Deputy Commissioner Of Income Tax ... vs M/S Apotex Pharmachem (India) Private ... on 22 February, 2019

[Cites 14, Cited by 1]

Income Tax Appellate Tribunal - Bangalore

Deputy Commissioner Of Income Tax ... vs M/S Apotex Pharmachem (India) Private ... on 22 February, 2019

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016                         Page - 1

       IN THE INCOME TAX APPELLATE TRIBUNAL
          BENGALURU BENCH 'A', BENGALURU

 BEFORE SHRI. A. K. GARODIA, ACCOUNTANT MEMBER
                        AND
      SHRI. LALIET KUMAR, JUDICIAL MEMBER

         I.T(TP).A No.156/Bang/2014 & 2200/Bang/2016
             (Assessment Years : 2009-10 & 2011-12)

Deputy Commissioner of Income-tax,
Circle - 11(1), Bengaluru                     ..    Appellant
                           v.
M/s. Apotex Pharmachem India P. Ltd,
Plot No.1A, 4th Phase, Bommasandra Industrial Estate,
Bengaluru 560099                              ..    Respondent
PAN : AACCB1658E

                   I. T (TP)A No.249/Bang/2014
                 (In I.T(TP).A No.156/Bang/2014)
                   (Assessment Years : 2009-10)
                         (By the Assessee)
Assessee by : Shri. Dinesh Bafna, CA
Revenue by : Shri. C. H. Sundar Rao, CIT - DR

Heard on : 17.01.2019
Pronounced on : 08.02.2019

                             ORDER

PER LALIET KUMAR, JUDICIAL MEMBER :

These are two appeals by the Revenue for the assessment year 2009-10 & 2011-12 and one cross appeal by the assessee for the assessment year 2009-10.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 2 Grounds of appeal raised by the Revenue for AY 2009-10 :

Grounds of appeal raised by the Revenue for AY 2011-12 :

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 3 Grounds of appeal raised by the Assessee for AY 2009-10 : IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 4 IT(TP)A.156/Bang/2014 - By the Revenue - A. Y. 2009-10:

02. Brief facts of the case are, the assessee, namely, Apotex Pharmachem India Private Limited, a subsidiary of Apotex Holdings, undertakes manufacturing of Active Pharmaceutical Ingredients ('APIs') and intermediates (hereinafter collectively referred to as Pharmaceutical products) for Apotex Group. APIPL was engaged in manufacturing intermediate products for Apotex Inc. and Apotex Pharmachem lnc.

APIPL also performs Research and Development activities ('R &D activities') on behalf of Apotex Pharmachem Inc. The R&D services are integral and is a prerequisite for undertaking manufacturing of any pharmaceutical products. The range of R&D services typically provided by APIPL include IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 5 development of synthetic chemical process in the field of active pharmaceutical Ingredient ('API'), development and preparation of Drug Master Files (DMF's), and analytical services like stability studies, validation studies, analytical method development.

Further, the R&D services performed by APIPL are in line with the main objective of the Group.

Apotex Group The Apotex Group of companies together research, develop, manufacture and market generic pharmaceutical products for the Canadian market and around the world. The Apotex Group works to ensure that every process meets the highest level of quality and customer service anywhere in the industry.

Financial Results of Apotex Research for the F.Y 2008-09 :

03. Functions performed by the assessee :

APIPL and Apotex PharmacemInc have entered into an arrangement whereby APIPL was engaged to perform R & D IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 6 activities, which are a pre-requisite for undertaking manufacturing of pharmaceutical products on behalf of Apotex Pharmachem Inc. The range of activities performed by APIPL include development of synthetic chemical processes in the field of APIs, development and preparation of Drug Master Filed (DMF's), and analytical services like stability studies, validation studies, analytical method development. Hence, the assessee rendered R & D services in this segment.

04. The TPO determined the TP adjustment u/s.92C as under :

05. Besides that in the draft assessment order, the assessee was denied the deduction u/s.10B of the Act, Assessee raised objections before the DRP. The DRP gave part relief with respect to TP adjustment and with respect to 10B deduction, there was no relief granted.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 7

06. The Ld. AR before us restricted his arguments to certain grounds of appeal and has submitted that the assessee is only insisting for exclusion of Celestial Labs Ltd and Oil Field Instrumentation (India) P. Ltd. However with respect to Tata Elxsi and TCG Lifesciences Ltd, the assessee has no objection to the finding recorded by the lower authorities. Accordingly, with respect to the TP issues we are adjudicating the exclusion of Celestial Labs Ltd and Oil Field Instrumentation (India) P. Ltd.

Celestial Lab Ltd :

07. First we shall take up the issue of exclusion of Celestial Lab Ltd. It was the contention of the assessee that this company is into software development services which is clear from the profit and loss account of the company at page 683 of the paper book and our attention was also drawn to the segmental reporting mentioned at page 689 of the paper book where it is mentioned that based on the guiding principle given in Accounting Standing on Segmental Reporting, AS XVII issued by ICAI, according to which the company's primary business segment is software development services. On the basis of the above, it was submitted that the functions performed by Celestial Lab Ltd, is not comparable with the finding of the assessee, therefore it is required to be excluded. Further the Ld. AR also relied on the decision of the sister entity in the matter of Appotex Research P. Ltd v. ITO [IT(TP)A.40/Bang/2014, dt.04.11.2016 for A Y 2009-10, wherein at para 11 and 12, at page 968 of the paper book, the Tribunal had recorded the finding to the following effect :

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 8

11. Having carefully examined the orders of lower authorities in the light of rival submissions, we find that the profile of Celestial Biolabs Ltd., IDC India Ltd. and Oil field Instrumentations (India) Ltd. were examined by the Tribunal in assessee's own case for the AYs 2007-08 & 2008-09 and the Tribunal has categorically held that these comparables cannot be considered to be good comparables for the purpose of computing the ALP, therefore, they have to be excluded from the list of comparables. The relevant observations of the Tribunal for AY 2008-09 with respect to Celestial Biolabs Ltd., IDC India Ltd. and Oil field Instrumentations (India) Ltd. are extracted hereunder:-

"15. It can thus be seen from the above that the activities of the assessee in the present case and that of Tevapharm Pvt. Ltd. are identical, i.e., both the companies carried out analytical research and stability testing services to its AEs. In the case of Tevapharm Pvt. Ltd., the TPO had selected Engineering India ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs and Mindtree Ltd., as comparable. The Tribunal examined the comparability of these companies to a company engaged in contract research & development and came to the following conclusion:-

"1. .........

3. IDC (India) Limited (IDC): IDC primarily undertakes research and survey services for products. IDC research documents cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile Usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requirements and buying patterns. Further, the areas of research include Communication Services Broadband Business, Network Services, IP based services, residential small business and wireless communications. The products and services of IDC consist of the following:

- Customised Services: IDC delivers strategic and tactical research, and consulting services to support the development and implementation of business strategies of ICT builders and providers. These projects are customised to address the client's specific business problem. The uniquely qualified, multi-disciplinary experts help you develop business IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 9 strategies, fine tune product development and pricing, define and implement marketing goals, assess competitive forces, and evaluate joint ventures and acquisitions.

- Standard research reports: These research documents cover everything in hardware-PCs, peripherals, servers, software services and key industry issues. The research reports provide market intelligence, forecasts, competitive analysis, vendor profiles, information on customer requirements and buying patterns. The frequency of standard research offerings may be monthly, quarterly, half- yearly and yearly.

Based on the above descriptions of activities undertaken by IDC it is clear that IDC engaged in providing market research and survey services which is not comparable to the functional profile of the assessee and accordingly ought not to be considered a comparable. (emphasis supplied)

4. Oil Field Instrumentation (India) Limited (Oil field):

Oil Field is the largest Mud Logging services provider in India. Oil Field offers Mud Logging services with real time data acquisition and monitoring of data with alarm on critical parameters, data storage option, computerized logs and web enabled transmission. Important parameters measured are Total Depth, Rate of Penetration, Weight on Hook, Heave, Weight on Bit, Rotation per minute, Stand Pipe Press, Stroke per minute, Mud Flow, Conductivity, Total Gas, Chromatographic analysis and H2S etc. Oil Field provides Customized Mud logging solutions for Exploratory, Developmental, Deepwater and CBM drilling locations. Oil Field is engaged in supply of equipment and rendering services mainly for geological operations for oil, gas and mineral exploration. Also as per the website of Oil Field, Oil Field provides Rig Instrumentation and services for drilling rigs like pressure indicators, diaphragms, drillers console, recorder, etc. It also provides accurate, timely and reliable drilling data. The website information also says that Oil Field's real time gas evaluation systems offer considerable accuracy that help in taking critical on site drilling decisions. It is rugged and field proven equipment, used in Exploration, Production and Refinery Sectors. Oil field IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 10 provides Gas Detection like Hydrocarbon Detector, Carbon Dioxide Detector, Hydrogen Sulphide Detector, Higher Hydrocarbons Detector, Nitrogen Detector, Sulphur Dioxide Detector, Oxygen Detector, Carbon Monoxide Detector, Hydrogen Detector, etc. The extracts of the functional profile of Oil Field from its website as given above and the information in the annual report of Oil Field on the nature of assets employed such as outer shell of mud logging units, sensors and other instruments clearly demonstrate the disparity between Oil Field's and Assessee's operations. As discussed earlier the functional profile of Assessee is in the nature of providing - Contract Research and testing services. Oil field does not carry out any of these stipulated activities and accordingly Oil field ought not to be considered a comparable. (emphasis supplied)

5. Celestial Labs Limited (Celestial Labs): According to assessee Celestial Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as rendering IT services encompassing application development and maintenance, production support, EERP, data warehousing, SAP implementation. Celestial Labs also is into manufacturing and trading of products such as ERP package for manufacturing and has a product 'Sanjivani' which is a portal for live ayurvedic consultation. The company is also engaged in the distribution of herbal ayurvedic products.

SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial is engaged in implementing SAP for customers from initial planning, design and implementation to maintenance and ongoing optimization. Celestial helps the company align IT Solutions with business strategies.

CelSanjivani Products: CelSanjivani is a part of Celestial Labs Ltd, an ISO 9001-2000 company working in this space of Bio-informatics and Gio-Technology. The goal is to become a primary market place for the herbal products providing quality products to the customers and industrial community. This is an Ayurvedic portal dedicated to B28&C market with online live consulting with our Ayurvedic IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 11 consultants. It provides excellent platform for trading of herbal products, with identification of raw herbs, scientific data, market & trade data, monographs, policy, laws, good manufacturing practices, DNA finger printing etc. It facilitates contacts with suppliers, manufacturers and dealers of herbal Pharma industry.

The activities undertaken Celestial Labs are in the nature of providing host of IT related services and some trading activity which is not comparable to the Assessee. Hence it is clear that it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable. (emphasis supplied) The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows:

"The Company as developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) Based on our in silico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable.

The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad.

The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 12 across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh."

According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard. (emphasis supplied) .............

.............

16. We are of the view that in the light of decision of the Tribunal in the case of M/s. Tevapharm Pvt. Ltd referred to above, the aforesaid companies cannot be compared as comparables. The action of the TPO in considering the aforesaid companies as comparables of the functions performed by the assessee are therefore held to be not proper and these companies are excluded for the purpose of comparability."

12. Since the profile of assessee company and the comparables remains the same and there is no change in the activities. We therefore following the order of the Tribunal in the earlier years in assessee's own case, hold that the aforesaid 3 comparables are not good comparables. Therefore, the AO/TPO is directed to exclude these comparables from the list of comparables for the purpose of computing the ALP.

On the basis of the above, it was submitted that as the Tribunal in the case of the sister concern of the assessee (supra) had examined IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 13 the functional profile of the comparable and therefore this comparable is requested to be excluded from the list of comparables.

08. Per contra, the Ld. DR had drawn our attention to the expenses at page 683, where the total expenditure incurred by the assessee was mentioned in raw material. The Ld. DR in the written submissions has mentioned as under :

During the hearing of the above appeals on 8/01/2019, Hon'ble Bench directed the undersigned to submit a note on the specific arguments made on behalf of the revenue in the course of hearing with regard to admissibility of deduction u/s 10B in respect of profits derived from R&D services purportedly carried out by the above assessee from its SEZ unit and the relevant provisions of the SEZ Act. In compliance thereto, the following submissions are made for kind consideration of the Hon'ble Bench :

1) The learned AR heavily relied on the jurisdictional ITAT's decision in the case of DClT vs Syngene International Ltd [2015] 64 taxmann.com 222 (Bangalore-Trib.) to argue that the assessee is eligible for deduction u/s 10B which the AC has denied for various reasons. The undersigned, besides highlighting the reasons elaborated by the AO in the assessment order for denial of deduction u/s 10 and making arguments in support thereof, made submissions distinguishing the facts of the assessee's case from that of the case of Syngene. Those submissions in brief are that in the case of Syngene, specific terms of R&D agreement clearly lay down that Syngene shall provide chemical research analysis, manufacturing of speciality chemical products or related services and that Syngene shall develop and provide/ship the compounds[refer page 9 of ITAT's order supra, at clauses

(d) & (h)]. The compounds are developed by conducting R&D. It was in that background the ITAT held that the agreement entered by that assessee with its customers clearly show that the parties expected definite results, be it in the nature of new or improved compounds or in the nature of research IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 14 documentation and each step that assessee had to take for achieving this result was also set out. The ITAT also took a note of the fact that the receipts are of two classes, one for research and other for sale of molecules but the export earnings were only for the results of the research.

2) On the other hand, in the assessee's case, the terms of R&D as per the agreement lay down that the assessee shall conduct research in compliance with any specifications that may be provided in writing to the assessee by the party awarding contract of research viz., Apotex, an associated enterprise. In so far as compensation for rendering R&D services, it is based on cost plus a mark-up amount as per terms in clause 3.1. So the assessee's activity as evident from the agreement is a pure research activity carried out on behalf of and as per specifications of Apotex which means that end result is not the criterion for making the payment of fees. Thus the assessee can be termed as a professional service provider in the sphere of Pharmaceutical R&D. The natural conclusion that follows is that the assessee failed to satisfy the condition of manufacture of article or thing so as to become eligible for the deduction u/s 10B on profits from R&D activity.

Another aspect argued was whether the assessee has SEZ approval in so far as claiming deduction of profit from R&D services. According to the assessee, it was registered as 100% EOU by Cochin SEZ for this activity and thus eligible for deduction u/s 10B. The assessee claims that it got approval for R&D services also vide letter dated 31.08.2004 issued by the Development Commissioner, Cochin SEZ. It is important to note that in the original letter of approval dated 16.04.2004 issued by DC, Cochin SEZ, the items of manufacture approved were Chloro Benzene and 3 other items whereas the item of manufacture was amended vide letter dated 31.08.2004 as Research & Development centre with an associated production facility of Chloro Benzene and other chemicals. Here it is relevant to point out that as per provisions of section 15 of the SEZ Act 2005, any unit intending to set up the unit in a SEZ shall submit a proposal to the concerned DC who shall put it up to the Approval Committee and upon approval by the Committee, grant a Letter of approval specifying the authorised operations. As per rule 19 of SEZ Rules also, the DC shall specify the items of IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 15 manufacture or particulars of service activity. The Letter of Approval assumes significance because any person running an approved unit within SEZ can only conduct authorised operations viz., items of manufacture specified therein so as avail the benefits under various acts. Viewed from this angle, the Letter of Approval dated 31.08.2004 cannot be interpreted to mean that approval was given for a new activity i.e. R&D services as being claimed by the assessee. The amendment letter cannot add a totally new activity without even specifying terms and conditions for that activity. Secondly, the definition of the manufacture given in clause (r) of section 2 of the SEZ Act does not envisage R&D services of the nature that are being rendered by the assessee. The mention of R&D centre in the amended letter can be reasonably understood as that the assessee has been permitted to have an R&D centre along with associated production facility of Chloro Benzene and other chemicals.

4) In the light of the above submissions, it is humbly requested that the AO's action of denial of 10B deduction in this case be upheld in the interest of justice and accordingly the appeal of the assessee be dismissed The Ld. DR had also drawn our attention to page 678 where the business analysis of the Celestial Labs Ltd, was mentioned as under:

The company has developed a de novo drug design tool "CELSUITE" to drug discovery in finding the lead molecules for drug discovery and further upgraded and optimized based on the report available from market. Further your company has developed extension of celsuite to Celtax for molecule toxicity prediction. This tool is quite helpful in preclinical trial.

Based on our in silico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favourable. The clinical study is in advance stage and molecule shall be ready for manufacturing or licensing by next year.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 16 The cloning and purification under wet lab conditions have been completed with our collaborative Institute, CCMB Hyderabad.

In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. Now your company has developed two more Industrial enzymes in house and has been validated at Department of Biotechnology JNTU Hyderabad, these 4 products shall make the investment and expansion feasible, On the basis of the above it was submitted that the company is into R & D and is therefore cannot be compared with that of the assessee.

09. We have heard the rival contentions and perused the material on record. Though this company was considered by the Tribunal in the case of sister concern (supra), but the finding recorded by the Tribunal in the said case was on the basis of the order passed by the Tribunal for the earlier assessment year in the case of the assessee. If we examine the expenditure incurred by Celestial Labs Ltd, on research and development in this year then it is clear that the R & D expenditure at a percentage of the total turnover was only 4.40% and the balance was on account of various heads mentioned under the expenditure mentioned at page 683 of the paper book. Moreover if we look into the profile of Celestial Labs Ltd, then it is clear that this company is into development of molecule to treat Leucoderma and was in the process of filing IPR for the said research. Thus this company is not only into R & D, but is also into IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 17 development of various IPRs, whereas the assessee is only into R & D of pharmaceutical products and is not into development of IPRs on research done by it. We also find that this company Celestial Labs Ltd, has also entered into technology transfer agreement with IMTECH, Chandigarh to manufacture market to namely Alpha Amylase and Alkaline Protease in India and overseas. On the basis of the above it can be safely deduced that Celestial Labs Ltd, is having multifaceted activities and is into R & D, manufacture market and also owning IPR. Thus in our view the functional profile of this company is not matching with that of the assessee. Hence this company is required to be excluded from the list of comparables. Accordingly, we direct to exclude this company from the list of comparables.

Oil Field Instrumentation (India) Ltd :

10. It was pointed out by the Ld. AR that this company had received various orders for mudlogging services for Indian as well as international markets. Our attention was drawn to page 728 of the paper book where the performance of the assessee has been mentioned as follows :

Company received various orders for Mud Logging services for domestic Market as well as International Market. These orders were received from various Public Sector undertakings as well as Multinational companies and private companies.

Order for supply of equipment for SCADA Project which was executed completely by providing balance Real time Gas Evaluation Systems and Mud Logging Software Licenses during 2007-08. The Installation and Commissioning of the systems is in progress as per the schedule drawn by ABB Ltd which they IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 18 are working out in consultation with ONGC for their Onshore & Offshore drilling Rigs.

As far as International Market is concerned Syria contract got over in Sept, 2009 Oman Mud Logging operations are going through out while Iran project started in June 08.

During the year the company also received repeat order for Mud Logging Services from TTOPCO, Iraq and extension of contracts received from Medco (Oman), ONGC (MUMBAI) and British Gas. Efforts in enhancing the company's business internationally have continued to remain aggressive in countries of interest i.e. in Middle East countries etc., It was submitted by the Ld. AR that this company was considered by the coordinate bench in the matter of the sister concern of the assessee (supra) at pages 960 to 980 of the paper book, where this company was excluded from the list of comparables.

11. Per contra the Ld. DR had relied upon the order passed by the lower authorities.

12. We have heard the rival contentions and perused the material on record. The functions performed by Oil Field Instrumentation (India) Ltd, during the current year continues to be the same as it was doing in the earlier year 2008-09, which was so mentioned by the Tribunal, though in the matter of sister concern (supra). As there is neither change in profile or the functions, therefore following the decision of the coordinate bench in the matter of the sister concern of the assessee, we direct the TPO to exclude this company from the list of comparables.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 19

13. Ground no.2 of the Revenue appeal pertains to the inclusion of Max Neeman Medical Intl. Ltd. It was the case of the Ld. DR that the TPO has excluded this comparable on the ground that this company has been incurring loss at the enterprise loss and is a consistent loss making company. Therefore it was submitted that the DRP had erred in taking it on the basis of the segmental results / profit shown by this company for one year.

14. Per contra, the Ld. AR had submitted that there is no reason to exclude this company as the finding recorded by the TPO is incorrect as even at the enterprise level this comparable had made profit of Rs.1.2 crore and further for the segmental it had made profit of Rs.1.08 crores.

15. We have heard the rival contention of the parties and perused the record. At page 239 of the paper book the table is given where the profit for FY 2007-08 was mentioned as 12.96% and for FY 2008-09, it was mentioned as 9.03% and for AY 2009-10 it is mentioned as 22.32%. In view of the above the finding recorded by the TPO is factually incorrect. However we find that the other aspect whether this company is functionally comparable or not has not been examined by the TPO. Therefore we are remanding this issue to the file of the DRP for examining it afresh.

Working capital :

16. Ground 3 ,4 & 5 of the Revenue's appeal for AY 2009-10 pertains to working capital adjustment.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 20

17. The Revenue has filed the appeal against the order passed by the DRP wherein the DRP has given the working capital adjustment on actual figures as per para 21.3 of the order.

18. On the other hand the Ld. AR had submitted that this issue is covered in favour of the assessee by the order of the Bangalore bench of the Tribunal in the matter of • Huawei Technologies India P. Ltd v. JCIT [ITA.1939/Bang/2017] • Apigee Technologies (India) P. Ltd [ITA.870/Bang/2013] • Indigra Exports P. Ltd [ITA.309/Bang/2015].

19-20. We have heard the rival contentions and perused the record. The working capital adjustment is required to be given on actual basis for the purpose of determining the ALP as the adjustment is required to be given which had a bearing on the profit and margin of the comparables. Undoubtedly the working capital [receivable inventory, trade debtor and trade creditor, etc] have the impact on the profit and margin and therefore with a view to bring the parity between the assessee and the comparables it is necessary to give adjustment to work out the average PLI of the comparables. Moreover this issue is fairly covered in favour of the assessee in view of the decisions of the coordinate bench referred above. Hence, this ground raised by the Revenue is dismissed. IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 21 IT(TP)A.249/Bang/2014 - A. Y. 2009-10 - By the Assessee :

21. The corporate tax issues are raised vide ground nos.5.1 to 5.4 which is reproduced elsewhere in this order.

22. The assessee filed its return of income declaring net income from business and profession of Rs.547.46 lacs after claiming deduction u/s.10B of the Act amounting to Rs.103.13 lacs in respect of its manufacturing activities. Further the assessee also recorded income from other sources (consisting of interest on deposits) amounting to INR 19.31 lacs. The net taxable income of the Company was arrived at INR 17.93 lacs after set-off of brought forward losses. Subsequently, the Appellant revised its return of income for FY 2008-09 on September 27, 2010. In the return of income filed, the Appellant declared a net income from business and profession of INR 526.33 lacs after claiming deduction under section 10B of the Act amounting to INR 119.45 lacs for both the manufacturing activities and the R&D activities. Further, the Appellant also recorded income f am other sources (consisting of interest on deposits) amounting to INR 19.31 lacs. The net taxable income of the Appellant was arrived at INR 38.58 lacs after set-off of brought forward losses. In the revised return filed by the Appellant, the deduction under 10B of the Act was calculated by taking 'manufacturing' and 'R&D' activities as separate business undertakings. The deduction was calculated by 2 IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 22 applying the formula of profits to export turnover and total turnover of the individual segment. The case was picked up for scrutiny assessment proceedings. Notices were issued by the Deputy Commissioner of Income-Tax, Circle - II(i) ('the AO'), under section 143(2) & 142 (i) of the Act. During the course of assessment proceedings, the Appellant submitted a revised computation of income to the AO vide submission dated March 11, 2013, filed on March 12, 2013. As per the revised computation of income submitted to the Learned AO, the Company claimed a deduction of INR 407.27 lacs under section 10B of the Act. Post such deduction, the Company had computed the Profits and gains from business & profession at NIL, after setting off the brought forward losses and unabsorbed depreciation of earlier years.

Further, the Company reported a net taxable income of INR 19.28 lacs including therein the interest income from deposits. In such revised computation, the Appellant had revised the amount of deduction eligible to be claimed under section 10B of the Act, by applying the correct formula to calculate such deduction by taking the deduction for both the segments as one undertaking. Thereby, the entire profit of the business was taken as eligible and deduction was calculated taking into account the total turnover and total export turnover of the entire business. Post the completion of assessment proceedings, the AO passed a draft assessment order ('draft order') dated March 15, 2013, as per the terms of section 144C read with section 143(3) of the Act. In the said draft order, the Learned AO, inter alia, denied the claim of deduction under section 10B of the Act on the below mentioned IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 23 reasoning/assumptions:

a) Since the board approval (i.e. ratification) to the permission granted by Development Commissioner was given only on January 18, 2011 (inadvertently mentioned as March 25, 2011) and hence, the same would be effective only from the FY 2011-12 (i.e. AY 2012-13) and accordingly, the AO denied deduction u/s. ioB with respect to both manufacturing and research activities.

b) Further, the AO denied the deduction u/s. section 10B of the Act with respect to Research & Development services on the ground that:

i) The same does not amount to manufacturing or producing articles or things;

ii.The approval was not granted by Development Commissioner w.r.t. R&D activities;

23. The AO in the draft assessment order had denied the benefit of 10B and the reason recorded by the AO were mentioned in para 5.7 to 5.9 of the order, which is as under :

5.7 It is explicit from the provisions that such a deduction is only for the newly, export-oriented undertakings that manufactures or produces any items / computer software. By no stretch of imagination can R&1) services tantamount to manufacture or production of an article.

But in zeal to claim the maximum possible deduction the assessee has made a false claim. It has been attempted by bringing the non-eligible business profits into the fold of eligible profits. The assessee has gone to such an extent that even though the F.56G does not support this illegal claim, the assessee has revised the return seeking the extra, undue claim.

5.8 The Board's Approval submitted by the assesee was closely scrutinized. It is seen that the date of issue of the Approval was 25/03/2011. To put things in perspective, effectively only from the FY 2011-12 (AY 2012-13) the assessee would be eligible for the claim of deduction. IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 24 However the assessee has made the claim in the AY 2009-10. Although in the approval the date 16.04.2004 is mentioned, it cannot be construed that it is the date of approval by the Board. It is important to note that for the claim u/s lOB, the approval by the Board is required. The Board has to be constituted under the Industries Development and Regulation Act, 1951(IDRA). The Certificate by the authorities of the SEZ does not amount to Approval by the Board. A separate ratification is needed in such cases. It is also observed that the approval has been granted only for the products manufactured. It has not been given for the R & D Services. Even going by this it can be seen that the assessee has made an undue claim of deduction. Reliance is placed on a recent judgement of the Delhi High Court on the case of CIT vs Regancy Creations Ltd. (17/09/12).

5.9 Based on all the above the claim u/s.10B is hereby disallowed. It is further ordered that the benefit of brought forward losses shall be given to the assessee only after reassessing the incomes of the earlier years. It is also observed that the assessee has claimed the deduction before setting off the brought forward losses. This is incorrect as per the judgments in the cases of Sword Global (I) Pvt Ltd. Vs. ITO (ITAT, Chennai) 306 ITR (AT) 286, ACIT Vs. Jewellery Solutions International (P) Ltd. (ITAT, Mumbai) 28 SOT 405, inteilinet Technologies India P Ltd. Vs. ITO (ITAT, Bang) 5 ITR (Trib) 96, WIPRO Ltd. Vs. DCIT (ITAT, Bang) 34 DTR 493 and Global Vantedge P Ltd. Vs. ACIT (ITAT, Del) 1 ITR (Trib) 326 etc. Feeling aggrieved by the draft assessment order, the assessee filed appeal before the DRP.

24. The DRP at page 64 of the order had considered the submissions made by the assessee and in para 23 has recorded the reasons as under:

23.We have duly considered the facts of the case, submissions of the assessee and the draft assessment order.

We observe that the assessee was a 100% EOU, engaged in the manufacturing of Active Pharmaceutical Ingredients (APIs) and IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 25 Intermediates for Apotex Group. Apart from this, the assessee was also providing (lie Apotex Group certain contract R&D services which apparently fell outside the manufacturing activities carried on by the assessee and they, rather, constituted contract services having no nexus with the manufacturing of APIs. Though its submissions, the assessee sought to emphasize that the R&D services would he covered by Explanation 2 to section 1013, precisely by clause (b) of the said Explanation 2 i.e., any customized electronic data or any product or service of similar nature as may be notified by the Board. On a careful perusal of the provisions of section 10B and CBDT's Notification No. SO 890(E) dated 26.09.2000, we are of the view that what was sought to be covered by clause (b) of Explanation 2 to section 1011 is in the context of 'computer software" and in view of the nile of ejusdein generis, they cannot mean anything else than "computer software". Hence, the assessee's reliance upon clause (h) of Explanation 2 to section 10B is Far-fetched and cannot be accepted. Further, the activities carried on the assessee clearly fell within two distinct business segments - one is Manufacturing of APIs and the other is contract R&D services. Just because the APIs were manufactured for the Apotex Group and also at the same time the R&D services were provided to this group on contract basis, the two segments cannot be considered together as to have constituted a coherent or integral whole so as to qualify for deduction of profits and gains of both the segments under section 1OB of the Act. We find sufficient force in the findings recorded by the AO in denying (he claim for deduction tinder section 10B of the Act. In the result, we confirm the action of the AU and the assessee's grounds of objections (a) to (g) are, therefore, rejected.

On the basis of the above, the DRP denied the benefit of deduction u/s.10B to the assessee :

25. Following the direction of the DRP, the AO has passed the order denying the benefit u/s.10B of the Act, against which the assessee is in appeal before us.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 26

26. In the written submissions, the Ld. AR at para 2.1 to 2.1.7 had mentioned as under :

2.1 Denial of deduction u/s. 10B of the Act (w.r.t.

manufacturing and R&D activities) on the ground of delayed ratification by board w.r.t. the permission granted by Development Commissioner ("DC") 2.1.1 In this regard, the Appellant submits that the initial EOU approval was granted on April 16, 2004 vide LOP No. 1/19/2004 by the Development Commissioner (Please refer 513- 516 of the Paper Book ("PB"). The Appellant received green card on August 31, 2004 (Page 523 of the PB). Post that the Appellant has duly undertaken all necessary approvals/activities/intimations to satisfy a 100% EOU criteria. Subsequently, the Board has ratified the permission granted by Development Commissioner on January 18, 2011.

2.1.2 The AO denied the deduction u/s. 10B of the Act on the ground that the same would be effective only from the FY 11- 12 (i.e. AY 2012-13) i.e. after the ratification by the board.

2.1.3 In this regards, the Appellant submits that the moment the decision / approval of the Development Commissioner is ratified by the Board of Approval, it will relate back to the date on which the approval was granted by the Development Commissioner and, therefore, the deduction u/s. ioB of the Act ought to have been allowed by the AO.

2.1.4 In this regards, the Appellant relies on the decision of the Hon'ble Gujarat High Court in the case of ECI Technologies Pvt. Ltd. (Tax Appeal No 203 of 2015) wherein the Hon'ble High Court after relying on CBDT notification no. 178/19/2008-ITA dated 9 March 2009 has held as follows:

"it is not in dispute that vide Circular /instruction of the CBDT dated 09/03/2009 it was clarified that the approval granted by the Development Commissioner in the case of Export Oriented Unit set up in an Export Processing Zone will be considered valid, once such an approval is ratified by IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 27 the Board of Approval for EOU Scheme. In the present case, it is not in dispute that the permission / approval granted by the Development Commissioner has been ratified by the Board of Approval, may be subsequently. The moment the decision / approval of the Development Commissioner is ratified by the Board of Approval it will relate back to the date on which the approval was granted by the Development Commissioner." (emphasis supplied) 2.1.5 Further, the Hon'ble Delhi High Court in the case of Enable Exports Private Limited (ITA No. 1072 of 2011), held that the approval granted by the SEZ Development Commissioner which was subsequently ratified by the board was valid for the purpose of claiming deduction under Section 10B of the Act.

2.1.6 Further, in subsequent assessment year (i.e. AY 2010- 11, 2011-12), the Commissioner of Income Tax (Appeals), after relying on the above judicial precedents has allowed deduction u/s.10B of the Act.

2.1.7 Considering the above judicial precedents, the Appellant submits that the denial of deduction u/s. ioB (w.r.t. Manufacturing and R&D activities) on the ground of delayed ratification by the hoard is unjustified.

It is the case of the assessee before us that initially the EOU approval was granted to the assessee on 16.04.2004 vide LOP- 1/19/2004, by the Development Commissioner (DC for short) of the written submissions

27. Thereafter the assessee vide application dt.16.08.2004 has sought to amend the approval granted on 16.04.2004 and sought to include the R & D Centre with Associate Production facilities into the LOP. Vide letter dt.31.08.2004, the DC had granted such permission thereby including the R & D Centre :

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 28 FOR : ITEM OF MANUFACTURE : Chloro Benzene and other chemicals .

READ : ITEM OF MANUFACTURE : Research & Development Centre with an associated production facility of Chloro Benzene and other chemicals.

Subsequently the Board ratified the permission granted by the DC on 18.01.2011.

28. Before us it was contended as mentioned hereinabove that the ratification done by the Board would come id, wherein the into effect from the date of initial grant by the DC w.e.f 31.08.2004.

This view was also canvassed by the Ld. AR relying upon the judgment of the Hon'ble Gujarat High Court in the matter of ECI Technologies P. Ltd, (Tax Appeal No.203 of 2015) wherein the court held as under :

"it is not in dispute that vide Circular /instruction of the CBDT dated 09/03/2009 it was clarified that the approval granted by the Development Commissioner in the case of Export Oriented Unit set up in an Export Processing Zone will be considered valid, once such an approval is ratified by the Board of Approval for EOU Scheme. In the present case, it is not in dispute that the permission / approval granted by the Development Commissioner has been ratified by the Board of Approval, may be subsequently. The moment the decision / approval of the Development Commissioner is ratified by the Board of Approval it will relate back to the date on which the approval was granted by the Development Commissioner."

29. With respect to the ratification by the Board giving effect from 31.08.2004, in our view, there should not be any quarrel as the issue stands covered in favour of the assessee by the authoritative pronouncement by the Board. In our view, initial permission is IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 29 required to be granted by the DC in accordance with the Rules framed for the purpose of Section 2. Once the said permission has been granted then the ratification by the Board is merely a formality and therefore would relate back to the date of actual grant, as the assessee cannot be permitted to wait till eternity, if there is a delay / latch on the part of the Board for not ratifying within the time sanctioned by the DC.

30. Having said so, we shall examine the other aspect raised by the assessee in para 2.2 onwards of the written submissions. For the purpose of completeness, we are reproducing herein below the written submissions filed by the assessee with regard to the fact whether R & D activities undertaken by the assessee would fall within the ambit of section 10B or not.

2.2. Denial of deducton /s.10B of the Act w.r.t R & D activities 2.2.1 On the ground that the same does not amount to manufacturing or producing of articles or things:

R&D amounts to manufacturing or producing of articles or things

i) At the outset, we invite Your Honours attention to Section 10B (i) of the Act which is reproduced below:

"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."

ii) As can be seen from above, the provisions of Section 10B of the Act require the assessee to export and IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 30 manufacture or produce article or things or computer software.

iii) Though the term manufacture is defined in Section 2(29BA) of the Act, production is not defined anywhere in the Act and therefore, one may refer to dictionary to understand the meaning of the word. According to Oxford English Dictionary, production means amongst other things, that which is produced, a thing that results from any action process or effort, a product of human activity or effort. In the case of the Appellant, research documentation/reports are produced by the efforts put in by the Appellant's employees and therefore, research conclusions i.e. documentations/ reports can be considered as production of article or thing for the purpose of section 10B of the Act.

Though the term produce gets colour of the term manufacture as held by Hon'ble apex court in the case of N.C. Budharaja & Co. (supra), the next question is whether all the ingredients that are necessary to constitute manufacture should necessarily be there for production also. The answer to the same in Appellant's opinion is no, since otherwise legislature would not have wasted their energy by adding that term in juxtapostition with the term manufacture. This is elucidated by the judgment of Hon'ble Calcutta High Court in the case of CIT v. Air Survey Co. of India (P.) Ltd. [1998] 232 ITR 707. The question before Hon'ble Calcutta High Court was whether business of surveying, mapping and aerial photography which resulted in photographs was production of article or thing. Revenue had rejected assessee's claim for investment allowance on the ground that the activity of the assessee could not be called as manufacture or production and that in the nature of the assessee's business no thing or article was produced as such. The Tribunal, in appeal, however, reversed the aforesaid finding and allowed the relief in favour of the assessee by holding that the activity of the assesse was such that it would fall within the purview of the expressions "manufacture" or "production" and that the ultimate photographs which came to be produced as a result of the business activity of the assessee came within the expressions "article" or "thing". This view was upheld by Hon'ble Calcutta High Court.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 31

v) Further, according to Webster Dictionary, meaning of the word 'thing' is the product of work or activity which in Appellant's case is the research reports/documentation. In this regards, the Appellant relies on the decision of Rajasthan High Court in case of CIT vs. Trinity Hospital (86 Taxman 127) wherein the high court while dealing with issue of allowability of investment allowances with respect to x-ray machine has held that the graphs obtained from these machines, which are the result of efforts or activity, could be said to be a 'thing'.

vi) In view of the above, the Appellant submits that the research documentations/ reports are produced by the efforts put in by the employees of the Appellant and hence, same amounts to manufacture/ producing of article/things and therefore, the same is eligible for deduction u/s. 10B of the Act.

vii) Now, the Appellant invites Your Honours attention to the services provided under R&D agreement entered with the AE:

2.1 From time to time, APIPL shall diligently provide Apotex with professional research and development services, which may include, without intimation, development of synthetic chemical process in the field of active pharmaceutical ingredients, development and preparation of DMFs, analytical services (stability studies, validation studies, analytical method development), vendor qualification services and manufacture of related compounds and metabolites ("Research")"

viii) On perusal of the above clause in the agreement, Your Honour may kindly observe that the Appellant provides the following R&D services to the AE:

I. Development of synthetic chemical process in the field of active pharmaceutical ingredients: This includes detailed understanding of the raw materials, the prescribed conditions (like temperature, air pressure, packaging etc.), equipments & techniques to be used etc II.Preparation of DMFs: DMF is a dossier containing details of the entire product development process, documented in the form of a file. The DMF is prepared by a dedicated team which specializes IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 32 in preparation of such reports.


      I I I. Analytical
                      services such as stability                   studies,

validation studies, analytical method development I V. Manufacture of related compounds and metabolites

ix) On perusal of the above, Your Honours may kindly observe that the Appellant produces research reports (which are derived after processes of research, efforts put in by Appellant's employees) amounts to manufacture or producing of article or thing. The same is documented in the form of an electronic report and transmitted electronically.

x) In this regards, the Appellant relies on the decision of Bangalore Tribunal in the case of in the case of DCIT vs Syngene International Limited (I.T.A. Nos. 11o6 & 1107/ Bang! 2012) wherein the Hon'ble Tribunal on the exact similar facts has held that an assessee engaged in the business of contract research and development services is entitled to deduction under section 10B since the R&D activity tantamount to manufacture.

xi) The chart showing comparison between the Appellant's case and Syngene International Limited's is tabulated as below:

xii) IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 33 It can he observed from the above chart that the facts of the Appellant is exactly similar to the Syngene International Limited (Supra) and hence, the decision of the Hon'ble Bangalore Tribunal is squarely applicable to the Appellant's case. The relevant para of the order is reproduced hereunder for Your Honour's ready reference:

23. "Research conclusions can be considered as documentations of the analysis and steps done during the research process. Or in other words the end result is the analysis and presentation of data in a desired format.

Hon Madras High court had art occasion to consider the issue as to whether data processing done with the help of computer resulting in end product which was analysis and presentation of data in prescribed format was a product of new article in the case of CIT vs Comp- Help Services Pvt Ltd (2000) 246 ITR 722. Claim of the assessee was for investment allowance................................

25. The assessee here had done research using sophisticated machinery and the end product was either research documents in the nature of experimental records or compound. Just because these were intermediary things which would find use only in later stages of development of industrially useful chemicals and formulations would not disentitle the assessee from saying that it was producing an article or thing. The agreement entered by the assessee with its customers clearly show that the parties expected definite results, be it in the nature of new or improved compounds or in the nature of research documentation and each step that assessee had to take for achieving this result was also set out. Such results were to be given to its customers. The activities done by the assessee used sophisticated equipment and methodologies resulting in speciality compounds and documentations. The payments effected by the clients, though based on manhour spent were for such results. Hon Madras High court had again in the case of CIT vs N Venkatraman (2000) 245 IYT 73 clearly held that the nature of the state of the what is produced, ie IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 34 whether an intermediary or final product, could not be criteria for deciding whether an assessee was manufacturing or producing an article or thing..................

This in our opinion assesse was eligible for claiming the benefit of Section 10B of the Act."

xiii) In view of the above, it is submitted that the R&D activities rendered to the customers of the Company amounts to manufacture/ production of article or thing. Therefore, the R&D activity is eligible for deduction under section 10B of the Act and the Learned AO has erred in denying the said deduction to the Company.

R&D amounts to manufacture of computer software within the meaning of any customized electronic data or any product or service of similar nature:

Without prejudice to our contention that activities of R&D segment classify as 'article' or 'thing' as defined under section 10B of the Act, the Appellant wishes to submit that the activities carried out are covered within the meaning of the term 'computer software' and hence, eligible for deduction under section 10B of the Act. The term 'computer software' has been specifically defined in terms of Explanation 2 to section 10B of the Act to mean:

i) any computer programme recorded on any disc, tape, perforated media or other information storage device; or

ii) any customized electronic data or any product or service of similar nature, as maybe notified by the Board, which is transmitted or exported from India to any place outside India by any means".

xv) As mention above, the findings of research is documented in the form of an electronic report and transmitted electronically. Therefore, given the fact that the data exported (i.e. the report) is largely a summary of the research data which are customized, it should fall under the category 'customized electronic data' as envisaged in clause (i)(b) of explanation 2 to section 10B of the Act and IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 35 therefore, the benefit of section 10B should be given to the Appellant.

xvi) Further, it may kindly be noted that the AO in subsequent years (i.e. AY 2010-11, & AY 2011-12) has not denied the deduction u/s.10B on the ground that R&D activities does not amount to manufacturing/ producing of article / things.

xvii) In view of the above, the Appellant most humbly submits that deduction u/s. 10B w.r.t. R&D activities be granted to Appellant.

31. On the other hand the Ld. DR relied upon the decision of the DRP reproduced herein above and sought to distinguish the decision in the matter of DCIT v Syngene International Ltd, [ITA Nos.1106 & 1107/Bang/2012] which was relied upon by the Ld. AR in support of his contentions. During the course of argument, we have also directed the Ld. DR to produce the policy guidelines with respect to grant of approval by the DC, SEZ.

32. We have gone through the record and heard the rival submissions as also the orders passed by the lower authorities as well as the written submissions.

33. The predecessor of the assessee, namely Brantford Chemicals P. Ltd had filed an application for setting up EOU at SEZ by depositing a draft on 30.03.2004 in respect of plot No.1A vide application of even date and in the said application, the (page 502 of paper book), the items of manufacture / service were mentioned as under :

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 36

34. Along with the application, the assessee had also filed sketch showing the sizes of the plot where the above said activity was sought to be carried out by the assessee.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 37 Based on the application, the Development Commissioner had granted the permission for setting up of EOU at the SEZ for manufacture and export of chlorobenzene and other chemicals.

35. In para 6 of the said letter it was mentioned that "approval is based on the details furnished by you in your project application". Thereafter the request was made for amendment / addendum to the approval letter dt.16.04.2004, by letter dated 16/8/2004 wherein it was sought to amend the letter or issue a suitable addendum incorporating the clause that "this EOU is an R&D Centre with an associated production facility". On 25.08.2004, the Development Commissioner has granted permission to change the name of the company from 'Brandford Chemicals P. Ltd' to 'Apotex Pharmachem India P. Ltd'.

36. On 31.08.2004, the Development Commissioner had accepted the request for issuing amendment / addendum to the letter dt.16.04.2004 and it was mentioned that as against manufacture of chloro benzene item and other chemicals, now the letter mentioned the item as 'R&D Centre with Associated Production facility of chlorobenzene and other chemicals.

37. The Ld. AR had canvassed before us that as the DC had mentioned the item of manufacture as R&D Centre with Associated Production facility of chlorobenzene and other chemicals therefore both the activities namely, R&D Centre with Associated Production facility of chlorobenzene and other chemicals are exigible to the benefit u/s.10B of the Act. It was the case of the assessee that the R & D pharmaceuticals falls under the category of computer software IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 38 as held by the Bangalore Bench of the Tribunal in Syngene International Ltd (supra).

38. Before we closely scrutinise and examine the permission initially granted and subsequently amended by the DC, it is necessary to mention the relevant provisions of SEZ Act, which are as under :

2(r) "manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, cutting, polishing, blending, repair, remaking, re-engineering and includes agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining;

2 (z) "services" means such tradable services which,-

(i) are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organisation concluded at Marrakes on the 15th day of April, 1994; (ii) may be prescribed by the Central Government for the purposes of this Act; and (iii) earn foreign exchange;

15. (1) Any person, who intends to set up a Unit for carrying on the authorised operations in a Special Economic Zone, may submit a proposal to the Development Commissioner concerned in such form and manner containing such particulars as may be prescribed: Provided that an existing Unit shall be deemed to have been set up in accordance with the provisions of this Act and such Units shall not require approval under this Act. Setting up of Unit.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 39 (2) On receipt of the proposal under sub-section (1), the Development Commissioner shall submit the same to the Approval Committee for its approval.

(3) The Approval Committee may, either approve the proposal without modification, or approve the proposal with modifications subject to such terms and conditions as it may deem fit to impose, or reject the proposal in accordance with the provisions of sub-section (8):

Provided that in case of modification or rejection of a proposal, the Approval Committee shall afford a reasonable opportunity of being heard to the person concerned and after recording the reasons, either modify or reject the proposal.

(4) Any person aggrieved, by an order of the Approval Committee, made under sub-section (3), may prefer an appeal to the Board within such time as may be prescribed.

(5) No appeal shall be admitted if it is preferred after the 19 expiry of the time prescribed therefor: Provided that an appeal may be admitted after the expiry of the period prescribed therefor if the appellant satisfies the Board that he had sufficient cause for not preferring the appeal within the prescribed time.

(6) Every appeal made under sub-section (4) shall be in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.

(7) The procedure for disposing of an appeal shall be such as may be prescribed: Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.

(8) The Central Government may prescribe,- (a) the requirements (including the period for which a Unit may be set up) subject to which the Approval Committee shall IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 40 approve, modify or reject any proposal referred to in subsection (3); (b) the terms and conditions, subject to which the Unit shall undertake the authorised operations and its obligations and entitlements.

(9) The Development Commissioner may, after approval of the proposal referred to in sub-section (3), grant a letter of approval to the person concerned to set up a Unit and undertake such operations which the Development Commissioner may authorise and every such operation so authorised shall be mentioned in the letter of approval.

19. Notwithstanding anything contained in any other law for the time being in force, the Central Government may, if required, -

(a) prescribe a single application form for obtaining any licence, permission or registration or approval by a Developer, or an entrepreneur under one or more Central Acts; Single application form, return, etc.

(b) authorise the Board, the Development Commissioner or Approval Committee, to exercise the powers of the Central Government on matters relating to the development of a Special Economic Zone; or setting up and operation of units;

(c) prescribe a single form for furnishing returns or information by a Developer or an entrepreneur under one or more Central Acts.

20. Notwithstanding anything contained in any other law for the time being in force, the Central Government may, by notification, specify any officer or agency to carry out surveys or inspections for securing of compliance with the provisions of any Central Act by a Developer or an entrepreneur, as the case may be, and such officer or agency shall submit verification and compliance reports, in such manner a.......

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 41 SEZ RULES 2006

19. Letter of Approval to a Unit.--

(1) On approval of a proposal under rules 18 and 19, Development Commissioner shall issue a Letter of Approval in Form G, for setting up of the Unit. (2) The Letter of Approval shall specify the items of manufacture or particulars of service activity, including trading or warehousing, projected annual export and Net Foreign Exchange Earning for the first five years of operations, limitations, if any on Domestic Tariff Area sale of finished goods, by-products and rejects and other terms and conditions, if any, stipulated by the Board or Approval Committee: Provided that the Approval Committee may also approve proposals for broad- banding, diversification, enhancement of capacity of production, change in the items of manufacture or service activity, if it meets the requirements of rule 18 : Provided that no such approval shall be granted by the Approval Committee in those cases which fall within the competence of the Board of Approval. Provided also that the Approval Committee may also approve change of the entrepreneur of an approved unit, if the incoming entrepreneur undertakes to take over the assets and liabilities of the existing Unit.

(3) An entrepreneur holding Letter of Approval issued under sub-rule (1) shall only be entitled to set up a Unit in processing area of the Special Economic Zone or Free Trade and Warehousing Zone, as the case may be:

Provided that a proposal for setting up of a Unit in a Special Economic Zone or Free Trade Warehousing Zone shall be entertained only after the processing area of the Special Economic Zone or Free Trade Warehousing Zone has been demarcated under rule 11.

(4) The Letter of Approval shall be valid for one year within which period the Unit shall commence production or service or trading or Free Trade and Warehousing activity and the Unit shall intimate date of commencement IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 42 of production or activity to Development Commissioner:

Provided that upon a request by the entrepreneur, further extension may be granted by the Development Commissioner for valid reasons to be recorded in writing for a further period not exceeding two years: Provided further that the Development Commissioner may grant further extension of one year subject to the condition that two-thirds of activities including construction, relating to the setting up of the Unit is complete and a chartered engineer's certificate to this effect is submitted by the entrepreneur.

(5) If the Unit has not commenced production or service activity within the validity period or the extended validity period under sub-rule (4), the Letter of Approval shall be deemed to have been lapsed with effect from the date on which its validity expired.

(6) The Letter of Approval shall be valid for five years from the date of commencement of production or service activity and it shall be construed as a licence for all purposes related to authorized operations, and, after the completion of five years from the date of commencement of production, the Development Commissioner may, at the request of the Unit, extend validity of the Letter of Approval for a further period of five years, at a time.

(7) If an enterprise is operating both as a Domestic Tariff Area unit as well as a Special Economic Zone Unit, it shall have two distinct identities with separate books of accounts, but it shall not be necessary for the Special Economic Zone unit to be a separate legal entity:

Provided that foreign companies can also set up manufacturing units as their branch operations in the Special Economic Zones in accordance with the provisions of Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000 as amended from time to time.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 43 IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 44 IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 45 IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 46 IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 47 IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 48 From the above said provisions, rules and forms, it is clear that the assessee or any applicant is required to make a detailed project report in respect of various activities in respect of which the assessee is required to register itself under the SEZ Act as per rule 17 of SEZ rules 2006.

39. The definition of 'manufacture' clearly postulates the manufacture of any article, thing or software for which permission is required to be issued by the DC. In the present case, if we look into the project submitted by the assessee on 30.03.2004, it is clear that assessee has sought permission in respect of four items which the assessee sought to manufacture. In none of the activities mentioned by the assessee, there is a mention of R & D of the pharmaceutical products. In our understanding if the assessee sought to manufacture or provide services in respect of computer software ( R & D ), then specific application for the said purposes should have been made and there should be specific approval for the said purposes by the DC, we draw strength from Rule 17 and 19 form F and Form G of SEZ rules 2006)

40. In the present case, there is no specific permission accorded by the DC for the R & D of pharmaceutical products. Strangely, only one permission was sought i.e., for R & D Centre with associated production of chlorobenzene and other chemicals. The assessee in its TP study and also in Form 56G filed before the authorities had mentioned separate the export turnover in respect of article or thing of Rs.15,46,15,965/-, whereas in the computer software / R & D it was mentioned as Rs.35,82,94,015/-.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 49

41. If the argument of the Ld. AR that both the activities are interwoven, interconnected and integral of each other is correct, then there was no necessity for the assessee to mention separately about the "Aricle Or Thing Manufactured" and " R & D" separately for the purpose of claiming the export turnover. The assessee itself was convinced that both the activities are distinct and separate and therefore the assessee has given two separate export turnovers in respect of each of the activity.

34. In our understanding, as mentioned hereinabove also, the manufacturing of Active Pharmaceutical Ingredients (API) and intermediaries and carrying out of R & D for the same AE{ as a contract service provider}, are two distinct activities and therefore the assessee should have taken two distinct approval from the DC by filing two separate project reports for carrying out these two activities. Only one project report in respect of manufacture of API and others for chlorobenzene and other chemicals were submitted and therefore there was no independent permission for carrying out the R & D activities of pharmaceuticals for AE.

42. There is yet another reason for rejecting the contention of the assessee is that vide letter dt.16.8.2004, the assessee has sought issuance of amendment / addendum to the approval letter mentioning therein the items of manufacture as R & D Centre with Associated Production of chlorobenzene and other chemicals. In our understanding, the Amendment of the item of manufacture is different than the Addition of item of manufacture. For addition of manufacture, as mentioned herein above a separate project report is IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 50 required to be given mentioning the items sought to be manufactured / services to be rendered. Further a dedicated ear- marked place is required to be given for that purpose. As reproduced herein above, it is incumbent upon the DC for the purposes of granting the permission under the Act, to give specific things / article sought to be manufactured ( Rule 19) and also there is a statutory requirement to mention the area where the said manufacturing activity was sought to be carried out. In the present case, neither the separate activities / things / article sought to be manufactured were mentioned in the project report, nor a separate ear marked place was mentioned at the time of seeking the amendment to the order. Hence the argument of the assessee that the assessee is also entitled for deduction u/s.10B of the Act is incorrect and is liable to be rejected.

Further, if we look into the activities undertaken by the assessee under the R & D segment then it is clear that activities of the assessee as per the R & D segment was as under :

2.1 From time to time, APIPL shall diligently provide Apotex with professional research and development services, which may include, without limitation, development of synthetic chemical process in the field of active pharmaceutical ingredients, development and preparation of DMFs, analytical services (stability studies, validation studies, analytical method development), vendor qualification services and manufacture of related compounds and metabolites ("Research"). 411 of the Research to be performed shall he mutually agreed upon by Apotex and APIPL.

2.2 The parties shall agree on a timetable for completion of each project constituting Research (each a "Project"). APIPL shall allocate sufficient time IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 51 and resources to complete each such Project.

2.3 APIPL shall complete each Project in accordance with the timetable for that Project, subject to any timetable revisions that may be agreed upon by Apotex and APIPL from time to time.

2.4 APIPL shall report to Apotex on the progress of each Project in the manner and at such times as may be agreed upon by Apotex and APTPL from time to time.

2.5 APIPL shall conduct the Research in compliance with any specifications that may be provided in writing to APIPL by Apotex, and any changes to these specifications made by APIPL, must be notified to and approved by Apotex in writing, prior to implementation. APIPL shall conduct the Research and provide any additional services requested by Apotex in accordance with Good Laboratory Practice and Good Manufacturing Practices, as commonly known and referred to in the pharmaceutical industry.

43. From a close scrutiny of the activities undertaken by the assessee, it is clear that the assessee is required to conduct the research in compliance with the specification that may be provided in writing to the assessee by its AE and the assessee is not permitted to deviate from the specification without a written prior approval. Moreover the approval granted to the assessee by the DC with respect to item as mentioned as under :

Research & Development Centre with an associated production facility of Chloro Benzene and other chemicals .

Thus it is clear that the activity undertaken by the assessee under the SEZ was only one i.e., R & D Centre and there were two separate independent activities which were permitted to be undertaken, viz., IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 52 production of medical formulas and secondly for R & D related to the medical formula. In fact the DRP had given a cogent and robust finding, reproduced hereinabove, where the DRP has upheld the finding of the AO by recording that R & D services and manufacturing of items are two different segments and cannot be considered to be a coherent and integral part of the same activity. Further we are of the opinion that the amendment of the item of manufacture provided u/s.2 of the SEZ Act, prima facie do not cover the rendition of R & D services. We do not feel that the decision of the Tribunal in Syngene International Ltd (supra) is of any help to the assessee as in the said case, there was a stand-alone permission granted by the DC of the Board for that purposes, whereas there is no such specific permission granted by the Board. Moreover, we are of the opinion that for the purposes of adjudicating the present dispute before us, the decision in Syngene International Ltd (supra) is a misfit as the said decision was on a different set of facts. When permission was not granted for two separate and independent activities and the permission was only granted with respect to one activity.

44. The ratio laid down by the coordinate bench in the matter of Syngene International Ltd (supra) is not applicable to the activities of the assessee as the assessee is doing two activities and two activities are not permissible. In view of the above, this issue on Section 10B, raised by the assessee is required to be dismissed. We do so. Hence, ground nos.5.1 to 5.4 raised by the assessee are dismissed.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 53

45. Ground no.6 of the Revenue's appeal :

This ground is covered in favour of the assessee by Hon'ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd. (2012) 341 ITR 385 (Kar). In its decision the Hon'ble High Court has held that as the income of sec. 10A unit has to be excluded at source itself before arriving at the gross total income, loss under non-section 10A unit cannot be set off against sec. 10A units u/s 72 of the Act. As the deduction u/s 10A of the Act has to be excluded from the total income of the assessee, the business loss being set off against such profit and gains of the undertaking as a whole could not arise. In this view of the matter and respectfully following the decision of the Hon'ble Karnataka High Court in Yokogawa India Ltd. (341 ITR 385). We uphold the impugned order of the ld CIT(A) in directing the AO to compute the deduction u/s 10A of the Act in the case on hand without setting off the business losses from non section 10A units against the income of 10A units. We hold and direct accordingly. Consequently, the ground raised by assessee is allowed.

IT(TP)A. 2204/Bang/2016 -Revenue appeal for AY 2011-12 :

20. In this appeal the grounds no.1 to 6 pertains to the issue of 10B. As we have dismissed the ground of the assessee for the assessment year 2009-10, in the superseding paragraphs, following the same, the grounds raised by the Revenue for AY 2011-12 are allowed.

IT(TP)A.156, 249/B/2014 & 2204/Bang/2016 Page - 54

46. In the result, :

IT(TP)A.156/Bang/2014 by the Revenue is partly allowed. IT(TP)A.2204/Bang/2016 by the Revenue is allowed. IT(TP)A.249/Bang/2014 by the Assessee is partly allowed.

Order pronounced in the open court on 8th day of February, 2019.

            Sd/-                                 Sd/-

      (A. K. GARODIA)                        (LALIET KUMAR)
  ACCOUNTANT MEMBER                         JUDICIAL MEMBER
Bengaluru
Dated     : 08.02.2019


MCN*

      Copy to:
      1. The assessee
      2. The Assessing Officer
      3. The Commissioner of Income-tax
      4. Commissioner of Income-tax(A)
      5. DR
      6. GF, ITAT, Bangalore


                                             By order

                                        Assistant Registrar,
                                   Income Tax Appellate Tribunal,
                                              Bangalore.

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Income Tax Appellate Tribunal - Bangalore

Deputy Commissioner Of Income Tax ... vs M/S Apotex Pharmachem (India) Private ... on 22 February, 2019