In a recent ruling Delhi High Court in the case of Apollo Tyres Ltd. [2010-TIOL-279-HC-DEL-IT] considered the issue whether the Taxpayer, having an in-house R&D facility ‘recognized’ by the Department of Scientific and Industrial Research (DSIR), would be eligible for weighted deduction from a date prior to making application to DSIR for approval under Section 35(2AB)(Section) of the Indian Tax Law (ITL).
The HC, dismissing the writ petition filed by the Taxpayer, held that (a) Mere ‘recognition’ by DSIR for allied purpose is not sufficient to qualify for weighted deduction under the Section. (b) The Taxpayer would be eligible for weighted deduction only from the year in which the application for approval is made and an agreement, for cooperation and audit of accounts of the R&D facility, is entered into with DSIR in terms of the Section, relevant rules and DSIR guidelines. (c) Having regard to specific dispensation in DSIR guidelines, the Taxpayer would also be eligible for weighted deduction in respect of eligible capital expenditure incurred in the immediately preceding tax year, if the quantum of such expenditure is in excess of INR 10m.
Background and facts of the case
Under the ITL, taxpayers engaged in the business of biotechnology or manufacturing of any article or thing (Except certain negative list items specified in Eleventh Schedule of the ITL) and incurring expenditure on approved in-house R&D facility, are eligible for weighted deduction of 150% (enhanced to 200% by Finance Bill, 2010 from tax year 2010-11.) of the qualifying expenditure {Capital (except on land and building) and revenue expenditure as approved by DSIR on annual basis}. Weighted deduction is subject to approvals and conditions as set out in the relevant rules of the ITL and guidelines prescribed by DSIR which is the approving authority prescribed under the ITL for the purposes of the Section.
DSIR guidelines, inter alia, provide that the R&D facility should be ‘recognized’ by DSIR as a prerequisite for grant of approval under the Section. The ‘recognition’ is generally granted for a period of three years, which can be renewed thereafter.
For the specific purpose of approval under the Section, the rules stipulate that the taxpayer should make an application to DSIR in a prescribed form (Form 3CK). The taxpayer is also required to enter into an agreement, for cooperation and audit of accounts of the R&D facility, with DSIR, which is part of the prescribed form.
DSIR guidelines, inter alia, provide that approval granted pursuant to an application made anytime during a particular year, would be effective from the first day of the April in which the application is made and any qualifying expenditure incurred from that date would be eligible for weighted deduction. To illustrate, if the application is made anytime during tax year 2010-11, the approval would be granted with effect from 1 April 2010, subject to fulfillment of other conditions.
DSIR guidelines further provide that capital expenditure (except on land and building), incurred during the year preceding the year of application, would also be eligible for weighted deduction provided its quantum exceeds INR 10m.
The Taxpayer had two in-house R&D units which were ‘recognized’ by DSIR since tax year 2004- 05, for a period of three years. The ‘recognition’ was renewed in tax year 2007-08 for another period of three years i.e. up to tax year 2009- 10. On 21 August 2008, the Taxpayer submitted an application in Form 3CK for approval under the Section. The Taxpayer pleaded that the application in Form 3CK was inadvertently omitted to be submitted to DSIR earlier and requested for grant of approval for the purpose of claiming weighted deduction benefit from tax year 2004- 05 i.e. with effect from the year of first ‘recognition’.
DSIR granted approval on 15 June 2009 with effect from tax year 2007-08 i.e. year preceding the year in which the application was made. In terms of DSIR guidelines, DSIR restricted the approval for tax year 2007-08 to capital expenditure on R&D equipment.
The Taxpayer filed a writ petition before the HC contending that DSIR ought to have granted approval with effect from tax year 2004-05 as sought by it.
Contentions of the Taxpayer
The in-house R&D facilities of the Taxpayer were ‘recognized’ by DSIR from tax year 2004-05 and fulfilled all the eligibility criteria for grant of approval under the Section from that year. Hence, DSIR ought to have granted approval from the year of ‘recognition’.
Furthermore, DSIR ought to have granted approval for all expenditure (capital as well as revenue) incurred since tax year 2004-05 without limiting it to capital expenditure incurred in tax year 2007-08.
Contentions of the Revenue
DSIR guidelines clearly provide that the approval to in-house R&D facility having valid ‘recognition’ would be considered from first of April of the year in which application for approval is made.
DSIR guidelines also prescribe that capital expenditure in excess of INR 10m, incurred in the year prior to year of making an application for approval, would be considered for weighted deduction. This is a specific beneficial exception made by DSIR.
The approval granted to the Taxpayer is in accordance with DSIR guidelines and, hence, the Taxpayer cannot seek any further additional benefit for earlier years.
Ruling of the HC
The HC dismissed the writ petition of the Taxpayer and held as follows:
- Entering into an agreement, for cooperation and audit of accounts of the in-house R&D facility, as prescribed in Form 3CK, is a statutory prerequisite for the purpose of qualifying for weighted deduction. Though the in-house R&D facilities of the Taxpayer were ‘recognized’ from tax year 2004-05, this condition stood fulfilled only on 21 August 2008 when the Taxpayer submitted application to DSIR in Form 3CK.
- Since the application was made in tax year 2008-09, the benefit of weighted deduction would have normally accrued to the Taxpayer only from this year. It is only by virtue of beneficial provision in DSIR guidelines that the Taxpayer is extended the benefit for an earlier year also, though it is restricted to capital expenditure only.
- The Taxpayer is, therefore, not entitled to the benefit of weighted deduction for earlier years without complying with DSIR guidelines.
Comments:- The Section, intended to promote R&D activity by various industries, offers significant tax benefit by way of weighted deduction to the eligible taxpayers who set up in-house R&D facilities. The Finance Bill, 2010 proposes to enhance weighted deduction to 200% with effect from tax year 2010- 11. The approval under the Section is largely governed by compliance with procedures laid down in the rules under the ITL and DSIR guidelines. The present ruling emphasizes the necessity for a taxpayer to comply with the procedures, within the specified time lines, to qualify for the benefit of weighted deduction.
