Depreciation allowable on table, tools, trollies used in laboratory at rate applicable on machinery

DCIT Vs Serum Institute of India Ltd. (ITAT Pune)

ITAT Pune held that depreciation on items like stainless steel table, tools, trollies used by scientist or lab technicians in laboratory are used for production of vaccine/ other is allowable at the rate applicable to plant and machinery

Facts-

During the course of assessment proceedings, various disallowances were made by AO. Being aggrieved, an appeal was preferred before CIT(A). CIT(A) deleted following disallowance –

• Disallowance u/s 14A;
• Disallowance of foreign travel expenditure;
• Disallowance of depreciation on items stainless steel table, tools, trollies used in laboratory;
• Disallowance of product development expenditure;
• Disallowance of claim for exemption of income u/s 10AA; etc.

Being aggrieved, revenue has preferred the present appeal.

Conclusion-

Disallowance u/s 14A – we hold that the disallowance of Rs.7,81,83,703/- as made by the AO deleted by the ld. CIT(A) is correct in law, as the AO had failed to record the satisfaction as envisaged u/s 14A(2).

Disallowance of foreign travel expenditure – expenditure incurred by an assessee on foreign tour of wife of the director, who accompanied the director of the assessee company cannot be said to be not for the purpose of the business of the assessee company.

In view of the law laid down by the Hon’ble Jurisdictional High Court in the case of Alfa Laval (I) Ltd. (supra), it cannot be said that the expenditure incurred on foreign travel of the director of the respondent-assessee company and his wife cannot be said to be personal in nature.

Disallowance of depreciation on items used in laboratory – the Hon’ble Bombay High Court in the case of CIT vs. Parke Devis, 214 ITR 587 (Bom.) has held that if the scientists or lab technicians used the said stainless steel tables, stools, trollies, racks as part of the production of vaccine and other should be classified as plant and machinery, accordingly, the depreciation should be allowed at the rate applicable to plant and machinery.

FULL TEXT OF THE ORDER OF ITAT PUNE

This is an appeal filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)-13, Pune [‘the CIT(A)’] dated 28.10.2020 for the assessment year 2013-14.

2. The Revenue raised the following grounds of appeal :-

1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs. 9103879/- on account of guarantee fees (adjustment made by the Transfer Pricing Officer) on relying the decision of the Bombay High Court in the case of Everest Kanto Cylinders Ltd. vs. Commissioner of Income Tax, Mumbai 58 Taxmann.com 254″ however, the facts of the case are not identical. Hence, the same should be treated as international transaction and should be; added to the total income of the assessee.

2. On the facts and circumstances of the case and in law, the Ld. C1T(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs.64683703/- made u/s 14A of the Income-tax Act, 1961 (hereinafter referred as ‘the Act’) since, the dividend and interest on bonds, share of profit from firms are the sources of income of assessee and the assessee has incurred expenditure on salary and miscellaneous expenses. Thus, these expenditures are incurred for earning both type of income. Thus the provisions of the Section 14A of the Income-tax Act, 1961 are squarely applicable and the same was applied correctly during the course of the assessment proceedings.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the Assessing Officer amounting of Rs. 2445047/- on account of foreign travel expenses as being in a nature of personal expenditure, however, the same should have been treated as capital expenditure as the same has been incurred by the employees of the assessee company with the aim of purchase of assets.

4. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of depreciation of P&M to Furniture made by the Assessing Officer amounting to Rs.1,38,153/- considering the certain items of stainless steel tables, stools trollies used in laboratory as ‘Plant and Machinery’. However, the same tools are specifically designed and integrated with the plant, therefore, same should have been claimed @10% instead of 15%.

5. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs.100355672/- on account of Product development Expenditure i.e. Deduction u/s 35(2AB) of the Income-tax Act, 1961 as the same was not approved by the DSIR and certified in form 3CL. As per provisions of the Section 35(2AB)(3) and Section 35(2AB)(4) of the Income-tax Act, 1961 clearly mandates that in order to eligible for weighted deduction, the expenditure incurred by the assessee should be approved by the DSIR and certified in Form 3CL.

6. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs.143706712/- on account of Product development Expenditure i.e. deduction u/s 35(1)/37(1)  of the Act, Since the expenditure was in nature of capital and the same is not allowable expenditure under the said provisions.

7. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs.47,46,67,962/- on account of Deduction u/s 10AA on sale to UNICEF, since the said section does not speak about goods sold but talks about goods taken outside India. In the case, the goods (medicines) are sold in territory of India, although procured by UNICEF, therefore, the section u/s 10AA of the Income-tax Act, 1961 is not applicable in the case and accordingly, not eligible to claim deduction under the provisions of the Section 10AA of the Income-tax Act, 1961.

8. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting to Rs.56,11,914/- on account of additional depreciation on Windmill since the depreciation on civil works is allowed @ 10% and @15% on electric works instead of claimed by the assessee @15% and 20% respectively.

9. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs.29094637/- on account of Disallowance of Freebies to Doctors, as the same expenses are cannot be treated as discount as it is not reduced from sale price, rather some monetary benefit in kind were used to be given.

10. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the Assessing Officer amounting of Rs. 3106820/- on account of Increase in Book Profit u/s 115JB (as Wealth lax expenditure), since there is no provision in section 115JB, that the assessee can claim wealth tax as expenditure and can reduce it from book profit.

11. For this and such other reasons, as may be urged at the time of the hearing, the order of the CIT(A) may be vacated and that of the Assessing Officer be restored.

12. The appellant craves, leave to add, amend, alter or delete any of the above grounds of appeal during the course appellate proceedings before the Hon’ble Tribunal.”

13. Briefly, the facts of the case are as under :

The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of life saving drugs and vaccines. The respondent-assessee filed the Return of Income for the assessment year 2013-14 on 29.11.2013 declaring total income of Rs.307,56,44,960/- and the same was revised on 30.03.2015 at total income of Rs.306,36,31,370/-.

Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-1(1), Pune (hereinafter called as the ‘Assessing Officer’) vide order dated 12.01.2017 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (‘the Act’) at total income of Rs.390,30,53,064/- after making the following disallowances to the returned income :-

(a) Disallowance u/s 14A of Rs.6,46,83,703/-.

(b) Disallowance of EDP (Electronic Data Processing) expenses of Rs.42,49,840/-.

(c) Disallowance on Foreign Travelling Expenses – Employees of Rs.22,31,668/-.

(d) Disallowance on Foreign Travelling Expenses – Others of Rs.2,13,379/-.

(e) Disallowance of depreciation on certain items of stainless steel tables, stools, trollies used in the laboratory as Plant & Machinery of Rs.1,38,153/-.

(f) Disallowance of Product Development Expenditure u/s 35(1)/37 of Rs.14,37,06,712/-.

(g) Disallowance of donation u/s 37(1) of Rs.5,50,000/-.

(h) Disallowance of repairs to building, plant and machinery of Rs.1,16,36,450/-.

(i) Disallowance of sales and promotion expenditure of Rs.2,90,94,637/-.

(j) Disallowance of Corporate Guarantee Commission of Rs.1,20,29,793/-.

(k) Disallowance of deduction u/s 10AA of Rs.47,46,67,962/-.

4. Being aggrieved by the above disallowances, an appeal was filed before the ld. CIT(A), who vide impugned order held that :

(i) No disallowance u/s 14A can be made by the Assessing Officer without recording satisfaction as to how the suo moto disallowance offered by the respondent-assessee company is incorrect. Accordingly, ld. CIT(A) directed the Assessing Officer to delete the addition of Rs.6,46,83,703/- made u/s 14A of the Act.

(ii) As regards to the foreign travel expenditure, the ld. CIT(A) considering the fact that in the earlier assessment years i.e. A.Ys. 2011-12 and 2012-13 pursuant to the remand order passed by this Tribunal, the Assessing Officer for the assessment year 2011-12 had allowed this expenditure after due verification of fact that the expenditure was incurred for the purpose of other than the projects of machinery, had allowed the expenditure.

(iii) As regards to the disallowance of depreciation of Rs.1,38,153/- on items stainless steel table, tools, trollies used in the laboratory, the ld. CIT(A) following the decision of this Tribunal in assessee’s own case for the assessment year 2001-02, allowed the depreciation at the rate applicable to the Plant & Machinery.

(iv) As regards, the disallowance of Product Development Expenditure, the ld. CIT(A) taking into consideration the fact that in the earlier assessment years i.e. for the assessment year 2011-12 and 2012-13 pursuant to the order of the Tribunal, the ld. CIT(A) had allowed the deduction under the provisions of section 35(2AB) following the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd., 31 com 300 (Gujarat).

(v) As regards to the disallowance of Rs.1,64,05,330/-, being the payments made to two foreign parties, namely, (i) Vakzine Project Management, Germany and (ii) Medicine in need corporation, USA, the ld. CIT(A) held that the same may be allowed as revenue expenditure.

(vi) As regards, allowability of the product development expenditure as revenue expenditure u/s 35(1), the ld. CIT(A) following the decision of this Tribunal for the assessment year 2008-09 in ITA No.914/PUN/2013 order dated 22.07.2016 allowed the claim.

(vii) As regards, the disallowance of claim for exemption of income u/s 10AA of the Act in respect of deemed exports to UNICEF, the ld. CIT(A) allowed the benefit of exemption u/s 10AA considering the fact that the deemed exports are also eligible for exemption u/s 10AA following the decision of the Hon’ble Supreme Court in the case of DCIT vs. Metal Closure (P) Ltd., 102 taxmann.com 72 (SC).

(viii) As regards, the disallowance of donation of Rs.5,50,000/- u/s 37(1), the ld. CIT(A) confirmed the disallowance of donation of Rs.5,50,000/- made to Sakal Social Foundation.

(ix) With regard to claim for allowance of depreciation on windmill of Rs.56,11,914/-, the ld. CIT(A) held that civil construction and electrical work were undertaken for operation of windmills and are not separable, therefore, allowed the depreciation at the rate applicable to plant and machinery following the decision of this Tribunal in assessee’s own case for assessment years 2011-12 and 2012-13.

(x) With regard to the disallowance of expenditure on account of Freebies/Incentives to doctors amounting to Rs.2,90,94,637/-, the ld. CIT(A) considering the fact that this expenditure is only discount and incentives given to doctors following the decision of the Tribunal in assessee’s own case for assessment years 2011-12 and 2012-13 allowed the claim.

(xi) As regards, the corporate guarantee commission, the ld. CIT(A) directed the Assessing Officer/TPO to restrict the TP addition on account of corporate guarantee commission to the extent of 0.5% following the decision of the Hon’ble Bombay High Court in the case of Everest Kanto Cylinders Ltd. vs. CIT, 58 com 254 (Bom.).

5. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.

6. Ground of appeal no.1 challenges the correctness of the decision of the ld. CIT(A) deleting the addition on account of transfer pricing adjustment on account of corporate guarantee commission of Rs.91,03,879/-. The factual matrix of the issue is as under :

During the previous year relevant to the assessment year under consideration, the respondent-assessee had provided corporate guarantee for borrowing made by its foreign subsidiaries. Further, it had not charged any corporate guarantee commission. The respondent-assessee had also given corporate guarantee in favour of its subsidiaries viz. Serum International BV and Bilthoven Biologicals BV, Netherlands.

On reference to the TPO u/s 92CA for benchmarking of the above international transactions, it was contented before the TPO that the corporate guarantee was given to the lenders for the loan taken by its AE is for the benefit of respondent-assessee and it is not in the nature of service being provided to its AE. It was also contended that providing corporate guarantee is a shareholder activities. Thus, it was contended that the transaction of corporate guarantee is not an international transaction u/s 92B of the Act.

However, the TPO rejecting the above contentions proposed a TP adjustment of Rs.1,20,29,793/- at the rate of 2%.

On receipt of the TPO’s order, the Assessing Officer passed a draft assessment order after making the TP adjustments.

On appeal before the ld. CIT(A), the ld. CIT(A) following the decision of the Hon’ble Bombay High Court in the case of Everest Kanto Cylinders Ltd. vs. CIT, 58 taxmann.com 254 (Bom.) restricted the TP adjustment on account of corporate guarantee to 0.5% instead of 2%.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us challenging the correctness of the finding of the ld. CIT(A).

7. The ld. CIT-DR submits that the transaction of corporate guarantee is international transaction within the meaning of provisions of section 92B of the Act. Therefore, ld. CIT(A) ought to have sustained the TP adjustment suggested by the TPO keeping in view of the Safe Harbour Rules.

8. On the other hand, ld. Sr. Counsel submits that the decision of the ld. CIT(A) restricting the TP adjustment on account of corporate guarantee to 0.5% is in consonance with the law laid down by the Hon’ble Jurisdictional High Court in the case of Everest Kanto Cylinders Ltd. (supra). Therefore, no interference in the order of the ld. CIT(A) is called for by this Tribunal.

9. We heard the rival submissions and perused the record. The issue in the present ground of appeal no.1 relates to the benchmarking of international transaction of furnishing corporate guarantee. There cannot be any dispute that the transaction of furnishing bank guarantee to subsidiary constitutes international transactions in view of retrospective amendment to the provisions of section 92B of the Act by the Finance Act, 2012 by inserting Explanation (1)(c) to section 92B w.e.f. 1/4/2002. Then the question that comes for consideration is, as to, what is the arm’s length rate of commission to be applied to the transaction of furnishing of corporate guarantee. The approach of the TPO for the purpose of benchmarking the transaction for corporate guarantee cannot be upheld. There cannot be universal application of any rate of commission. It depends upon terms and conditions on which loan has been given, risk undertaken and relationship between bank and client, economic and business interest are some of the major factors which are required to be taken into consideration to arrive at appropriate rate of commission. The Jurisdictional High Court in the case of CIT vs. Everest Kento Cylinders Ltd., 378 ITR 57 (Bom.) held that the Corporate Guarantee cannot be treated on par with Bank Guarantees, as the considerations which are applied for issuance of Corporate Guarantee are distinct and separate from bank guarantee and the Hon’ble Jurisdictional High Court held that the corporate guarantee fees charged at the rate of 0.5% cannot be called in question. The ratio of this decision was subsequently followed by the Hon’ble Bombay High Court in the case of CIT vs. Glenmark Pharmaceuticals Ltd., 398 ITR 439. The order of the ld. CIT(A) is based on the decision of the Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd. referred to supra.

10. In view of the above, we find no illegality and perversity in the finding of the ld. CIT(A) restricting the TP adjustment on account corporate guarantee commission at the rate of 0.5%. Hence, we do not find any merit in the ground of appeal no.1 filed by the Revenue. Accordingly, ground of appeal no.1 stands dismissed.

11. Ground of appeal no.2 challenges the correctness of the finding of the ld. CIT(A) in holding that the provisions of section 14A have no application in the absence of recording a satisfaction as to the incorrectness of the claim of the respondent-assessee that the respondent-assessee incurred expenditure of Rs.1,35,00,000/- to earn the exempt income. The factual matrix of the issue is as under:

During the course of assessment proceedings, the Assessing Officer found that the respondent-assessee earned exempt income of Rs.49,66,91,432/-. However, the respondent-assessee disallowed only a sum of Rs.1,35,00,000/- u/s 14A of the Act. It was contended before the Assessing Officer that there is no direct expenditure incurred to earn the exempt income. The contentions raised by the assessee company before the AO are extracted para 3 at page 8 of the assessment order.

Without prejudice to the above contentions, the respondent-assessee offered a suo moto disallowance of Rs.1,35,00,000/-. However, the Assessing Officer had proceeded to make a disallowance u/s 14A invoking Rule 8D of the Income Tax Rule, 1962 (‘the Rules’) by observing that the assessee had failed to prepare separate books of account for the expenditure to earn the exempt income or non-exempt income rejected the contention of the assessee company that no expenditure was incurred to earn the exempt income and proceeded to make a disallowance u/s 14A r.w. Rule 8D placing reliance on the CBDT Circular No.5/2014 dated 11.02.2014 and made disallowance of Rs.7,81,83,703/- as against suo moto disallowance offered by the respondent-assessee company of Rs.1,35,00,000/-.

On appeal before the CIT(A), it is held that when the respondent-assessee offered a suo moto disallowance of Rs.1,35,00,000/-, the Assessing Officer cannot make a recourse to the provisions of Rule 8D for the purpose of computing the disallowance u/s 14A of the Act without recording a satisfaction as to how the contention of the assessee that no expenditure was incurred to earn the exempt income is incorrect. Accordingly, the ld. CIT(A) directed the AO to delete the addition made u/s 14A of the Act.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present ground of appeal no.2 challenging the correctness of the findings of the ld. CIT(A).

12. The ld. CIT-DR contended that once the assessee earns exempt income, the provisions of section 14A automatically triggers. He submits that the Assessing Officer had no choice, but to apply the provisions of Rule 8D to compute the amount of disallowance u/s 14A, merely because AO did not expressly record the satisfaction, would not per se justify the ld. CIT(A) to conclude that no satisfaction was recorded to reject the Assessing Officer conclusion placing on the decision of the Hon’ble Delhi High Court in the case of Indiabulls Financial Services Ltd. vs. DCIT, 395 ITR 242 (Delhi.). Thus, he submits that the order of the ld. CIT(A) deleting the addition cannot be sustained in the eyes of law.

13. On the other hand, ld. Sr. Counsel submits that from the perusal of the assessment order, it would reveal that the Assessing Officer without recording the satisfaction, as to how the claim of the assessee that only expenditure of Rs.1,35,00,000/- was incurred to earn exempt income is incorrect, cannot resort to the provisions of section 14A of the Act. He placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., 370 ITR 338 (Del) and PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd, 105 com 274.

14. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal no.2 relates to the applicability of provisions of section 14A of the Act to the facts of the present case. Admittedly, the respondent-assessee company made investments, which yielded the dividend income. The respondent-assessee company itself offered suo motu disallowance of Rs.1,35,00,000/-. The provisions of sub-section (2) of section 14A provides that resort to disallowance u/s 14A can be made only if the Assessing Officer is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred to earn the exempt income. Therefore, it is incumbent upon the Assessing Officer to record satisfaction, as to the correctness or otherwise of the assessee company that only an expenditure of Rs.1,35,00,000/-was incurred to earn the exempt income. The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (supra) held as follows:

“41. Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the Assessing Officer.”

Even the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd, 400 ITR 217 (Bom) held as under:

“The AO is not entitled to make any disallowance under Rule 8D if he does not specifically record that he is not satisfied with the correctness of the assessee’s claim. The fact that the CIT(A) and ITAT were not satisfied with the assessee’s disallowance and enhanced it does not mean that Rule 8D becomes applicable and the disallowance should be computed as per the prescribed formula.”

The similar view was taken by the Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., 370 ITR 338 (Del) and PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd, 105 taxmann.com 274. In the present case, the AO vide para 7.6 merely observed that the assessee company made substantial investments in mutual funds and therefore, incurred substantial expenditure to earn the exempt income and in the circumstances, he was of the opinion that rule 8D has to be applied. Therefore, the question that comes up for consideration before us is whether the above observation made by the AO amounts to satisfaction as envisaged u/s 14A(2). It is a settled position of law that the satisfaction recorded by the AO should be based on the objective material and cannot be subjective. From mere reading of para 7.6, it is clear that the AO has not recorded satisfaction regarding the correctness of suo motu disallowance offered by the assessee u/s 14A and mere rejection of the explanation of the assessee per se, cannot be said to be a satisfaction as envisaged u/s 14A(2). The ratio laid down by the Hon’ble Delhi High Court in the case of PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd (supra) and PCIT vs. Keshav Power Ltd., 112 taxmann.com 323 as well as the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd (supra) is squarely applicable to the facts of the present case. Therefore, we hold that the disallowance of Rs.7,81,83,703/- as made by the AO deleted by the ld. CIT(A) is correct in law, as the AO had failed to record the satisfaction as envisaged u/s 14A(2). Since the order of the ld. CIT(A) is based on the ratio laid down by the Hon’ble Jurisdictional High Court in the cases referred (supra), we do not find any reason to interfere with the order of the ld. CIT(A). Hence, the ground of appeal no.2 filed by the Revenue stands dismissed.

15. Ground of appeal no.3 challenges the correctness of the decision of the ld. CIT(A) deleting the addition made by the Assessing Officer on account of foreign travel expenses of Rs.24,45,047/- by holding to be personal expenditure.

During the course of assessment proceedings, the Assessing Officer found that the employees of the respondent-assessee company have travelled abroad for the purpose of acquisition of machinery incurred of expenditure of Rs.22,31,668/-.The Assessing Officer was of the opinion that the expenditure incurred on travelling by the employees of the respondent-assessee company should be treated as capital expenditure, as same was incurred in relation to acquisition of plant and machinery. He accordingly treated the travelling expenditure as capital expenditure and disallowed the same as revenue expenditure.

Secondly, the Assessing Officer also found that the respondent-assessee company incurred expenditure on foreign travelling of two members of Poonawall family, namely, Mrs. Natasha Poonawalla and Mrs. B.Z. Poonawalla. It is contended that Mrs. B.Z Poonawalla is a director of the respondent-assessee company and Mrs. Natasha Poonawalla had also been made director in later years. It is contended that the travelling expenses with Mrs. B.Z. Poonawalla had been reimbursed no deduction was claimed. However, the Assessing Officer had disallowed the foreign travelling incurred by Mrs. Natasha Poonawalla holding it to be personal expenditure.

On appeal before the ld. CIT(A), the ld. CIT(A) considering the fact that for the assessment years 2011-12 and 2012-13, the AO accepted the claim on due verification that the foreign travel was not undertaken in connection with the acquisition of plant and machinery pursuant to the remand made by ITAT, held that the expenditure is revenue in nature.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present ground of appeal no.3 challenging the correctness of finding of the ld. CIT(A).

16. It is contended that the ld. CIT(A) ought not to have held that the foreign travel expenses incurred by the employees is capital in nature, inasmuch as, the foreign tours were undertaken by the employees of the respondent-assessee company for the purpose of procurement of machinery.

As regards to the foreign travel expenses of wife of the director of the respondent-assessee company, he submitted that expenditure incurred by Mrs. B.Z. Poonawalla is purely personal expenditure and cannot be allowed for deduction.

17. On the other hand, ld. Sr. Counsel submits that the visit of employees is for the purpose of running business as some more plant and machinery was intended to be purchased. If the visit was either to take a decision whether it was suitable for its business or not or for any other such purpose, it cannot be said that the expenditure incurred on such visits is on account of capital outlay. In this connection, he placed reliance on the decision of the Hon’ble Bombay High Court in the case of Bralco Metal Industries (P.) Ltd. vs. CIT, 206 ITR 477 (Bom.) and Antifriction Bearings Corpn. Ltd. vs. CIT, 114 ITR 335 (Bom.). He finally submits that the Assessing Officer in the remand assessment proceedings for the assessment years 2011-12 and 2012-13 had accepted the submission of the assessee following the decision of the Hon’ble Bombay High Court in the case cited supra. Thus, it is submitted that the order of the ld. CIT(A) cannot be faulted and no interference is called for.

As regards to the foreign expenses of Mrs. B.Z. Poonawalla, he submits that she was also a director of the respondent-assessee company and wife of another director of the respondent-assessee company, namely, Mr. Zavaray Poonawalla. He submits that the spouse of a director of company, accompanies the director on foreign trip, it cannot be said to be not for the purpose of business placing reliance on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Alfa Laval (I) Ltd., 282 ITR 445 (Bom.) and CIT vs. Zuari Finance Ltd., 271 ITR 538 (Bom.).

18. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal no.3 relates to the allowability of foreign travel expenditure incurred by employees of the assessee company. During the previous year relevant to the assessment year under consideration, the assessee company had incurred expenditure of Rs.22,31,668/- on foreign trips of employees, undertaken for the purpose of procurement of machinery. The Assessing Officer was of the opinion that this expenditure is capital in nature and cannot be allowed as revenue expenditure. Admittedly, the foreign travel was undertaken by the employees for running business purposes and there is no material on record to show that the expenditure was incurred in connection with procurement of machinery from abroad. The visit was undertaken by the employees of the assessee company to take a decision whether machinery was suitable for his business or not. Therefore, the ratio of decision of the Hon’ble Jurisdictional High Court in the case of Bralco Metal Industries (P.) Ltd. vs. CIT, 206 ITR 477 (Bom.) is squarely applicable to the facts of the present case, wherein, it was held as follows :-

“There was no dispute about the fact that the visit of the managing director was for the purpose of business. There was also no dispute that the business of the assessee was already going on and it was in connection with the running business that some more plant or machinery were intended to be purchased. If the visit was either to take a decision whether it was suitable for its business or not or for any other such purpose, it will not convert the expenditure incurred on the managing director’s visit into an expenditure of a capital nature. Where a decision is taken to purchase the machinery and the purchase has in fact been made in pursuance of such decision, it may be possible for the revenue to contend that the expenditure should be added to the cost of the machinery but in a case where a decision is taken note to purchase the machinery it would not be possible to treat the expenditure as part of the cost of any machinery because no machinery, as such, is purchased. In such an event, either it may be disallowed altogether or it may be allowed treating it as a revenue expenditure. In aforesaid circumstances, applying the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 it was to be held that the Tribunal was not justified in holding the expenditure in question was capital expenditure and in disallowing the claim of the assessee for deduction under section 37(1).”

We also find that the AO for assessment years 2011-12 and 2012-13 pursuant to the remand made by the ITAT accepted vide order dated 26.12.2019 passed u/s 143(3) r.w.s. 254 had accepted the position that the purpose of foreign visits of the employees is only for the purpose of to take decision whether the machinery was suitable for business or not and the foreign visits by the employees were not undertaken in connection with the any acquired plant and machinery. It is also matter of record that the impugned addition was made on the basis of similar addition made for assessment year 2012-13, since this basis was removed in the remand order passed pursuant to order of remand by ITAT, the present addition cannot be sustained on the principle that once the foundation is removed superstructure falls based on latin maxim (sublato fundamento cedit opus). Therefore, in the light of above discussion, we do not find any illegality or perversity in the finding of the ld. CIT(A) holding that the expenditure incurred on foreign trips of the employees is revenue in nature.

As regards to the foreign travel expenses of Mrs. B.Z. Poonawala, who is a wife of another director, namely, Mr. Zavaray Poonawalla, it is settled position of law as held by the Hon’ble Bombay High Court in the case of Alfa Laval (I) Ltd. (supra) that the expenditure was incurred for business purpose or not can be judged from the point of view of normal, prudent businessman. Similarly, the expenditure incurred by an assessee on foreign tour of wife of the director, who accompanied the director of the assessee company cannot be said to be not for the purpose of the business of the assessee company. The relevant paragraphs of the said decision of the Hon’ble Bombay High Court in the case of Alfa Laval (I) Ltd. (supra) are reproduced hereunder :-

“4. ……………………….  The expenses must stand to the test of commercial expediency. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water-tight compartment so as to be confined in a straitjacket formula. All that law requires is that the expenditure should not be in the nature of capital expenditure or personal expenditure of the assessee and it should be wholly and exclusively laid out for the purposes of the business. It is well settled that items of expenditure are to be considered from the point of view of a normal, prudent businessman. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business. It seems that in the ultimate analysis the matter would depend on the status of the parties as spelt out and the nature or character of the trade or venture, the purpose for which the expenses were incurred and the object which was sought to be achieved in incurring those expenses.

5. Applying normal, prudent businessman’s approach, we do not think that the expenses incurred by the assessee on a foreign trip of the wife of the company’s President could be said to be not for the purposes of the business of the assessee-company. Considering the concurrent finding of fact recorded by both the authorities below, in our view, the expenditure would be allowable as deduction while computing the profit and gains of the business.”

In view of the law laid down by the Hon’ble Jurisdictional High Court in the case of Alfa Laval (I) Ltd. (supra), it cannot be said that the expenditure incurred on foreign travel of the director of the respondent-assessee company and his wife cannot be said to be personal in nature. Therefore, we do not find any illegality and perversity in the finding of the ld. CIT(A) allowing the foreign travel expenses as revenue expenditure. Thus, the ground of appeal no.3 filed by the Revenue stands dismissed.

19. Ground of appeal no.4 challenges the correctness of the decision of the ld. CIT(A) deleting the disallowance of depreciation of items of stainless steel tables, stools, trollies used in the laboratory treating as Plant & Machinery as against the treatment of these items as furniture items.

During the course of assessment proceedings, the Assessing Officer found that the respondent-assessee company treated the stainless steel tables, stools trollies amounting to Rs.39,07,934/-used in the laboratory as Plant & Machinery and claimed depreciation at the rate applicable for Plant & Machinery. However, the Assessing Officer was of the opinion that the same formed part of the furniture and allowed the depreciation at 10% as against 15% claimed by the respondent-assessee.

On appeal before the ld. CIT(A), the ld. CIT(A) following the decision of ITAT for the assessment year 2001-02 till assessment year 2012-13 held them as forming part of Plant & Machinery, accordingly, allowed the appeal.

Being aggrieved, the Revenue is in appeal before us challenging the correctness of the findings of the ld. CIT(A). The ld. CIT-DR submits that the items of stainless steel table,

20. stools, trollies used in the laboratory cannot be classified as the Plant & Machinery for the purpose of allowance of depreciation. He submits that the assets such as stainless steel table, stools, trollies are furniture and depreciation can be allowed at the rate applicable to furniture.

21. On the other hand, ld. Sr. Counsel submits that identical issue was decided by this Tribunal in assessee’s own case for the assessment year 2001-02 in ITA No.948/PUN/2055 dated 18.01.2012. He further submits that functional tests are applied to determine the classification of a particular asset, i.e. the functional test in deciding whether a particular tool constitutes plant and machinery placing reliance on the decision of the Hon’ble Karnataka High Court in the case of Hindustan Aeronautics Ltd. vs. CIT, 206 ITR 338.

22. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal no.4 relates to determination of whether stainless steel tables, stools, trollies used in the laboratory constitutes a plant and machinery or furniture. Admittedly, the stainless steel tables, stools, trollies were used in the laboratory i.e. for the purpose of production and processing of chemical test. We find from the order of the Tribunal in assessee’s own case (supra) that the Tribunal taking into consideration the ratio of the decision of the Hon’ble Bombay High Court in the case of CIT vs. Parke Devis, 214 ITR 587 (Bom.) wherein it was held that if the scientists or lab technicians used the said stainless steel tables, stools, trollies, racks as part of the production of vaccine and other should be classified as plant and machinery, accordingly, the depreciation should be allowed at the rate applicable to plant and machinery. We do not see any illegality and perversity in the decision of this Tribunal in the earlier assessment year 2001-02. Even the ld. CIT(A) only followed the order of the Tribunal for the assessment year 2001-02 in deciding the issue. Therefore, we do not see any reason to interfere with the order of the ld. CIT(A). Accordingly, the ground of appeal no.4 filed by the Revenue stands dismissed.

23 Ground of appeal no.5 challenges the correctness of the decision of the ld. CIT(A) allowing the weighted  eduction u/s 35(2AB) in respect of the product development expenditure of Rs.10,03,55,672/-.

During the previous year relevant to the assessment year under consideration, the respondent-assessee made a claim for weighted deduction of Rs.86,32,04,668/- under the provisions of section 35(2AB) in respect of product development expenditure. However, the prescribed authority i.e. DSIR had only certified that only a sum of Rs.80,48,24,167/- was eligible for weighted deduction u/s 35(2AB) and the DSIR had not certified the expenditure claimed on clinical trial expenses amounting to Rs.4,19,75,171/- and payments made to certain parties amounting to Rs.1,64,05,330/- is not eligible for weighted deduction u/s 35(2AB) of the Act.

During the previous year relevant to the assessment year under consideration, the respondent-assessee had incurred a total product development expenditure of Rs.50,34,55,690/-. Out of which, the respondent-assessee made a claim for weighted deduction of expenditure of Rs.35,97,48,978/- u/s 35(1)/37(1) of the Act.

On appeal before the ld. CIT(A), considering the fact that for the assessment year 2011-12 and 2012-13 pursuant to the remand made by the ITAT, the Assessing Officer had allowed the clinical trial expenses for weighted deduction u/s 35(2AB) following the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd., 31 taxmann.com 300 (Gujarat), had allowed the weighted deduction on clinical trial deduction of Rs.4,19,75,171/-.

As regards, the expenditure incurred towards payment made to two foreign parties namely, (i) Vakzine Project Management, Germany and (ii) Medicine in need corporation, USA, the ld. CIT(A) directed the Assessing Officer to allow the same as revenue expenditure after verifying the compliance with the TDS provisions.

As regards, the claim for allowance as revenue expenditure on product development expenditure of Rs.4,19,75,171/-, the ld. CIT(A) allowed the same following the Tribunal’s order in assessee’s own case for the assessment year 2008-09.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present ground of appeal no.5 challenging the correctness of the decision of the ld. CIT(A).

24. The ld. CIT-DR submits that the ld. CIT(A) ought not to have granted weighted deduction in respect of clinical trial expenditure, inasmuch as, the same was not approved by DSIR in terms of provisions of section 35(2AB) of the Act.

25. On the other hand, ld. Sr. Counsel submits that the Assessing Officer denied the claim for weighted deduction of expenditure incurred amounting to Rs.4,19,75,171/- on the ground that the expenditure was incurred outside approved facilities. The reasoning of the Assessing Officer was not approved by the Hon’ble Gujarat High Court in the case of Cadila Healthcare Ltd. (supra) and following the ratio laid down by the Hon’ble Gujarat High Court in the case of Cadila Healthcare Ltd. (supra), the Assessing Officer had accepted the expenditure incurred on clinical trial outside the approved facility as eligible for weighted deduction u/s 35(2AB) for the assessment years 2011-12 and 2012-13 pursuant to the remand made by this Tribunal. Thus, it is submitted that on the parity of the same reasoning, the order of the ld. CIT(A) requires no interference.

26. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to the allowance of weighted deduction u/s 35(2AB) of Rs.4,19,75,171/-in respect of expenditure incurred on clinical trial expenditure. Admittedly, this expenditure was incurred outside approved facility for the purpose of section 35(2AB) of the Act. The Hon’ble Gujarat High court in the case of Cadila Healthcare Ltd. (supra) while dealing the identical issue held as follows :-

“15. Such explanation thus provides that for the purpose of said clause, i.e. clause (1) of section 35(2AB), expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under the Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970.

16. The whole idea thus appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could be put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on. Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If we give such restricted meaning to the term expenditure incurred on in-house research and development facility, we would on one hand be completely diluting the deduction envisaged under sub-section (2AB) of section 35 and on the other, making the explanation noted above quite meaningless. We have noticed that for the purpose of the said clause in relation to drug and pharmaceuticals, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the Revenue would completely make the explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an explanation.

17. In the case Dy. CIT v. Mastek Ltd. [2012] 210 Taxman 432/25 com 133 (Guj.) and connected matters, a Division Bench of this Court had touched on the aspect of what can be termed as scientific research. In the context, certain observations made by the Bench may be of some relevance.

“25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) of the Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such research was undertaken. It can be easily envisaged that the scientific research undertaken often times would completely fail to achieve desired results. That by itself does not mean that no scientific research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee.”

18. We are, therefore, of the opinion that the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises.”

No contrary decision had been brought to our notice warranting a different opinion. In the light of law laid down by the Hon’ble Gujarat High Court in the case of Cadila Healthcare Ltd. (supra), we do not find any reason to interfere with the order of ld. CIT(A), as same is in consonance with the law laid down by the Hon’ble Gujarat High Court in the case of Cadila Healthcare Ltd. (supra). Therefore, the ground of appeal no.5 filed by the Revenue stands dismissed.

27. Ground of appeal no.6 challenges the decision of the ld. CIT(A) allowing the capital expenditure incurred on product development as revenue expenditure u/s 35(1) of the Act. During the year under consideration, the product development expenditure of Rs.50,34,55,690/- out of which weighted deduction has been claimed on expenditure of Rs.35,97,48,978/- u/s 35(2AB) of the Act. The balance expenditure of Rs.14,37,06,712/- was claimed as revenue expenditure u/s 35(1)/37(1) of the Act. It is stated that the process of development of a new product of drugs or vaccine required time a spent of 3 to 5 years. The process requires certain revenue expenditure like purchase of raw material, chemicals, consumables, salaries, testing charges, utilities like steam, power, expenses on clinical trials, stationery etc.. Such expenditure were capitalized in books of account and amortized over a period of 5 years, the respondent-assessee company claimed that the treatment given in the books of account is in consonance with the Accounting Standard – 26. However, in the return of income, this expenditure incurred on Research & Development and products though capitalized in the books of account was claimed as deduction as revenue expenditure u/s 37(1) or u/s 35(1)(iv) of the Act. The Assessing Officer was of the opinion that such expenditure is capital in nature and cannot be allowed as revenue expenditure and, accordingly, disallowed the same.

On appeal before the ld. CIT(A), the ld. CIT(A) following the decision of the Tribunal for the assessment year 2008-09 onwards allowed said expenditure is revenue expenditure u/s 35(1)(iv) of the Act.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present appeal ground of appeal no.6.

28. The ld. CIT-DR submits that the expenditure was incurred in the process of developing a new product and, therefore, the same should be held to be capital expenditure and cannot be allowed as deduction.

29 On the other hand, ld. Sr. Counsel submits that the expenditure which does not qualify for weighted deduction can be allowed as revenue expenditure either under the provisions of section 35(1)(iv) or u/s 37(1) of the Act. He submits that this issue was covered by the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment year 2008-09. Since the CIT(A) only followed the decision of the ITAT in assessee’s own case in ITA No.914/PUN/2013 dated 22.07.2016 no interference is called for.

29. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to the allow ability of the expenditure incurred on the development of new products in the case of running business. Admittedly, the expenditure was incurred in the process of development of new product of drugs or vaccine which was not qualified for weighted deduction u/s 35(2AB) of the Act. The mere fact that the absence of approval of prescribed authority u/s 35(2AB) is not a bar for allowance of claim within the ambit of provision of section 35(1)(iv) or u/s 37(1) of the Act, inasmuch as, the expenditure is incurred is revenue in nature for running business. The treatment given in the books of account is not determinative of the allowability or otherwise the expenditure under the provisions of the Act as held by the Hon’ble Supreme Court in the case of (i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT, 82 ITR 363 (SC) and (ii) Kedarnath Jute Mfg. Co. Ltd. vs. CIT, 116 ITR 1 (SC) and (iii) CIT vs. Smifs Securities Ltd., 348 ITR 302 (SC). The Tribunal had rendered the decision following ratio rendered in those judgment and, therefore, we do not see any reason to interfere with the findings of the ld. CIT(A), inasmuch as, he only followed the decision of the Tribunal in assessee’s own case for the assessment year 2008-09 (supra). Therefore, we do not find any merits in the ground of appeal no.6 filed by the Revenue and hence, dismissed.

31. Ground of appeal no.7 challenges the decision of the ld. CIT(A) allowing the deduction u/s 10AA in respect of sales of Rs.47,46,67,962/- made to United Nations International Children’s Emergency Fund (UNICEF). The factual matrix of the issue is as under :-

During the previous year relevant to the assessment year under consideration, the respondent-assessee company made a sales of Rs.69,80,96,800/- through SEZ-Unit –IV to UNICEF which is a United Nation (UN) program headquartered in New York City that provides humanitarian and developmental assistance to children and mothers in developing countries. The UNICEF undertakes various projects all over the world and distributes essential items as vaccines, medicines for children, nutritional supplement, emergency shelter and educational supplies. The respondent-assessee company had entered into contract with UNICEF and had supplied vaccines manufactured in Special Economic Zone, Hadapsar, Pune, Maharashtra to be supplied all over the world. The respondent-assessee company made supply of some of the required vaccines in India as per delivery instructions by UNICEF. It had received the sale proceeds in convertible foreign exchange, even in respect of supplies made in India. The assessee is at no stage privy to the arrangement between UNICEF and its beneficiaries in India or abroad. The Assessing Officer was of the opinion that since the sales were delivered in India and were not exported out of India, the respondent-assessee was not entitled for deduction u/s 10AA of the Act and, accordingly, denied the deduction u/s 10AA in respect of sales made to UNICEF in India placing reliance on the Explanation 1 to section 10AA which defines the term “export out of India”.

On appeal before the ld. CIT(A), the ld. CIT(A) taking into consideration the following facts had concluded that the provisions of Special Economic Zone (SEZ) Act, 2005 shall override the provisions of section 10AA of the Act :-

A. “The assessee company is selling vaccines to “UNICEF” (based outside India) on principal to principal basis.

B. It is receiving payment only in convertible foreign exchange from UNICEF. Primary intention of the legislature in granting deductions/exemptions u/s 10A, 10B, 10AA and 80HHC was to promote earnings in foreign exchange and export activity.

C. As per EXIM Policy and Rule 53 of SEZ rules, 2006, supply to projects funded by UN agencies is treated as “Deemed Exports”.

D. While UNICEF directs to deliver the goods to ‘Consignees’ in India; there is no direct communication between the assessee and the Indian consignees in respect of sale of vaccines. The privity of the contract for sales under consideration is between the assessee and an international institution, non-resident based out of India (UNICEF).

E. In order to comply with the condition of physical delivery of goods out of India as emphasized by the learned AO, UNICEF should first import the goods from India and re-export them back to India. This will be an unfeasible proposition particularly with cold chain logistics system required for transportation of vaccines and impractical exercise with additional cost and therefore direct delivery in India was only a matter of convenience for UNICEF and this part always formed part of the long term export order placed by UNICEF on the assessee.”

The provisions of SEZ Act, 2005 defines the term “Exports” to include within its ambit, even the deemed export drawing support from the decision of the Hon’ble Karnataka High Court in the case of Metal Closures (P.) Ltd. vs. DCIT, 101 taxmann.com 71 (Kar.), which is confirmed by the Hon’ble Supreme Court by dismissing the SLP, wherein it is held that an assessee is entitled for deduction u/s 10A of the Act even in respect of deemed exports.

Being aggrieved, the Revenue is in appeal before us in the present ground of appeal challenging the correctness of findings of the ld. CIT(A).

32. The ld. CIT-DR submits that the CIT(A) grossly erred in allowing the benefit of deduction u/s 10AA even in respect of deemed exports made to UNICEF against the plain provisions of section 10AA of the Act.

33. The ld. Sr. Counsel submits that the provisions of section 10AA were introduced in the Income Tax Act, 1961 by SEZ Act, 2005. The object behind enactment of SEZ Act, 2005 is only to promote the exports in order to augment the foreign exchange earnings. In this regard, he also referred to the decision of the Hon’ble Kerala High Court in the case of Girnar Industries vs. CIT, 338 ITR 277 (Kerala) and also the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Macquarie Global Services (P.) Ltd., 102 taxmann.com 272 (Delhi). He further submits that the provisions of section (1) of section 10AA provides that while computing the total income of the respondent-assessee company, an entrepreneur, who begins to manufacture or produce articles or things or provide any services from a unit established in Special Economic Zone shall be entitled for deduction of the profits derived from such unit. Taking us through the provisions of sub-section (1) of section 10AA, he submits that no condition as to the export of goods outside India was stipulated in order to be eligible to claim of deduction u/s 10AA of the Act. He further submits that the provisions of sub-section 7 of section 10AA only provides the methodology for computing the amount of deduction of eligible profits for deduction u/s 10AA of the Act. As regards, the interpretation of the provisions of sub-section (7) of section 10AA, he submits that the Literal Interpretation of provisions of sub­section (7) of section 10AA would result in absurdity and, therefore, Purposive Interpretation should be adopted. In this regard, he placed reliance on the decision of the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO, 131 ITR 597 (SC).

Without prejudice to the above, he submits that the agreement entered into with UNICEF by the respondent-assessee satisfied the requirement of export outside India, inasmuch as, the supplies of goods made to UN Agency are regarded as “Deemed Exports” under the Foreign Trade Policy. In this regard, he also took us through the clause 8.2 of EXIM Policy, which provide supplies of goods to projects funded by UN agencies is treated as “Deemed Exports”. He further submits that the Rules framed under Special Economic Zone Act, 2005 stipulates that the supplies made to the project funded by United Nation are to be considered as “Deemed Exports”. Finally, he submits that the provisions of section 10AA were introduced by the Income Tax Act, 1961 for the purpose of implementation of the EXIM policy and the provisions of section 10AA cannot be construed in the manner to be inconsistent with EXIM policy.

Finally, he submits that a two way traffic cannot be read into the provisions of section 10AA placing reliance on the decision of Hon’ble Supreme Court in the case of J.B. Boda & Co. (P.) Ltd. vs. CBDT, 223 ITR 271 in the context of provisions of section 80-O of the Act.

34. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to the eligibility of profits earned out of sales made to UNICEF for its program in India. Admittedly, the respondent-assessee company had received consideration in convertible foreign exchange towards sale of vaccine to UNICEF for its projects in India and the goods had not moved out of the India. The Assessing Officer was of the opinion that the respondent-assessee company is not eligible for deduction of its profits derived from sale of vaccine to UNICEF for its projects in India, as the goods were not exported outside India.

On appeal before the ld. CIT(A), the ld. CIT(A) placing reliance on the decision of the Hon’ble Supreme Court in the case of J.B. Boda & Co. (P.) Ltd. (supra) and the decision of the Hon’ble Karnataka High Court in the case of Metal Closures (P.) Ltd. (supra) allowed the claim of the respondent-assessee company by treating the sales made to UNICEF for its projects in India as “Deemed Exports”. The correctness of this finding of the ld. CIT(A) is under challenge before us. For better appreciation of issue on hand, it is apt to reproduce the relevant provisions of section 10AA of the Act :-

“Special provisions in respect of newly established Units in Special Economic Zones.

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 2 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, but before the first day of April, 2021, the following deduction shall be allowed—

(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) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub­section (2).

Explanation.—For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.

(2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely :—

(a) the amount credited to the Special Economic Zone Re­investment Reserve Account is to be utilised—

(i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and

(ii) until the 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 income⁶¹ 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 Re­investment 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 not so utilised,

shall be deemed to be the profits,—

(i) in a case referred to in clause (a), in the year in which the amount was so utilised; or

(ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (2), and shall be charged to tax accordingly :

Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be 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 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 and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006.

(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:—

(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 re­establishment, 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 sub­section.

(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 this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,—

(a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and

(b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place.

(6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward 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 undertaking :

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)⁶² 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 this section as they apply for the purposes of the undertaking referred to in section 80-IA.

(10) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified business, referred to in clause

(c) of sub-section (8) of section 35AD, for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.

Explanation 1.—For the purposes of this section,—

(i) “export turnover” means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery 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) 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.

For the purpose of deciding the issue on hand, the provisions of sub-section (1) and sub-section (7) of section 10AA of the Act are relevant. Sub-section (1) of section 10AA provides that while computing the total income of the assessee, the income derived at from it unit who beings to manufacture or produce the article or things provide any service during the relevant period deduction shall be allowed. Sub-section (2) of section 10AA stipulates the conditions for availing the deduction u/s 10AA of the Act.

The provision of sub-section (7) of section 10AA provides the methodology for computing the amount of deduction u/s 10AA of the Act. We find that the provisions of sub-section (7) of section 10AA provides that the amount of deduction shall be the profits derived from export of articles or things bears to the profits of business of undertaking, as export turnover to total turnover of the business. Clause (ii) to Explanation 1 of section 10AA defines the term “export in relation to Special Economic Zones” to mean taking the goods or otherwise out of India by

–       land,

–       sea,

–       air, or

–       any other mode,

–       whether –

–       physical or

–       otherwise

In the backdrop of the above provisions of the Act, we are required to examine the eligibility of the profits earned in respect of sales made to UNICEF for its projects in India, for exemption u/s 10AA of the Act. On mere perusal of sub-section (1) of section 10AA, it would reveal that the export of goods, manufactured from the unit situated in the Special Economic Zone, is not a condition precedent for availing the benefit of deduction u/s 10AA of the Act. The language of the provision does not support any construction.

It is significant to note that the provisions of section 10AA were introduced in the Income Tax Act, 1961 by Special Economic Zone Act, 2005 w.e.f. 10.11.2006. The Special Economic Zone Act, 2005 was enacted to provide for concessions which, apart from Central Excise Customs and other laws allied and as provided for deduction of Income Tax in respect of profits derived by an entrepreneur within the meaning of clause (j) of section 2 of Special Economic Zone Act, 2005. Clause 27 of Special Economic Zone Act, 2005 provides for modification of the provisions of Income-tax Act and it reads as follows :-

“27. Provisions of Income-tax Act, 1961 to apply with certain modification in relation to developers and entrepreneurs.—The provisions of the Income-tax Act, 1961 (43 of 1961), as in force for the time being, shall apply to, or in relation to, the developer or entrepreneur for carrying on the authorised operations in a Special Economic Zone or unit subject to the modifications specified in the Second Schedule.”

In pursuance of clause (27) of the SEZ Act, section 10AA was inserted to provide for a deduction to an entrepreneur as defined in clause (j) of section 2 of the SEZ Act, 2005 from such unit under the Act. Clause (ii) of Explanation I to section 10AA defines “Export” as follows :-

“(ii) “Export” in relation to the Special Economic Zones” 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.”

The definition of “export” in clause (m) of section 2 of the SEZ Act, 2005 is in conformity with clause (ii) of section 10AA and it reads as under :-

“(m) “Export” means—

(i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise ; or

(ii) supplying goods, or providing services, from the domestic tariff area to a unit or developer; or

(iii) supplying goods, or providing services, from one unit to another unit or developer, in the same or different Special Economic Zone.”

Therefore, the legislative history of provisions of section 10AA would clearly reveal that the provisions of section 10AA have been inserted in the Income Tax Act in order to give effect to the provisions of Special Economic Zone Act, 2005. Therefore, it is imperative that if a particular transaction of supply of goods falls within the ambit of the terms “export” as defined under Special Economic Zone Act, 2005, the same definition should be imported while construing the provisions of section 10AA of the Act. The Rules framed under the Special Economic Zone Act, 2005 for the purpose of computing net foreign exchange earnings, even the supply made to the project funded by United Nation Agencies should be considered as a “export”. The Special Economic Zone Act, 2005 was introduced only for purpose of implementation of EXIM policy of Government of India and, therefore, the definition contained in EXIM policy are very much relevant for the purpose of construing the term “exports” under the provisions of 10AA of the Act. Therefore, we are of the considered opinion that on due consideration of background of introduction of the provisions of section 10AA in the Income Tax Act, 1961, we do not see any reason to adopt a different meaning of word “Exports” other than meaning assigned to the term “Exports” under SEZ Act, 2005 or EXIM policy.

Further, if we are to hold that in view of the provisions of sub­section (7) of section 10AA, the respondent-assessee is not entitled for deduction in respect of goods supply to UNICEF, it would be contrary to the plain meaning of provisions of sub-section (1) of section 10AA and militates against the very object for which the provisions of section 10AA were enacted.

From the above discussion, it is clear that Literal Interpretation of provisions of sub-section (7) of section 10AA produces a clear absurdity which could never have intended by the Parliament. It is well settled principle of construction that if a Literal Interpretation provision of statute produces absurd results, then the purposive interpretation should be adopted having regard to the purpose behind the enactment of provisions of statute, which means a purposive interpretation is to be adopted in preference to the Literal Interpretation, as held by the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO, 131 ITR 597 (SC).

Moreover, if a particular provision of statute has been incorporated in order to give effect to the provision of another enactment, the provision should be interpreted in the sense in which they harmonise with the object of the statute and which effectuate the object of the Legislature, as held by the Hon’ble Supreme Court in the case of New India Sugar Mills Ltd. Commissioner of Sales Tax, Bihar, AIR 1963 SC 1207 and Land Acquisition Officer and Mandal Revenue Officer vs. Narsaiha JT 2001 (3) SC p. 161. Therefore, placing purposive interpretation on the provisions of sub­section (7) of section 10AA of the Act, the purport of term “Export” cannot be different from the meaning assigned to it in SEZ Act, 2005.

Furthermore, if we are to hold that in view of the provisions of sub-section (7) of section 10AA, the assessee is not entitled to deduction u/s 10AA(1) on the premises that the goods were not exported outside India, it would cause violence to the provisions of sub-section (1) of section 10AA of the Act. It is settled principle of construction of the statute, when a language of statute is clear of unambiguous, the courts are to interpret the same in its literal sense and not to give a meaning which would cause violence to the provisions of the statute as held in Britania Industries Ltd. vs. CIT, 278 ITR 546 at 547 (SC). It is also well-settled principle of law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intention. While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subject to the abuse of process of law, it is for the Legislature to amend, modify or repeal it, if deemed necessary. Legislative casus omissus cannot be supplied by judicial interpretative process. A casus omissus ought not to be created by interpretation, save in some case of strong necessity as held in Union of India vs. Dharmendra Textiles Processors and Others, 306 ITR 277 at 278 (SC).

The Constitutional Bench of Hon’ble Supreme Court in the case of Commissioner of Customs (Import), Mumbai vs. Dilip Kumar & Company, 95 tamann.com 327 (SC) after referring to its earlier judicial precedents concurred with the view expressed by its earlier Constitutional Bench’s decision in the case of CCE vs. Hari Chand Shri Gopal, (2011) 1 SCC 236 that it is not open to the courts to extend or widen the ambit and scope of the exemption provisions at the stage of applicability, but, once that hurdle is crossed, the provisions of exemption should be construed liberally. Applying the ratio of this decision to the facts of the present case, on plain reading of the provisions of sub-section (1) of section 10AA, it would clear that the case of the respondent-assessee company clearly falls within the provisions of sub-section (1) of section 10AA of the Act, which prescribes the applicability conditions for deduction u/s 10AA of the Act. Therefore, other provisions such as sub-section (7) of section 10AA should be construed liberally in favour of the assessee.

There is yet another reason as to why the provisions of sub­section (7) of section 10AA cannot override the provisions of sub­section (1) of section 10AA, inasmuch as, computation provisions and applicability of exemption provisions operate in different fields. The operation of exemption provisions cannot be affected by construction of particular computation provision.

Furthermore, the CBDT Circular No.1/2013 dated 17.01.2013 in the context of provisions of section 10AA/10A/10B had clarified that the profits and gains derived from services for development of software outside India would also be deemed as profits derived from exports, which means that the CBDT had itself recognized deemed exports as exports.

The Hon’ble Karnataka High Court in the case of Anil Kumar vs. ITO, 343 ITR 33 in the context of interpretation of the provisions of section 80HHC of the Income Tax Act after making a reference to the decisions of the Hon’ble Supreme Court in the case of CIT vs. Silver and Arts Palace, 259 ITR 684, CIT vs. Suresh (B.), 313 ITR 149, J. B. Boda & Co. P. Ltd. vs. CBDT, 223 ITR 271 (SC) and CIT vs. Bombay Burmah Trading Corporation, 242 ITR 298 (SC) held that the deduction u/s 80HHC cannot be denied to an assessee purchasing goods from one foreign country and transferring to another foreign country in the absence of any such requirement under the provisions of section 80HHC and they need not be any two-way traffic for bringing the goods from a foreign country into Indian shores and thereafter exporting that goods from Indian shores to offshore because it is a mere empty formality and meaningless ritual. The relevant paragraphs of the said judgement are extracted herein asunder :-

“13. Now section 80HHC provides that an assessee who is engaged in the business of export out of India of any goods or merchandise, to which the said section applies in computing his total income, deduction to the extent of profits referred to in sub-section (1)(b ) derived by the assessee from the export of such goods or merchandise is allowed. In the entire provision, there are no express words which provide that the export of such goods is to be from India. Two conditions which require to be satisfied before an assessee claims deduction under this provision are :

(1) the assessee must be engaged in the business of export out of India of any goods or merchandise.

(2) sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange. 

If these two conditions are fulfilled, the assessee is entitled to the benefit conferred under section 80HHC.

14. Explanation (2) to sub-section (2), when a deemed export in India takes place, is explained. Where any goods or merchandise are transferred by an assessee to a branch office, warehouse, or any other establishment of the assessee situated outside India, and such goods or the merchandise are sold from such branch office, warehouse or establishment, then such transfer shall be deemed to be export out of India of such goods and merchandise, and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in sub-section (1) of section 50 of the Customs Act shall be deemed to be the sale proceeds thereof. This explanation is an explanation to sub-section (2). In sub-section (2)(a ), it is made clear that all goods or merchandise other than those specified in clause (b ), which are exported out of India, the sale proceeds in convertible foreign exchange is to be received or brought into India within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf. Therefore, the law has prescribed a limit within which the sale proceeds in convertible foreign exchange is to be brought into this country. In the case of stock transfer from India to a place outside India where the assessee has a branch office, ware-house, or other establishment, if that date is taken into consideration as the starting point for six months time to bring back the foreign currency, it would cause injustice to the assessee. Therefore, Explanation (2) makes it clear that only when the assessee sells such goods or merchandise from such branch office, warehouse or establishment, such transfer shall be deemed to be export out of India and six months period is to be computed from the date of such sale from a territory to an ultimate purchaser.

15. Explanation (aa ) makes it clear that in what circumstances it will not be an export out of India. Any transaction by way of sale or otherwise in a shop, emporium or any other establishment situated in India not involving clearance at Customs station though the goods are exported out of India would not fall within the phrase ‘export of India’ and the assessee is not entitled to the benefit of deduction. In other words, it is only in cases as mentioned in the said explanation, it can be said that it is not export out of India and in all other cases, it, amounts to export out of India. In fact this provision was the subject matter of a judgment by the Allahabad High Court. In the case of Ran Babu & Sons v. Union of India [1996] 222 ITR 606 , wherein it is held as under :

“Section 80HHC was made to give certain benefits to exporters. However, Explanation (aa ) was inserted by the Finance (No. 2) Act of 1991, with effect from April 1, 1986. An exception was carved out from the main provision of section 80HHC. In our opinion, Explanation (aa ) was to plug a loophole in the Act since there was possibility that the goods after purchase may not he exported at all and yet the benefit may be claimed. In our opinion. Explanation (aa ) is constitutionally valid, as it was made to plug a loophole in section 80HHC. It is settled law that in fiscal statutes greater latitude is given to the Legislature and the Legislature has an option to pick and choose the item which is to be taxed.

……Explanation (aa) means is that it will not be an export out of India if two conditions are satisfied: (i ) it should be a transaction by way of sale otherwise in a shop, emporium or an establishment situate in India; (ii) it should not involve clearance in the customs as defined in the Customs Act. Both these conditions must be satisfied if the transaction is to be held to be not an export out of India. Hence, if either of these two conditions is not satisfied, it is an expert out of India. Hence, if the transaction involves clearance at customs, it will be an export out of India within the meaning of Explanation (aa ).”

16. This judgment was considered by the Apex Court in the case of CIT v. Silver & Arts Palace [2003] 259 ITR 684/ 129 Taxman 56 the Apex Court has held as under:

“…The Allahabad High Court specifically considered the effect of introduction of Explanation (aa ) to section 80HHC(4A) of the Act and had taken the view in Ram Babu & Sons v. Union of India [1996] 222 ITR 606 that this Explanation means that for the purpose of this section, there will be no export out of India if two conditions are cumulatively fulfilled, viz., (a ) it is a transaction by way of sale or otherwise in a shop, emporium or establishment situate in India, and (b ) that it does not involve clearance in any customs station as defined in the Customs Act. This view of the Allahabad High Court had been consistently followed by several other High Courts, including the Rajasthan High Court itself in ITO v. Vaibhav Textiles [2002] 238 ITR 346. Reliance was placed on a number of orders of the Income-Tax Tribunal following the view taken in Ram Babu’s case [1996] 222 ITR 606 (All.), consistently and the law laid down therein. In fad, even in the case of the respondent-assessee, for the previous assessment years, the Tribunal had taken the same view. Although the Revenue attempted to canvass against the view by seeking references under sections 256(1) and (2) of the Act, the attempt failed. There was no further challenge to the settled consistent judicial view taken on the issue. It was also pointed out that the judgment of the Allahabad High Court in Ram Babu’s case [1996] 222 ITR 606, had been challenged by the Revenue before this court, but the special leave petition, was summarily dismissed. In view of this position, the Tribunal felt that consistency of the judicial decision should he respected and followed.”

17. Therefore, it is clear if a transaction in question is by way of sale, in a shop, emporium or an establishment situated in India and it does not involve clearance at any customs station, then it is not an export out of India. Therefore, the aforesaid explanations read with the main section do not in any way indicate that, to be eligible for the benefit of deduction under section 80HHC, the goods or merchandise has to emanate from India. Though we do not find any direct decision on the point, this question has been discussed by several High Courts as well as the Supreme Court in different contexts which throw light upon the interpretation of these words. In fact, the circular issued by the Board in Circular No. 621 elated 19.12.1991 reads as under:

“Tax concession for export of …

31. Under the existing provisions of section 80HHC of the Income-tax Act exporters are allowed, in the computation of their total income, a deduction of the entire profits derived from export of goods or merchandise other than mineral oil, minerals and ores.

31.1 In view of the fact that significant value addition is achieved when a mineral is processed or when a stone is cut and polished, it is desirable to encourage their export. The benefit of deduction under section 80HHC has, therefore, been extended to exporters of processed minerals. The list of processed minerals, in respect of which this concession is being extended, is being provided in a new Twelfth Schedule to the Income-tax Act.

31.2 This amendment taken effect from the 1st day of April, 1991 and will, accordingly, apply, in relation to the assessment year 1991-92 and subsequent years.”

18. The Apex Court in the case of J.B. Boda & Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271/[1996] 89 Taxman 311 , while interpreting the section 80-O of the Act considered. The question whether the commission retained out of the gross premium payable in foreign exchange would be eligible for deduction under section 80-C. In that context, the Apex Court has held as under:

.. “The appellant instead of remitting the entire amount to the foreign reinsurers and then receiving remittance from the said reinsurers the commission due to it, entered into an agreement with the foreign reinsurers, that while remitting the reinsurance premia, the appellant would retain the fee due to it for the technical services rendered and this arrangement is effected only with the concurrence or the permission of the Reserve Bank of India. The question in the instant case is, whether instead of remitting the amount to the foreign reinsurers first and receiving the commission due to the appellant later, the arrangement by which the appellant remitted the reinsurance premia, after retaining the fee due to it for technical services rendered will satisfy the requirement of section 80-O of the Income-tax Act.”

In answering the said question, it held as under:-

“..the objective was to encourage Indian companies to develop technical know-how and to make it available to foreign companies so as to augment the foreign exchange earnings of this country and establish a reputation of Indian technical know-how for foreign countries. The objective was to secure that the deduction under the section shall be allowed with reference to the income which is received in convertible foreign exchange in India or having been received in convertible foreign exchange outside India, is brought to India by and on behalf of taxpayers in accordance with the foreign exchange regulations.”

Then it proceeded to hold as under:-

“..It seems to us that a “two-way traffic” is unnecessary. To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case, …We are of the view that the income is received in India in convertible foreign exchange, in a lawful and permissible manner through the premier institution concerned with the subject-matter, the Reserve Bank of India. In this view, we hold that the proceedings of the Central Board of Direct Taxes dated March 11, 1986, declining to approve the agreements of the appellant with Sedgwick Offshore Resources Ltd., London, for the purposes of section 80-O of the Income-tax Act, are improper and illegal.”

19. The Apex Court in CIT v. Bombay Burmah Trading Corpn. [2000] 242 ITR 298/ 109 Taxman 72 , while interpreting the provisions of section 35B of the Act, the deductions in respect of the execution of any contract for the supply outside India of such goods, services or facilities, held that the Tribunal’s reading of the Section that the export should be ex-India is not supported by the language of the provision or any authority. The High Court has, therefore. rightly concluded that to avail of the benefit of deduction, the provision does not require that the export should be ex-India” is not supported by any of the provision or any authority. The High Court has therefore, rightly concluded that to avail the benefit of deduction the provision does not claim that the export should be ex-India.

20. The Apex Court in the case of CIT v. B. Suresh [2009] 313 ITR 149/ 178 Taxman 457 , dealing with section 80HHC, has held as under:-

“The basic requirement of section 80HHC is earning in foreign exchange and retention of profits for export business: Profits are embedded in the “income” earned. Earning of income depends on sale of goods and services. Today the difference between the two is getting blurred with globalisation and cross-examination border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles.”

21. In fact, the Mumbai Bench of the Income-tax Tribunal in SM Energy Tekniks & Electronics Ltd. v. Dy. CIT [2006] 10 SOT 679 , dealt with the very question which arises for consideration in this case. After carefully scrutinising the provision of law, various judgments and after noticing the judgments of the Apex Court, it is held that,

“.. The direct shipment of goods to another country without touching base in India should not be an impediment to the assessee from claiming the benefits of s. 80-HHC, if it was otherwise entitled to do so. When third country trade is a recognized feature of the new import-export policy and procedure of the Government of India, there is no reason to deny deduction under s. 80HHC solely on the ground that the exports were not made ex-India. It is undisputed that the assessee had earned foreign exchange for the country. The focus and emphasis of foreign polity is to increase the foreign reserves of the country. “Export” literary means sending goods to another country. So, the word “export” does not mean only sending goods out of one’s own country to another. The wordings of s. 80HHC do not provide for such an interpretation at all as distinguished from the expression “from India to a place outside India” as appearing in sub-s. (1) of s.80HHE. The assessee is entitled for deduction under s. 80HHC on profit of shipment in respect of plant and machinery sold in Bangladesh.:

22. In this context, it is necessary to know-how the Parliament has chosen to make known its intention in the event the goods have to be exported from India. Section 80HHC deals with deductions in respect of profits from export of computer software etc.

23. There also the words used are “export out of India”. But to be eligible for deduction under the aforesaid provision, mere export out of India is not sufficient. What is to be exported out of India should be from India to a place outside India by any means. Such a wording is conspicuously missing in section 80HHC. It stands to reason. Today, India is a leader in the world insofar as software is concerned. If the intention of the Parliament is not only the assessee should earn foreign exchange in the process of exporting out of India, the country also should be benefited by way of encouraging local talent and activity in India. They have chosen to carve out a separate section by way of section 80HHC. The Parliament here wants to achieve dual object. First, they want to earn foreign exchange by export out of India and secondly, what is to be exported out of India namely, computer software or its transmission should be from India so that the software industry in the country grows. Such an intention is conspicuously missing while drafting section 80HHC. There the stress is only on earning foreign exchange, not the goods and merchandise to be exported out of India, they do not necessarily have to be from. India. Therefore, the law does not require the goods to be physically exported out of India. The provision does not require that the export should be from India. There need not be a two-way traffic of bringing the goods from a foreign country into the Indian shores and thereafter exporting that goods from Indian shores to the off-shore, because it is a mere empty formality and meaningless ritual in which the country gains nothing, because, if the goods have to be brought into the country, precious foreign exchange is wasted and when it is sold, though the assessees gets foreign exchange, it is only to compensate what he has already parted in purchasing and what really is the gain is the profit which he has earned. If that profit is brought to this country, the object of earning foreign exchange is achieved and then under section 80HHC he is entitled to the said benefit.

24. In that view of the matter, we are of the view that the authorities have not properly understood the object and intent of the Parliament in making these provisions and they have misread the section. Therefore, the impugned order passed by the three authorities is vitiated and cannot be sustained in law. The substantial questions of law are answered in favour of the assessee and against the revenue. Hence, we pass the following :-”

Applying the ratio of the above decision to the facts of the present case, the provisions of section 10AA(1) does not require that the goods manufactured in SEZ unit should be exported outside of India. In any event, they need not be a two-way traffic of exporting goods outside India and thereafter importing that goods into India. It is a mere empty useless formality.

Therefore, in the light of the foregoing discussion, we are of the considered opinion that the benefit of deduction under the provisions of section 10AA cannot be denied to an assessee merely on the ground that the assessee had not exported the goods outside India despite the fact that the consideration was received in convertible foreign exchange in India. We do not find any fallacy in the reasoning of the ld. CIT(A). Accordingly, this ground of appeal no.7 filed by the Revenue stands dismissed.

35. Ground of appeal no.8 challenges the decision of the ld. CIT(A) allowing the additional depreciation in respect of civil works and electrical works associated with windmill. The factual matrix of the issue is as under :

During the previous year relevant to the assessment year under consideration, the respondent-assessee company installed 7 windmills of Rs.75,24,16,115/- and the same were capitalized in the books of account. The respondent-assessee company claimed depreciation at the rate of 15% of the windmill and also additional depreciation at the rate of 20%. It is claimed that the expenditure incurred during the process of acquisition of capital assets requires to be capitalized to the same asset. Accordingly, the respondent-assessee company had capitalized the cost amounting to Rs.7,14,24,367/- i.e. on electrical works of Rs.2,77,69,890/- and civil works of Rs.4,36,54,477/- claimed the depreciation at rates applicable to the windmill. The Assessing Officer was of the opinion that the respondent-assessee company is not entitled for additional depreciation on entire civil works and electrical works only depreciation at the rate of 10% should be allowed.

On appeal before the ld. CIT(A), the ld. CIT(A) considering the fact that in the earlier years for the assessment years 2010-11, 2011-12 and 2012-13, the ld. CIT(A) had allowed the higher depreciation in respect of civil works and electrical works associated with windmill following the certain judicial precedents, allowed the claim of the assessee.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present ground of appeal no.8.

36. It is contended that the civil works and electrical works carried out along with the windmill are not eligible for additional depreciation or depreciation at the rate applicable to the windmill but are entitled only rate of depreciation as applicable to buildings and electrical works.

37. On the other hand, ld. Sr. Counsel submits that all the expenditure incurred to bring the assets to existence should be capitalized and the depreciation at the applicable rate should be allowed as deduction. In this regard, he placed reliance on the decision of the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT, 98 ITR 167 (SC).

38. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal that comes up for consideration is, as to whether the civil works and electrical works forms part of the actual cost of windmill or not for the purpose of allowance of depreciation. It is trite law as held by the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. (supra) that all the expenses incurred on the civil works to bring an asset into existence should be capitalized. Admittedly, in the present case, the civil works and electrical works are part and parcel of the windmill and cannot be treated separately from the windmill. Without executing civil works and electrical works, the windmill cannot be installed. The Hon’ble Rajasthan High Court in the case of CIT vs. K. K. Enterprises, 108 DTR 109 (Raj.) had observed that the civil work and foundation is necessary for strong foundation and no windmill could be installed without having a strong foundation. As such depreciation on the cost of civil work should be allowed at the rate applicable to the windmill. Similarly, the electrical items, components and common power evacuation too are integral part of the windmill, as that could have not been operational without electrical works. Similarly, the Hon’ble Bombay High Court in the case of CIT vs. Cooper Foundry Pvt. Ltd. (ITA No.1326/2010) also held to the same effect. In view of these decisions, we do not find any illegality and unreasonableness in the order of the ld. CIT(A). Accordingly, we do not find any reason to interfere with the order of the ld. CIT(A). Accordingly, this ground of appeal no.8 filed by the Revenue stands dismissed.

39. Ground of appeal no.9 challenges the decision of the ld. CIT(A) deleting the addition of Rs.2,90,94,637/- on account of alleged freebies to doctors. The factual background of the present issue is as under :

During the previous year relevant to the assessment year under consideration, the respondent-assessee company had incurred an expenditure on discounts given to doctors amounting to Rs.2,90,94,637/-. It is contention of the respondent-assessee that there were no freebies given to the doctors, as incentives are given in the form of discount linked to the sales made by them and target achieved by doctors. It was contended that the Explanation 1 to section 37 has no application, inasmuch as, it does not involve to the distribution of freebies to doctors in consideration of promoting their products. However, the Assessing Officer was of the opinion that the discounts were offered in the sales campaign programme. The terms of the scheme read as under :-

“In above context, in order to facilitate the mass vaccination, Serum runs a sales promotion campaign wherein private doctors are involved and encouraged to carry out the vaccination. Detail nature of scheme is attached as Annexure no. – 6. On the basis of number of Vaccines purchased by such doctors, they are given scheme benefits under the sales promotion campaign in the form of gift vouchers. Under the sales promotion campaign, the private doctors are required to purchase the required amount of vaccine products from Serum’s authorized dealers. These dealers are one of the important links in the supply chain of Serum. All over India Serum has appointed ‘Stockists’ who purchase vaccines from Serum and supply the products to Chemists. During the sales promotion campaign period the doctors are required to purchase the vaccines from these stockists on regular basis. After the sales promotion campaign period the field managers of Serum, collect the data from these stockists for individual doctors who have purchased vaccines from them. The stockists provide copies of all their sales invoices. The field managers also take summary statements from the stockists, doctor-wise for processing the doctor’s claims regarding the ongoing sales promotion campaign. These claims are submitted and settled on the basis of the agreed terms of the sales promotion campaign.”

Thus, it is contended that the scheme formulated does not amount to professional misconduct by medical professionals attracting the provisions of Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002. The ld. CIT(A) considering the scheme of the Act and the decision of the Tribunal in assessee’s own case for the assessment years 2010-11 and 2012-13 deleted the addition of Rs.2,90,94,637/- on account of freebies given to doctors.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present ground of appeal no.9.

40. The ld. CIT-DR submits that the issue in the present ground of appeal no.9 is squarely covered by decision of the Hon’ble Supreme Court in the case of Apex Laboratories (P.) Ltd. vs. DCIT, 442 ITR 1 (SC) which is against the respondent-assessee.

41. On the other hand, ld. Sr. Counsel submits that the under the scheme the respondent-assessee company does not distribute freebies to doctors, but it is a sale promotion scheme under which the discounts are passed on to the doctors linked with the quantum of sales. The medical professional were never provided any free gifts such hospitality or conference fees etc to promote its product and the provisions of Explanation 1 to section 37 have no application nor is there any violation of the provisions of Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002.

42. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to allowability of discount passed on to the doctors on achieving such sales targets. On mere perusal of the sale campaign programme extracted above, it would reveal that the respondent-assessee company had not indulged in distribution of any freebies, gifts to medical professionals, which amounts to misconduct under the provisions of the provisions of Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002. Therefore, the question of applicability of Explanation 1 to section 37 does not arise and the ratio of the Hon’ble Supreme Court in the case of Apex Laboratories (P.) Ltd. (supra) have no application. Accordingly, we do not find any reason to interfere with the order of the ld. CIT(A). Thus, the ground of appeal no.9 filed by the Revenue stands dismissed.

43. Ground of appeal no.10 challenges the correctness of the decision of the ld. CIT(A) that the provisions for wealth tax paid of Rs.31,06,820/- is not required to be added back to book profit for the purpose of computing the tax under the provisions of section 115JB of the Act. The brief factual matrix of the issue is as under :-

During the previous year relevant to the assessment year under consideration, the respondent-assessee paid a wealth tax of Rs.31,06,820/- which was included under the head of current tax and debited to Profit & Loss Account. The respondent-assessee company while computing the amounts of books profits for the purpose of provision of section 115JB added back the entire amount under the head current tax paid and debited to the Profit & Loss Account. However, the component of wealth tax of current taxes paid was claimed as separately as deduction, as the wealth tax does not partake of the character of income tax. The Assessing Officer was of the opinion that the wealth tax is also part of the income tax and accordingly added back to the book profits for the purpose of computing the tax liability u/s 115JB of the Act.

On appeal before the ld. CIT(A), the ld. CIT(A) following the decision of the Pune Bench of the Tribunal in assessee’s own case for the assessment year 2009-10 reduced the same from book profits.

Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present ground of appeal no.10.

44. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal no.10 is squarely covered by the decision of the ITAT in assessee’s own case for the assessment year 2009-10 in ITA No.1184/PUN/2015 dated 28.06.2018. Since the ld. CIT(A) only followed the decision of the Tribunal in assessee’s own case for the assessment year 2009-10 (supra) and no contrary position of law was brought to our notice, we find no reason to interfere with the order of the ld. CIT(A). Accordingly, the ground of appeal no.10 filed by the Revenue stands dismissed.

45. Ground of appeal no.11 is general in nature and hence dismissed.

46. In the result, the appeal filed by the Revenue stands dismissed. Order pronounced on this 15^th day of September, 2022.