Income Tax Appellate Tribunal - Mumbai
Pharmacetical Resear5Ch Association ... vs Assessee on 4 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "J", MUMBAI
BEFORE SHRI H.L. KARWA, PRESIDENT AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA No.3097/Mum/2007
Assessment Year : 2003-04
M/s. Pharmaceutical Research Income tax officer
Associates India Pvt. Ltd. Ward-8(3)(2)
(Formerly known as Sterling Mumbai.
Synergy Systems Pvt. Ltd.)
5, Kamdar Shopping Centre Vs.
V.S. Khandekar Marg, Vile Parle
(E)
Mumbai-400 057.
PAN :AAACS 9202 R
(Appellant) (Respondent)
ITA No.3631/Mum/2009
Assessment Year : 2005-06
M/s. Sterling Synergy Systems Dy. Commissioner of Income
Pvt. Ltd.(Now known as tax
Pharmaceutical Research Circle-8(3)
Associates (India ) Pvt. Ltd.) Mumbai.
Kamdar Shopping Centre Vs.
Office No.5 V.S. Khandekar
Marg, Vile Parle (E)
Mumbai-400 057.
PAN :AAACS 9202 R
(Appellant) (Respondent)
ITA No.7275/Mum/2008
Assessment Year : 2003-04
For M/s. Pharmaceutical Income tax officer
Research Association India Pvt. Ward-8(3)(2)
Ltd. (Formerly M/s. Sterling Mumbai.
Synergy Systems Pvt. Ltd.)
5, Kamdar Shopping Centre Vs.
V.S. Khandekar Marg, Vile Parle
(E)
Mumbai-400 057.
PAN :AABCC 2010 L
(Appellant) (Respondent)
Assessee by : Shri Dharmesh Shah
Department by : Shri Rajarshi Dwivedi
2 ITA No.3097/07, 3631/09 & 7275/08
AY .03-04, 05-06 & 03-04
Date of hearing : 04.03.2013
Date of Pronouncement : 20.03.2013
ORDER
PER RAJENDRA SINGH, AM:
These appeals by the assessee are directed against different orders of CIT(A) relating to the additions in the assessment and penalty under section 271(1)(c) for assessment year 2003-04 and relating to additions/disallowances in the assessment for assessment year 2005-06. These appeals are being disposed off by a single consolidated order for the sake of convenience.
2. We first take up the appeal of the assessee for the assessment year 2003-04 in ITA No.3097/M/07. In this appeal the assessee has raised dispute on six different grounds.
3. Ground Nos. 1 to 3 relate to legal validity of the assessment order. These grounds were not pressed before us by the ld. AR at the time of hearing of the appeal. Therefore these grounds are dismissed as not pressed.
4. Next two grounds are regarding disallowance of claim of deduction under section 10B and under section 80HHE. The assessee is engaged in three different business activities i.e. Contract Research Organization (CRO), Medical Transcription Activity(MT) and Trading and Marketing Activity. The CRO is acting as a support centre to do clinical research and trials undertaken by foreign pharmaceutical companies in India on Indian patients and provides human resource support for carrying out clinical research activity and also acts as an assembler and exporter of databases generated from the report or investigators appointed by the company. The assessee also has a State of Art medical transcription facility in which it converts medical file which is in voice form into computer generated text files. The assessee claimed deduction under section 10B and section 80HHE in respect of CRO and Medical Transcription activities whereas the trading and marketing activities were 3 ITA No.3097/07, 3631/09 & 7275/08 AY .03-04, 05-06 & 03-04 normal business activities not eligible for any special deduction. In assessment year 2003-04, the turnover and profit position in respect of three activities were as under :-
S.No. Activity Turnover (Rs.) Profit (Rs.)
1. CRO 1,40,97,760.00 83,52,977.00
2. M.T. 97,15,675.00 (-) 94,19,416.00
3. Trading & Marketing 1,42,66,440.00 95,25,725.00
4.1 The assessee had claimed deduction of Rs.75,19,697/- under section
10B of the Income tax Act out of the profit from CRO activities and resultant business income was adjusted towards the brought forward business lossess. The assessee thus declared total income at nil after setting off losses from MT activities against normal business profit. The AO observed that deduction under section 10B was available to 100% export oriented undertakings in respect of profit from export of articles or things or computer software and deduction was available only to undertakings approved by the board appointed by the government. The AO noted that the assessee had filed application for approval as 100% EOU to the director STPI on 1.12.2003 and approval had been granted only by letter dated 5.12.2003. The AO, therefore, held that the assessee was not an approved undertaking for the purpose of deduction under section 10B in assessment year 2003-04. The AO also examined the activities and noted that in the CRO unit, assessee was only acting as co-ordinator and by no stretch of imagination, the activity could be considered as manufacturing /production of computer software for which deduction under section 10B was applicable. It was observed by him that any activity carried on with the aid of computer could not be considered as eligible for deduction under section 10B as computer now a days is being used for every normal business activity such as sale & purchase of readymade garments, electronic goods, software etc and therefore it is an integral part of any normal business activity. The AO therefore held that the assessee was not eligible for deduction under section 10B. The assessee had also claimed deduction under section 80HHE in respect of CRO activities and M.T activities. The AO noted that the net result from the two activities was loss of Rs.10,66,439/- and therefore, there was no question of allowing deduction 4 ITA No.3097/07, 3631/09 & 7275/08 AY .03-04, 05-06 & 03-04 under section 80HHE. It was also held by him that all brought forward losses were required to be set off before considering the claim of deduction under section 80HHE and in view of heavy brought forward losses, claim could not be allowed on this ground also. The AO, thus rejected the claim of deduction both under section 80HHE and section 10B.
4.2 In appeal, CIT(A) agreed with AO that since there was net loss from CRO and M.T. activities, the assessee was not eligible for deduction under section 10B and section 80HHE. CIT(A) also upheld the order of AO and rejected the claim of deduction on the ground that approval of the assessee as 100% export oriented undertaking had been received only in the subsequent year. Moreover, the CIT(A) also noted that the approval had been given subject to certain conditions and assessee did not show whether those conditions were fulfilled. In relation to alternate claim of the assessee that deduction may be allowed under section 80HHE, CIT(A) agreed with the finding of the AO that the activities of the assessee were not eligible for deduction under section 80HHE which was available only if the assessee was engaged in the business of providing technical services outside India in the development and production of computer software. CIT(A) also upheld the order of AO that brought forward losses were required to be set off before considering any claim of deduction under section 80HHE. He placed reliance on the judgment of Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. vs. DCIT (266 ITR 521). CIT(A), also held that brought forward losses were required to be adjusted before allowing deduction under section 10B. As CIT(A) upheld the disallowance of claim under section 10B and section 80HHE on technical grounds, he did not consider it necessary to decide the issue whether the assessee can be considered a manufacturer/producer of computer software as the same had become academic. Aggrieved by the decision of CIT(A), assessee is in appeal before the Tribunal.
5. Before us, the ld. AR submitted that for the purpose of deduction under section 10B, each unit has to be considered as separate undertaking and deduction has to be allowed before set off of brought forward losses of 5 ITA No.3097/07, 3631/09 & 7275/08 AY .03-04, 05-06 & 03-04 non eligible units as held by the Hon'ble High Court of Bombay in the case of CIT vs. Black & Veatch Consulting (P) Ltd. (251 CTR 265). It was also submitted that in case there was loss in a unit eligible for deduction under section 10B, the same could be set off against profit of the non eligible business unit. For the said proposition, ld. AR placed reliance on the judgment of Hon'ble High Court of Bombay in the case of Hindustan Uniliver Ltd. vs. DCIT (325 ITR 102). It was pointed out that though the AO had considered the brought forward losses for the purpose of section 80HHE, CIT(A) had considered the same both in relation to deduction under section 10B and under section 80HHE. It was further submitted that though approval in case of the assessee had been granted by the competent authority in the subsequent year the same was applicable from the date of production/manufacture. It was pointed out that CIT(A) had confirmed the disallowance only on technical grounds and did not decide the issue whether the assessee could be considered as a manufacturer/producer of computer software. It was, therefore, argued that the matter requires fresh consideration by the CIT(A) in view of the judgments relied upon. The ld. DR on the other hand placed reliance on the orders of authorities below.
6. We have perused the records and considered the rival contentions carefully. The dispute raised in this appeal is regarding allowability of deduction under section 10B and under section 80HHE of the Act. Deduction under section 10B is allowable to 100% export oriented undertakings engaged in the export of articles, things or computer software and which have been approved for this purpose by the competent authority. Deduction under section 80HHE is available in respect of profit from the export of computer software or from its transmission to a place outside India or from providing technical services outside India in connection with development/production of computer software. The assessee in this case is engaged in contract research activity on behalf of the foreign pharmaceutical companies and is also engaged in medical transcription activity. The assessee claimed that these activities were eligible for deduction under section 10B or alternatively under section 80HHE. The Assessing Officer held that these 6 ITA No.3097/07, 3631/09 & 7275/08 AY .03-04, 05-06 & 03-04 activities were not eligible on which CIT(A) has given no finding as he has confirmed the disallowance on technical grounds. Both the AO and CIT(A) have clubbed both the activities for the purpose of deduction and there being net loss have not allowed the claim. It has also been held by them that brought forward losses have to be adjusted before allowing claim of deduction. They have also pointed out technical fault in the prescribed audit report not being filed. It has also been noted that the approval as EOU had been given in the subsequent year but it has not been examined as to from which date approval was applicable.
6.1 The ld. AR has pointed out that deduction under section 10B has to be allowed before setting off brought forward losses as held by the Hon'ble High Court of Bombay in the case of CIT vs. Black & Veatch Consulting (P) Ltd. (supra). The Hon'ble High Court of Bombay in case of Hindustan Uniliver Ltd. (supra), have also held that loss in eligible unit can be set off against profit of non eligible unit. However, in relation to section 80HHC, the Hon'ble Supreme Court in the case of Shirke Constructions Ltd. (292 ITR 380) have held that brought forward loss has to be adjusted before allowing deduction under section 80HHC. This judgment may be relevant in respect of claim of deduction under section 80HHE. In our view the matter requires fresh examination in the light of aforecited judgments at the level of CIT(A) who is also required to give finding on merit as to whether the activities of the assessee are eligible for deduction under section 10B and section 80HHE. Both parties had no objection if the matter was restored to CIT(A). We, therefore, set aside the order of CIT(A) and restore the issue of deduction under section 80HHE and under section 10B back to him for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee.
7. The assessee has also raised disputes regarding disallowance of expenses on purchase of CD-Roms and headphones. The ld. AR did not press this ground and, therefore, the same is dismissed as not pressed.
7 ITA No.3097/07, 3631/09 & 7275/08AY .03-04, 05-06 & 03-04
8. ITA No.3631/M/09 (Assessment Year : 2005-06) In this appeal the assessee has raised disputes on six different grounds. Grounds No.1-3 which relate to legal validity of assessment order were not pressed by the ld. AR for the assessee at the time of hearing of the appeal. These grounds are, therefore, dismissed as not pressed.
9. Grounds No. 5 and 6 relate to claim of deduction under section 10B and section 80HHE. These grounds are admittedly identical to the grounds raised in assessment year 2003-04. In fact, CIT(A) has followed the order in assessment year 2003-04. We, therefore, set aside the order of CIT(A) and restore these grounds to his file for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee.
10. Ground No.7 is regarding disallowance of computer software expenses amounting to Rs.17,160/-. The ld. AR did not press this ground at the time of hearing of the appeal and, therefore, this ground is dismissed as not pressed.
11. We are now left with only the ground No.4 which is regarding disallowance of expenses treating the same as capital in nature. The AO during the assessment proceedings noted that the assessee had incurred repair expenses of Rs.27,57,933/- at the office of the director. The AO noted that the expenditure had been incurred on account of furniture and fixtures and not on repair of the building which was capital in nature. It was observed by him that such expenditure on furniture and fixtures could not be allowed even if the same were incurred in rented premises. The AO accordingly treated the expenditure as capital in nature and allowed depreciation @ 15%, i.e., Rs.4,13,690/- and thus, balance amount of Rs.23,44,243/- was disallowed. In appeal CIT(A) observed that the assessee had not produced agreement with the landlord. He agreed with the AO that the expenditure was capital in nature and accordingly confirmed the disallowance aggrieved by which assessee is in appeal before the Tribunal.
8 ITA No.3097/07, 3631/09 & 7275/08AY .03-04, 05-06 & 03-04 11.1 We have heard both parties, perused the records and considered the matter carefully. The dispute is regarding allowability of expenses incurred by the assessee on renovation of director's office. There is no dispute that the renovation has been done in the rented premises. However in view of Explanation -1 to section 32(1) inserted from assessment year 1988-89, the capital expenditure incurred by way of renovation or extension or improvement even in rented premises has to be considered as owned by the assessee on which depreciation is allowable. Therefore, it is required to be seen whether expenditure incurred was capital in nature. We find that full details of expenditure has not been brought on record either in the order of AO or in the order of CIT(A). Further CIT(A) has also mentioned that copy of agreement with landlord had not been produced by the assessee which in our view is necessary in understanding the true nature of expenses. In our view, the matter requires fresh examination and hence we restore this issue also back to CIT(A) for passing a fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee.
12. ITA No.7275/Mum/08 (Assessment Year : 2003-04):
The dispute raised by the assessee in this appeal relates to levy of penalty under section 271(1)(c) of the Income tax Act. The AO in the assessment order had disallowed claim of deduction under section 10B amounting to Rs.75,19,697/- which had been confirmed by the CIT(A). The AO had also initiated penalty proceedings under section 271(1)(c) of the Act and levied penalty at the minimum rate of 100% of tax sought to be evaded amounting to Rs.31,73,945/-. In appeal CIT(A) confirmed the penalty aggrieved by which the assessee is in appeal before the Tribunal .
12.1 We have heard both parties, perused the records and considered the matter carefully. The dispute is regarding levy of penalty under section 271(1)(c). Penalty is in relation to disallowance of claim of deduction under section 10B amounting to Rs.75,19,697/-. We have already set aside the order of CIT(A) in relation to claim of deduction under section 10B and section 80HHE and restored the matter back to him for passing a fresh order.9 ITA No.3097/07, 3631/09 & 7275/08
AY .03-04, 05-06 & 03-04 Therefore, in our view, the issue of penalty is also required to be restored to CIT(A) for fresh decision in the light of the decision taken by him in the quantum appeal. The issue is therefore, restored to CIT(A) for fresh decision after allowing opportunity of hearing to the assessee.
13. In the result, appeals of the assessee in ITA Nos. 3097/M/07 and 3631/M/09 are partly allowed for statistical purposes whereas that in ITA No.7275/M/08 is allowed for statistical purposes.
Order pronounced in the open court on 20.3.2013.
Sd/- Sd/-
(H.L. KARWA) (RAJENDRA SINGH)
PRESIDENT ACCOUNTANT MEMBER
Mumbai, Dated: 20.3.2013.
Jv.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.