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TMI Blog2017 (10) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier, the entire R&D activities was carried on by the assessee for the benefit of its parent company and not for itself. Therefore, one of the basic conditions of Section 35(1)(iv) of the Act is not fulfilled. - Decided against assessee. - ITA NO.4240/MUM/2013 - - - Dated:- 21-6-2017 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEV, JUDICIAL MEMBER For The Appellant : Shri Divyesh I. Shah For The Respondent : Shri B.C.S Naik ORDER PER SAKTIJIT DEY (JM) 1. This is an appeal filed by the assessee against the order dated 22.03.2013 passed Under Section 263 of the Income Tax Act 1961 by Learned CIT(LTU), Mumbai for the Assessment Year 2007 08. 2. Assessee has raised the following grounds: - (1) On the facts and circumstances of the case and in law, the Learned Commissioner of Income tax (LTU), Mumbai { the CIT } erred in passing the order under section 263 of the Income Tax Act, 1961 ( the Act ) on the alleged ground that the assessment order assed by the Deputy Commissioner of Income Tax (LTU), Mumbai ( the AO ) was erroneous to the extent of the claim under section 35 of the Act claimed and allowed by the AO and as such was prejudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he R D activity must be connected with the business of the assessee. Since, the capital expenditure claimed by the assessee was in connection with the R D activities carried on for the benefit of other entities, Ld.CIT held that the assessee is not eligible to claim deduction Under Section 35(1)(iv) of the Act. Since, the Assessing Officer has allowed assessee s claim u/s 35(1)(iv), Ld.CIT holding the Assessment Order passed by the Assessing Officer to be erroneous and prejudicial to the interests of the revenues set it aside with a direction to disallow assessee s claim of deduction Under Section 35(1)(iv) of the Act in respect of the capital expenditure incurred of ₹ 1,24,87,065/- 7. Reiterating the stand taken before the Revisional authority, Ld.AR submitted, assessee has in-house scientific research facilities approved by the Central Government. He submitted, the assessee itself is engaged in developing and manufacturing of products which requires scientific research. He submitted, the capital expenditure relating to R D activities was in respect of assessee s own business activities and not related to the business activities of its holding company. The Ld.AR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s business. He submitted as per the terms of the agreement the discoveries and inventions made as a result of R D project would accrue to the parent company. He submitted, as per the terms of the agreement not only the parent company bears all costs relating to the R D activities but also pays the markup of 15% over the costs to the assessee. He submitted, as per the terms of the agreement all risk relating to success / failure of the R D work undertaken by the assessee shall lie with the parent company and only on request by the assessee the parent company may grant license to the assessee for use of R D project results in India, subject to payment of royalty. Thus, it was submitted, the R D activities carried on by the assessee being in connection with the business of the parent company, assessee is not eligible to claim deduction Under Section 35(1)(iv) of the Act. In support of such contentions Ld.DR relied upon the following decisions:- i. Ciba(P). Ltd v. Income Tax Officer, 9(1)3, Mumbai [2009] ITD 94 (Mumbai) ii. Enem Nostrum Remedies (P.) Ltd v. Assistant Commissioner of Income-tax, Circle 8(1), Mumbai [2009] 119 ITD 427 (Mumbai) iii. Deputy Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilled. Having held so, now we may proceed to examine assessee s claim of deduction Under Section 35(1)(iv) of the Act on merits. Before we proceed to decide the issue, it is necessary to look into the provision contained Under Section 35(1)(iv) of the Act which reads as under:- in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) 10. A plain reading of the aforesaid provision makes it clear that capital expenditure incurred on scientific research is allowable as deduction to assessee subject to fulfillment of two conditions. Firstly, such capital expenditure must be incurred on scientific research and secondly, such scientific research must be related to the business carried on by the assessee. Keeping in view the aforesaid legal position we have to examine the facts of the present case. On perusal of the audited Profit and Loss Account of the assessee for the year ended 31 March 07 it is noticed during the relevant previous year assessee has received an amount of ₹ 164.63 lakhs from its parent company towards res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oject will be with SI Group US. The Assessee is permitted to use the R D project results in India subject to grant of license by SI Group US and on payment of royalty. Thus, from the overall reading of the agreement between the assessee and SI Group US it becomes abundantly clear that the entire R D activity is carried on for the benefit and development of business of SI Group US and does not pertain to the assessee s business. The assessee is permitted to use the result of the R D product only if the SI Group US grants license which is also subject to payment of royalty. These factors clearly demonstrate that the entire R D activities carried on by the assessee is for the business of SI Group US and not for itself. This fact is further proved from assessee s own admission that the entire revenue expenditure relating to R D activities was reimbursed by SI Group US. Keeping in perspective the aforesaid factual positon, it is hardly believable that the revenue expenditure on R D relates to the business of the parent company whereas, the capital expenditure on R D relates to the Assessee. 11. We fail to understand how the assessee incurs only capital expenditure on R D relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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