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2016 (1) TMI 114 - AT - Income TaxEntitlement to deduction u/s 10B - Held that - 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 (2) TMI 66 - MADRAS High Court ) clearly held that the nature of the state of the what is produced ie whether an intermediary or final product could not be criteria for deciding whether an assessee was manufacturing or producing an article or thing. Billing done by the assessee on man hour basis would at the best demonstrate the difficulty in fixing the value of the ultimate production considering the inherent complexities of the processes involved and the value of the outcome as such. It will not be a reason to say that assessee was being compensated only for the research irrespective of the final outcome. Thus not only was there exports but the exports were of articles or things produced by the assessee. We are alive to the fact that assessee had in its own books demarcated its receipts into two classes one for research and other for sale of molecules. But this demarcation will not take away the sheen of its argument that the export earnings were only for the results of the research and this fell with in the meaning of production of an article or thing. In any case it is trite law that accounting entries are not decisive in determining the question of eligibility for a claim of deduction or exemption Thus in our opinion assessee was eligible for claiming the benefit of Section 10B of the Act. Ld CIT was justified in directing so - Decided in favour of assessee.
Issues Involved:
1. Eligibility of the assessee for deduction under Section 10B of the Income-tax Act, 1961. 2. Claim of the assessee that Unit-II was not formed by splitting up of an existing business. 3. Whether the assessee's activities constituted "manufacture or production" of articles or things. 4. Alternate claim for deduction under Section 80IB(8A) of the Act. Issue-wise Detailed Analysis: 1. Eligibility of the Assessee for Deduction Under Section 10B: The primary issue was whether the assessee, engaged in contract research services, qualified for the deduction under Section 10B of the Income-tax Act, 1961. The Revenue contended that the assessee's earnings were from research services rather than the export of articles or things. The assessee argued that it exported chemical compounds and intellectual property, thus fulfilling the conditions for the deduction. The CIT (A) ruled in favor of the assessee, stating that the assessee was engaged in the manufacture or production of articles or things, as it exported chemical compounds and brought foreign exchange into the country. 2. Claim of the Assessee That Unit-II Was Not Formed by Splitting Up of an Existing Business: The AO argued that Unit-II was formed by splitting up the existing business, citing reasons such as similar research work, common customers, and shared scientists. The assessee countered, stating that Unit-II was a separate facility with new investments and approvals, and no assets were transferred from Unit-I. The CIT (A) agreed with the assessee, noting that Unit-II was independently established and not formed by splitting up the existing business. 3. Whether the Assessee's Activities Constituted "Manufacture or Production" of Articles or Things: The AO contended that the assessee's activities were predominantly research, and the production of compounds was incidental. The assessee argued that the compounds produced were the result of complex processes and constituted articles or things. The CIT (A) accepted the assessee's argument, noting that the assessee satisfied the conditions for being deemed a manufacturer of articles or things, as it exported chemical compounds and research output. The Tribunal upheld this view, emphasizing that the definition of "manufacture" under the Foreign Trade Policy should be considered, and the research documentation and compounds produced by the assessee fell within the meaning of "articles or things." 4. Alternate Claim for Deduction Under Section 80IB(8A): The assessee made an alternate claim for deduction under Section 80IB(8A) if the deduction under Section 10B was not allowed. The AO rejected this claim, stating that the assessee did not demonstrate fulfillment of the conditions under Section 80IB(8A). However, since the CIT (A) allowed the deduction under Section 10B, the alternate claim was not adjudicated. The Tribunal noted that the alternate claim became infructuous as the primary claim under Section 10B was upheld. Conclusion: The Tribunal dismissed the Revenue's appeals and the assessee's cross objections, affirming the CIT (A)'s decision that the assessee was eligible for deduction under Section 10B of the Act. The Tribunal concluded that the assessee's activities constituted the manufacture or production of articles or things, and Unit-II was not formed by splitting up the existing business. The alternate claim under Section 80IB(8A) was deemed unnecessary.
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