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TMI Blog2017 (12) TMI 1703X X X X Extracts X X X X X X X X Extracts X X X X ..... o much of consideration. This factor, should clinch the issue in favour of the assessee-company. Thus viewed from any angle, the assessee-company cannot be denied the benefit of deduction u/s. 10AA though the reasoning adopted by the CIT(A) is cryptic. No reason to interfere with the order of the CIT(A) this issue. - Decided against revenue TDS liability on reimbursement of actual cost incurred - addition u/s 40(a)(ia) - HELD THAT:- There was no dispute with regard to the contention of the assessee-company that subject payments are merely reimbursement of the cost incurred and no profit element was present. Further there was no dispute that the payees had shown receipts as income in their respective hands and discharged the tax liability. In the light of these facts, we hold that the assessee-company is not under obligation to deduct tax at source on the payments which are not liable to tax in the hands of the payee. Further we find no reason to differ with the reasoning of the CIT(A) that when the second proviso to section 40(a)(ia) is applicable to the facts of the present case there is no obligation to deduct tax at source and consequent disallowance u/s. 40(a)(ia). See M/S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iatives and out-licenses products, processes, patents, technology that arises from the aforementioned research and development. The return of income for the assessment year 2011-12 was filed on 29/11/2011 declaring income of ₹ 91,469/- after claiming exemption of ₹ 14,48,36,551/- u/s. 10AA of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. Against the said return of income, the assessment was completed by the Addl. CIT, Range-11, Bengaluru, [AO] vide order dated 24/03/2014 passed u/s. 143(3) of the Act at total income of ₹ 98,05,69,683/-. While doing so, the AO had denied the exemption claimed u/s. 10AA of the Act and made addition of ₹ 82,65,66,645/- u/s. 40(a)(ia) on the payments made to domestic companies without deduction of tax at source, a sum of ₹ 84,99,225/- u/s. 40(a)(ia) of the Act in respect of payments made to non-resident parties and ₹ 5,75,793/- invoking the provisions of section 14A of the Act. The assessee had not deducted tax at source on the payments made to (i) M/s. Biocon Ltd. of ₹ 75,15,36,000/- and (ii) M/s. Biocon Biopharmaceuticals Pvt. Ltd. of ₹ 40,54,14,000/-. The AO noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Unit begins to manufacture or produce such articles or things or provide services, as the case may be. 6.2 It is claimed by the assessee that it is providing the Research and development Services to M/s. Mylan, GMBH, a foreign entity thereby claiming it as export of services and deduction u/s. 10AA is claimed on the profits arising out of the same. 6.3 The important things that can be derived from para 4.3.4 with respect to the case of the assessee for its claim to have provided services is that the assessee should provide services, export the same and deduction is available from the year in which such unit begins to provide services. 6.4 The assesses has stated that it has provided services to M/s. Mylan, GMBH. On verification of the profit and loss account of the assessee, it is observed that it has credited a sum of ₹ 64,95,91,000/- which includes a sum of ₹ 64,33,53,000/- (out of 18 million USD) being Licensing and development fees on which expenses have been claimed and arrived at net income(loss) of ₹ 32,24,38,000/- (loss) and net income of ₹ 14,48,36,551/- after making adjustments (disallowance and allowances as per In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready had with it and which was also not developed/produced by the assessee. It is the technology developed by the other company M/s. Biocon Limited. 6.8 In the beginning of the above mentioned agreements dated 27/06/2009, it is stated under the heading Background that - A. Biocon has certain rights with respect to the Biological Entity (as defined below) and capabilities with respect to the development and manufacture of products incorporating the Biological Entity and with respect to commercializing biopharmaceutical products globally. B. Mylan has capabilities and experience developing and commercializing branded and generic pharmaceutical products globally. C. The Parties desire to collaborate to develop, manufacture and commercialize product (as defined below), all on the terms and conditions set forth herein below. 6.9 The assessee has also made two agreements dated 08/06/2009 with M/s. Biocon Limited to acquire license, with right to grant sub-license, of the Licensed Technology for Development and Commercialization of the products in the BRL Territory. Biocon retains the exclusive rights to Manufacture the Product in the BRL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-company is entitled for deduction under the provisions of section 10AA of the Act. The relevant paragraph is as under: 7. Denial of relief u/s. 10AA for the A.Y. 2011-12: 7.1 According to the AO Section 10AA of the Act is available to an assessee who has been granted a letter of approval by the Development Commissioner under sub-section (9) of section 15 of the SEZ Act, 2005, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006. 7.2 The other condition is that the assessee will get a deduction of hundred per cent (or lesser depending on the number of years the deduction has been claimed) of profits and gains derived from the export, of such articles or things or from services beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture of produce such articles or things or provide services., as the case may be. 7.3 Further, sub-section 4 of section 10AA again lays dow certain conditions for a unit or undertaking to be eligible to claim deduction under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struction but Parliament amended to restrict reconstruction in the Income-tax Act. However, it is submitted that the non obstante Clause of SEZ is still there. It is submitted that it is not correct that there was no export, with the Joint Development, they exported information, some profit remained after receiving expenses payment. Some Bicon Engineers were working for them. There was also allocation of expenses by Biocon. 7.8 It is submitted that Mylan gave US $ 18 Million for further research for diabetic. The SEZ has given recognition to this unit. 7.9 It is submitted that BRL has been set up as a unit in SEZ and is eligible to claim relief under section 10AA of the Act. 7.10 Further, section 10AA of the Act encompasses to provide relief in relation income derived from the export during the year. Relevant extract of section 10AA of the Act, entailing the same is provided below: 10AA. (1) Subject to the provisions of this section; in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 245 of the Special. Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order regarding non-entitlement for the said relief as the assessee company did not satisfy all the conditions stipulated for claiming deduction u/s. 10AA. 3. The Ld. CIT(A) erred in not appreciating the fact that the initial consideration received by the assessee company from M/s. Mylan GMBH amounting to US$ 18 Million was for Biocon's development of platform technologies with respect to monoclonal antibodies prior to the effective date. Therefore, at the first instance, the assessee has not provided any service as the product was developed by M/s. Biocon Ltd. and later acquired by the assessee and accordingly, no export of services provided for which the said consideration was received by the assessee. The Ld. CIT(A) ought not to have held the assessee was eligible for deduction u/s. 10AA as no services have been provided by the assessee's unit in SEZ and thus has not satisfied the condition for availing the claim of disallowance. 4. The Ld. CIT(A) erred in not appreciating the fact brought out by the AO that the assessee company has acquired exclusive development and commercialization rights of certain monoclonal antibodies and since the intangible a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le with the assessee. For further development and research, the foreign entity M/s. Mylan is paying its share of expenditure and remaining amount is paid by the assessee as its share of expenses for R D. The entire activities are not being carried out for M/s. Mylan but it is being carried out by all the three entities for benefits of each of the party and such benefits are defined in the agreements signed by them. The agreements clearly state that this is a collaboration between three parties for development and commercialization of the product. Hence, the amount received initially cannot be attributed to any research activity carried out after the date of agreement and accordingly, no services are produced and exported as far as the initial consideration is concerned. 8. The Ld. CIT(A) ought to have appreciated that the agreements are more like a JDA between three parties where the costs being provided by each party is defined and the commercialization/manufacturing rights in various territories have also been defined. The parties to the agreement are coming together to develop the product or carry out trials in accordance with the various laws and regulatory authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees once in a while or for some reasons. However, as per the assessee's submissions though it is engaged in R D, its entire R D work is carried out by others. Thus the payment to others cannot be brought under the category of reimbursement and thus the same should have been treated as payment for works in the nature of contract for work which is liable for TDS. 14. The LD. CIT(A) erred in placing reliance on Ravi Spice Processors judgment while deleting the disallowance of ₹ 82,65,66,645/- made in the assessment order as in that case the issue was TDS to be made on freight charges to transport facilitators while in the instant case though the assessee is primarily into activities of R D of drugs, almost entire R D activities are carried out by other group companies and thus the nature of payments fall in the category of contract work. Thus these payments are liable to TDS u/s. 194C and the case relied upon by the Ld. CIT(A) is distinguishable. 15. The Ld. CIT(A) erred in deleting the disallowance made u/s. 40(a)(ia) of ₹ 82,65,66,645/-, while the appellate authority himself has upheld the finding of the A.O. in para 9.3 of the assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own for formation of the Unit will be examined during such re-assessment proceedings. b) Besides, reference was also made to the observations of the Assessing Officer in Paragraphs 7.1 to 7.8 to show that the Appellant's Unit has been established by using previously used Plant Machinery acquired from M/s. Biocon Limited and that such old Plant Machinery are more than 20% of the assets reflected in the balance Sheet. For this purpose, the Assessing Officer had treated the consideration of ₹ 48,05,00,000/- paid by the assessee to M/s. Biocon Limited for acquiring rights to certain molecules pursuant to the Agreement dated 8th June, 2009 as part of plant Machinery by relying upon the decision of Hon'ble Supreme Court of India in the case of M/s. Scientific Engineering House Pvt. Ltd. vs. CIT (1986) 157 ITR 86 and CIT Vs. M/s. Elecon Engineering Co. Ltd. (1987) 166 ITR 66. In these decisions, the Court had held that even the intangible assets could be regarded as Plant. In this respect, the assessee's Authorised Representative argued that what the assessee had acquired was certain Molecules and not Assets as considered by the Supreme Court in these deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en in Explanation 1 Sub-clause (ii) of this section is as follows. export in relation to the Special Economic Zones means taking goods or providing services out of India from a Special Economic Zone by land, Sea, air or by any other mode, whether physical or otherwise; In the Return of Income, the assessee had claimed deduction u/s. 10AA on account of export of R D services made to M/s. Mylan, GMBH. The Assessing Officer has discussed this issue in Paragraphs 6 to 6.13 of his Order. In this respect, during the course of hearing before the Hon'ble Bench, following facts were again reiterated to show that no export of services has taken place during the year to entitle the assessee such deduction u/s. 10AA. a) Attention was drawn to Page 208 of the Paperbook submitted by the assessee. The relevant Paragraph is at the end of the Page which is as follows. Mylan shall pay to Biocon a non-refundable payment of Eight Million Dollars ($ 8,000,000.00) (the Initial Payment ) within Five (5) Business Days of the later of the Effective Date and receipt of Biocon's wire instructions. Such Initial Payment is in consideration for Biocon's dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf had submitted that the payment received from M/s. Mylan, GMBH had been amortised over a period of 21 months in its P L account. Thus, the payment made to M/s. Biocon Limited had been set off against the payment received from M/s. Mylan, GMBH and after debiting certain other expenses, the balance Net profit has been computed and has been claimed as deduction u/s. 10AA. This itself shows that the claim was not on account of export of R D services but was only on account of acquisition of rights relating to certain monoclonal antibodies molecules and sublicensing of the same. It may be mentioned here that out of payment received from M/s. Mylan, GMBH, the appellant had credited ₹ 38,44,00,000/- during the F.Y. 2009-10 and balance amount of ₹ 64,33,53,000/- during the F.Y. 2010-11. Thus the entire amount has been amortised over a period of 21 months out of which 09 months fall within the F.Y. 2009-10. As already stated, the Unit in SEZ had started functioning from March 15, 2010. Thus the appellant had claimed deduction regarding the income amortised by it for 09 months of the F.Y. 2009-10. e) The other contention of the Assessing Officer was that the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the income credited to the P L account for the FY 2010-11 was not on account of export of any R D services, had also been accepted by the assessee before the assessing officer vide following relevant paragraphs of submission made before the AO on march 10, 2014, which has been reproduced on page No. 19 of the assessment order: The provisions of the section 10AA of the Act clearly provide that the benefit of tax holiday is conferred upon even in case of export of any service. Further, export turnover includes any consideration received by the SEZ undertaking in relation to export. Such definition invariably includes any passive income that may be generated in relation to exports, being income from grant of rights in the present case. (emphasis supplied) g) The other submission made on behalf of the Department was that no material evidence has been brought either before the AO or during the course of hearing before CIT(A), and not even before the Hon'ble Bench evidencing export of any services as being claimed by the assessee, except for the receipt of amount from M/s. Mylan, GMBH in consequent to the agreement entered by it with the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring this year and nothing has been exported in the nature of services. Hence, the Assessing Officer has rightly disallowed the claim of deduction u/s. 10AA of the Income Tax Act. ) The ground numbers 12 to 15 of Departmental Appeal for A.Y. 2011-12 relate to disallowance of research and development expenses under section 40(a)(ia) of the Act. The assessee had paid ₹ 115,695,000 to M/s. Bicon Ltd. and and M/s. Bicon Bio Pharmaceutical Pvt. Ltd. for conducting research and development activities on its behalf. It was claimed as re-imbursement or cross charges and hence no TDS was deducted. The AO has held that the payment falls under the category of contract work and hence deduction under section 194C was required to be made. In this respect, following arguments have been made before the Hon'ble Bench: a) Regarding assessee's contention that there is no written contract between the assessee and these two parties, reference was made to the decision of Hon'ble High Court of Karnataka in the case of Maruti Subray Patil [2015] 63 taxmann.com 28 (Karnataka). In paragraph 25 of the order the Court has held that TDS has to be made even if oral contract i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement entered into Biocon Limited and BRL is already furnished in pages 99 to 124 of the paper book for AY 2011-12. The platform technology acquired by BRL was not used at any time by Biocon Limited. This product was not completely developed and could not have been used independently/commercialized on a standalone basis. Thereafter, to further develop and commercialize the platform, the Appellant, Biocon and Mylan had entered into a development and commercialization agreement. While Appellant had the research and development expertise, Mylan had the expertise in commercialization of the product. Biocon Limited had the manufacturing expertise and hence was given manufacturing right. The arrangement entailed significant amount of research and development activities which were required to be carried out by the Appellant and therefore the Appellant had to incur significant costs in respect of such research and development activities carried out pursuant to the arrangement. As part of the above arrangement, BRL received the following consideration: Upfront payment of USD 18MN which represented commitment payment for undertaking futu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd activities conducted to generate data intended for.... Clause 1.8 and 1.16 - Line 282 and 341 to 343 of agreement - Page 197 and 199 of the Paperbook BRL, Biocon Limited and Mylan shall collaborate and each use commercially reasonable efforts to Develop, Manufacture and Commercialize Product, respectively ... Clause 2.1 - Line 494 to 496 of the agreement - Page 205 of the Paperbook Parties shall establish a joint development committee to review and coordinate the conduct and progress of the development ...Clause 2.3 - Line 546 to 548 of the agreement-Page 207 of the Paperbook The committee shall be comprised of representatives from each of parties - Clause 2.6 - Line 642 of the agreement -- Page 209 of the Paperbook BRL and Mylan shall conduct a Development Program directed towards Development of Product for applications in the Field in both the Mylan Territory and ROW on a collaborative basis - Clause 3.1 - Line 784 to 786 of the agreement - Page 213 of the Paperbook The Development plan shall be carried out in accordance with development plan covering development activities to be conducted - Clause 3.2 - Line 809 to 811 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made in the Assessment order for AY 2011-12 In the assessment order for AY 2011-12, the learned AO has denied the deduction under section 10AA of the Act claimed for the following reasons: Mylan paid the consideration for the platform technology which was already available with the Appellant. BRL had not carried out any research activity in the SEZ unit. BRL has not produced any article or things or provided any services. The entire research activities had been carried out by other group concerns. Consideration received by BRL is not for the R D services but for Licensing and Development. BRL had acquired the platform and technology from M/s. Biocon Limited. Hence, BRL failed to fulfill the condition under clause (iii) of sub-section 4 of section 10AA of the Act. In the above back ground, the Appellant hereby submits as under: A. Consideration represents amount received towards export of research and development services carried out in SEZ Unit and not towards any existing technology At the time of entering into the contract with Mylan, the MABS programs were in early development phase and had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitial research and development activities. A statement showing quantum of expenses incurred by BRL vis-`-vis. is enclosed as Annexure 7. The quantum of expenses firstly incurred by BRL during the initial years vis-a-vis quantum of expenses incurred by Mylan during the initial years reflects the facts that the activities in question were carried out by BRL. Annual Performance Report ('APR'): The Appellant further wishes to submit that it had further filed APR in the Form I for FY 20101-11 (copy enclosed as Annexure 8), with the Development Commissioner Confirming export of services; Evidencing investment in plant and machinery (lab equipment) and building; and Evidencing employees hired by the Appellant for undertaking research and development activities. The investment in fixed assets is also evidenced by the disclosure in the cash flow statement as well as fixed assets schedule of the Company. The above demonstrates the fact that the Appellant had an infrastructure facility - a R D laboratory out of which the research activities are being undertaken. Though the Appellant had availed certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be commercialization after the completion of the above-mentioned services/activities. Licensing of Biocon technology is integrally linked to completion of research and development activities through the Company's continued involvement and cannot be viewed as a discrete event. It is a common practice in the pharmaceutical industry, that prior to any drug/pharmaceutical product being marketable/sold in a country/territory, certain approvals are required to be obtained from the governmental authorities and the selling/marketing entity proposing to obtain such an approval is required to file a dossier containing various technical specifications of the drug/pharmaceutical product proposed to be marketed/sold. Accordingly, it is common for marketing/selling entities to obtain a license/commercial rights in respect of the drug/pharmaceutical product for the purpose of obtaining the regulatory approvals and marketing/commercializing the drug/pharmaceutical product. In light of the above, it is evident that grant of rights for commercializing and marketing is imperative and an integral step to enable the customer to utilize the research and de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd rules thereunder, the provisions of the SEZ Act will override the provisions of Act even if anything inconsistent is contained in the provisions of the Act and deduction will be available: DCIT v. Bommidala Enterprises (P.) Ltd. [2017] 80 taxmann.com 362 (Visakhapatnam - Trib.) DLF Info city Developers Ltd. [TS-362-ITAT-2013(DEL)] Zaveri Co (P.) Ltd. v. Commissioner of Income-tax 2014 48 taxmann.com 154 (Ahd - Tri) Goenka Diamond Jewellers Ltd. [TS-57-ITAT-2012(JPR)] A copy of these decisions have been already been submitted in the case law paper book compilation/during the course of hearing. The Delhi ITAT in the case of DLF Info City Developers (supra) held as under: 38. Thus, it is clear from the above that the provisions of SEZ Act shall have over riding effect even if anything inconsistent is contained in the Income Tax Act. The SEZ Act has been enacted containing the specific legislation to be brought in other statutes. When the terms like SEZ, authorized operations, developers etc have been specifically defined under the SEZ Act, it is not open to any authority to relook at the meaning of terms already def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxed only under the head Business Income. Page 35 para 6.16 The letter of approval is issued by the Board by a statutory process of law and once it has been issued by the exclusive sanctioning authority, the consequential benefits that are available to a Developer cannot be denied. The Assessing Officer or the Commissioner of Income-tax exercising the power of revision under the Act cannot have any jurisdiction to question the validity of the legality of the authorized operations which have been approved by the Regulatory body of the Central Government i.e. BOA and attempt to dispute the same is contrary to the statutory provisions of the SEZ. (Emphasis Supplied) In the present case, as highlighted above, the approval for the SEZ unit has been duly granted by the SEZ authorities and further such approval has been extended for a further period of five years (a copy of the extension letter is enclosed as Annexure 9). No violation of the terms and conditions of the approval has been pointed out by the SEZ Authorities. Accordingly, the SEZ authorities having duly granted the approval and further having renewed the approval, it is not open for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for undertaking research and development activities. There was no business in the first instance in the hands of Biocon Limited for it to be transferred to BRL. Accordingly, it cannot be said that the SEZ Unit of the Appellant was formed by splitting up and re-construction of any existing business of Biocon Limited. c) The SEZ Unit must not be formed by the transfer to a new business, of machinery or plant previously used for any purpose subject to a relaxation of 20% (Third condition). Intangible asset cannot be considered as plant and machinery The terms 'machinery' or 'plant' have not been denned in the context of section 10AA of the Act. It is relevant to note that under section 43(3) of the Act, plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of business or profession but does not include tea bushes or livestock or buildings or furniture or fittings. Explanation 3 to section 32(1) of the Act defines assets to mean both tangible and intangible assets. The decision of the Supreme Court in the case of Scientific Engineering House (P) Ltd. V. CIT 1985 23 Taxman 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logy acquired and was not formed by transfer of such platform technology. Accordingly, it cannot be said that SEZ unit was formed by transfer of used plant and machinery of Biocon Limited. Income-tax written down value to be considered for the purpose of calculating threshold limit Without prejudice to the above, section 10AA of the Act does not specify the value to be considered for computing the 20 percent threshold. The Appellant wishes to submit that the value of assets to be considered for comparison should be tax written down value. In the present case, the cost of acquisition for such rights was considered nil in the tax books of the Appellant. Accordingly, the 20 percent limit is not breached. Conclusion To conclude, as highlighted above, Biocon had its own SEZ unit from where it could have undertaken research and development activities to claim tax holiday. However, BRL was set-up with the objective of undertaking research and development in biosimilars and novel products. Further, there was no existing business in Biocon in respect of such molecules. Hence, the allegation that SEZ Unit has been set-up by spl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Economic Zone Re-investment Reserve Account is to be utilised-- (i) for the purposes of acquiring machinery or plant which is first put to use before the expiry acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India; (b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income 23 for the assessment year relevant to the previous year in which such plant or machinery was first put to use. (3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),-- (a) has been utilised for any purpose other than those referred to in sub-section (2), the amount so utilised; or (b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (2), the amount n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose. Explanation.--The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.] (5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India; (ii) export in relation to the Special Economic Zones means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise; (iii) manufacture shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005; (iv) relevant assessment year means any assessment year falling within a period of fifteen consecutive assessment years referred to in this section; (v) Special Economic Zone and Unit shall have the same meanings as assigned to them under clauses (za) and (zc) 27 of section 2 of the Special Economic Zones Act, 2005. Explanation 2-For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10 of the Special Economic Zone Act, 2005 which are as under: Suspension of letter of approval and transfer of Special Economic Zone in certain cases 10. (1) If, at any time, the Board is of the opinion that a Developer-- (a) is unable to discharge the functions or perform the duties imposed on him by or under the provisions of this Act or rules made thereunder; or (b) has persistently defaulted in complying with any direction given by the Board under this Act; or (c) has violated the terms and conditions of the letter of approval; or (d) whose financial position is such that he is unable to fully and efficiently discharge the duties and obligations imposed on him by the letter of approval, and the circumstances exist which render it necessary for it in public interest so to do, the Board may, on application, or with the consent of the Developer, or otherwise, for reasons to be recorded in writing, suspend the letter of approval, granted to the Developer for a whole or part of his area established as Special Economic Zone, for a period not exceeding one year and appoint an Administrator to discharge the functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Board, again vest in the person, being the Developer, in whom it was vested immediately prior to the date of appointment of the Administrator. (9) Where the Board suspends the letter of approval, under this Section, in respect of any Developer, the following provisions shall apply, namely:-- (a) the Board shall invite applications for transferring the letter of approval of the Developer, whose approval has been suspended and select the person or persons, in accordance with the procedure as may be prescribed, to whom the letter of approval of the Developer in the Special Economic Zone may be transferred; 11. Now we shall deal with the reasons assigned by the AO while denying the deduction u/s. 10AA of the Act. 12. The reasons given by the Assessing Officer while denying the deduction u/s. 10AA of the Act are as under: Mylan paid the consideration for the platform technology which was already available with the Appellant. BRL had not carried out any research activity in the SEZ unit. BRL has not produced any article or things or provided any services. The entire research activities had been carried out by other group c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment on the platform technologies. In other words, the AO has not disputed the activity carried on by the assessee. The findings of the Assessing Officer are contradictory to each other. 15. The fourth reason assigned by the AO is that the assessee-company had acquired platform technology from Biocon Ltd. and failed to fulfill the condition under clause (iii) of sub-section (4) of section 10AA of the Act which provides that the SEZ units should not be formed by splitting up or reconstruction of the existing business or should not be formed by transfer to a new business of Plant Machinery previously used for any purpose. 16. In rebuttal, the assessee-company had made submission that platform technology was acquired by the assessee-company from Biocon Ltd., for the purpose of development and commercialization. This platform was never used by Biocon earlier in its business. This is nothing but an intangible asset and can be considered as a plant and machinery in the light of plain provisions of Explanation 2 to section 32(1) of the Act which defines 'asset' to mean to include both tangible and intangible assets. Furthermore, under the provisions of SEZ, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny reason to interfere with the order of the CIT(A) this issue. The grounds of appeal No. 2 to 11 of the revenue are dismissed. 18. Ground Nos. 12 to 15 challenge the finding of the CIT(A) that there was no liability to deduct tax and the provisions of section 40(a)(ia) not applicable on the payment of ₹ 82,65,66,645/-. The impugned payments are made by the assessee-company to M/s. Biocon Ltd. and M/s. Biocon Pharmaceuticals Ltd. It was stated that these payments were in the nature of reimbursement of actual cost incurred by these companies. It was contended that there was no profit element on these payments and the question of deduction of tax at source does not arise. It was further contended that the payees i.e. M/s. Biocon Ltd. and M/s. Biocon Pharmaceuticals Ltd. had already offered this amount as income in their hands and tax due thereon was duly discharged by them and therefore, by virtue of second proviso to section 40(a)(ia), the question of deduction of tax at source does not arise. It was further submitted that the second proviso to section 40(a)(ia) was inserted by the Finance Act, 2012 but it was held by the Hon'ble Delhi High Court in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same were reversed in the beginning of the next accounting year. The short point that arises for our consideration is whether the liability for deduction of tax at source has arisen the moment the amount is credited in the books of accounts. Having regard in the scheme of tax deducted at source, under Chapter-XVII-B of the IT Act, we are of the considered opinion that the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee. We are holding so, keeping in view the ratio laid down by the Hon'ble Apex Court in the case of M/s. GE India Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) wherein the Hon'ble Supreme Court held that if payment is not assessable to tax there is no question of tax at source being deducted. The relevant portion of the judgment is reproduced as under:- If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words chargeable under the provisions of the Act in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preting the provisions of the Income Tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly and Co. (India) (P) Ltd. (2009) 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income Tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are chargeable to tax under the Income-Tax Act. It is true that the judgment in Eli Lilly (2009) 312 ITR 225 was confined to section 192 of the Income Tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income chargeable under the head salaries . Similarly section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act . Which expression, as stated above, do not find place in othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, section 195(1) uses the expression sum chargeable under the provisions of the Act . We need to give weightage to those words. Further, section 195 uses the word payer and not the word assessee . The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The above-mentioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the Income Tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an expenditure'. Under Section 40(a)(i), inserted, vide Finance Act, 1988, with effect from April 1, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount on the footing that only a portion of the payment made represented 'income chargeable to tax in India' then it was necessary for him to make an application under section 195(2) of the Act to the Income Tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view, section 195(2) is based on the principle of proportionality . The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of 'income' chargeable to tax in India. It is in this context that the Supreme Court stated, 'if no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax, even though in book-keeping an entry is made about a 'hypothetical income;, which does not materialize. Where income has, in fact, been received and is subsequently, given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account . Thus, having regard to the ratio laid down by the Hon'ble Apex Court, it cannot be said that income had accrued in the hands of the payee. We, therefore, hold that there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end. Hence, the assessee company cannot be treated as 'assessee in default' for not deducting tax at source and therefore, we allow the grounds of appeal filed by the assessee company in this regard. The Hon'ble High Court of Karnataka in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT (2016) 383 ITR 59(Karn) held that for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40(a)(ia) is applicable to the facts of the present case there is no obligation to deduct tax at source and consequent disallowance u/s. 40(a)(ia) of the Act. Thus, we do not find any reason to interfere with the order of the CIT(A). The grounds No. 12 to 15 filed by the revenue are dismissed. 19. In the result, the appeal filed by the revenue is dismissed. ITA No. 1299/Bang/2016 (Assessment year 2011-12): 20. The assessee-company raised the following grounds of appeal: 1. The Ld. CIT(A) has erred in passing an order under section 250 of the Act which is bad in law and in facts. 2. The Ld. CIT(A) has erred in upholding the order of the Assessing Officer ( AO ) in relation to the disallowance made under section 40(a)(i) and section 14A of the Act. 3. Disallowance of claim under section 40(a)(i) of the income tax Act. 1961 3.1 The Ld. CIT(A) has erred, in law and on facts, in upholding the disallowance made by the AO in respect of the payments made by the Appellant to certain overseas parties towards professional services. 3.2 The Ld. CIT(A) has erred, in law and on facts, in disregarding the reliance plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the portfolio manager from the Appellant in relation to the investments made by the Appellant. 4.5 The Ld. CIT(A) has erred, in law and on facts, by making a disallowance when no expenditure has been claimed as a deduction by the Appellant in the first place. 4.6 The Ld. CIT(A) has erred, in law and on facts, in disregarding the provisions of section 14A of the Act mandates that expenses debited to the Profit and loss account should have adequate nexus to the exempt income. 4.7 The Ld. CIT(A) has erred in disregarding the decisions in the case of Maruti Udyog Limited Vs. Deputy Commissioner of Income Tax (92 ITD 119), Wimco Seedlings Limited Vs. DCIT - 107 ITD 267 (Del.)(TM) and Karnataka High Court in the case of Canara Bank Vs. Act (2014) relied upon by the Appellant, wherein it has been held that the onus to establish the nexus of the expenditure claimed with the exempt income is on the Revenue. Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Karnataka High Court in the case of De beers Minerals vs. OT (2012) (Kar. HC). 24. We heard rival submissions and perused the material on record. From the description of services rendered by non-resident parties, it is clear that the assessee-company is only entitled to use the annual report given by those parties which does not mean that technology is made available to it. The co-ordinate bench of Tribunal (Delhi) in the case of ITO vs. Nokia India Pvt. Ltd. (59 taxman.com 120) has considered an identical issue wherein, after placing reliance on the decision of the Hon'ble Karnataka High Court in the case of De Beers Ltd., (supra) held as follows: 8. We have heard the rival submissions and perused the material on record. The undisputed facts of the case are that the nature of services rendered by Olof Granlund Finland to the assessee respondent company are as under:-- (a) Review of systems description, diagrams, cost estimates, building designs etc. (b) Review of preliminary system design and quality control (c) Review of equipment list/selections, lay out proposals, conducting inspections etc. 9. Now we are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd, it is pertinent to mention the Mumbai Tax Tribunal in the case of Raymond Ltd. (supra), has clarified that meaning of the term 'make available' under India-UK Double Taxation Avoidance Agreement may be inferred from the MoU to India-US Treaty. This equally and expressly follows that the Hon'ble Tribunal has accepted the concept of parallel treaty interpretation. The ITAT held as under: The MOU appended to the DTAA with USA and the Singapore DTAA can be looked into as aids to the construction of the UK DTAA. They deal with the same subject (fees for technical services, referred to in the US agreement as fees for included services ). As noted earlier, it cannot be said that different meanings should be assigned to the US and UK agreements merely because of the MOU despite the fact that the subject-matter dealt with is the same and both have been entered into by the same country on one side (India). The MOU supports the contention of the assessee regarding the interpretation of the words make available . The portions of the MoU explaining para 4(b) of the relevant article, which we have extracted earlier in our order while adverting to the contentions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wledge, experience, skill, know-how, or processes to the recipient which enables the recipient to apply the same on his own. Further, on page 790 of Klaus Vogel on Double taxation conventions - Third edition, Vogel comments that the criterion used to distinguish the provision of know-how from rendering advisory services is the concept of imparting. The relevant extract of the commentary has been reproduced below: Imparting of experience: Whenever the term royalties relates to payments in respect of experience ('know-how'), the condition for applying Article 12 is that the remuneration is being paid for 'imparting' such know-how ...... ..... in contrast, the criterion used to distinguish the provision of know-how from rendering advisory services is the concept of 'imparting'. An advisor or consultant, rather than imparting his experience, uses it himself (BFH BstBl II 235 (1971), Ministre des Relations exterieures, Response a M Bockel, 36 Dr. Fisc. Comm. 1956 (1984)). All that he imparts is a conclusion that he draws - inter alia - from his own experience. His obligation to observe secrets, or even his own interest in retaining his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its primary insurance cover in conjunction with lB. Boda and Alsford Page and gems Ltd. (the reinsurance brokers). The terms of the agreement specifies that the assessee in conjunction with J.B. Boda are recognized as intermediary, through whom all communications relating to this agreement shall pass. The terms of the agreement further provides that the assessee will provide all the details of agreed endorsements to the re insurers bye-mail or facsimile and shall submit the slip policy to XIS (Lloyd's processing market) for signing. The assessee will act as a claim administrator and will submit claims advices to relevant market systems. For the services rendered, the assessee along with the other reinsurance brokers acting as an intermediary in the reinsurance process for New India Assurance Co. will be entitled to 10% brokerage. From the role played by the assessee in the reinsurance process as discussed above, it is evident to us that the assessee was rendering only intermediary services while acting as an intermediary/facilitator in getting the reinsurance cover for New India Insurance Co. There exists no material or basis on the basis of which, it would be said that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in the facts and circumstances of the present case. 13. In our view, the Tribunal has arrived at these conclusions purely on assessing the factual matrix of the case at hand. The findings are in the nature of factual findings and, therefore, according to us, no substantial question of law arises for our consideration, particularly, because the learned counsel for the Revenue was unable to point out any perversity in the recording of such findings. As such no substantial question of law arises for our consideration. The appeal is dismissed. There shall be no order as to costs. Even Hon'ble Karnataka High Court in the case of De Beers India Minerals (P.) Ltd. (supra) had interpreted the term 'make available' as under:-- 22. What is the meaning of make available . The technical or consultancy service rendered should be of such a nature that It makes available to the recipient. Technical knowledge, know-how and the like., The service should be aimed at and result in transmitting technical knowledge, etc. so that the payer of the service could derive an enduring benefit and utilize the knowledge or know how on his own in future without th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; technical knowledge etc., where such technical knowledge is transferred to the person utilizing the service (i.e., the appellant in the instant case) and such person is able to make use of the technical knowledge etc., by himself in his business or for his own benefit and without recourse to the performer of services (i.e. Olof Granlund) in the future. The mere fact that provision of service may require technical knowledge by the person providing the service would not per se mean that knowledge has been made available. The learned assessing officer has in the impugned order accepted the position that recourse should be made to the interpretation provided under the MoU to India-US tax treaty to determine whether payments made by the appellant qualify as FTS under the provisions of India-Finland tax treaty. However, the learned assessing officer has erroneously relied on certain examples provided under the MoU to conclude that payments made by the assessee qualify as FTS under provisions of India-Finland tax treaty. Further, the term 'make available' in the context of consultancy services has been subject matter of consideration before various appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovider must itself develop the technical plan or design and then transfers the same to the recipient of the services ..... 28. In the light of the above position of law, we are of the considered opinion that the assessee-company is not under obligation to deduct tax at source on the payments made to non-resident parties and therefore, the question of consequent disallowance u/s. 40(a)(ia) of the Act does not arise. Thus, the grounds of appeal are allowed. 29. Ground No. 4 relates to confirmation of disallowance u/s. 14A of the Act. During the previous year relevant assessment year under consideration, the assessee-company had earned dividend income on investment in mutual funds. It is the contention of the assessee-company that investments are made out of surplus funds of the assessee-company. Therefore, dividend income earned by the assessee-company is net of the expenditure and there is no expenditure incurred to earn exempt income. Therefore, the question of invoking provisions of section 14A does not arise. Reliance in this regard was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share Stock Brokers (P.) Ltd. (233 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the payees once in a while or for some reasons. However, as per the assessee's submissions though it is engaged in R D, its entire R D work is carried out by others. Thus the payment to others cannot be brought under the category of reimbursement and thus the same should have been treated as payment for works in the nature of contract for work which is liable for TDS. 4. The LD. CIT(A) erred in placing reliance on Ravi Spice Processors judgment while deleting the disallowance of ₹ 45,22,75,447/- made in the assessment order as in that case the issue was TDS to be made on freight charges to transport facilitators while in the instant case though the assessee is primarily into activities of R D of drugs, almost entire R D activities are carried out by other group companies and thus the nature of payments fall in the category of contract work. Thus these payments are liable to TDS u/s. 194C and the case relied upon by the Ld. CIT(A) is distinguishable. 5. The Ld. CIT(A) erred in deleting the disallowance made u/s. 40(a)(ia) of ₹ 45,22,75,447/-, while the appellate authority himself has upheld the finding of the A.O. in para 4.3 of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Double Taxation Avoidance Agreement ( DTAA ) entered into between India and USA/and UK, wherein the Appellant has not withheld taxes on payments made to Biologies Consulting Group Inc, Bioprocess Tech Consultants Inc, Millipore UK Ltd. and Kaisheva Associates Pharmaceuticals Consulting ( overseas parties ) as the services provided by such overseas parties was not in the nature of fees for included services under Article 12 of the DTAA. 3.3 The Ld. CIT(A) has erred, in law and on facts, in concluding that the services rendered by the overseas parties is in the nature of fees for included services by not appreciating the fact such services do not make available any technical knowledge, experience, skill or process that can be applied by the Appellant itself going forward. 3.4 The Ld. CIT(A) has erred, in law and on facts, in disregarding the decision of the Karnataka High Court in the case of De beers Minerals Vs. CIT (2012) relied upon by the Appellant, wherein the court has explained the meaning of make available in detail. 3.5 The Ld. CIT(A) has erred, in law and on facts, in treating the payments made by the Appellant to overseas parties as pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honourable Income tax Appellate Tribunal to decide this appeal according to law. 35. Ground Nos. 1 and 2 are general in nature and do not require any adjudication. 36. Ground No. 3 challenges the fining of the ld. CIT(A) confirming the addition u/s. 40(a)(ia) for alleged failure to deduct tax at source on the payments made to non-resident parties. An identical issue was decided in assessee's own case in ITA No. 1229/Bang/2016 (assessee's appeal) in assessee's favour. On the parity of same reasoning, this ground of appeal filed by the assessee is allowed. 37. Ground No. 4 challenges the finding of the ld. CIT(A) confirming the addition made u/s. 14A of the Act. An identical issue was decided in assessee's own case in ITA No. 1229/Bang/2016 (assessee's appeal) in assessee's favour. On the parity of same reasoning, this ground of appeal filed by the assessee is allowed. 38. In the result, the assessee's appeal is allowed. 39. In the result, the appeals filed by the revenue in ITA Nos. 1250 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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