9911796707
TMI Blog2017 (12) TMI 1703X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2011-12 was filed on 29/11/2011 declaring income of Rs. 91,469/- after claiming exemption of Rs. 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 Rs. 98,05,69,683/-. While doing so, the AO had denied the exemption claimed u/s. 10AA of the Act and made addition of Rs. 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 Rs. 84,99,225/- u/s. 40(a)(ia) of the Act in respect of payments made to non-resident parties and Rs. 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 Rs. 75,15,36,000/- and (ii) M/s. Biocon Biopharmaceuticals Pvt. Ltd. of Rs. 40,54,14,000/-. The AO noted that the assessee-company had complied with TDS provisions only on payment of Rs. 16,89,43,700/- and the amount of Rs. 16,14,39,655/- being the 'provision made for cost recharge for Mylan Program ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby 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 Rs. 64,95,91,000/- which includes a sum of Rs. 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 Rs. 32,24,38,000/- (loss) and net income of Rs. 14,48,36,551/- after making adjustments (disallowance and allowances as per Income Tax) which is claimed as deduction under section 10AA. It is observed that the said amount of Rs. 64,33,53,000/- is received by the assessee on account of four agreements entered into by the assessee with M/s. Mylan, GMBH, which the assessee has divided over a period of 21 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity (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 territory" as mentioned at para 2.1 and" co-exclusive license, with right to grant sub-license, of the Licensed Technology for Development and Commercialization of the products in the ROW. Biocon retains the exclusive rights to Manufacture the Product in ROW" as mentioned in para 2.2 of the License agreement. 6.10 The product mentioned the license agreement refers to four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture 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 10AA that:- (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 splitting up, or the reconstruction of a business already in existence; (iii) It is not formed by the transfer to a new business of machinery or plant previously used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her 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 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, a deduction of- (i) hundred per cent of profits and gains derived from the export, of such articles or things or from (services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asset is transferred from the holding company, M/s. Biocon Ltd., to its wholly owned subsidiary, the assessee company does not satisfy the condition laid down in sec. 10AA(4)(iii) that the unit should not be formed by the transfer to a new business, of machinery or plant previously used for any purpose and thus not eligible for deduction u/s. 10AA. 5. The Ld. CIT(A) ought to have appreciated the fact that as per sub-section 4 of sec. 10AA and provided in explanation 2 of sub-section 3 of sec. 80IA, the old plant and machinery used in new business should not exceed 20%. However in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authorities to make it marketable in respective territories. The development is being carried out by the parties in India and as such there is no export of services. 9. The Ld. CIT(A) ought to have held that the assessee is not eligible for deduction u/s. 10AA as the consideration is for the technology platform which was already developed by M/s. Biocon Ltd. and the same is to be used in India by the assessee for further development and trials. 10. The Ld. CIT(A) erred in not holding that the assessee is not eligible for deduction u/s. 10AA as it is observed that the assessee itself has not carried out any R & D activity but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 Rs. 82,65,66,645/-, while the appellate authority himself has upheld the finding of the A.O. in para 9.3 of the assessment order vide para 5.4 of the appellate order. 16. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 17. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal. 4. The ground Nos. 1, 16 and 17 are general in nature and do not require any adjudication. 5. Ground Nos. 2 to 11 challenge the finding of the ld. CIT(A) holding that the assessee-company is entitled for deduction u/s. 10AA of the Act. 6. The ld. CIT(DR) filed written submissions as under: As directed during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific 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 decisions, which were in the nature of up to date and complete sets of documents. In this regard, it has been argued by the Department that the Molecules could not have been physically handed over and what would have been handed over are documents relating to the manufacture and production of such Molecules. Hence payment made is for the acquisition of Plant & Machinery as held by the Supreme Court. c) The other contention of the appellant was that once Approval has been granted by the SEZ Commissioner, the Assessing Officer cannot act against such approval without making reference under the First Proviso to Section 143(3)(iii). In this respect, it has been submitted by the Department that these aspects will be looked into during the course of Re-assessment proceedings for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant 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 development of platform technologies with respect to monoclonal antibodies prior to the Effective date. (emphasis supplied) b) Further the relevant dates of the formation of the assessee's unit in the SEZ, Agreement entered into by the assessee with its Parent company, M/s. Biocon Limited; and the Joint Development Agreement entered amongst the Assessee, M/s. Biocon Ltd. & M/s. Mylan, GMBH were mentioned, which are as follows. I) Date of initial registration of the appellant unit with SEZ on 05.03.2009. II) Date of commencement of manufacture and production on 15.3.2010. III) Date of agreement with the Parent company M/s. Biocon Limited for acquiring rights relating to development of 4 molecules vide 4 separate agreements dated 08.06.2009. IV) Date of Agreement amongst the Assessee, M/s. Biocon Limited and M/s. Mylan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 appellant was not doing any research activity in its SEZ unit and the entire work had been outsourced to Parent company and to one another Sister concern. During the course of hearing before the Hon'ble Bench, it had been claimed by the Ld. AR that the appellant had only taken help of some employees of Sister concerns, which were transferred to the Research facility established by the assessee in its SEZ unit and their salaries had been reimbursed to the Sister concerns and accordingly, R & D expenses of Rs. 1,156,950,000/- had been debited to the P & L A/c. On behalf of the Department it was stated that this claim of the Ld. AR was incorrect. In support of such contention, reference was made to Page No. 17 of the Assessment order on which the copy of the letter dated March 10, 2014 submitted by the assessee before the Assessing Officer has been reproduced. The relevant Paragraphs regarding such contention are reproduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;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 and M/s. Biocon Limited. h) It was also pointed out that the agreement dated 27.6.2009 between the assessee, M/s. Mylan, GMBH and M/s. Biocon Limited was not an agreement for export of R & D services but rather was a Joint Development Agreement, by virtue of which the assessee was to develop the marketable products out of Molecule obtained from M/s. Biocon Limited and M/s. Mylan, GMBH was to commercialise the same in the territories assigned to it. Besides, M/s. Biocon Limited was given the right to manufacture all the commercially suitable products in India as well as rest of the World. Further the agreement also provided that the assessee itself had to do commercialisation of the products in areas outside the areas assigned to M/s. Mylan, GMBH. Thus, the result of the R & D allegedly done by the assessee was going to accrue to all 3 parties which included the assessee itself. Besides, the results of services made to M/s. Biocon Limited were available in India itself and hence involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubray 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 is there. b) Regarding assessee's claim that it was reimbursement of payments, it has been argued that no evidence in this regard in documentary form has been produced either before the Assessing officer or the CIT(A) or the during the course of the hearing before the Hon'ble Bench. c) Regarding the claim that the recipients have included the receipts in their income in the returns of income filed by them and hence, as per the second proviso to section 40(a)(ia) no disallowance is required to be made, it has been submitted that Hon'ble Supreme Court of India has admitted the SLP filed by the revenue against the decision of hon'ble High Court of Delhi in the case of CIT v. Ansal Land Mark Township (P.) Ltd. [2015] 61 taxmann.com 45/234 Taxman 825 (Delhi). In this decision the Court had held that the second proviso to section 40(a)(ia) is declaratory and curative and it has retrospective effect from 2005. d) Further, reliance was placed on the decision of ITAT Mumbai Bench in the case of [2013] 40 taxmann.com 154 (Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Upfront payment of USD 18MN which represented commitment payment for undertaking future obligations (i.e., performance of research and development services). This was recognised as revenue in the books of account on a straight-line basis over the expected period of performance of R & D activities. Sharing/reimbursement of development expenses between BRL and Mylan in agreed ratio. A pictorial representation of the arrangement is enclosed as under: Step - 3: Research and development services provided by BRL Step - 4: Recovery/payment of joint expenses The Appellant wishes to submit that Biocon Limited had its own SEZ unit from which it could have undertaken research and development services and claimed tax holiday. The Appellant was set-up with the objective to engage in research and development of biosimilars and novel products, being niche products. The Appellant was not set-up with a view to take any tax benefit. The agreement with Mylan was entered into with the overall objective of development and commercialization of MABS (being bio similars). B. Summary of the key terms of the agreement Agreement between Biocon and BRL - Pages 99 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreement - Page 214 of the Paperbook Initial development plan outline - Exhibit 3.2 - Page 231.5 to 231.61 of Paper book The cost shall be shared with respect to performance of Development Program in accordance with Article 5 of the Financial Exhibit - Clause 3.5 - Line 900 to 902 of the agreement - Page 216 of the Paperbook. Development cost shall be shared in agreed ratio between parties - Clause 5.1(a) and 5.2(a) of financial exhibit-Page 231.48 to 231.49 of the Paperbook. Mylan shall have exclusive right to commercialize product in field of Mylan Territory and co-exclusive right to commercialize products in ROW - Clause 4.1.1 - Line 906 to 909 of the agreement - Page 216 of the Paperbook Biocon Limited shall manufacture and supply product for both Mylan Territory and ROW for use in all Development and all Commercialisation...- Clause 5.1 - Line 985 to 987 of the agreement - Page 218 of the Paperbook BRL shall be responsible for (i) Development, scaling up, optimization and validation and qualification of manufacturing processes and methods - Clause 5.1.2 - Line 995 to 997 of the agreement - Page 219 of the Paperbook Myla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad significant continuing obligations under the agreement. Mylan would not be in a position to carry out any commercialization activities until the development of molecules reaches a certain stage. Accordingly, the Appellant was required to render research and development services under the development program. BRL was required to conduct the following activities: Clone acquisition and Tech Transfer New Formulation Process Development and Consistency Testing Cell line Engineering & Characterization Pre-clinical studies Viral validation Development Batches Product Characterization The development activities constitute rendering of services to Mylan. In support to its contention that amount received was towards research and development services and also export of the same, the Appellant wishes to submit/highlight the following: A confirmation letter from Mylan confirm receipt of services and deliverables from the Appellant (copy enclosed as Annexure 5). The upfront payment received by the Company is not a discrete event but is integrally linked to completion of research and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained from Group Company were used by the Appellant for its R & D activity. It was contented by the tax Department that Appellant had no lab facility and had not undertaken any research activity but was undertaken by Group companies/and had earned passive income, which is incorrect. The Departmental representative has referred to various submissions made by the Appellant in isolation without appreciating full facts of the case and not referring to other parts of the submission which captured the essence of the arrangement. During the course of the hearing/in submissions it was submitted that the Company had employed qualified professionals for conducting R & D activity and that it had a self-sustained facility (refer page 341 of the paperbook). Further, during the course of the hearing/in submissions it was categorically mentioned that income from Mylan represents consideration represents export of article or things carried out of SEZ unit. Notwithstanding the above, it was also submitted that export turnover would also include any income generated in relation to exports (refer pager 343 of the paperbook). The Company had also earned certain income from rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant. Effectively, the grant of license is inextricably linked to the research services carried out by the Appellant. As a matter of fact, Mylan would not have entered into the agreement with BRL unless BRL had agreed to perform the above-mentioned services. The fact that BRL is responsible for the above-mentioned activities is captured in Clause 5.1.2 of the agreement between BRL and Mylan besides being mentioned in the presentation before the JSC referred to in the agreement. C. Submissions on allegation of SEZ unit having been formed by splitting up and re-construction At the outset, the Appellant wishes to submit that section 10AA was introduced in the Act by the SEZ Act, 2005 and not by the Finance Act. The second schedule to the SEZ Act which enumerates the tax holiday provisions does not contain the provisions on splitting up and reconstruction being a prerequisite to eligibility of claiming the tax holiday department. Section 51 of the SEZ Act 2005, states that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave placed 'Developer' and the 'Co-developer at the same level i.e. for Development (creating infrastructure facilities), maintenance and operations. It was in this context that SEZ BOA, under the aegis of Ministry of Commerce, approved conversion of 'bare shell' into 'warm shell by the Co-Developer as 'Authorized Operations 'Page 21 para 5.15 Assessee received clarification from BOA/Government of India, Ministry of Commerce and Industry, Deptt of Commerce (SEZ Section), Udyog Bhawan, New Delhi dated 18/1/2011 & 20/1/2011 BOA in exercise of its statutory powers approved business model of the Assessee clarified that under Rule 11(g) 'sale of land' is no permissible in a SEZ. However Co-Developer can take land on lease from Developer for definite period. Further SEZ buildings i.e. bare shell/cold shell can be transferred and handed over to the Co-developer on payment of consideration to Developer, this transfer is permissible and authorized as per SEZ Act and Rules. The correspondence with the SEZ Authorities on this issue is placed on the P.B. at Pages 122 to 130 and its contents are referred to by the ld. Counsel. Thus as per specific clarifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the formation condition specified in Section 10AA of the Act. SEZ Unit not formed by splitting up or reconstruction of existing business or transfer of plant or machinery previously used for any purpose Section 10AA(4) of the Act contains certain conditions for determining the eligibility of an SEZ Unit to claim tax holiday. The tax holiday under Section 10AA of the Act is subject to fulfillment of the following conditions: a) The tax payer must begin to manufacture or provide services in an SEZ Unit (First condition) In present case, as highlighted above, the Company has already begun to provide services from the SEZ unit. Accordingly, this condition is satisfied. b) The SEZ Unit should not be formed by the 'splitting up' or 'reconstruction' of an existing business (Second condition); and 'Splitting up 'of an existing business can generally mean that an existing business is split into two or more parts, and each part is then termed as a separate business. In other words, when an existing business is split up, not only does the overall business remain largely the same, but also that the same persons continue operating all the parts, larg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute physical lab equipment, etc. and not development and commercialization rights relating to research work. The platform technologies acquired from Biocon Limited during 2009 pertaining to Monoclonal Antibodies was shown as Intangible assets under commercialization in the financial statements. Accordingly, the Appellant wishes to submit that the intangible rights may not be regarded as plant and machinery for the said business. Platform technologies not previously used by Biocon Limited Notwithstanding that such rights are not to be considered as "Plant", the Appellant submits that the "Plant" has not been previously used by Biocon Limited or any other party. While Biocon Limited has initially possessed these rights, the same have not been utilized by Biocon in relation to its own business as the same was not commercialized/not capable of being commercialized until further research. The restriction specified in section 10AA of the Act is on the use of the plant and machinery and not the second ownership. The Supreme Court in the case of Bajaj Tempo Ltd. v. CIT 1192 AIR 1622 (SC) has noted that denial of benefit would arise only if unit is formed by transfer of use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under SEZ after obtaining necessary approval, it is not open to the AO to embark upon the enquiry into the process carried on by the assessee-company. For better appreciation, the provisions of section 10AA of the Act are extracted below: "[Special provisions in respect of newly established Units in Special Economic Zones. AA. (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 222 of the Special Economic Zones Act, 2005, from his Unit, 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, a deduction of- (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1). Explanation.--For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section: Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone: Provided also that where a Unit initially located in any free trade zo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or set off. (7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on [by the under-taking]: [Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.] (8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if- (a) for the figures, letters and word "1st April, 2001", the figures, letters and word "1st April, 2006" had been substituted; (b) for the word "undertaking", the words "undertaking, being the Unit" had been substituted. (9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to manufacture or production of articles or things or provision of any service whereas the respondent-assessee-company contends that the assessee-company is engaged in business of undertaking research and development activity as a part of it, it acquired certain platform technologies from Biocon Ltd., during the year 2009 pertaining to Monoclonal Antibodies (MABS) for a consideration of INR 480 million. It was stated that there was an agreement governing this transaction. It was further stated that this platform technology was never used at any time by Bicon Ltd., nor was it completely developed nor it could not have used independently or cannot be commercialized on stand-alone basis. Therefore, to further develop and commercialize this platform technology, the assessee-company and Mylar had entered into a development and commercialization agreement. It was stated that the assessee-company had requisite research and development expertise whereas Mylan had the expertise in commercialization of product and Biocon Ltd. had expertise in manufacturing. It was further stated that in the process of carrying out research and development activities, assessee-company had incurred significa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and any further terms or conditions so imposed shall be binding upon and be complied with by the Developer and shall be of like force and effect as if they were contained in the letter of approval. (5) In case the Board suspends a letter of approval under this section, it shall serve a notice of suspension upon the Developer and fix a date on which the suspension shall take effect. (6) Upon suspension of the letter of approval under sub-section (1), the Special Economic Zone of the Developer referred to in sub-section (5) shall vest in the Administrator under sub-section (2) for a period not exceeding one year or up to the date on which the letter of approval for such Special Economic Zone is transferred, whichever is earlier, in accordance with the provisions contained in sub-sections (7) and (9), as the case may be. (7) Where the Board has given notice for suspension of letter of approval under sub-section (5), the Developer may, after prior approval of the Board, transfer his letter of approval to any person who is found eligible by the Board for grant of such approval. (8) If at any time, it appears to the Board that the purpose of the order appointing the Administrato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to suspend the letter of approval in specified circumstances. In the present case, undisputedly the assessee-company continued to enjoy the SEZ status even during the year under consideration. Furthermore it is obligatory on the part of the entrepreneur under the provisions of the SEZ Act to submit annual performance report in Form 1 confirming the export of services and investment in Plant & Machinery and the number of employees hired by the entrepreneur etc. All these factors go to show that the assessee-company had carried on the activity. Therefore, this cannot be a valid reason for denial of deduction u/s. 10AA of the Act. 13. The second reason is that the assessee has not produced any articles or things or provided any services. This reason is interlined or part of the first reason assigned by the Assessing Officer. Our findings in respect of reason one given supra, hold goods even in respect of this. 14. The third reason assigned by the Assessing Officer is that consideration received by the assessee-company is not for research and development services but licensing and development. When the AO had not controverted the activities undertaken by the assessee-company nor chos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll over-ride the provisions of Income-tax Act. Even if there is anything in the Income-tax Act which is inconsistent with the SEZ Act, the provisions of SEZ Act shall prevail as it is trite law that the provisions of special Act shall prevail over the normal provisions of the Act. This ratio was followed in the following cases by the co-ordinate bench of Tribunal. DCIT v. Bommidcda 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 CJPR)] 17. It is undisputed fact that the M/s. Biocon Ltd., also enjoys the SEZ status. Therefore, by selling platform technology to the assessee-company, the motive of tax evasion cannot be attributed to M/s. Biocon Ltd., Furthermore, M/s. Mylan Ltd., also said to be unrelated party. Therefore, it cannot be even imagined that without any value addition by the assessee-company, M/s. Mylan would have paid so much of consideration. In our considered opinion, this factor, should clinch the issue in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in the case of M/s. TE Connectivity India Pvt. Ltd. vs. ITO(LTU)(TDS) in ITA No. 3/Bang/2015 dated 25/05/2016 (wherein both the Members are parties), after placing reliance on decision of the jurisdiction High Court decision in the case of Karnataka Power Corporation Ltd. vs. DCIT (2016) 383 ITR 599 and its earlier decision in the case of M/s. Bosch Ltd. vs. ITO in ITA No. 1583/Bang/2014 dated 01/03/2016 held as follows: "6. We heard the rival submissions and perused material on record. The issue in appeal relates to the liability of the assessee-company to deduct tax at source on provisions made as at the end of the accounting year. The undisputed fact is that the provisions, made at the end of the accounting year are reversed in the beginning of the next year. No payees are identified. The exact amount of liability also cannot be quantified. The provisions are made merely on for Management Information System. In our considered opinion, liability to deduct tax at source does not arise. In identical circumstances, the Hon'ble Tribunal in the case of M/s. Bosch Ltd. vs. ITO in ITA No. 1583/Bang/2014 dated 01/03/2016, to which one of us i.e. the Accountant Member is the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the Income tax Officer (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e. section 4, 5 and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in section 195(1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interpretation of the Department, therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department, huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that section 195(2), as interpreted by the High Court would plug the loophole as the said interpretation requires the payer to make a declaration before the Income tax Officer (TDS) of payments made to non-residents. In other words, according to the Department, section 195(2) is a provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o force only from April 1, 2008. It will only apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case of Transmission Corporation (supra) In Transmission Corporation's case (1999) 239 ITR 587 (SC) a nonresident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Now to determine where there was income accrued or not considering the fact that the provisions were made at the year end is reversed in the beginning of the next accounting year goes to show that there was no income accrued. Mere entries in the books of accounts does not establish the accrual of income in the hands of the payee as held by the Hon'ble Supreme Court in the case of CIT Vs. M/s. Shoorji Vallabhdas & Co. 46 ITR 144 wherein it was held as follows; " That the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was nota case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lessor remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act, takes into accounts two points of time at which the liability to tax is attracted, viz. the accrual of the income or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educt tax at source in the hands of the tax deductor. In view of the admitted fact that interest being not paid to the payees (suppliers) being reversed in the books of account, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the payees (suppliers). It is true that in the case of Ericsson Communication Limited (supra), the Delhi High Court was dealing with the case of section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the "income chargeable under the Act". Absence of such words "chargeable to tax" under the provisions of section 194A of the Act would not empower the authorities to invoke the provisions of section 201(1) and 201(1A) of the Act ignoring the words any income by way of interest." Respectfully following the above order, we hold that the assessee-company is not liable to deduct tax at source as no income has accrued in the hands of the payee." 18.4 Respectfully following the decisions, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94C of the Act which is not applicable to payments made to overseas parties. 4. Disallowance under section 14A of the Act 4.1 The Ld. CIT(A) has erred, in law and on facts, in upholding the addition of Rs. 575,793 under section 14A of the Act. 4.2 The Ld. CIT(A) has erred, in law and on facts, in disregarding the submission made by the Appellant before the AO where the Appellant has submitted that it has not incurred any expenses in connection with the exempt dividend income earned during the year. 4.3 The Ld. CIT(A) has erred in disregarding the decisions in the case of CIT Vs. Hero Cycles Ltd. [2010] 323 ITR 518 (P & H) (HC), Modern Info Technology P. Ltd. Vs. ITO (Delhi Tribunal) [AY 2009-10], Relaxo Footwears Ltd. Vs. ACIT [2012] 50 SOT 102 (Delhi Tribunal) [AY 2008-09], wherein it is held that no disallowance under section 14A of the Act can stand where no expenditure has been incurred towards earning exempt income and similar other views. 4.4 The Ld. CIT(A) has erred, in law and on facts, in disregarding the letter submitted by the Appellant before the AO, from its portfolio manager stating that no fee/charges is charged by the portfolio manager from the Appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... review services. Millipore UK Limited, UK: Conducts study and provide study reports based on assay developed by BRL. Kaisheva and Associates Pharmaceuticals, USA: Provides consultancy and advisory services in field of formulation and process development. 23. It was contended that by virtue of Article 12 of DTAA with USA country, rendering of any technical consultancy services fell within the ambit of fees for technical services' and Article 13 of India-UK Tax Treaty, consideration paid for rendering any technical services fell within the ambit of the term fees for technical services'. It is further submitted that any consideration paid towards technical services shall be construed as fees for included services or fees for technical services only when such technical services are made available to the assessee-company. Similarly, in terms of Article 12 of India-USA tax treaty, technical services shall be construed only when such services are made available. Reliance in this regard was placed on the decision of the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght or information in respect of which consideration had been received by Olof Granlund. In order to determine whether payments made to Olof Granlund fall under Article 13(4)(c), it is imperative to determine whether these services 'make available' any technical knowledge, experience, skill, etc. to the recipient of the service or involves development and transfer of technical plan or design to the recipient of services. The India-Finland tax treaty does not specifically define the term 'make available'. Accordingly, in absence thereof reliance may be placed on the meaning assigned to the said term under the MoU to India-USA Double Taxation Avoidance Agreement (hereinafter referred to as India-US Treaty), which serves as an official guide to interpreting India-US tax treaty and reflects the policies, understanding reached with respect to the application and interpretation of India-USA Treaty. In this regard, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375 (AAR) MEANING OF THE TERM 'MAKE AVAILABLE' Under the MoU to India-US tax treaty, it has been clarified that: "Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product, which embodies technology, shall not per se be considered to make the technology available." In other words, the MoU seeks to clarify that the services are considered to be made available only where the services leads to transfer/imparting of technical knowledge, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Act. While doing so the Tribunal, inter alia, found that the assessee company was an international reinsurance intermediary (broker) and was a tax resident of United Kingdom. Further, that it was a recognized broker by the financial service authority of United Kingdom. It was also an admitted position that the assessee did not maintain any office in India and that it had a referral relationship with J.B. Boda reinsurance (Broker) Pvt. Ltd. of Mumbai and that J.B. Boda was duly licenced by the Insurance Regulatory & Development Authority to transact reinsurance business in India. 11. The Tribunal also observed as under.-- "27. In the illustrative transaction, New India Insurance Co. Ltd. in India has entered into an agreement to reinsure on an Excess Loss basis the catastrophe risk arising from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act is remitted to the assessee, i.e., reinsurance brokers, for onward transmission to international reinsurers. The intermediation fee which is another word for brokerage is paid separately by the originating insurance in India to J.B. Boda, the international reinsurance brokers like the assessee and other intermediaries, based on a mutually agreed ratio which accounts for their relative contribution in the reinsurance process. 12. Based on this manner of transacting, the Tribunal came to a conclusion that the payment received by the assessee could not be regarded as 'fees for technical services'. Further, more, the Tribunal also held that such receipts would not amount to fees for technical services as the "make available" clause contained in article 13(4)(c) had not been satisfied 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ires a means to an end, i.e. he acquires the technical knowledge, experience, skills, know-how or processes from the provider which acts as a means and enables him to use the same for achieving a further end. In a service which does not qualify as technical services, the services itself serves as an end for the recipient since he does not acquire any technical knowledge, experience, skill, know-how, or processes from the service provider. In light of the judicial pronouncements highlighted above (which have affirmed the principle of parallel treaty interpretation, especially as regards the meaning of the term 'make available'), considering the interpretation provided in the MoU to India-US tax treaty, services can be said to 'make available' 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following cases also:-- CESC Ltd. v. Dy. CIT [2005] 275 ITR (AT) 15 (Kol.-Trib.); Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.); Dy. CIT v. Boston Consulting Group Pte Ltd. [2005] 93 TTJ 293 (Mum. - ITAT); JT. CIT v. Essar Oil Ltd. [2006] 7 SOT 216 (Mum.) and National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.) Additionally, it can be seen that under the provisions of Article 13 of India-Finland tax treaty, provision of services shall qualify as FTS where the same consist the development and transfer of a technical plan or technical design to the recipient of the services. For the services to qualify as FTS the provider 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 confirmatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment order the payments made to payees are in the nature of R & D works carried out by them for the assessee and therefore it falls in the category of contract work and so the payments made for this are liable to TDS u/s. 194C. 3. The Ld. CIT(A) ought to have appreciated the fact that when the entire work is being carried out by the said payees, the assessee's contention that it is reimbursement of expenses or cross charges is not correct. This is in view of the fact that reimbursement can be for some expenses which otherwise were payable by the assessee but were paid 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 Rs. 45,22,75,447/- made in the assessment order as in that case the issue was TDS to be made on freight charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance 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 placed by the Appellant on Article 12 of the 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 proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, 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 ide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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