2020 (1) TMI 144 - AT - Income Tax

Revision u/s 263 - Reopening of assessment u/s 147 - denying deduction under section 10B of the Act pertaining to functional genomics division and other miscellaneous disallowances made - HELD THAT - On perusal of impugned orders for assessment years under consideration, it is observed that Ld.CIT records assessee developed software i.e Vector NTI advance. However, Ld.CIT observes that there is no mention in export of the software outside India. It appears that because the service agreement does not mention any export of software outside India, Ld.CIT held order passed by Ld.AO to be erroneous and prejudicial to interest of revenue. There is no denial on behalf of Ld.CIT that assessee is not involved in development of software tools. However, according to Ld.CIT, exemption should be denied because assessee is exporting results of research and development carried out by Bioinformatics division. We deem it necessary to extract observations of DRP for assessment year 2010-11, wherein reference to Circular 1 of 2013 issued by CBDT has been made, which clarifies that even if any research and development in any field is done in process of providing notified services, in particular, services of engineering and design, the same will be covered under aforesaid CBDT notification which will be eligible for 10A/10B benefit. Although assessee conducts research and development activities, but the same is only a process step to provide final output to its parent company. Also observed that what is developed by assessee under this segment is a customised electronic data created through various research and development. No doubt, invoices placed in paper book mentions Research and Development charges cannot impliedly mean that activities carried on by assessee under Bio-informatics segment does not amount manufacture computer software. A co-joint reading of definition of computer software and the CBDT Circular No.1/2013 what comes to our understanding is that assessee is developing a customised software in the form of bio-infirmatics tools using platforms like C , Java which is used to analyse gene sequence, protein sequence in Silicon Valley owning, gene expression profiling, pathways development etc, This is what AO intend from what he mentioned in para 10 of assessment order, specifically referred to by Ld. CIT DR. In our opinion Ld.AO was satisfied upon verification of documents placed by assessee at the time of reassessment proceedings. He called upon various details to verify claim of assessee under both segments. And then allowed deduction under section 10B of the Act, restricting claim only to the extent of Bioinformatics segment. Thus, we are of the opinion, that view taken by Ld.AO is a possible view. It is well settled proposition that merely because, Ld.CIT has taken different view, assessment order cannot be termed as erroneous and prejudicial. For section 263 to be initiated both conditions of assessment order being erroneous as well as prejudicial to the interest of revenue must be jointly satisfied. In the facts of the present case, having regards to evidences filed by assessee as analysed by Ld.AO, view adopted by Ld.AO is one of the possible views and therefore cannot be treated as erroneous. As both conditions are not satisfied in present case, we are unable to uphold proceedings under section 263 In the present facts of the case, Ld.CIT has not analysed activities carried on by assessee under Bioinformatics division having regards to documents filed by assessee and Circular referred and relied upon by assessee, as well as considered DRP order for assessment year 2010-11, on which reliance has been placed by Ld.AR. We are hold revision proceedings under section 263 to be bad in law and the same is quashed and set-aside. - Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed by the Commissioner of Income-tax (CIT) under section 263 of the Income Tax Act.
2. Whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue.
3. Eligibility of the assessee's claim for deduction under section 10B of the Income Tax Act for the Bioinformatics division.

Detailed Analysis:

1. Validity of the Order Passed by the CIT under Section 263:
The assessee challenged the CIT's order dated 30/03/2016, which revised the AO's assessment orders for the assessment years 2007-08 and 2008-09. The CIT invoked section 263, arguing that the AO's orders were erroneous and prejudicial to the interest of the revenue. The CIT contended that the AO had not adequately verified the assessee's claim for deduction under section 10B for the Bioinformatics division. The assessee argued that the CIT's order was "bad in law and/or void ab initio" and should be quashed.

2. Whether the AO's Order was Erroneous and Prejudicial to the Interest of the Revenue:
The CIT held that the AO's assessment orders were erroneous and prejudicial to the interest of the revenue because the AO had allowed the deduction under section 10B without proper verification. The CIT noted that the Bioinformatics division's activities did not qualify as "export of computer software" under section 10B. The CIT emphasized that the AO had failed to appreciate that the assessee's activities were primarily research and development (R&D) in bioinformatics chemistry, which did not fall under the definition of computer software.

3. Eligibility of the Assessee's Claim for Deduction under Section 10B:
The AO had allowed the assessee's claim for deduction under section 10B for the Bioinformatics division, concluding that the division was engaged in software development. The assessee argued that it developed bioinformatics software used for analyzing gene sequences and protein sequences and that these activities qualified as software development under section 10B. The assessee provided various documents, including agreements, approval letters from the Cochin Special Economic Zone (CSEZ), and financial statements, to support its claim.

The CIT, however, disagreed, stating that the assessee's activities were R&D in bioinformatics and not the export of computer software. The CIT pointed out that the invoices described the activities as "R&D charges," indicating that the assessee was exporting the results of its R&D rather than software.

Tribunal's Findings:
The Tribunal examined the submissions and documents provided by both parties. It noted that the AO had conducted a thorough verification of the assessee's claim during the reassessment proceedings. The AO had called for various details and documents to analyze the eligibility of the deduction under section 10B. The Tribunal observed that the AO had disallowed the deduction for the Genomics division but allowed it for the Bioinformatics division after verifying the details.

The Tribunal also referred to Circular No. 1/2013 issued by the Central Board of Direct Taxes (CBDT), which clarified that R&D activities related to software development would be covered under the definition of computer software for the purposes of section 10B. The Tribunal concluded that the AO's view was a possible and reasonable interpretation of the law.

The Tribunal held that the CIT had not adequately analyzed the activities carried out by the assessee and the documents submitted. The Tribunal emphasized that merely because the CIT had a different view, it did not make the AO's order erroneous or prejudicial to the interest of the revenue. The Tribunal cited various judicial pronouncements, including the Supreme Court's decision in Malabar Industrial Co Ltd vs CIT, to support its conclusion that the AO's order was not erroneous.

Conclusion:
The Tribunal quashed the CIT's order under section 263, holding that the AO's assessment orders were neither erroneous nor prejudicial to the interest of the revenue. The Tribunal allowed the assessee's appeals for both assessment years 2007-08 and 2008-09, thereby upholding the AO's decision to grant the deduction under section 10B for the Bioinformatics division.

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