M/s. Bioplus Life Sciences Pvt. Ltd, Bangalore V. D CIT, Bangalore

ITA 1437/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51344 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 03-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 14-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CITI
• Keywords: Revenue expenditure
• Section: 10B; 10

Judgement Text

PAGE 1 OF 9 ITA NOS.1436 & 1437/ BANG/2010 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NOS.1436 & 1437/BANG/2010 (ASST. YEARS 2006-07 & 2007-08) M/S BIOPLUS LIFE SCIENCES PVT. LTD., SITE NO.10/1A, KRISHNARAJAPURAM HOBLI, HOODI VILLAGE, BANGALORE-48. - APPELLANT PA NO.AABBC3621R VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(2), BANGALORE. - RESPONDENT DATE OF HEARING : 03/11/2011 DATE OF PRONOUNCEMENT : 04/11/2011 APPELLANT BY : SHRI BALRAM R RAO, ADVOCATE RESPONDENT BY : SHRI G V GOPALA RAO, CIT-I O R D E R PER GEORGE GEORGE K : THESE APPEALS PREFERRED BY THE ASSESSEE ARE DIRECT ED AGAINST THE CONSOLIDATED ORDER OF THE CIT(A)-I, BANGALORE D ATED 04/10/2010.. THE RELEVANT ASST. YEARS ARE 2006-07 & 2007-08. 2. SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEA LS AND THEY RELATE TO THE SAME ASSESSEE, THESE APPEALS ARE DISP OSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. PAGE 2 OF 9 ITA NOS.1436 & 1437/ BANG/2010 2 3. THE GROUNDS OF APPEAL FOR BOTH THE ASST. YEARS A RE IDENTICAL. GROUND NOS. 1 AND 7 ARE GENERAL IN NATURE AND NO SP ECIFIC ADJUDICATION IS CALLED FOR AND HENCE, THE SAME ARE DISMISSED. 4. GROUND NOS.2 TO 4 READS AS FOLLOWS:- (2) THE LEARNED CIT(A) ERRED IN UPHOLDING THE ORDER OF THE AO IN REDUCING THE QUANTUM OF DEDUCTION U/S 10B OF THE ACT IN EXCLUDING CERTAIN ITEMS OF EXPENDITURE INCUR RED OUTSIDE INDIA BY DEDUCTING THE SAME FROM THE QUANTUM OF EXPORT TURNOVER. (3) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT E VEN IF THE ADJUSTMENTS AS MADE BY THE AO ARE TO BE HELD AS CORRECT WITH REGARD TO THE EXPORT TURNOVER, HE SHOU LD HAVE DIRECTED THE AO TO ADOPT THE VERY SAME PROCEDUR E BY EXCLUDING THOSE ITEMS FROM THE TOTAL TURNOVER. (4) THE LEARNED CIT(A) ERRED IN CONFIRMING THE REDUCTIO N AS MADE BY THE AO WITH REGARD TO QUANTUM OF EXPORT TURNOVER WHICH IS CONTRARY TO THE WELL ESTABLISHED REASONING AND JUDICIAL PRONOUNCEMENTS OF ITAT AND VARIOUS COURTS AND HE OUGHT TO HAVE HELD THAT SUCH ADJUSTMENTS OUGHT NOT TO HAVE BEEN MADE BY THE AO IN THE ASSESSMENT. 5. GROUND NOS.5 & 6 RELATE TO THE ISSUE AS TO WHET HER THE PRODUCT DEVELOPMENT EXPENSES ARE CAPITAL OR REVENUE EXPENDI TURE. 6. GROUND NOS. 2 TO 4 FOR THE ASST. YEAR 2006-07, WHILE FRAMING THE ASSE SSMENT, THE AO REDUCED FREIGHT CHARGES AMOUNTING TO RS.2,33,27, 780/- FROM THE EXPORT TURNOVER AND DID NOT REDUCE THE SAME FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10B OF THE ACT. THE AO RE LIED ON THE EXPLANATION PAGE 3 OF 9 ITA NOS.1436 & 1437/ BANG/2010 3 2 TO CLAUSE (III) OF SECTION 10B OF THE ACT. THE DE TAILS OF THE CLAIM MADE BY THE ASSESSEE, THE ADJUSTMENT MADE BY THE AO AND THE VARIANCE ON ACCOUNT OF ADJUSTMENT MADE BY THE AO ARE GIVEN BELOW:- AMOUNT IN RUPEES CLAIMED BY THE ASSESSEE ADJUSTED CLAIM AS PER AO VARIANCE EXPORT TURNOVER 35,48,42,088 31,42,44,017 4,05,98,071 TOTAL TURNOVER 35,48,42,088 35,48,42,088 -- 10B DEDUCTION 16,23,40,499 14,37,66,854 1,85,73,645 6.1 SIMILARLY, FOR ASST. YEAR 2007-08, THE AO, WHIL E CONCLUDING THE ASSESSMENT, REDUCED THE QUANTUM OF DEDUCTION U/S 10 B OF THE ACT BY REDUCING THE FREIGHT FROM THE EXPORT TURNOVER AND, AT THE SAME TIME KEEPING THE TOTAL TURNOVER AT AN AMOUNT INCLUSIVE O F FREIGHT. THE RELEVANT DETAILS WITH REFERENCE TO THE CLAIM OF THE ASSESSEE , THE ADJUSTMENT MADE BY THE AO ARE AS FOLLOWS:- AMOUNT IN RUPEES CLAIMED BY THE ASSESSEE ADJUSTED CLAIM AS PER AO VARIANCE EXPORT TURNOVER 59,40,30,339 57,14,93,308 2,25,378,031 TOTAL TURNOVER 59,40,30,339 59,40,30,339 -- 10B DEDUCTION 25,75,01,180 24,62,32,462 1,12,68,718 6.2 THE ASSESSEE, BEING AGGRIEVED, FILED APPEALS B EFORE THE FIRST APPELLATE AUTHORITY. 6.3 THE FIRST APPELLATE AUTHORITY CONFIRMED THE ACT ION OF THE AO. PAGE 4 OF 9 ITA NOS.1436 & 1437/ BANG/2010 4 6.4 THE ASSESSEE BEING AGGRIEVED IS IN APPEALS BEF ORE US. 6.5 THE LEARNED AR SUBMITTED THAT THE ISSUE IN QUESTION IS SQUARELY COVERED BY THE JUDGEMENT OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT V GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 AND THE ORDER OF THE SPECIAL BENCH IN THE CASE OF ITO V M/S SAK SOFT LTD . 313 ITR 353. 6.6 ON THE OTHER HAND, THE LEARNED DR SUPPORTED TH E ORDERS OF THE INCOME TAX AUTHORITIES. 6.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. THE HONBLE MUMBAI HIGH COURT IN THE CA SE OF GEMPLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTANCES, HEL D THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, IF AN IT EM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FR OM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATOR WH ILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBLE MUMBAI HIGH COURT READS AS FOLLOWS:- HELD : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPO RT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNOVER ALSO FORMS A CONS TITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPO RT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANI NG AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TUR NOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN PAGE 5 OF 9 ITA NOS.1436 & 1437/ BANG/2010 5 THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERT AKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED I N OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FO REIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGH T, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGI SLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURA NCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BE HALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHA RGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN D EFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOW EVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AN D INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FRE IGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OT HER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE C ONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRES SION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNO TATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSIO N OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLU DED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUME RATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMIN ATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISIO N WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVE R, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NO T HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTA L PAGE 6 OF 9 ITA NOS.1436 & 1437/ BANG/2010 6 TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAV E ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURN OVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRI PTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (IN DIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 6.8 IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASSE SSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETING THE ASSESSMENT U/S 1 43(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCH ANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA, FROM THE EXPORT T URNOVER WITHOUT CORRESPONDING REDUCTION FROM TOTAL TURNOVER, THEREB Y REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE A CT. 6.9 IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENCH HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTIO N 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTA BLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN F OREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSID E INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AN D FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. THE APPEAL S FILED BY THE DEPARTMENT ARE THUS DISMISSED. 6.10 THE ORDER OF THE SPECIAL BENCH IS ALSO IN THE CONTEXT OF SECTION 10B OF THE ACT AND THE RATIO LAID DOWN BY THE ABOVE DECISION SQUARELY APPLIES PAGE 7 OF 9 ITA NOS.1436 & 1437/ BANG/2010 7 TO THE FACTS OF THE INSTANT CASE. IN THE LIGHT OF THE ABOVE REASONING, WE DIRECT THE AO TO EXCLUDE THE ABOVE MENTIONED EXPENS ES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10B OF THE ACT. 6.11 IN THE RESULT, GROUND NO.3 MENTIONED ABOVE IS ALLOWED. 7. GROUND NOS.5 & 6 THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS O F MANUFACTURE AND EXPORT OF PHARMACEUTICAL AND NEUTRA CEUTICAL PRODUCTS. DURING THE ASST. YEARS 2006-07 AND 2007-08, THE ASS ESSEE COMPANY DEVELOPED IN ITS PLANT AT HOSUR A NEW PRODUCT KNOWN AS SUCRALOSE. THE EXPENDITURE INCURRED IN RELATION TO DEVELOPMENT OF THIS NEW PRODUCT WAS CLAIMED AS REVENUE EXPENDITURE. THE AO WHILE COMPL ETING THE ASSESSMENT FOR ASST. YEARS 2006-07 AND 2007-08 TREATED THE ABOV E SAID EXPENSES AS CAPITAL IN NATURE AND HELD THAT THIS IS FOR THE DEV ELOPMENT OF A NEW PRODUCT AND THE SAID EXPENDITURE IS NOT ALLOWABLE. THE AMO UNT OF PRODUCT DEVELOPMENT EXPENDITURE ADDED BACK WAS RS.4,91,13,8 80/- FOR ASST. YEAR 2006-07 AND RS.2,35,53,611/- FOR ASST. YEAR 2007-08. 7.1 ON FURTHER APPEAL, THE VIEW OF THE AO WAS AFFI RMED BY THE FIRST APPELLATE AUTHORITY. 7.2 THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFO RE US. PAGE 8 OF 9 ITA NOS.1436 & 1437/ BANG/2010 8 7.3 THE LEARNED AR REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW WHEREAS THE LEARNED DR RELIED ON THE FINDINGS/CONCLUSIONS OF THE INCOME TAX AUTHORITIES. 7.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IT IS AN ADMITTED FACT THAT THE ASSESSE E COMPANY HAS VENTURED INTO A NEW LINE OF BUSINESS. IN THE STATEMENT OF F ACTS SUBMITTED BEFORE THE FIRST APPELLATE AUTHORITY, THE ASSESSEE HAD CONCEDED THAT, IT DEVELOPED A NEW PRODUCT KNOWN AS SUCRALOSE. THE GESTATION PE RIOD OF SUCH PRODUCTS IS LONG AND THE BENEFITS ARE NOT IMMEDIATE BUT SPREAD OVER A PERIOD OF TIME. THE ASSESSEE, BY MANUFACTURING THIS NEW PRODUCT, HAS OBTAINED AN ENDURING BENEFIT. THE NEW PRODUCT MANUFACTURED IS OUT OF NE W TECHNOLOGY. IN FACT, THE ASSESSEE ITSELF HAD CAPITALIZED THIS EXPENDITUR E IN THE BOOKS OF ACCOUNTS. HOWEVER, FOR THE INCOME TAX PURPOSE IT H AD CLAIMED THE SAME AS REVENUE EXPENDITURE. AS STATED EARLIER, SUCRALOSE IS ENTIRELY A NEW PRODUCT DIFFERENT FROM THE PRODUCTS, WHICH WERE MAN UFACTURED CURRENTLY AND EXPORTED BY THE ASSESSEE COMPANY. THE PRODUCT WA S DEVELOPED DURING THE RELEVANT FINANCIAL YEAR AND PILOT TRIAL WAS DRAW N. ONCE THESE PRODUCTS ARE MADE FOR MARKET CONSUMPTION, THE BENEFIT DERIVE D THEREFROM WOULD BE A LONG LASTING AND ENDURING ONE. THEREFORE, WE ARE O F THE VIEW THAT THE EXPENDITURE INCURRED IS OF CAPITAL NATURE AND THE S AME HAS BEEN RIGHTLY DISALLOWED BY THE INCOME TAX AUTHORITIES. ACCORDING LY, GROUND NOS.5 AND 6 ARE DISMISSED. 8. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE PARTLY ALLOWED AS INDICATED ABOVE. PAGE 9 OF 9 ITA NOS.1436 & 1437/ BANG/2010 9 ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH DAY OF NOVEMBER, 2011 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO:- 1.THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCE RNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.