has had to pay upfront for any services from a third party.
13 ASSIGNMENT
13.1 The Developer may not assign or transfer or purport to assign or transfer any of its rights or obligations under this Agreement, without the prior written consent of Cornelius,
13.2 Cornelius may assign or transfer to a third party its rights and obligations under this Agreement. ………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………..”
8.1 Thus, as per recitals A – the assessee is developer providing services in the form of development work to Cornelius, as per recitals B- The assessee to carry out on Cornelius behalf certain development work on the terms set out in the agreement and as per recitals D –Cornelius and Developer agree that these terms and conditions shall apply to all work undertaken by Developer (the assessee) to Cornelius . As per clauses 2& 3, the assessee shall undertake the Project(s) as identified by Cornelius and meet the Milestones, Such detail of Project(s) shall be contained in the Project Proposal under schedule 1 etc as per payment term in clause 5. Clause 8 specifies that the Intellectual property ie all Foreground Information shall vest in and be owned by Cornelius
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immediately on its coming into existence and full details of such Foreground Information including without limitation supporting documentation information and results shall be disclosed promptly to Cornelius by the Developer upon its coming into being in accordance with the Technology Protocol, Cornelius shall he entitled to seek protection in its own name in respect of the Foreground Information anywhere in the world as it shall decide in its sole discretion. Clause 8.1 states that for the avoidance of doubt all Foreground Information is and shall be treated as Confidential Information of Cornelius notwithstanding that it is conceived, developed or reduced to practice by the Developer (ie the assessee)or a Third Party (if it was engaged by the assessee).
From the above, it is clear that the assessee is merely a (developer) or a collaborator for the Cornelius or its group and it has undertaken the services required by them for which the assesse was compensated and hence it’s business can be considered as a Research Collaborator “ rendering technical services” which is not within the scope of s10B . The Cornelius or its group own the entire property including the assessee’s output or it’s so called product etc as defined in the “Foreground Information, IPR” etc under clause 1.1,supra. Thus, the assesse owns nothing which could be exported. When the assessee has not established that its output is an independent product or article or thing or computer software, it is owner of it, it has exported them and earned the impugned income, the questions whether it manufactured or produced articles or things or computer software, whether it exported them etc as required u/s10B is nowhere in the realm and hence its claim of deduction 10B is not allowable. Since the issue is decided on the peculiar facts and circumstances of this case,supra, the case laws relied on by the AR is not relevant and hence they are not dealt with. The assessee’s corresponding appeal grounds are dismissed.”
Since the Tribunal has examined the identical issue in the aforesaid cases and has taken a particular view, I find no justification to take a contrary view in this appeal under the similar set of facts.
In the result, appeal of the assessee in ITA No. 1810/Bang/2017 is allowed and ITA No.1811/Bang/2017 is dismissed.
Pronounced in the open court on 14th December, 2017.
Sd/- (SUNIL KUMAR YADAV) Judicial Member
Place : Bangalore Dated : 14/12/2017 /NS/*
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Copy to :
1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file
By order
Sr. Private Secretary, ITAT, Bangalore.