8 August 2017 EY Tax Alert Delhi High Court upholds weighted R&D deduction for recognized inhouse R&D facility from the date prior to recognition and approval Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. Executive summary This Tax Alert summarizes the ruling of the Delhi High Court (HC) in the case of Maruti Suzuki India Ltd. [1] (Taxpayer), dated 4 August 2017, on the effective date from which weighted deduction for research and development (R&D) expenditure incurred on inhouse R&D facility recognized and approved by the Department of Scientific and Industrial Research (DSIR) can be claimed. In the facts of the case, the Taxpayer had intimated DSIR on 30 March 2011, much before the set up of the facility, and then sought recognition and approval for the facility as per the guidelines laid down by DSIR. DSIR granted approval to the facility on 2 February 2015 with effect from 1 April 2013. The HC held that it was incorrect on DSIR s part to deny approval for qualifying expenditure incurred in tax year 2010-11 on the ground that the approval for the facility was effective from tax year 2013-14. The HC allowed the Taxpayer s writ petition to direct DSIR to grant approval for qualifying expenditure incurred from tax year 2010-11. [1] TS-320-HC-2017(DEL)
Background and facts Under the Indian Tax Laws (ITL), taxpayers engaged in the business of biotechnology or manufacturing of any article or thing [2], incurring expenditure on approved in-house R&D facility, are eligible for weighted deduction, currently @ 200% [3] of the qualifying expenditure [4]. The weighted deduction is subject to approvals and conditions as set out in the relevant rules of the ITL and guidelines prescribed by DSIR being the approving authority prescribed under the ITL for the purposes of grant of such approval. DSIR guidelines, inter alia, provide for a three-step sequential process involving application by taxpayer and authorization by DSIR in prescribed forms at each step. First step is recognition of the facility by DSIR. This is generally granted for a period of three years and renewed thereafter. Such recognition does not automatically grant weighted deduction income tax benefit but has other commercial and indirect tax advantages. Second step is approval of the facility by DSIR. This is a pre-condition for availing weighted deduction income tax benefit. The tax rules require taxpayers to make an application in Form 3CK which also comprises an agreement with DSIR, for cooperation and audit of accounts of the R&D facility. The third step is approval of qualifying expenditure by DSIR. This is also a pre-condition for availing weighted deduction income tax benefit. Seeking expenditure approval from DSIR is an annual exercise. DSIR guidelines, inter alia, provide that approval to facility will be granted from the first day of April in which the application is made and any qualifying expenditure incurred from that date would be eligible for weighted deduction. DSIR guidelines also provide that qualifying capital expenditure incurred during the year preceding the year of application, would also be eligible for weighted deduction provided its quantum exceeds INR 10m. The Taxpayer is a leading automobile company in India. The Taxpayer had an existing DSIR approved R&D facility at Gurgaon. The present dispute pertains to additional in-house R&D facility set up by the Taxpayer at Rohtak for which the Taxpayer incurred qualifying expenditure in tax year 2010-11, much prior to initiation of three step process for obtaining recognition and approval from DSIR. The date chronicle for facts relevant to tax year 2010-11 leading to approval of Rohtak facility and related dispute is summarized in the table below. [2] Except certain negative list items specified in Eleventh Schedule of the ITL. [3] Weighted deduction is restricted to 150% from 1 April 2017 to 31 March 2020 (i.e. from tax years 2017-18 to 2019-20) and 100% from 1 April 2020 (i.e. from tax year 2020-21 onwards). [4] Capital expenditure (except on land and building) and revenue expenditure on scientific research, as approved by the DSIR on an annual basis.
Date Event 30 March 2011 The Taxpayer incurred qualifying expenditure of INR 1248m on new Rohtak facility during tax year 2010-11. The Taxpayer informed DSIR that it is in the process of setting up new facility at Rohtak and would be seeking approval for the same. 31 October 2011 The Taxpayer filed an application for approval of R&D expenditure incurred during tax year 2010-11. The subject line of application referred to existing Gurgaon facility but Auditor's report accompanying the application gave break-up of expenditure incurred for both Gurgaon and Rohtak facilities separately. 30 March 2012 The Taxpayer made application for recognition of Rohtak facility. 26 April 2013 DSIR informed the Taxpayer that recognition cannot be granted for Rohtak facility since the facility was not yet functional and, hence, the application was closed as being premature. January February 2014 The Taxpayer resubmitted application for recognition informing DSIR that Rohtak facility had become operational from November 2013. The Taxpayer also furnished details of qualifying expenditure incurred on Rohtak facility during tax year 2010-11. 26 March 2014 DSIR granted recognition to Rohtak facility with effect from 25 February 2014. 31 March 2014 The Taxpayer made application in Form 3CK for approval of Rohtak facility. 2 February 2015 DSIR granted approval for Rohtak facility for the period 1 April 2013 to 31 March 2015 (i.e. tax years 2013-14 and 2014-15). Presumably, this was based on DSIR s guideline as per which approval is granted from first day of April of the year in which the application in Form 3CK is made. 9 March 2015 DSIR approved R&D expenditure incurred including on Rohtak facility but DSIR s approval merely referred to Gurgaon facility presumably because the subject line of the Taxpayer s initial application in October 2011 had erroneously referred to Gurgaon facility only. 26 March 2015 The Taxpayer sought clarification by way of inclusion of name of Rohtak facility in DSIR approval granted on 9 March 2015. 7 May 2015 DSIR issued a corrigendum amending and modifying expenditure approval granted earlier on 9 March 2015. DSIR excluded expenditure incurred on Rohtak facility resulting in withdrawal of approval for said expenditure.
Aggrieved by DSIR s action to withdraw the approval for expenditure incurred on Rohtak facility in tax year 2010-11, the Taxpayer filed a writ petition before the Delhi HC seeking to quash the impugned corrigendum and direct DSIR to grant approval for expenditure incurred in tax year 2010-11. Ruling of the HC The HC allowed the writ petition and held that the Taxpayer is entitled to benefit of weighted deduction from tax year 2010-11 for the following reasons: The legislative intent behind the weighted deduction is to encourage establishment of R&D facilities in India and also to encourage innovation. Although the Taxpayer s initial application in October 2011 erroneously referred to existing Gurgaon facility alone, the Auditor s report accompanying the application clearly provided the break up of expenditure on Gurgaon and Rohtak facilities. Furthermore, the Taxpayer has in the pursuit of its application candidly provided requisite details of both facilities since inception. Hence, it was incorrect of DSIR to allege that the Taxpayer had tried to mislead DSIR by providing incorrect information. By its application dated 26 March 2015, the Taxpayer merely sought to correct the error by requesting DSIR to add reference to Rohtak facility in expenditure approval granted on 9 March 2015. At that stage, it was incorrect for DSIR to deny this request and to exclude the expenditure incurred for Rohtak facility depriving the Taxpayer from claiming benefit of legitimate expenditure incurred on Rohtak facility. The earlier rulings of the Delhi HC in case of CIT v Sandan Vikas (India) Ltd. [5] and Gujarat HC in case of CIT v Claris Lifesciences Ltd. [6] make it clear that the legislative intent is to grant deduction for all qualifying expenses on R&D and that, for availing the benefit of weighted R&D deduction, neither the date of recognition nor the cut-off date mentioned in DSIR certificate nor even the date of DSIR approval is relevant. What is relevant is the acknowledgement of DSIR in the form of DSIR recognition. If an in-house R&D facility is not recognized it is not entitled to deduction but if it is recognized, it is entitled to benefit. The Gujarat HC in Claris Lifesciences (supra) ruling rightly observed that restricting the grant of deduction from the date of approval of the R&D facility, not being a part of the provision, amounts to reading more in the law which is not expressly provided. Reliance placed by DSIR on another Delhi HC ruling in the case of Apollo Tyres Ltd. v UOI [7] is misplaced. The said ruling is distinguishable on facts. It is true that in that ruling, the Delhi HC held that unless the taxpayer furnishes agreement in Form 3CK it is not entitled to weighted R&D benefit even if the facility is recognized by DSIR. But, in that case, there was considerable delay on the taxpayer s part to apply for approval of the facility (second step) after having obtained recognition (first step). In that case, DSIR granted recognition in 2004 but the taxpayer applied for approval in 2008. Hence, the Delhi HC did not grant weighted deduction benefit from 2004. However, in the present case, there has been no such lapse. DSIR granted recognition on 26 March 2014 and the Taxpayer immediately applied for approval on 31 March 2014. Hence, Apollo Tyres ruling is clearly distinguishable on facts. An isolated error in an application cannot result in the entire benefit itself being refused to the Taxpayer resulting in it being deprived of the deduction as permissible under the ITL. [5] (2011)(335 ITR 117)(Del) [6] (2010)(326 ITR 251)(Guj) [7] (2010)(SCC Online Del 1599)
Comments The weighted R&D deduction offers significant tax benefit to the eligible taxpayers who set up in-house R&D facilities. The tax benefit is subject to compliance with three-step procedure as outlined in the tax rules and DSIR Guidelines. The present ruling highlights the significance of taxpayers diligently adhering to the compliance process to avail the benefit for the new facility from the inception. The Delhi HC granted the benefit in the present case by overlooking a bonafide error committed by the Taxpayer in its initial application by referring erroneously only to existing Gurgaon facility whereas other support documentation clearly showed that the Taxpayer was seeking approval as well for the new facility at Rohtak. The Delhi HC also distinguished the present case from an earlier case where there was lapse of four years on the taxpayer s part in taking up the second step after completing the first step. The present ruling emphasizes that where taxpayer is diligent in approaching DSIR at the earliest possible opportunity, the tax benefit can be availed even for period prior to the effective date of approval as mentioned in DSIR certificate.
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