2006 (11) TMI 140 - AAR - Income Tax

Applicant, resident of Netherlands wants to establish a manufacturing facility in partnership with her family members in India, to avail of the tax holiday u/s 80-IC - Question regarding exemption u/s 80-IC, pertaining to the profits and gains derived by Bayer Health from the production outsourced to the applicant s firm, and included in the gross total income of Bayer Health, a resident company, is beyond the scope and consideration of Advance Rulings under Ch. XIX-B application rejected

Summary

Issues:
1. Entitlement to Income Tax exemption under Section 80-IC for direct business and processing charges.
2. Nature of direct business and eligibility for exemption under section 80-IC.
3. Control and management of the firm for claiming non-resident status.

Analysis:

Issue 1: Entitlement to Income Tax Exemption
The applicant sought clarification on whether their firm would be entitled to Income Tax exemption under Section 80-IC for the direct business procured by it and the processing charges received from Bayer Health Care Pharmaceuticals. The Commissioner highlighted the necessity for the industrial undertaking to be situated in a specified area to claim the exemption. It was emphasized that outsourcing manufacturing to the applicant's unit would not allow Bayer Health to claim the exemption under section 80-IC.

Issue 2: Nature of Direct Business and Eligibility for Exemption
The applicant clarified that the direct business would involve formulation/processing of pharmaceutical products for companies other than Bayer Health. However, the Commissioner raised concerns about the nature of the business, stating that for eligibility under section 80-IC, the business must involve manufacturing or production. The Commissioner also noted discrepancies in the facts provided by the applicant, indicating that complete information was not provided.

Issue 3: Control and Management for Non-Resident Status
The Authority examined the partnership deed between the applicant and her husband to determine the control and management of the firm. It was found that the resident partner would have de facto control over the affairs, which does not align with the requirement for a firm to be considered non-resident as per section 6(2) of the Act. The Authority concluded that since the de facto control and management would be with the resident partner in India, the firm could not be classified as a non-resident entity, leading to the rejection of the application.

In conclusion, the Authority rejected the application due to incomplete information provided, lack of clarity on the nature of direct business, and the control and management structure of the firm. The ruling emphasized the importance of meeting the criteria for Income Tax exemption under Section 80-IC and maintaining accurate documentation to support such claims.