DCIT, CHENNAI vs. M/S. ALLIANZ BIOSCIENCES PVT. LTD., CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

2.1 The crux of the identical grounds raised by the Revenue in both the appeals is that:- i. The Ld.CIT(A) has erred in allowing the claim of deduction

U/s.80IB of the Act which was disallowed by the Ld.AO. ii. The Ld.CIT(A) has erred in deleting the addition made by the Ld.AO invoking Section 14A read with Rule 8D of the Act.

2.2 For the assessment year 2009-10, the Revenue has raised one more ground i.e., the Ld. CIT(A) has erred in holding that the loss incurred on sale of shares is business loss as against speculative loss U/s. Section 73 of the Act held by the Ld.A.O.

During the relevant assessment year 2009-10, the assessee had claimed deduction U/s. 80IB of the Act as it was engaged in the business of manufacturing pharmaceutical products. During the course of assessment proceedings, it was observed by the Ld.AO that in the assessee’s own case for the assessment year 2005-06 being the initial assessment year in which the deduction U/s.80IB was claimed, the Ld.Addl. CIT disallowed the claim by observing as under: a) The assessee does not possess a licence to manufacture drugs in its own name. b) The assessee is manufacturing on a “loan licence” taken from M/s. Tablets (India) Limited. c) The technical knowhow on production operation including processing, mixing, drying, compounding, filling, finishing, labelling, packaging, storage and testing in accordance with the Pharmacopoeial standards and quality specifications are prescribed by the principal manufacturer namely, M/s. Tables (India) Limited from time to time. d) The products manufactured by the assessee company are examined, inspected and tested for quality checks in accordance with the instructions and testing procedures prescribed by the principal manufacturer and reports in this regard are submitted to the principal manufacturer. e) The materials are supplied directly b y the principal manufacturer namely, M/s. Tablets (India) Limited. In other words, the raw materials are not purchased by the assessee company. f) The assessee is in receipt of only conversion charges for the work done by it on behalf of M/s. Tablets (India) Limited.

Further for the assessment year 2005-06 directions U/s.144A of the Act was sought from the Addl. Commissioner of Income Tax, Company Range I, Chennai on the claim of deduction U/s.80IB of the Act wherein he passed an order disallowing the deduction U/s.80IB of the Act. Since, the facts of the case for the relevant assessment year were identical and there were no further developments on the issue, following the order of the assessment year 2005-06, the Ld.AO disallowed the claim of deduction U/s.80IB of the Act amounting to Rs.1,33,33,418/- for the relevant assessment year 2009-10.

5.1. For the assessment year 2010-11, the assessee had claimed deduction U/s.80IB of the Act for Rs.53,79,202/-. The Ld.AO observed that the raw material used by the assessee for manufacturing his produce are bacteria like streptococcus, closterium, bacillus, lacto bacilles, etc.. The Ld.AO further opined that the constituents of the tablets produced by the assessee is immobilized living bacteria. The Ld.AO thereafter observed that the living bacteria put in a carrier material and packet in sachet or in capsules which also contains living bacteria, cannot be considered as manufacturing as per Sec 2(29)BA of the Act.

Therefore, the Ld.AO denies the deduction claimed U/s.80IB of the Act for the relevant assessment year 2010-11. This decision of the Ld.AO was also in parity with the decision for the earlier assessment year i.e., 2009-10.

5.2. On appeal, the Ld.CIT(A) for both the assessment years passed an identical order by holding the issue in favour of the assessee following the decision of the Tribunal in the assessee’s own case for the assessment years 2005-06, 2006-07 & 2008-

9. The relevant portion of the order is reproduced herein below for reference: “7.The appellant assailed the view taken on counts of (i) consistency (ii) mis-appreciation of the term 'manufacture' u/s. 2(298A). (iii) the appellant is engaged in the manufacture of drug formulation in capsules/powder through detailed

processes with a id of manpower and state )f art machinery (iv) the raw materials used are hard gelatine capsules, multiple strains of immobilized bacterial powders and excipients used all being non living objects (v) the immobilized bacterial powder cannot e considered as living object (vi) the process results in the transformation of the objects into a new and distinct object having different name, character and use (vii) the end product is the distinctly new object as it brings into existence an object with different chemical composition or integral structure (viii) the process is irreversible (ix) the product is excisable (x) it is a commercially different commodity as resulting from a manufacture as different from processing (xi) it amounts to production, if not manufacture. The appellant also placed reliance on several case laws to support its case in this regard. Among them are two of the decisions of the jurisdictional ITAT in the appellant's own case for the AY 2005-06 and 2007 in & 1366/Mds/09 and for the A.Y. 2008-09 in ITA No.28/Mds/2013.

9. The provisions u/s.80IB provide for specified deductions to an industrial undertaking which manufacture or produce an article or thing. The provisions of Sec. 2(29BA) introduced from 1.4.2009 defines manufacturing which mandates change in a non living physical object or article or thing which includes (i) resulting in transformation into a new and distinct object or article or thing having a different name, character and use or (ii) bringing into existence and distinct object or article or thing with a different chemical composition or integral structure. Various case laws have elucidated the concepts of production and manufacture. In India Cine Agencies vs. CIT (308 ITR 98), the Supreme Court held that ship breaking activity gave rise to production of a distinct and different article. It was similarly held in Vijay Ship Breaking Corporation and Others vs CIT (314 ITR 309) that conversion of jumbo rolls of photographic films into small flaps and rolls in desired sizes amounts to manufacture or production of an article or thing. Similarly, in ITO vs. Arihant Tiles and Marbles Pvt. Ltd {320 ITR 79), the Supreme Court held that conversion of marble bloc s into polished slabs and tiles amounted to manufacture or production. In CIT vs. Oracle Software India Ltd(320 ITR 546) the Supreme Court held that the process of transforming the blank or compact disc if to software loaded disc amounts to manufacture . While in CIT vs. Empee Poly-yarn Pvt. Ltd (320 ITR 665), the Supreme Court held that twisting and texturising of partially oriented yarn by thermo mechanical process which converts it into a texturised yarn amounts to manufacture.

10 The provisions of Sec.2(29BA) w.e.f. 1.4.2009 mandate change in non living physical objects or article or thing resulting in transformation into a new and distinct object or article or thing having a different name, character and use or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. The appellant manufactures capsules for M/s. Tablets India Ltd and the process of manufacturing such capsules are highly complex under controlled conditions and specialized supervision. The raw materials used undergo a metamorphic change and the final product is generically new and distinct. It is also known by a distinct name and the usage itself is different in as much that it becomes a formulated potable medicine. The introduction of provisions of Sec2(29BA) does not therefore impair the claim of the appellant. The activity of the appellant continues to be that of manufacture and production of medicines per specification. The views expressed by the Hon'ble ITAT In the appellant's own case referred in t e foregoing hold good and apply in all force. The AO, in my considered view, fell in error in applying the provisions of Sec.2(29BA) to the facts of the case.

11. Taking the sum totality of the facts and case laws into account, I have no hesitation in holding that the appellant is entitled to the claim of deduction made uhi.80lB of the Act for reasons discussed in the foregoing. This ground of appeal is allowed.”

5.3. The Ld.DR argued in support of the orders of the Ld.AO, however he could not successfully controvert to the decision arrived at by the Ld.CIT(A) who had only followed the order of the Tribunal. The Ld.AR on the other hand relied on the order of the Ld.CIT(A) in this issue.

5.4. We have heard the rival submission and carefully perused the materials available on record. The Tribunal on the earlier occasion has held the issue in favour of the assessee in and CO No.35/Mds/2013 for the assessment year 2008-09 also. The relevant portion of the order is reproduced herein below for reference:

“10. We have heard both the sides, perused the records and gone through the orders of the authorities below. The Tribunal in & 1366/Mds/2009 by order dated 19-11-2010 for the assessment years 2005-06 and 2006-07 considered the issue involved in the present appeal and allowed the appeals of the assessee by passing an elaborate order. The relevant portion of the said order is reproduced here-under : 5. We find force in the argument of the ld.AR when he states that section 80IB(13) refers to sub-sections(5), (7) to (12) of section 80IA which deal with the eligibility criteria like, computation of profits/calculation of deduction/procedure for claim of deduction applicable to an eligible industrial undertaking, meaning thereby, whatever eligibility criteria as laid down under section 80IB has to be read as complete in itself and no meaning can be imported from section 80IA for this deduction. When the eligibility criteria is clearly laid down under section 80IB itself, the explanation of section 80IA cannot override the eligibility of an industrial undertaking either u/s 80IA or 80IB or vice versa. These are to different provisions of law and cannot be mixed or substituted each other, vice versa. In our opinion, the contention of the ld.DR that Explanation below section 80IA will also apply to eligibility criteria for deduction u/s 80IB is simplistic and didactic and carries no substance therein. Section 80IA deals with deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development like industrial park, socio economic zone, generation of power or substantial renovation and modernization of existing transmission and distribution lines or laying and operation of cross country industrial gas distribution network whereas section 80IB relates to an industrial undertaking other than infrastructure development undertakings. In case we accept the contention of the ld.DR, the harmony between these two sections would become extinct which is not permissible in fiscal law. The Drugs Cosmetics Act, 1940 vide section 69A speaks of grant of loan licence to manufacture for sale or for distribution of drugs other than those specified in Schedule ‘C’. The decision of Hon'ble Jurisdictional High Court (supra) also supports our finding. There is no doubt about the fact that the assessee is engaged in systematic and organized activity of production by engaging labourers to produce the end product. The Hon'ble P&H High Court in the case cited supra has gone to the extent in holding that once it is found that the assessee is deriving income from eligible business covered by section 80IB apart from other conditions, the assessee has liberty to do manufacturing activity not only for himself but also for others and consequently profit derived from job work done for others also qualifies for deduction u/s 80IB of the Act. We have seen the copy of the loan licence enclosed in the paper book and a copy of the certificate issued by M/s Tablets (India) Ltd and so also the assessment order of the same year in the case of M/s Tablets (India) Ltd. Although these evidences may be self-serving evidences yet, in the absence of any dispute with regard to the facts mentioned above, these factors help the assessee to a greater extent to bring its claim u/s 80IB. So, it is clearly seen that u/s 80IB(4) sub-contract is not prohibited. Undisputedly, the assessee has got its factory at Pondicherry from where it carries on manufacturing activities. This company holds a licence in Form No. 24 and Form No.28 to manufacture drugs and formulations under the licence obtained in Form No.25A and Form 28A obtained by M/s Tablets (India) Ltd. A loan licence has been issued to the assessee who does not have his own arrangement for manufacture and who intends to avail facilities from other manufacturers. Hence, the entire activities are done by the assessee on behalf of the loan-licencee i.e M/s Tablets (India) Ltd. The manufacturing activities are done under the direction and supervision of technical staff who are the employees of the assessee company. There is a written agreement between the two companies which provides and prescribes the methodology of the role of M/s Tablets (India) Ltd in inspection and supervision of drugs manufactured by the assessee in order to exercise quality control by test checking which is a must in the field of drugs industry. The drugs and other formulations are sold by M/s Tablets (India) Ltd under their name. So, in a way the contractual agreement is with regard to supervision of the process by M/s Tablets (India) Ltd whereas the entire manufacturing process is being done by the assessee under his statutory obligation and as per law and as per the terms and conditions provided in the loan licence. The capacity and infrastructure regarding production of these medicines formulations and pharmaceutical formulations is not doubted by the Department. To manufacture drugs either for self or for others on a loan licence basis, getting a loan licence from the authorities is a condition precedent. In the loan licence the premises where the manufacturing activity is to be carried on has to be mentioned and in this case, it is the factory of the assessee-company. The Drug Control Department officials frequently visit and supervise/verify with regard to the prescribed standards regarding hygiene strategies and cleanliness failing which the licence can be withdrawn. In this case, undoubtedly the assessee has used its own plant and machinery, infrastructure and skilled workers for the purpose of manufacture. It has manufactured goods in its premises and has incurred substantial expenditure on infrastructure, consumables, manpower, etc. The goods manufactured have suffered excise duty under the category – Drugs and Formulations. These products are cleared through Central Excise invoices to M/s Tablets (India) Ltd after paying the relevant Central Excise Duty. The assessee has converted the raw materials received from M/s Tablets (India) Ltd into drugs and other pharmaceutical formulations. Whereas M/s Tablets (India) Ltd does not have a manufacturing unit and hence, it cannot claim deduction u/s 80IB. The ld. CIT(A) has also ascertained from the Assessing Officer through a remand report dated 25.3.2009 though M/s Tablets (India) Ltd M/s Tablets (India) Ltd has not claimed deduction u/s 80IB because they are not entitled to do so. The case before us is that as to whether the person to whom the work has been outsourced by another has to be treated as manufacturer or not. This issue is directly covered by the decision in the case of CIT vs Taj Fire Works Industries (supra) which goes in favour of the assessee. In these circumstances, we do not find any valid reason(s) to interfere in the impugned finding, hence, we confirm the same.

Since for the relevant assessment year also the issue is identical, we do not find it necessary to interfere with the orders of the Ld.CIT(A) who has only followed the earlier decisions of the Tribunal. Accordingly, we don’t find any merit in the appeal of the Revenue on this issue.

6. Ground No.2.1(ii) – Disallowance U/s.14A read with Rule 8D of the Rules:-

During the course of scrutiny assessment, it was observed by the Ld.AO that the assessee had made investments in shares and mutual funds for earning exempt income for both the relevant assessment years. Therefore he invoked the provisions of Section 14A r.w.r 8D of the Rules and made disallowance of Rs.22,585/- for the assessment year 2009-10 and Rs.1,25,613/- for the assessment year 2010-11. On appeal, the Ld.CIT(A) deleted the addition because the same issue had come up before his predecessor in the assessment year 2008-09, and the same was held in favour of the assessee vide order dated 28.09.2012 in ITA No.501/2010-11. Aggrieved by the order of the Ld.CIT(A) the Revenue is in appeal before us.

6.1 At the outset, we are reminded of the recent decision of this bench of the Tribunal in vide order dated 10.04.2017. The relevant portion of the order is reproduced herein below for reference:

“5. We have heard the rival submissions and carefully perused the materials available on record. Relying on various decisions of the higher judiciary this bench of the Tribunal on the earlier occasion in the case of Lakshmi Electrical Drives Ltd in vide order dated 23.03.2017 has held as follows:-

“The assessee had invested Rs.18.01 crores which would yield exempt income. Therefore the Ld. AO invoked the provisions of Section 14A and Rule 8D of the Rules and made addition which was subsequently confirmed by the Ld. CIT(A). At the outset, the Ld. AR submitted before us that, the entire investments, for strategically reasons, was made in subsidiary companies and it was sourced from interest free funds. The Ld. AR further argued that on several occasions, the Chennai bench of the Tribunal has held that if such investments are made in sister /subsidiary companies, the provisions of Section 14A cannot be invoked. He therefore pleaded that the addition made by invoking the provisions of Section 14A of the Act, may be deleted. The Ld. DR though opposed to the submission of the Ld. AR could not successfully controvert to the submissions. After hearing both sides, we find merit in the arguments of the Ld. AR. On several instance this bench of the Tribunal has held as what was argued by the Ld. AR. For instance in the case of M/s. Data Software Research Company

(International) Pvt. Ltd. v. ACIT, & 2170/Mds/2015 and ACIT v. M/s. Data Software Research Company (International) Pvt. Ltd., ITA Nos. 2171& 2172/Mds/2015 vide order dated 03.02.2016, this bench of the Tribunal has held as follows:

“7.We have heard both the parties and carefully perused the materials available on record. It is a normal practice to make investment in sister companies due to commercial exigencies. While doing so, no expense can be attributable other than interest expense for making such investments because all management costs will be absorbed for strategic decision making process which is allowable as business expenditure. In the case of the assessee it is submitted that no interest cost was incurred as the entire investments were made out of own funds. Further in the decision of the Tribunal in dated 06.01.2016, extracted herein below, it has been held that section 14A of the Act will not be applicable when investments are made in sister companies.

“5. We have heard both the parties and carefully perused the materials available on record. On the identical issue as pointed out by the Ld. A.R. the Chennai bench of the Tribunal in vide order dated 20/08/13 for the assessment year 2009-10 has remitted back the matter to the Ld. Assessing Officer to decide the matter once again afresh based on the findings whether the assessee had actually incurred any expenditure in earning the dividend income. The relevant portion of the order is extracted herein below for reference:-

Further, on the identical issue various Benches of the Tribunal and the Hon’ble Bombay High Court have held as follows:- i) Garware wall Ropes Ltd., Vs. ACIT reported in (2014) 65 SOT 086 (Mum.) held as follows:- “When assessee has prima facie brought out case that no expenditure has been incurred for earning income, which does not form part of total income, then in absence of any finding that expenditure has been incurred for earning exempt income provisions 14A cannot be applied..” ii) Integlobe Enterprieses Ltd., Vs. DCIT repoted in (2014) 40 CCH 0022(Del. Trib.) held as follows:-

“No disallowance of interest is required to be made under rule 8D(i) & 8D(ii) where no direct or indirect interest expenditure was incurred for making investments. Where the assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries, which was not for the purpose of earning exempt income and which was for strategic purposes only, no disallowance of interest was required to be made under Rule 8D(i) & 8D(ii) and strategic investment has to be excluded for purpose of arriving at disallowance under Rule 8D(iii).” iii) M/s.JM Financial Ltd., Vs. ACIT reported in 2014-TIOL- 202-ITAT-MUM held as follows:

“…the department has not disputed this fact out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. The assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the Assessing Officer is not justified, accordingly the same is deleted.” (iv) CIT Vs. Bharti Televenture Ltd. reported in (2011) 331 ITR 0502.

“Where the assessee was found to be having adequate non-interest bearing fund by way of share capital and reserves and there was no nexus between the borrowals of assessee and the advances given, no disallowance for interest was called for.”

(v) CIT Vs. Reliance Utilities & Power Ltd., reported in (2009) 313 ITR 0340(Bom.) has held as follows:-

“Tribunal having recorded a clear finding that the assessee possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds.”

(vi) EIH Associated Hotels Ltd Vs. DCIT reported in 2013- TIOL-796-ITAT-MAD “…. The investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. The assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore the investment made by the assessee in its subsidiary is not to be reckoned for disallowance U/s.14A r.w.r.8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company.”

Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in cited supra, we hereby remit the matter back to the file of Ld. Assessing Officer to examine the issue involved in this case afresh and pass appropriate order as per law and merits and in the light of the decisions cited herein above. While doing so, we also direct the Ld. Assessing Officer to consider the decision of the Tribunal in the case M/s Agile Electric Sub Assembly Pvt. Ltd. cited supra wherein it was held as follows:-

‘”7.2 In regard to applicability of Section 14A of the Act read with Rule 8D also; the above view will be applicable. Moreover in the case EIH Associated Hotels Ltd v. DCIT reported in 2013 (9) TMI 604 in 1624/Mds/2012 dated 17th July, 2013, it has been held by the Chennai Bench of the Tribunal as follows:- “Disallowance U/s. 14A rw Rule 8D – CIT upheld disallowance – Held that – investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment of Rs.64,18,19,775/-, Rs.63,31,25,715/- is invested in wholly owned subsidiary. This fact supports the case of the assessee that the assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investments made by the assessee in its subsidiary are not to be reckoned for disallowance U/s. 14A r.w.r. 8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company – Decided in favour of assessee.” For the above said reasons, we hereby hold that in the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee’s sister concerns. Accordingly we restrain ourselves from interfering with the Order of the Ld.CIT(A) on this regard.”

8. Therefore, following the aforesaid decision of the Tribunal, we hereby direct the learned Assessing Officer to delete the addition made on account of section 14A where investments are made in sister concerns such as equity shares and share application money. However, if the investments are made from borrowed funds, section 14A of the Act would be applicable and learned Assessing Officer shall compute the disallowance under section 14A read with rules 8D in accordance with law.”

6.1 Accordingly we hereby remit back the matter to the file of the Ld. AO to consider the issue afresh in the light of the above order of the Tribunal and pass appropriate order in accordance with merits and law. We also make it clear that for the investments made in mutual funds, provisions of Section 14A read with Rule 8D will be applicable since the assessee would incur some expenditure at least for the decision making process as to in which mutual fund the investment has to be made and at what point of time exit from such funds. It is ordered accordingly.”

Accordingly in this case of the assessee also, we hereby remit the matter back to the file of the Ld. AO for fresh consideration so as to pass appropriate Order as per merit and law and in the light of the above Order of the Tribunal.”

Accordingly we hereby remit the matter back to the file of the Ld.AO for both the relevant assessment years to decide the issue afresh in the light of the decision of the Tribunal cited herein above. It is also needless to mention that if the assessee has invested in shares and mutual funds from its interest free funds ie., from its own capital and general reserves then no cost towards interest can be assumed while computing the deduction U/s.14A r.w.r 8D(2)(i)&(ii) of the Rules.

During the relevant assessment year, the assessee declared total loss on account of sale of shares Rs.89,53,603/-.

The Ld.AO opined that since the assessee’s primary business activity is only related to pharmaceutical products and not related to buying and selling of shares, provisions of Section 73 of the Act will come into play and accordingly loss on account of sale of shares has to be treated as speculative loss and not business loss as claimed by the assessee.

7.1 On appeal, the Ld.CIT(A) held the issue in favour of the assessee by observing as under:

“25. In respect of the loss arising from sale of share and securities, the plea taken by the appellant at the stage of assessment as also at the appellate stage is that the appellant had purchased shares through the portfolio management of Kotak Security Ltd and securities from Reliance Portfolio Management Ltd. There has been actual delivery of shares and further that no shares are purchased or sold other than by way of actual delivery. What would follow is that the resultant gains or loss cannot be termed as being speculative. The AO has therefore fallen in error with regard to categorizing the loss arising from transaction in shares and securities as speculative loss instead of business loss.”

7.2 Before us the Ld.DR argued in support of the order of the Ld.AO while as the Ld.AR relied on the orders of the Ld.CIT(A).

We have heard the rival submission and carefully perused the materials available on record. Explanation to Section 73A clearly states that where any part of the business of a company consists of purchase and sale of shares of other companies shall be deemed to be carrying on speculation business other than the company whose gross total income consists mainly of income which is chargeable under the heads “interest on securities”, “income from house property”, “capital gains” and “income from other source”, “the principal business is the business of trading in shares or banking or granting of loans and advances”. In the case of the assessee the principal business is only manufacturing pharmaceutical products and therefore the Ld.AO had rightly treated the loss on sale of shares as speculative loss.

8. Since the cross objections raised by the assessee are only in support of the order of the Ld.CIT(A) for both the relevant assessment years 2009-10 & 2010-11 they are partly allowed for statistical purposes.

Order pronounced in the court on the 09th May, 2017.