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TMI Blog2014 (12) TMI 298X X X X Extracts X X X X X X X X Extracts X X X X ..... to the business carried on by the assessee' and in the definition clause of section 43, the language used is 'scientific research related to a business or class of business' to include 'any scientific research which may lead to or facilitate an extension of that business or as the case may be, all businesses of that class - the molecules when successfully developed will yield patent rights to the assessee - the assessee will be inventor of such product and, therefore, the expenditure is for scientific research and eligible for deduction u/s. 35 of the Act - the process of development of molecule to the stage of vaccine i.e., medicine is the process involved in scientific research - the proper course of action for the AO is to refer the matter as directed u/s. 35(3) - The Tribunal cannot decide the claim against the assessee or in its favour without following the procedure laid down in the Act –thus, the matter is remitted back to the AO with a direction to refer the claim of deduction u/s. 35 according to the procedure laid down u/s. 35(3) – Decided in favour of revenue. - ITA No. 392/Hyd/2010, ITA No. 632/Hyd/2011, ITA No. 310/Hyd/2012 - - - Dated:- 3-12-2014 - Shri B. Ramakot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development, it is working on three molecules viz., Lysostaphin, Insulin and vaccine for Hepatitis A. For these products the Government of India, Council for Scientific and Industrial Research (CSIR) sanctioned loan of ₹ 5.6 crores. Similarly IDBI Ltd., had sanctioned a term loan of ₹ 10 crores for development of insulin and ICICI Bank Ltd. under World Bank sponsored Research and Development (SPREAD) sanctioned ₹ 4.75 crores exclusively for R D of hepatitis-A vaccine. The interest paid on the above loans and chemicals consumed in the development of these molecules/vaccine have been debited to product development expenditure account. It was also clarified that the expenditure was incurred in the product research and development and, therefore, claimed as revenue expenditure though the same was capitalised in the books of account as per its accounting policy. The Assessing Officer rejected the assessee's claim on the ground that the assessee has already made a separate claim in respect of the expenditure incurred on R D u/s. 35(2AB) and that the expenditure on product development expenditure was incurred with the intention to go for commercial production, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or does not become successful, either at clinical tests stage or at laboratory scale or commercial scale viability, the project fails and the expenditure incurred in the process is written off. On these facts, it cannot be said that the assessee would derive some enduring advantage in future. The expenditure incurred by the assessee is not on setting up of any new manufacturing facilities. 7. The CIT(A) observed that a perusal of the above mentioned provisions under clause (i) of sub-section 1 of section 35 shows that any assessee carrying on scientific research is eligible to get the deduction of entire revenue expenditure incurred in the previous year. Similarly, clause (iv) of sub-section (1) of section 35 allows deduction of expenditure of capital nature on scientific research related to the business carried on by the assessee except cost of the land and building. 8. The CIT(A) observed that a perusal of the statement of facts shows that the assessee is in the business of research and development towards production of new drugs through biotechnology routes. The CIT(A) stated that It develops and produces vaccines and other bio-pharmaceuticals. The assessee is recognize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) that section 35(2AB) allows weighted deduction in respect of expenditure incurred by a bio-tech company in its in-house R D. Whereas, the deductions allowable for any company carrying on scientific research, even by way of collaborative research, separate deduction is allowable for different research and development project. Thus, these two deductions are independently allowable on facts in the assessee's case. The CIT(A) given similar findings for the other two assessment years. Against this, the Revenue is in appeal before us. 11. The learned DR submitted that this expenditure was incurred on payment of interest and also towards consumables for product development and during the pre-commencement period and there was no commercial production of any product by the assessee during assessment year under consideration. He submitted that the expenditure is incurred with an intention to go for commercial production and this expenditure results in getting enduring benefit and is advantageous to the assessee and, therefore, such expenditure is not revenue expenditure but capital expenditure. The DR stated that the loan was granted for meeting part of the cost of the new projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Product Development Expenditure which is of revenue in nature as the expenditure claimed is expenditure of interest and consumables incurred by the assessee in relation to research and development and would fall under the ambit of expenditure on Scientific Research and thus would qualify as eligible expenditure to be claimed u/s 35 (1)(i) of the Act. It was stressed by the AR that none of this expenditure has been incurred outside and all the expenditure relates to assessee-company only. Further, it was pointed out that all of this expenditure relates to scientific research, as in a collaborative research, research is conducted independently by all the partners according to their research strengths. Further, it was argued that the whole funding has been awarded for scientific research, and the programme under which funding was granted to the assessee is solely restricted to research and development funding for scientific research only. It was stated that the Assessing Officer has wrongly placed reliance on treatment of this expenditure in the annual accounts of the company, rather than going by the provisions of Income-tax Act, 1961, which was ruled in assessee's favour a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The Tribunal in its order dated 31st July, 2013 held that the assessee will not get benefit of deduction u /s. 35(1)(i) and confirmed the order of the Assessing Officer. Further, the plea of the assessee before this Tribunal was also that if the expenditure is not allowable u/s. 35(1)(i) then the expenditure is nothing but scientific R D expenditure and, therefore, allowable u/s. 35(1)(iv) of the Act. Under section 35(1)(i) deduction is to be allowed in respect of any expenditure of capital nature of scientific nature relating to business carried on by the assessee. 16. However, the Tribunal held in para 24 of its order dated 31st July, 2013 as follows: In the light of the above scope of the provisions, we examined the facts of the case and the arguments of the assessee's counsel that conducting scientific research is the business of the assessee and thus, the said research is related to the business carried on by the assessee. In the present case, the expenditure claimed by the assessee as deduction has nothing to do scientific research. On the other hand, it was incurred for setting up of facilities for commercial production of a new product. In such circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us will not be either active or grow in pilot scale or if it grows, the growth media used may not be commercially viable media for commercial exploitation of the intended product. To avoid any failures this activity has to be taken up in a specially created atmosphere / environment, which is normally attached to the manufacturing unit. The molecule/virus which has been obtained by separating from the human/animal cells in a laboratory, which is recognized for such process, is developed/multiplied by feeding the appropriate feed. A favourable environment is to be created/facilitated for the multiplication of the molecule. The growth of the molecule which is being developed is embedded with impurities; the purification process is most important part of the development process. There is a possibility of losing the entire developed product in the process of purification which is to be done in a proprietary and scientific process being developed during product development stage which IS very crucial for commercial success; otherwise there is a possibility that the entire developed strain may go waste. In the process the Scientists involved has to improve the expression level to the maxi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is purely related to the extension of its business. 23. The learned counsel further submitted that the Bench confirmed the order of the Assessing Officer stating that the expenditure is capital in nature, under a wrong assumption that the assessee is not carrying on any scientific research which will lead to or facilitate an extension of business. This assumption of the Bench is contrary to the findings given by the CIT(A) who held that the assessee-company is carrying on scientific research and the expenditure incurred on scientific R D would facilitate extension of assessee's business to develop new vaccines. 24. The learned counsel submitted that the Assessing Officer for the assessment year 2006-07 2007-08 observed as the assessee's contention that the expenditure incurred on specific product development is in the nature of research expenditure cannot be accepted. Subsequently the learned Assessing Officer also observed as the expenditure incurred by the assessee is towards new project under taken by the assessee and to set up facilities for the manufacture of new products. The expenditure on the product development results in obtaining patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel submitted that with the contrary observations as submitted above by the Assessing Officer the claim was not allowed by the Assessing Officer with a presumption that it is not incurred as expenditure on scientific research. The learned Commissioner after examining the claims in detail held that the process of development of a molecule to the stage of vaccine/medicine is a process involving scientific research. However, the Hon'ble ITAT has confirmed order of the Assessing Officer. In this regard it is submitted that the learned Assessing Officer has not followed the correct procedure laid down in section 35 while disallowing the claim. The relevant part of the section i.e. section 35(3) is produced here under for kind consideration of the Bench. If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted or any asset is or was being used for, scientific research, the Board shall refer the question to (a) the central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1) and its decision shall be final; (b) the prescribed authority, when question relates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions of respective clauses of section 35 should be fulfilled. [Para 10] Primarily there is difference in the language of clause (iv) of section 35(1) and section 43(4)(110(a) because the reference in the former section is to 'scientific research related to the business carried on by the assessee' and in the definition clause of section 43, the language used is 'scientific research related to a business or class of business' to include 'any scientific research which may lead to or facilitate an extension of that business or as the case may be, all businesses of that class. The harmonious construction of these provisions clearly indicates that there should be a 'business carried on by the assessee' and the scientific research should relate to that business which is carried on by the assessee. It nowhere suggests that the 'business of carrying on scientific research' is covered within the ambit of this provision. Again, the reference to the 'extension of that business' in section 43(4)00 clearly divulges that the scientific research so done by the assessee should contribute to the extension of business carried on by it. It is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for scientific research and eligible for deduction u/s. 35 of the Act. This observation of the Assessing Officer and the learned counsel after examining the claim in detail held that the process of development of molecule to the stage of vaccine i.e., medicine is the process involved in scientific research. 31. However, the Assessing Officer has not followed the correct procedure. The relevant para of section 35(3) reads as follows: If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to- (a) the Central Government, when such question relates to any activity under clauses (ii) and (iii) of sub-section (1), and its decision shall be final; (b) the prescribed authority, when such question relates to any activity other than the activity specified in clause (a), whose decision shall be final.] 32. Hence it is very clear that the proper course of action for the Assessing Officer is to refer the matter as directed u/s. 35(3). The Tribunal cannot decide the claim against the assessee or in its favour withou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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