Syed Shah Mohammed Quadri, J. (Chairman), A.S. Narang and A. Sinha, Members o Advance ruling--Maintainability of applicationAssessee-firm was not non-resident as per Act--Partner of assesee-firm was resident of Netherlands. It filed application under section 246Q(1) seeking ruling of authority as to entitlement of exemption under section 80-IC against direct business procured by it and exemption of processing charges received by assessee-firm from Bayer Health Care Pharmaceuticals in India. Held: Partnership deed was not registered and it was not mentioned whether partners and witnesses signed it in India or Netherlands. The deed was silent about the place where HO of the firm was to be located. The requirement of the Act is that control and management of affairs should be situated wholly outside India, of a firm situated in India, that claims status of |non-resident|. Since de facto control and management of affairs of assessee-firm would be with resident partner in India, the firm could not be said to be a non-resident entity. Therefore, application was not maintainable and liable to be rejected. Further, complete facts have not been placed on record before authority inasmuch as, neither nature of direct business to be procured had been specified nor terms and conditions with |Bayer Health| have been placed on record. Therefore, question could not be answered in hypothetical manner. Regarding exemption under section 80-IC pertaining to profits and gain denied from Bayer Health concerned, same was beyond the scope and consideration of Advance Rulings under Chapter XIX-B. Application, was therefore, rejected.
1. Ms. Meenu Sahi Mamik a resident of Amsterdam, Netherlands has filed an application under Section 245Q(1) of the Income-tax Act, 1961 (for short "the Act") on March 10, 2006, in Form No. 34C (meant for non-resident applicants). The applicant wants to establish a manufacturing facility for the formulation of pharmaceuticals in partnership with one of her family members in the State of Himachal Pradesh, India, to avail of the tax holiday under Section 80-IC of the Act. The Central Government has declared income-tax holiday for a 10 year period for industrial undertakings in the State of Himachal Pradesh. The proposed industrial unit would be an integrated unit and would exist as a viable unit. Bayer Health Care Pharmaceuticals (for short "Bayer Health") proposes to have their products manufactured at the proposed unit by outsourcing the production but under their own direct supervision, licence and control, for which Bayer Health would pay negotiated processing charges to the firm. The specifications for manufacturing the various drugs would be provided by Bayer Health, and the applicant's firm, under the direct control and supervision of Bayer Health, would produce the pharmaceutical formulations. The finished goods thus manufactured would be sold under the Bayer Health trademark and would not be covered by Schedule XIII of the Act. In addition to this the firm would also procure direct business. On the facts stated, the applicant has sought the ruling of the Authority on the following questions: 1. Whether my firm would be entitled to income-tax exemption under Section 80-IC against the direct business procured by it? 2. Whether the processing charges received by my firm from Bayer Health Care Pharmaceuticals, Mumbai, would be exempt under Section 80-IC? 3. Whether the profits and gains included in the gross total income of Bayer Health Care Pharmaceuticals derived from the production outsourced to my firm would be exempted under Section 80-IC of the Income-tax Act? 2. The jurisdictional Commissioner in his comments has stated that the applicant has not given any details regarding the nature of the direct business, which would be procured by the applicant's firm. The direct business may or may not involve manufacturing, which is the basic condition for claiming exemption under Section 80-IC of the Act.
Therefore, it is not possible to say that the applicant would be entitled to the claim of deduction under the said Section. That for claiming the benefit, the industrial undertaking/enterprise, is required to be situated in a specified area. The proposed firm (undertaking), situated in Himachal Pradesh, would belong to the applicant and not to M/s. Bayer Health, Mumbai. By no stretch of imagination can M/s. Bayer Health located at Mumbai claim the exemption under Section 80-IC by outsourcing the manufacture of Pharmaceuticals at the applicant's unit.
3. The applicant in the rejoinder has stated that the direct business procured by the firm would involve formulation/processing of pharmaceutical products for companies other than Bayer Health. That M/s. Bayer Health would establish a place of business in the State of Himachal Pradesh as an enterprise, and would carry out manufacturing activities on their own by procuring raw material and using labour with their own quality control.
1. Nature of direct business : The applicant has stated that the direct business procured by her would involve formulation/processing of pharmaceutical products for companies other than Bayer Health Care Pharmaceuticals. In this regard, it is submitted that the assessee would be eligible for deduction under Section 80-IC only if the nature of business involves manufacturing or production as required under the provisions of Section 80-IC(2)(a) of the Act. If the formulation/ processing does not result in a new product and presents only a part of manufacturing process, it shall not be entitled to deduction under Section 80-IC in respect of direct business procured by the applicant.
2. Application of Section 80-IC : The applicant has stated that the provisions of Section 80 IC are applicable in the case of an 'enterprise' The deduction would be available to the applicant whether it is functioning as industrial undertaking or an enterprise provided the conditions prescribed in the section are fulfilled.
As per the rejoinder, Bayer Health Care Pharmaceuticals would establish a place of business in the State of Himachal Pradesh as an 'enterprise' and would carry out manufacturing activities on their own by procuring raw material and using labour with their own quality control . It may, however, be mentioned here that these facts, as stated in the rejoinder, are contrary to the facts stated in the original application which read as under: The finished products would be produced by the firm under the direct control and supervision of Bayer Health Care Pharmaceuticals.' Whereas now, it is stated that Bayer Health Care Pharmaceuticals would carry out manufacturing activities on their own. It is thus seen that the complete facts have not been provided by the applicant.
5. During the course of oral hearing Shri Harinder Kumar, Additional Commissioner of Income-tax, Chandigarh, appearing for the Commissioner, argued that the application is premature and not maintainable since the important facts pertaining to the constitution of the firm, nature of direct business and terms and conditions with Bayer Health have not been placed on record. Even copies of the partnership deed and agreement with Bayer Health have not been filed along with the application. That questions Nos. 1 and 2 cannot be answered in a hypothetical manner. Regarding question No. 3 it was contended that this pertains to the tax liability of a resident company (Bayer Health) and is, therefore, beyond the jurisdiction and scope of the Authority.
6. Shri Kanwaljeet Singh Jolly, C.A., appearing for the applicant, placed reliance on the facts in the application and contended that as per the proposed partnership deed (filed subsequently) the control of the affairs, would remain with the non-resident partner Ms. Meenu Sahi Mamik and as such the status of the firm should be that of a non-resident under Section 6(2) of the Act. That the processing charges to be received by the firm would be exempt under Section 80-IC since the firm would set up a new formulation unit in the State of Himachal Pradesh. Bayer Health would sell the finished products manufactured by the applicant's firm under their own trademark, and they are also entitled to exemption under Section 80-IC on the profits learned on sale of the finished products. That applicant is seeking exemption under Section 80-IC only in respect of formulation charges received from Bayer Health.
7. We have given a careful consideration to the rival contentions of the counsel for the applicant, the Commissioner and also examined the deed of partnership executed on October 4, 2006, between the applicant and her husband Mr. Vikramjeet Singh Mamik. It is seen that the deed has not been registered and it is also not mentioned whether the partners and the witnesses signed it in India or Netherlands. The deed is silent as to the place where the head office of the firm is to be located. Clauses 6, 7 and 8 of the deed, being apposite, are extracted below: 6. That the party of the first part take all decisions concerning vital policy matters such as acceptance or rejection of business opportunities, expansion or contraction of business whether in the same line of business or other line, establishment or closure of business in other geographical territories, raising of finances and their appropriations for specific purposes, appointment of staff etc.
7. The party of the first part shall also guide the day-to-day affairs of the business of the firm and shall control and review the same through establishment of suitable internal control systems and periodical reporting.
8. The party of the second part shall look after the day to day affairs of the business of the firm in accordance with the guidance and policies set by the party of the first part and shall refer all vital decisions to the party of the first part.
8. From the perusal of these clauses it is seen that though the nonresident partner would take decisions regarding policy matters, the resident partner Mr. Vikramjeet Singh Mamik, who will be having de facto control over the affairs, shall look after the day-to-day business of the firm. Whereas the requirement of the Act is that control and management of the affairs should be situated wholly outside India, of a firm situated in India, that claims status of a non-resident. As per Section 6(2) of the Act, a firm situated in India is said to be a resident in India in any previous year in every case, except where during a particular year the control and management of its affairs is situated wholly outside India. Section 6(2) is in following terms: (2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.
9. The word "affairs" must mean affairs which are relevant for the purpose of the Act and which have some relation to income. It is settled, that the expression "control and management" means de facto control and management and not merely the right or power to control and management (CIT v. Nandlal Gandalal ). In the present case, since the de facto control and management of the affairs would be with the resident partner in India, the firm cannot be said to be a non-resident entity. Therefore, the application is not maintainable on this ground alone, and is liable to be rejected.
10. Further, with reference to questions Nos. 1 and 2, complete facts have not been placed before the Authority, inasmuch as, neither the nature of "direct business" to be procured has been specified, nor the terms and conditions with Bayer Health, under which work outsourced would be executed have been placed on record. These questions, therefore, cannot be answered in a hypothetical manner (Advance Ruling P. No. 8 of 1995, In re [1997] 223 ITR 416 (AAR)).
11. Question No. 3 is regarding exemption under Section 80-IC of the Act, pertaining to the profits and gains derived by Bayer Health from the production outsourced to the applicant's firm, and included in the gross total income of Bayer Health, a resident company that is beyond the scope and consideration of "Advance Rulings" under Chapter XIX-B of the Act.