Dy. Commissioner of Income Tax , Circle-2(2), Hyderabad V. GVK Biosciences Private Limited, Hyderabad

ITA 1083/Hyd/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8585 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2021
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: DB-B
• Assessment Year: 2014-2015
• Appeal Filed On: 24-05-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: Y.V.S.T. SAI
• Section: 143(3); 80IB; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) B EFORE SH RI SA TBEER SING H GODA RA, JU DI CIA L MEM BER AND SHR I L AXMI PR AS A D SAHU , AC COUNT ANT MEMBE R ITA No. 1083/H/2018 Assessment Year: 2014-15 Dy. Commissioner of Income-tax, Circle – 2(2), Hyderabad. Vs. GVK Biosciences Pvt. Ltd., Hyderabad. PAN – AABCG3208J (Appellant) (Respondent) Revenue by: Shri Y.V.S.T. Sai Assessee by: Shri V. Sivakumar Date of hearing: 07/10/2021 Date of pronouncement: 15/11/2021 O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Revenue is directed against CIT(A) – 2, Hyderabad’s order dated 05/03/2018 for AY 2014-15 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act” on the following grounds of appeal: “1) Whether, on the facts and circumstances of the case, the CIT(A) is correct in allowing the assessee's claim of deduction u/s 80lB only on the pretext that the assessee has got approval from prescribed authority even though the assessee has not fulfilled the other conditions laid down u/s 80lB to claim such deduction? ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 2 -: 2) Whether, on the facts and circumstances of the case, the CIT(A) is correct in holding that the loss claimed by the assessee has to be allowed in contravention of circular No. 3/2010 of CBDT. 3) Whether, on the facts and circumstances of the case, the CIT(A) is correct in allowing the MTM losses and not treating them to be notional loss. 4) Any other ground that may urge during the course of appellate proceedings.” 2. Briefly, the facts of the case are that the Assessee, a company, engaged in the business of service activity in the field of Bio-Informatics, contract research, etc., filed its return of income for the AY 2014-15 on 29/11/2014 admitting total income of Rs. 115,15,09,321/- after claiming deduction of Rs. 106,10,74,602/- u/s 80IB and the remaining Rs. 5,04,34,720/- offered as taxable income. Subsequently, the case was selected for scrutiny under CASS and statutory notices were issued to the assessee, against which, the assessee furnished the information as required. 2.1 As regards the assessee’s claim of deduction u/s 80IB(8A), the AO observed that for availing the benefit of deduction under this section, the prime condition is that the assessee should be in the business of carrying scientific research and development. In the case of the assessee, he observed that the business of the assessee is that of rendering the services to other companies mostly ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 3 -: multinational companies in the field of chemistry/biology according to the work order placed by them and not a scientific research or development. He pointed out that on its own, the assessee did not undertake any scientific research or development. Whatever work done by the assessee was on the specific project assigned to it by other MNCs which has to be performed as per their requirement/parameters. Further, he observed that though some of the activity carried on by the assessee connected with research activity in the field of chemistry/biology, it cannot be regarded as scientific research and development as it is in the nature of job work/service work only and therefore, it cannot be termed as carrying on scientific research and development. 2.2 During the course of assessment proceedings, the assessee company filed two sample service agreements entered with the multinational companies, namely, i) Boehringer INgelheim Pharmaceuticals Inc., USA and ii) Pfizer Inc., New York. On perusal of these agreements, the AO opined, inter-alia, that the nature of work carried on by the assessee is in the nature of job work only. 2.3. Now coming to the issue of fulfilling of conditions prescribed under rule 18DA, the AO observed that as per sub rule (2)(a), every company approved shall sell any prototype or output if any from its laboratories or pilot ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 4 -: plant with the prior permission or prescribed authority. The assessee is not selling any prototype or out put. It is only selling R&D reports and conclusions drawn by the scientists. This confirms that the assessee has no own research projects of its own. This clearly-proves-that they are not carrying any scientific research or development. Without admitting but assuming that the services rendered by assessee, are in the nature of Scientific. Research & Development, the assessee having sold the out put (results) to MNCs \ without approval of DSIR, the assessee having not fulfilled the rule 18DA(2)(a) is not eligible for deduction u/s 80IB. 2.4 The AO further observed that a s per Rule 18DA(1)(d) the assessee should have well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of projects or programmes. Since the assessee has no own research projects it has no research programme at all. The assessee -merely executed the works given by other companies which are in the nature of job works. Hence, this condition is also not fulfilled. 2.5. Further, the AO observed that as per Rule 18DA (1) (e), the assessee should exclusively engage in scientific research and development activities leading to technology development, improvement of technology and transfer of ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 5 -: technology developed by themselves. As discussed above, the assessee was. doing job works entrusted to it by foreign multinational companies. Therefore it can be concluded that the assessee has not fulfilled this condition also. 2.6. It is further pertinent to mention here that while approving the company as R&D company ujs 80IB(8A), the concerned Central Government authority have not given blanket approval to assessee company. The approval is subject to all the provisions of sec.80IB and the provisions of Rule 18D and 18DA of the I.T. Rules. 2.7. It may also be mentioned here that in the context of incentive deduction/exemption provided under different sections of the Income Tax Act, the provisions of such sections are to be interpreted strictly. This follows from the ratio of the decisions of the Hon'ble Supreme Court in the case of Petron Engg. Construction Pvt. Ltd., Vs CBDT (175ITR 523), Pandian Chemicals Vs CIT (262 ITR 278), CIT Vs N C Budharaja and Company (204 ITR 412), IPCA Laboratories Vs DCIT (266 ITR 521) and of Hon'ble Andhra Pradesh High Court in the case of Dr.M/s Renuka Dhatla Vs CIT (240 ITR 463). 2.8. With respect to the assessee's submission that it received favourable orders for A.Y: 2005-06 and A.Y: 2006- 07 form ITAT and for A.Y: 2009-10, A.Y: 2010 and A.Y:2011- ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 6 -: 12, the AO observed that it is pertinent to note that the Revenue has not accepted the said decision and has filed further appeals. 2.9 In view of the above observations, the AO denied the benefit of deduction u/s 80IB(8A) claimed by the assessee in the impugned AY. 3. As regards the forex loss of Rs. 6,31,24,558/-, the AO observed that forex loss incurred by the assessee on account of Export receivable (i.e. underlying transaction) of US $ 1000, has been mitigated by the forex gain earned by the assessee on forward contract payable of US $1000. Thus, in the entire transaction, the cost (loss) to the assessee is the forward premium of Rs. 2 per US$ only. According to AO, there is no question of any loss on forward contracts had assessee followed the accounting treatment specified in AS-11. However, the assessee had debited Rs. 6,31,24,558/- towards unrealized hedging loss which practically will not arise if the assessee follows the AS-11. From this, it is evident that the accounting treatment followed by the assessee with reference to forward contract is not in accordance with the AS-11. 3.1 The AO observed that with reference to forward contracts, the assessee furnished the details of journal/accounting entries made by it in its books of ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 7 -: account, on perusal of which, the AO noticed that it had not accounted the forward contract transactions in accordance with AS-11. In view of the above observations, the AO disallowed the assessee’s claim of forex loss of Rs. 6,31,24,558/-. 4. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A). 5. As regards claim of deduction u/s 80IB(8A), the assessee submitted before the CIT(A) as under: “i. In this regard, we submit that our business activities are carrying on R&D activity for our customers and was granted recognition by Department of Science & Industrial Research (DSIR), Ministry of Science & Technology, Govt. of India u/s.80lA as required under the Act. Hence we have claimed deduction u/s.80IB(8A) on income derived from R&D business. The Assessing Officer disallowed this deduction stating that we are carrying on Research activities for fee to others on job work basis but not on our own and therefore not eligible for deduction u/s.80IB(8A). ii. We further submit that this ground is subject matter of appeal in our case for the asst. years 2005-06 & 2006-07 (Consolidated Order) and 2008-09 before the Hon'ble Income Tax Appellate Tribunal, Hyderabad Bench in ITA Nos.215/Hyd/2012 & 1276/Hyd/10 and ITA No.1053/Hyd/2013 respectively. On this issue the Hon'ble Income Tax Appellate Tribunal was pleased to grant the deduction u/s.80IB(8A) as claimed by us. Copies of these orders are herewith enclosed. iii. We also submit that Learned Commissioner of Income Tax (Appeals) directed the Assessing Officer to ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 8 -: grant deduction u/s.80IB(8A) in Asst. years 2009- 10,2010-11, 2011-12,2012-13 & 2013-14 in ITA Nos.0418/2014-15, 0158/2013-14,0378/2013-14, 001 0/2016-17/CIT(A-1 )/GNT & 00216/2016-17/CIT(A-1 )/GNT respectively. iv. Since the matter in this year also being of similar nature on all facts, we submit that the deduction disallowed by the Assessing Officer is not justified and request the learned Commissioner of Income Tax to direct the Assessing Officer to allow deduction u/s.80IB(8A).” 6. After considering the submissions of the assessee, the CIT(A) allowed the claim of the assessee by observing as under: “This deduction is w.r.t. profits derived from medicinal chemistry division and clinical Pharmacology division on the ground that appellant is not carrying scientific research and development and the said conditions have not been fulfilled. This is a recurring issue and the same has already been decided by the Hon'ble ITAT, Hyderabad in its orders dated 02-08-2013 in ITA Nos. 215/HYD/2012 & 1276/HYD/2010 for AYs 2005-06 and 2006-07 and other order dated 06-02-2014 in ITA No. 1053/HYD/2013 for AY 2008-09, wherein it was held that the appellant is entitled for deduction. The assessee also produced copy of the order of the Ministry of Science and Technology dated 29-07-2011 wherein the assessee has been approved as a R&D company and renewal for the same was granted for the AYs 2012-13, 2013-14 & 2014-15, but the renewal is subject to the provisions of sec. 80IB(8A) as well as Rules 180 and 18DA of IT. The AO has not made out any case that the facts for this AY are different from those of the earlier AYs. Duly following the above decisions, ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 9 -: Assessing Officer is directed to allow the same for this assessment year also.” 7. As regards the claim of forex loss, the assessee submitted before the CIT(A) as under: “i. We have entered into Agreements for our services with various foreign pharmaceutical companies like Wyeth Pharmaceuticals Inc., Boehringer Ingelheim Pharmaceuticals Inc., Vertex Pharmaceuticals Inc, Novartis Institute of Tropical Diseases, Dupont etc., for which monthly billing would be US$2.99 Million, Euro 1.04 Million and Great Britain Pound (GBP) 0.93 Million per month approximately. To safeguard ourselves against any adverse exchange rate variations and mitigate forex fluctuation losses we have entered forward contracts with Kotak Mahindra Bank and Citi Bank for a period of 1 year starting from Apr-2013 to Mar-2014. ii. When we entered such forward contracts, the spot rate of US$ was Rs.49.05 and we expected that the rate will increase around to Rs.55 to 57 within next year. Hence we entered contracts with Kotak Mahindra Bank and Citi Bank for value Ranging from Rs.54.63 to 56.78 from June-13 to Mar-14. Similar was the case with Euros and GBP. Details of foreign revenue and foreign contracts for Foreign Exchange during Financial year 2013-14 are as under. ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 10 -: As could be seen from the above, our revenue is more than value of foreign exchange forward contracts entered into by us and we have entered into such contracts to safeguard ourselves against any adverse exchange fluctuations. iii. Unfortunately the foreign exchange market trend between Rupee and US Dollar, Euro and GBP went up by more than what we expected. Hence we had to make good the difference between such foreign currencies with rupee during the agreed period. Such loss in exchange fluctuation was taken as Loss in Foreign exchange fluctuation and considered as expense in our profit and loss account. iv. We further submit that whenever sale proceeds are received from our customers, such proceeds were received in rupees at the rate of exchange prevailing at the time of receipt and was considered as income from sales/service. Thus loss suffered in exchange fluctuation is recouped in sale value of products / services. v. We therefore submit that since foreign exchange loss was suffered during the course of carrying on business, such loss is to be held to be revenue expenditure. In this connection reliance is placed on a recent decision of Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor India pvt.Ltd., (312 ITR 254). ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 11 -: vi. We also submit that in assessment years 2009-10 to 2012-13, loss suffered on account of Foreign Exchange Fluctuations was not disallowed by the Department and in asst. year 2013-14 when foreign exchange loss was disallowed, such loss was held to be deductible by Commissioner of Income Tax (Appeals)-l, Guntur in ITA NO.0216/2016-17/CIT(A)-1/GNT. Copy of the order is herewith enclosed. vii. We also submit that for any reason if it is held that loss on Foreign Exchange fluctuation is not allowable as deduction, profit for the year would go up by the same amount and such increased income is eligible for deduction u/s. 8OIB (SA). viii. Statement showing details of month-wise Hedged amounts and settled amounts along with Loss/ (gain) are enclosed as annexure.” 8. The CIT(A) after considering the submissions of the assessee, allowed the assessee’s claim by observing as under: “I have gone through the submissions of the appellant and the observations/conclusions drawn by the AG. In the case of appellant's export businesses, as fluctuations in foreign exchange are common, to safeguard from the future losses/gain from the likely profits due to fluctuations in the rates of foreign exchange contracts are generally entered with the banks to hedge against the said fluctuations. In the present case as the appellant foresaw that the rupee would become stronger that the rate will increase around to Rs.55 to 57 within next year. These contracts were entered in financial year 2013-14 for one year. As against the expectations of the appellant, as the rupee became weaker, the appellant suffered losses. As exchange rates between US dollar and Indian rupee, was increasing the appellant cancelled all such contracts and suffered loss. Such loss is allowable as ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 12 -: revenue expenditure as laid down by the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. 312 ITR 254. It may not be out of context to mention that in the earlier assessment year from Asst. year 2009-10 to 2012-13 under scrutiny this loss was allowed by the AO.” 9. Aggrieved by the order of CIT(A), the revenue is in appeal before the ITAT. 10. As regards ground No. 1 relating to the action of CIT(A) in allowing assessee’s claim of deduction u/s 80IB, the ld. DR submitted that the assessee cannot be said to be involved in the scientific research and development and, therefore, the amounts received was on account of job work and not out of scientific research activity. In regard to consistency he submitted that the every assessment year is a separate assessment year and it depends upon the facts of the each case. The CIT (A) has deleted the addition made by the AO without rebutting the objections raised by the Assessing Officer in regard to the deductions U/s 80IB(8A) . 11. The ld. AR, on the other hand relied on the order of CIT(A) and submitted that the assessee is undertaking research and development based on the agreements with its customers and therefore the assessee is engaged exclusively in R&D. ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 13 -: 12. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. We find that the CIT(A) has allowed the assessee’s claim of deduction u/s 80IB(8A) on two counts; relying on the decision of the ITAT in assessee’s own case for earlier AYs and grant of approval given by the Ministry of Science and Technology to the assessee as R&D company. But, the CIT(A) failed to address the objections raised by the AO in the assessment order, which are not required to reproduced here. 12.1 Therefore, we remit the issue to the file of the CIT(A) with a direction to decide the issue a fresh in accordance with law after examining the objections raised by the AO in his order. The assessee is also directed to co-operate to the CIT (A) for early disposal of the appeal. Therefore, this ground raised by the revenue is allowed for statistical purpose. 13. As regards Ground No. 2 & 3, ld. DR submitted that the CIT(A) has wrongly allowed assessee’s claim of forex loss in contravention of Circular No. 3/2010 of CBDT. Ld. DR relying on the observations of the AO submitted that if the assessee had followed AS – 11, the assessee would not have incurred the forex loss. ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 14 -: 14. On the other hand, ld. AR besides relying on the order of the CIT(A) submitted that foreign exchange loss was suffered during the course of carrying on business, such loss is to be held to be revenue expenditure. He further submitted that the AO was allowed such loss from AY 2009- 10 to 2012-13, but, in the impugned AY he has disallowed the same on a different footing without following the judicial consistency. He, therefore, submitted that the order of the CIT(A) may be upheld on this issue. 15. We have considered the rival submissions and perused the material on record. We find that the AO has allowed such loss in AY 2009-10 to 2012-13 to the assessee, but, in this AY the AO on a different footing disallowed the assessee’s claim of forex loss on the ground that the assessee has not followed AS-11, if followed, loss could not have arisen to the assessee. Following the judicial consistency, we uphold the order of the CIT(A) and dismiss the grounds raised by the revenue on this issue. 16. In the result, appeal of the revenue is partly allowed for statistical purposes, in above terms. Pronounced in the open court on 15 th November, 2021. Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 15 th November, 2021. ITA No. 1083/Hyd/2018 G V K B i o s c i e n c e s P v t . L t d . , H y d . :- 15 -: kv Copy to : 1 DCIT, Circle – 2(2), Hyderabad. 2 M/s Aragen Life Sciences Pvt. Ltd., (Formerly known as M/s GVK Biosciences Pvt. Ltd.), Plot No. 28A, Road No. 5, IDA, Nacharam, Hyderabad – 500 076. 3 CIT(A) – 2, Guntur 4 Pr. CIT - 2, Hyderabad 5 ITAT, DR, Hyderabad. 6 Guard File. S.No. Details Date 1 Draft dictated on 2 Draft placed before author 3 Draft proposed & placed before the Second Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement 7 File sent to Bench Clerk 8 Date on which the file goes to Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order