Ita/434/2019 Of M/S. Apotexpharmachem India P. Ltd v. The Deputy Commissioner Of Income Tax

I.T.A No.434/2019 C/W I.T.A No.435/2019 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 19 DAY OF APRIL, 2023 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE C.M. POONACHA I.T.A NO.434 OF 2019C/W I.T.A NO.435 OF 2019 IN I.T.A No.434 OF 2019 BETWEEN: M/S. APOTEXPHARMACHEM INDIA P. LTD., PLOT NO. 1A 4 PHASE, BOMMASANDRA INDUSTRIAL ESTATE, BENGALURU-560 099 (REPRESENTED BY ITS DIRECTOR SRI. P. YOGANJANEYA REDDY S/O SRI. P. SESHA REDDY AGED ABOUT 51 YEARS) PAN: …APPELLANT (BY SHRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR SHRI. TATA KRISHNA, ADVOCATE) AND: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 11(1), ROOM NO. 242 2 FLOOR, BMTC BUILDING 80 FT ROAD, KORAMANGALA BENGALURU-560 095 …RESPONDENT (BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL) I.T.A No.434/2019 C/W I.T.A No.435/2019 THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 08.02.2019 PASSED IN IT(TP)A NO.249/BANG/2014, FOR THE ASSESSMENT 2009-2010, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET-ASIDE THE IMPUGNED ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH IN IT(TP)A NO. 249/BANG/2014 FOR THE AY 2009-2010, IN SO FAR AS IT IS PREJUDICIAL TO THE APPELLANT AND ETC. YEAR IN I.T.A No.435 OF 2019 BETWEEN: M/S. APOTEXPHARMACHEM INDIA P. LTD., PLOT NO. 1A 4 PHASE, BOMMASANDRA INDUSTRIAL ESTATE, BENGALURU-560 099 (REPRESENTED BY ITS DIRECTOR SRI. P. YOGANJANEYA REDDY S/O SRI. P. SESHA REDDY AGED ABOUT 51 YEARS) PAN: …APPELLANT (BY SHRI. K.K. CHYTHANYA, SENIOR ADVOCATE FOR SHRI. TATA KRISHNA, ADVOCATE) AND: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 11(1), ROOM NO. 242 2 FLOOR, BMTC BUILDING 80 FT ROAD, KORAMANGALA BENGALURU-560 095 …RESPONDENT (BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL) THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 08.02.2019 PASSED IN IT(TP)A NO.2200/BANG/2016, FOR THE ASSESSMENT 2011-2012, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET-ASIDE THE IMPUGNED ORDER OF THE INCOME TAX YEAR I.T.A No.434/2019 C/W I.T.A No.435/2019 APPELLATE TRIBUNAL, 'A' BENCH IN IT(TP)A NO. 2200/BANG/2016 FOR THE AY 2011-12, IN SO FAR AS IT IS PREJUDICIAL TO THE APPELLANT AND ETC. THESE ITAs, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 28.02.2023 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S.DINESH KUMAR J, PRONOUNCED THE FOLLOWING:- JUDGMENT These two appeals by the assessee, directed against common order dated February 08, 2019 in IT(TP)A No. 156/Bang/2014 & 2200/Bang/2016 passed by the ITAT[1], have been admitted to consider following questions of law: i)Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying deduction under Section 10B on the basis of its perverse finding that the approval obtained from Development Commissioner as ratified by the Board constituted under Industries (Development and Regulation) Act, 1951, is not in order? case, the Tribunal is right in law in denying deduction under Section 10B on the basis of its perverse finding that the approval obtained from Development Commissioner as ratified by the Board constituted under Industries (Development and Regulation) Act, 1951, is not in order? ii) Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying deduction under Section 10B on the basis that the R&D and the associated manufacturing are two distinct and separate activities? case, the Tribunal is right in law in denying deduction under Section 10B on the basis that the R&D and the associated manufacturing are two distinct and separate activities? 1Income Tax Appellate Tribunal I.T.A No.434/2019 C/W I.T.A No.435/2019 ii) Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying deduction under Section 10B on the basis that the R&D and the associated manufacturing are two distinct and separate activities? case, the Tribunal is right in law in denying deduction under Section 10B on the basis that the R&D and the associated manufacturing are two distinct and separate activities? 1Income Tax Appellate Tribunal I.T.A No.434/2019 C/W I.T.A No.435/2019 iii)Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in denying the deduction under Section 10B when the Appellant is engaged in manufacture or production of an article or a thing or computer software?case, the Tribunal is right in law in denying the deduction under Section 10B when the Appellant is engaged in manufacture or production of an article or a thing or computer software? iv)Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in failing to adjudicate the ground on short credit of Tax deducted at source?case, the Tribunal is right in law in failing to adjudicate the ground on short credit of Tax deducted at source? 2. Heard Shri. Chythanya K.K, learned Senior Advocate for the Assessee and Shri K.V. Aravind, learned Senior Standing Counsel for the Revenue. 3. Brief facts of the case are, assessee is a Private Limited Company and subsidiary of M/s. Apotex Pharmaceutical Holdings Inc. It is engaged in R&D[2]services and manufacturing of APIs[3]M/s. ApotexPharmachem Inc, Ontario. Assessee filed its revised returns for the A.Y.[4] 2009-10 declaring income of Rs. 38,58,336/- and returns for A.Y. 2011-12 declaring income of Rs. 4,74,49,377/-, after claiming deduction to 2 Research and Development 3 Active Pharmaceutical Ingredients 4 Assessment Year I.T.A No.434/2019 C/W I.T.A No.435/2019 5 under Section 10B of the Income Tax Act, 1961[5] in respect of manufacturing and R&D activities. 4. A draft assessment order was passed for A.Y.2009-10 and a final assessment order was passed for A.Y. 2011-12 by AO[6], wherein the AO denied the claim under Section 10B of the Act holding that R&D activities do not amount to manufacturing or production of an article and assessee would be eligible for claim of deduction from A.Y. 2012-13. 5. Aggrieved by the draft assessment order passed for A.Y. 2009-10, assessee filed its objection before the DRP[7]. However, the DRP confirmed the findings of the AO and rejected the grounds of objections holding that manufacturing and R&D does not constitute a coherent or integral part to qualify for deductions of profits and gains under Section 10B of the Act. The AO 5 ‘the Act’ for short 6 Assessing Officer 7 Dispute Resolution Panel I.T.A No.434/2019 C/W I.T.A No.435/2019 6 passed the final assessment order[8] under Section 143(3) read with Section 144C(5) of the Act denying the deduction claimed under Section 10B of the Act along with certain other additions/disallowances. Aggrieved, Revenue filed an appeal[9] before the ITAT against deletion made by the DRP on certain transfer additions. The assessee filed a cross appeal[10], against the denial of deduction claimed under Section 10B of the Act and other grounds. 6. Aggrieved by the final assessment order passed for A.Y.2011-12, assessee preferred an appeal[11]before CIT(A)[12]. CIT(A) vide order dated August 18, 2016, allowed assessee’s appeal holding that assessee is eligible for claim of deduction under Section 10B of the Act. Challenging CIT(A)’s order, Revenue filed its appeal[13]. 8 Dated 31.01.2014 9 IT(TP)A No. 156/B/2014 10 IT (TP) A No. 249/B/2014 11 ITA No. 336/CIT(A)-1/CO/14-15 12 Commissioner of Income Tax (Appeals) 13 ITA No. 2200/Bang/2016 I.T.A No.434/2019 C/W I.T.A No.435/2019 7 6. Aggrieved by the final assessment order passed for A.Y.2011-12, assessee preferred an appeal[11]before CIT(A)[12]. CIT(A) vide order dated August 18, 2016, allowed assessee’s appeal holding that assessee is eligible for claim of deduction under Section 10B of the Act. Challenging CIT(A)’s order, Revenue filed its appeal[13]. 8 Dated 31.01.2014 9 IT(TP)A No. 156/B/2014 10 IT (TP) A No. 249/B/2014 11 ITA No. 336/CIT(A)-1/CO/14-15 12 Commissioner of Income Tax (Appeals) 13 ITA No. 2200/Bang/2016 I.T.A No.434/2019 C/W I.T.A No.435/2019 7 7. ITAT, by its common impugned order for A.Y.2009-10 and A.Y.2011-12, partly allowed Revenue’s appeal for A.Y.2009-10 with respect to transfer pricing and allowed Revenue’s appeal for A.Y.2011-12. The ITAT partly allowed assessee’s cross appeal, however, denied the deduction under Section 10B of the Act. Aggrieved by the said order, assessee has preferred these appeals. 8. Shri. Chythanya, for the Assessee, praying to allow the appeals, submitted that: the ITAT has erred in holding that R&D activity and manufacturing activity are two distinct activities for the purpose of Section 10B of the Act; the ITAT has erred in holding that R&D activity and manufacturing activity are two distinct activities for the purpose of Section 10B of the Act; as per Section 10B of the Act, assessee has been approved as an 100% EOU[14] for 'Research & Development centre with an associated production facility of Chloro Benzene and other chemicals by the Development Commissioner as per Section 10B of the Act, assessee has been approved as an 100% EOU[14] for 'Research & Development centre with an associated production facility of Chloro Benzene and other chemicals by the Development Commissioner 14 Export-oriented Undertaking I.T.A No.434/2019 C/W I.T.A No.435/2019 vide order[15] dated 31.08.2004 and the same was ratified by the Board appointed under Industries (Development and Regulation) Act, 1951[16]. Hence, assessee has satisfied the requirement of Explanation 2(iv) to Section 10B of IT Act; there is no mandate under Section 10B of the Act that there can be only one segment in an EOU. In the absence of any such condition, it is impermissible to introduce any condition to deny the benefit as held in Virmani Industries[17]; that there can be only one segment in an EOU. In the absence of any such condition, it is impermissible to introduce any condition to deny the benefit as held in Virmani Industries[17]; the ITAT has ignored the words ‘with an associated' used between "Research & Development Centre". The words "production facility of Chloro benzene and other chemicals make it clear that both are considered as related activities; the ITAT has ignored the words ‘with an associated' used between "Research & Development Centre". The words "production facility of Chloro benzene and other chemicals make it clear that both are considered as related activities; assessee is engaged in the business of exporting of collaborative research in customized electronic assessee is engaged in the business of exporting of collaborative research in customized electronic 15 Order No. 1/19/2004:EOU/CSEZ/3702 16 ‘the IDR Act’ for short 17 [1995] 216 ITR 607 (SC) 17 [1995] 216 ITR 607 (SC) I.T.A No.434/2019 C/W I.T.A No.435/2019 data which falls under the ambit of "computer software" as defined in clause (b) of item (i) of Explanation 2 to Section 10B of the Act; assessee is engaged in the business of exporting of collaborative research in customized electronic assessee is engaged in the business of exporting of collaborative research in customized electronic 15 Order No. 1/19/2004:EOU/CSEZ/3702 16 ‘the IDR Act’ for short 17 [1995] 216 ITR 607 (SC) 17 [1995] 216 ITR 607 (SC) I.T.A No.434/2019 C/W I.T.A No.435/2019 data which falls under the ambit of "computer software" as defined in clause (b) of item (i) of Explanation 2 to Section 10B of the Act; Explanation 2(i)(b) to Section 10B of the Act grants power to CBDT[18] to notify certain service of customised electronic data or any products or services to mean the Computer Software eligible for deduction. In this regard, CBDT has notified information technology enabled products or services vide Notification[19] dated September 26, 2000; Explanation 2(i)(b) to Section 10B of the Act grants power to CBDT[18] to notify certain service of customised electronic data or any products or services to mean the Computer Software eligible for deduction. In this regard, CBDT has notified information technology enabled products or services vide Notification[19] dated September 26, 2000; assessee carries out Engineering and Design assessee carries out Engineering and Design services. The CBDT vide Circular[20] dated January 17, 2013 has clarified that the services of ‘Engineering and Design’ do have in-built elements of ‘R&D’; 17, 2013 has clarified that the services of ‘Engineering and Design’ do have in-built elements of ‘R&D’; assessee’s activities constitute (a) manufacture assessee’s activities constitute (a) manufacture or production of an article or thing or 18 Central Board of Direct Taxes 19 No. S.O. 890(E) [No. 11521 (F. No. 142/49/2000-TPL)] 20 No. 1/2013 20 No. 1/2013 I.T.A No.434/2019 C/W I.T.A No.435/2019 10 (b) Engineering & Design. They qualify as export of 'computer software' under Explanation 2(i)(a) to Section 10B of the Act; "Computer Programmes" under Explanation 2(i) of Section 10B prior to Act, 2000 had an enhanced scope and also included "processing or management electronic data". Assessee’s activity of receiving the raw inputs from the clients, processing them and capturing the end result in research reports, being used as output is covered within the "processing managing of the electronic data" as per the Explanation 2(1)(a) of Section 10B of the Act read with Section 10BB. enhanced scope and also included "processing or management electronic data". Assessee’s activity of receiving the raw inputs from the clients, processing them and capturing the end result in research reports, being used as output is covered within the "processing managing of the electronic data" as per the Explanation 2(1)(a) of Section 10B of the Act read with Section 10BB. 9. In support of his contentions, Shri. Chyanthanya has placed reliance upon The I.T.A No.434/2019 C/W I.T.A No.435/2019 11 Commissioner of Income-Tax Vs. M/s. GE India Technology Center Pvt Ltd.[21] 10. Shri. K.V. Aravind, for the Revenue, supporting the ITAT’s order submitted that: the activities of R&D do not fall within manufacturing or production as contemplated under Section 10B of the Act; manufacturing or production as contemplated under Section 10B of the Act; assessee is neither engaged in the business of production nor manufacturing of computer software; assessee is neither engaged in the business of production nor manufacturing of computer software; the circular does not apply to assessee’s case because it clearly says that R&D would fall within the computer software; the circular does not apply to assessee’s case because it clearly says that R&D would fall within the computer software; the activities carried out by assessee does not fall within the meaning of computer software for the activities carried out by assessee does not fall within the meaning of computer software for the purpose of Section 10B of the Act; assessee is neither engaged in the business of production nor manufacturing of computer software; assessee is neither engaged in the business of production nor manufacturing of computer software; the circular does not apply to assessee’s case because it clearly says that R&D would fall within the computer software; the circular does not apply to assessee’s case because it clearly says that R&D would fall within the computer software; the activities carried out by assessee does not fall within the meaning of computer software for the activities carried out by assessee does not fall within the meaning of computer software for the purpose of Section 10B of the Act; 21 ITA No. 11/2014, decided on 09.04.2021 in batch appeal ITA No. 727/2017 (M/s. Marmon Food and Beverage Technologies India (P) Limted Vs. The Income Tax Officer) 727/2017 (M/s. Marmon Food and Beverage Technologies India (P) Limted Vs. The Income Tax Officer) I.T.A No.434/2019 C/W I.T.A No.435/2019 the Development Commissioner has granted permission specifically in respect to R&D activity for chloro benzene and other chemicals and not for R&D activities in general. With these submissions, Shri. K.V.Aravind prayed for dismissing the appeal. 11. We have carefully considered the rival contentions and perused the records. 12. Undisputed facts of the case are, assessee is a Private Limited Company, engaged in two activities namely, R&D activities and manufacturing of pharmaceutical products. It is an 100% EOU. The activities carried out by assessee are development of synthetic chemical processes in the field of APIs, development and preparation of DMF[22], and analytical services like stability studies, validation studies, analytical 22 Drug Master File I.T.A No.434/2019 C/W I.T.A No.435/2019 13 method development and exporting of collaborative research in customized electronic data. 13. The argument of Shri. Chythanya in substance is, assessee has been approved as 100% EOU for R&D Centre with an associated production facility of Chloro benzene and other chemicals and the same has been ratified by the Board[23]. Assessee is engaged in the business of exporting of collaborative research in customized electronic data which falls within the ambit of "computer software" under Section 10B of the Act. 14. Revenue’s contention is, R&D activities carried out by the assessee do not fall within manufacturing or production and assessee is not involved in the business of production or manufacturing of computer software as required under Section 10B of the Act. Hence, assessee is not eligible for deduction under Section 10B of the Act. 23 Appointed under Industries (Development and Regulation) Act, 1951 I.T.A No.434/2019 C/W I.T.A No.435/2019 14 15. Thus, the question that falls for our consideration is, whether in the facts of this case, whether the R&D activities carried out by the assessee amounts to manufacturing or production of computer software and the same is eligible for claim of deduction under Section 10B of the Act? 16. Section 10B of the Act reads as follows: “10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee: Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years: I.T.A No.434/2019 C/W I.T.A No.435/2019 Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years: I.T.A No.434/2019 C/W I.T.A No.435/2019 [Provided that for the assessment year beginning on the 1[st] day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:] Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1[st] day of April and subsequent years: [Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.] (2) This section applies to any undertaking which fulfils all the following conditions, namely:- (i) it manufactures or produces any articles or things or computer software; (ii) it is not formed by the splitting up, or the reconstructions, 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 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.” I.T.A No.434/2019 C/W I.T.A No.435/2019 16 17. Theabove provision is a special provision in respect of a newly established 100% EOU’s. Assessee’s specific case is that it is an 100% EOU and exports collaborative research in customized electronic data. We may record that it is not disputed by the Revenue that assessee does not exports the collaborative research in customized electronic data. 18. Shri. Chythanya has placed reliance upon Mormon Food and Beverage Technologies India (P) Limited Vs. The Income Tax Officer and connected cases[24]and argued that the activities carried out by assessee are identical to the one in the case of M/s. GE India Technology Centre Pvt Ltd[25] which is also decided in the same batch of appeals. We have perused the said judgment of this Court. In para 27 to 29 of the judgment it is held as follows: “27. In the considered opinion of this Court, the term ‘computer software’ means; 24 ITA No. 727/2017 decied on 9.04.21 25 ITA No. 11/2014 I.T.A No.434/2019 C/W I.T.A No.435/2019 (a) a set of instructions expressed in words, code, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result; (b) a sequence of instructions written to perform a specified task for a computer. The same programme in its human-readable source code form, from which executable programmes are derived, enables a programmer to study and develop its algorithms; (c) a set of ordered instructions that enable a computer to carry out a specific task; (d) written programmes or procedures or rules and associated documentation pertaining to the operation of a computer system; 24 ITA No. 727/2017 decied on 9.04.21 25 ITA No. 11/2014 I.T.A No.434/2019 C/W I.T.A No.435/2019 (a) a set of instructions expressed in words, code, codes, schemes or in any other form capable of causing a computer to perform a particular task or achieve a particular result; (b) a sequence of instructions written to perform a specified task for a computer. The same programme in its human-readable source code form, from which executable programmes are derived, enables a programmer to study and develop its algorithms; (c) a set of ordered instructions that enable a computer to carry out a specific task; (d) written programmes or procedures or rules and associated documentation pertaining to the operation of a computer system; 28. In the present case the appellant/assessee gets the inputs from its customers. Such inputs are received by it in electronic form. The assessee manipulates the inputs in the desired manner and generates output for being sent back to the customer. The output that goes to the customer is again in the electronic form and therefore, the output generated by the assessee has to be treated as customized electronic data. The activities of the assesseee certainly fall within the meaning of the phrase "processing or management of electronic data “ and therefore, the same has to be regarded as computer software keeping in view the ambit of Explanation 2(i)(a) to Section 10B of the IT Act. [See: ITO v. E-Infochips I.T.A No.434/2019 C/W I.T.A No.435/2019 18 Ltd., (2009) 124 TTJ (Ahmedabad) 176; DCIT vs. Tecnimont ICB (P) Ltd., (2009) 123 TTJ (Mumbai) 680/ (2010) 2 ITR (Trib) 480 (Mumbai); Cybertech Systems & Software Ltd., vs. ACIT (2006) 7 SOT 230 (Mum.)]. 29. The activities carried out by the assessee like analyzing/duplicating the reported problems, developing and building, testing products, carrying out tests, design and development are to be treated as falling within the scope of Section 10B with or without the aid of Section 10BB of the IT Act. Thus, the assessee is certainly eligible for deduction under Section 108 of the IT Act.” 19. Furtherin para 32, this Court has held that even if it is presumed that the assessee is in the business of industrial research and development for its principal, the same is ultimately a part of preparing a software or customized electronic data exported to its customers. We may further record that in para 39 & 40 this Court has held that the circular dated 17.01.2013 issued by CBDT made it clear that R&D activities would fall within the meaning of ‘Engineering and Design’ which would entitle deduction under Section 10B of the Act. We respectfully follow the said judgment. I.T.A No.434/2019 C/W I.T.A No.435/2019 19 20. In view of above discussion, these appeals merit consideration. 21. Hence, the following: ORDER i) Appeals are allowed. ii)The Order passed by ITAT in IT(TP)A No. 156/Bang/2014 & 2200/Bang/2016 dated February 08, 2019 is set-aside. iii)The substantial questions of law are answered in the favour of assessee and against the Revenue. No costs. Sd/-JUDGE Sd/- JUDGE SPS