PR COMMISSIONER OF vs. M/S SYNGENE

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2ND DAY OF DECEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.184 OF 2016 BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX

(CENTRAL CIRCLE)

CENTRAL REVENUE BUILDINGS,

QUEENS ROAD

BANGALORE - 560 001. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX

CIRCLE-12(3)

BANGALORE. ... APPELLANTS (BY SRI.E.R.INDRAKUMAR SR. ADV. A/W SRI.E.I.SANMATHI ADV.,) AND: M/S SYNGENE INTERNATIONAL LIMITED BIOCON PARK PLOT NO.1 & 3 BOMMSANDRA IV PHASE JIGANI LINK ROAD BENGALURU - 99. ... RESPONDENT (BY SRI.PERCY PARDIWALLA SR. ADV. FOR SRI.T.SURYANARAYANA ADV. AND SMT.TANMAYI RAJKUMAR, ADV.) - - -

2 THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 16.09.2015 PASSED IN ITA NO.1106/BANG/2012 FOR THE ASSESSMENT YEAR 2005-06, PRAYING TO (A) DECIDE THE FOREGOING QUESTION OF LAW AND OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 16.09.2015 PASSED BY THE ITAT, 'C' BENCH, BENGALURU IN APPEAL PROCEEDINGS NO.ITA A NO.1106/BANG/2012 FOR ASSESSMENT YEAR 2005-06 AS SOUGHT FOR IN THIS APPEAL AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT IN THE INTEREST OF JUSTICE. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2005-06. The appeal was admitted by a bench of this Court vide order dated 24.10.2017 on the following substantial question of law: (i) Whether the tribunal is correct in law in setting aside the disallowance of claim under Section 10B even when the assessee has not satisfied the requirements of said provision to claim deduction under Section 10B as the assessee was not involved in

3 manufacturing activity and was formed by splitting up of existing company? 2. The factual background in which the aforesaid substantial question of law arises for our consideration needs mention. The assessee is engaged in contract research related activities. The assessee filed the return of income for Assessment Year 2005-06, in which it declared income of Rs.8,07,40,434/-. During the course of assessment proceedings, it was noted by the Assessing Officer that tax audit report filed by the assessee mentioned it to be engaged in the business of providing contract research services in the field of molecular biology and synthetic chemistry. The assessee had categorized its receipts under two heads viz., contract research fees and sale of compounds. The contract research fees received for Assessment Year 2005-06 was mentioned as Rs.55,66,99,000/-. The receipt on sale of compounds was Rs.9,49,83,000/-. The assessee had two separate and distinct units. The

4 assessee was claiming deduction in respect of Unit-I since, 1999-00 and the same was allowed to the assessee till the year 2002-03. The assessee started claiming deduction under Section 10B of the Act in respect of Unit-II for Assessment Year 2003-04. 3. The Assessing Officer by an order dated 28.12.2007 inter alia held that assessee was not engaged in the business of manufacture or production of articles or things as it is exporting the result of research which is intangible. It was further held that the chemical compounds exported by the assessee are only incidental to the research activity. The Assessing Officer further held that Unit-II was formed by splitting up of Unit-I, which was already in existence. The Assessing Officer therefore, disallowed the deduction claimed by the assessee under Section 10B of the Act to the tune of Rs.21,31,59,892/- and added it to the income of the assessee.

5 4. The assessee thereupon approached the Commissioner of Income Tax (Appeals) who by an order dated 22.06.2012 inter alia held that Assessing Officer as unable to counter the claim of the assessee that Unit- II is a distinct unit and is situate in separate premises and customers of the new unit are different from Unit-I. It was further held that output generated by the assessee in the form of research output and chemical compounds is in the nature of manufacture /production of articles or things as prescribed under Section 10B of the Act and the assessee has satisfied all the conditions to claim the deduction under Section 10B of the Act. In the result, the appeal preferred by the assessee was allowed. The revenue thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 16.09.2015 dismissed the appeal preferred by the revenue. Being aggrieved, the revenue has filed this appeal.

6 5. Learned Senior counsel for the assessee submitted that the Commissioner of Income Tax (Appeals) as well as the tribunal ought to have appreciated that deduction under Section 10B of the Act can be given only for export earnings arising out of export of article or things which were manufactured or produced by the assessee. It was further submitted that the assessee was doing research work on contract basis to non resident customers and was delivering entire intellectual property resulting out of such research work to the customers. It is pointed out that the chemical compounds, which were supplied, were only the result of such research and the earnings were not for export of the compounds but for entire research work including intellectual property embedded therein and unless export benefits were derived from manufacture of articles or things, an assessee would not be eligible for claiming deduction under Section 10B of the Act and the only exception was with regard to computer software.

7 6. It is contended that the work done by the assessee is not different from works contract, under which a particular research is carried out, tested and finally handed over in to-to to the client and the aforesaid activity of the assessee does not amount to manufacture / production and research activity per se cannot be treated as manufacturee. It is also pointed out that the assessee had no ownership on the compounds and the money received is in the nature of fees for services provided and not for any manufacture. It is also urged that the assessee did not comply with the mandatory conditions prescribed under Section 10B of the Act viz., manufacture / production of any article or thing and not being formed by transfer to a new business of machinery or plant previously used for any purpose. While inviting our attention to the agreement, it has been contended that the agreement does not contain any stipulation with regard to sale of any compound except a clause regarding shipment of the

8 compounds. 7. The assessee could not be considered as an unit independently set up since, Unit-II was formed by splitting up of business, which was already in existence. It is also urged that assessee was a pure research organization and the compounds which resulted out of the research were only incidental and therefore, the essential condition with regard to manufacture as prescribed under Section 10B of the Act is not satisfied by the assessee and under the agreement, the payments were made to the assessee for the research done on contract basis. It is also urged that Commissioner of Income Tax (Appeals) as well as the tribunal grossly erred in holding that there is a production or manufacture in the nature of compounds. It is also urged that the foreign exchange earned by the assessee was from rendering research activity and not from export of any article and the approval granted by the prescribed authority does not automatically make

9 the assessee entitled to claim deduction under Section 10B of the Act. It is also pointed out that the activities of the assessee are not covered by the expression 'manufacture' which has been defined in Section 2 (29BA) of the Act. Alternatively, it is contended that since, the tribunal has not given any finding whether or not Unit-II came into existence by splitting up of the business, the matter deserves to be remitted to the tribunal. It is also urged that exemption provision should be interpreted strictly and since, the assessee has not fulfilled the condition to claim exemption, it is ineligible to claim exemption. In support of aforesaid submissions, reliance has been placed on decision of the Supreme Court in 'COMMISSIONER OF CUSTOMS (IMPORT) MUMBAI VS. DILIP KUMAR & CO.', (2018) 68 GST 239.

10 research and Commissioner of Income Tax (Appeals) as well as the tribunal have concurrently found that the activities of the assessee is in the nature of manufacture /production of articles or things as prescribed under Section 10B of the Act and the assessee has complied with all the conditions prescribed under Section 10B of the Act and is eligible for deduction under Section 10B of the Act. It is also urged that Unit-I had started claiming benefit of deduction under Section 10B of the Act for a period from 1999-00 till 2002-03 which had admittedly being allowed by the revenue and therefore, the revenue cannot be permitted to take different stand for subsequent years. It is urged that concurrent findings of fact are recorded in favour of the assessee and even in the memo of appeal no perversity in respect of aforesaid concurrent finding of fact has been pleaded. It is also urged that the Commissioner of Income Tax (Appeals) had recorded a finding regarding splitting up of the business of the units in favour of the assessee and while

11 pointing out to the memo of appeal filed by the revenue before the tribunal, it is submitted that the aforesaid finding has not been assailed before the tribunal, therefore, there is no need for remand of the matter to the tribunal. Learned Senior counsel has taken us through the order passed by the Commissioner of Income Tax (Appeals) as well as the order passed by the tribunal and has placed reliance on decisions in 'T.SATISH U.PAI VS. COMMISSIONER OF INCOME-TAX', (1979) 1 TAXMAN 123 (KAR.), 'COMMISSIONER OF INCOME-TAX-IV, TAMIL NADU VS. B.SURESH', (2009) 178 TAXMAN 457 (SC), 'COMMISSIONER OF INCOME- TAX VS. PEERLESS CONSULTANCY & SERVICE (P.) LTD', (2001) 116 TAXMAN 13 (SC), 'COMMISSIONER OF INCOME-TAX-V-, NEW DELHI VS. ORACLE SOFTWARE INDIA LTD.', (2010) 187 TAXMAN 275 (SC), 'COMMISSIONER OF INCOME-TAX VS. INDIAN ALUMINIUM CO. LTD.', (1977) 108 ITR 367 (SC).

12 9. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note relevant extract of Section 10B of the Act, which reads as under: 10B. 5 Special provision in respect of newly established hundred per cent export- oriented undertakings' (1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export- oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee. (2) This section applies to any undertaking which fulfils all the following conditions, namely:- (i) it manufactures or produces any article or thing; (ia) 7 in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994 , its exports of such articles and things are not

13 less than seventy- five per cent of the total sales thereof during the previous year;] (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.- The provisions of Explanation 1 and Explanation 2 to sub- section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (ii) of that sub- section.

Thus, from perusal of aforesaid provision, it is axiomatic that assessee has to satisfy the following

14 conditions in order to claim deduction under Section 10B of the Act viz., (i) Manufacture or production of any article or thing or computer software; (ii) not being formed by the splitting up, or the reconstruction, of a business already in existence; (iii) not being formed by the transfer of a new business of machinery or plant previously used for any purpose.

15 examined the issue of manufacture / production of any article or thing and after referring to various decisions has recoded a finding that the activity of the assessee amounts to manufacture / production of articles or things. The Commissioner of Income Tax (Appeals) has recorded following reasons for arriving at the conclusion that the assessee is entitled to benefit of Section 10B of the Act in para 10 of its order, which is reproduced below for the facility of reference: (i) Though the A.O. stated that Unit-II of the appellant company was established by splitting up of the existing Unit-I, the Assessing Officer was unable to counter the claims of the appellant that Unit-II is a distinct unit in a separate premises, substantial amount was invested in establishing the new unit and customers of the new unit are different from that of the Unit-I. On examination of a number of documents produced by the A.R of the appellant before me, I am convinced that Unit-II is a new unit established by the appellant, therefore, I am

16 unable to agree with the stand taken by the Assessing Officer that Unit-II was established by splitting up of the existing Unit-I. (ii) It is noticed that in respect of Unit- I, initially the appellant claimed deduction under Section 80HHC of the IT Act, 1961 and subsequently claimed deduction under Section 10B of the Act and those claims were allowed by the Department. Only in respect of Unit-II the claim of the appellant under Section 10B of the Act was denied though the activities carried on at Unit-I and Unit-II are identical. (iii) I am in agreement with the stand taken by the A.R. of the appellant that the output generated by the appellant in the form of research output and chemical compounds is in the nature of manufacture or production of articles or things as prescribed under Section 10B of the Act. The appellant had satisfied all the conditions for being eligible for deduction under Section 10B of the Act in respect of Unit-II, as the appellant made exports of chemical compounds and research output and brought foreign exchange into the country.

17 (iv) Section 10B is a beneficial provision enacted by the parliament to encourage investment and generation of employment and is a part of the broad economic development policy of the Government of India. Therefore, I am of the opinion that while examining the allowability of the deduction in the hands of the appellant one has to see whether the country is benefited by the investment made by the appellant in the said unit. On carefully examination of the facts of the case, I am of the considered opinion that the appellant is eligible for deduction under Section 10B of the Act.

(i) A specialty compound which is useful and to be used by the clients as a building block for other compounds of use in industry.

18 (ii) A specialty compound which turns out to be no good, due to lack of required properties. (iii) No compound but only certain research documentation in the nature of experimental records and laboratory notebooks, showing the results of the research which in turn show that has been empirically achieved. 12. The tribunal has held that in respect of first two contingencies, undoubtedly, there is a production or manufacture in the nature of a compound. However, in respect of third contingency by placing reliance on the decision of the Supreme Court in 'CIT VS. M.C.BUDHI RAJA AND CO.', 204 ITR 412, it has held that even in respect of third contingency, it can be held that the assessee is engaged in the activity of production. Thus, the order passed by the Commissioner of Income Tax (Appeals) has been upheld. It is pertinent to mention that in the memo of appeal filed before the tribunal, the

19 revenue has not assailed the finding recorded in favour of the assessee that there has been no splitting up of the business, therefore, the question of remitting the matter to the tribunal does not arise. 13. In ‘HERO VINOTH (MINOR) VS. SESHAMMAL’, (2006) 5 SCC 545 while dealing with the scope of Section 260A of the Act, it was held that this court will not interfere with findings of the court, unless the courts have ignored material evidence or acted on no evidence or have drawn wrong inferences from proved facts by applying the law erroneously or the decision is based on no evidence. The aforesaid decisions were referred to with approval in VIJAY KUMAR TALWAR VS. CIT, (2011) 1 SCC 673 supra as well as in ‘UNION OF INDIA V. IBRAHIM UDDIN’, (2012) 8 SCC 148 and ‘MANGALORE GANESH BEEDI WORKS VS. CIT’, (2016) 2 SCC 556. It is pertinent to mention here that even in the memo of appeal, the revenue has not pointed out any perversity

20 in respect of concurrent finding of fact recorded in favour of the assessee. In view of preceding analysis, substantial question of law framed by a bench of this court is answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss