TMI Blog2008 (8) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue. This ground is not allowed. Denial of deduction u/s 35(1)(iv) - R D work for its parent company in USA - HELD THAT:- We have perused the copy of profit and loss account of the assessee and noted that the major chunk of its income is the Product development charges at Rs. 4.50 crores from the parent company and the only other income is that of Rs. 24,000 and odd. As against this income, the assessee has claimed deduction for expenditure towards raw material consumption, research and development expenses of revenue nature and administrative expenses - the ld. Counsel for the assessee has argued that it is covered u/s 35(1)(iv), r/w section 43(4)(iii)(a) - The harmonious construction of 35(1)(iv) and section 43(4)(iii)(a), 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 - The contribution of the assessee's activity is facilitating the extension of business of Nostrum, USA and not that of its own. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rting anything as its business was of providing laboratory services on contract basis and the results of the laboratory tests were forwarded to the parent company, i.e., Nostrum Pharmaceutical Inc. USA. It was also noted that the assessee was not in the business of development or sale of computer software. On being show caused to explain the justification for exemption under this section, the assessee made a detailed reply which has been incorporated on pages 7-8 of the assessment order. The Assessing Officer observed that the assessee was not manufacturing or exporting anything as it was simply providing services of laboratory testing to its parent company which could not be considered as the business of developing or exporting computer software within the meaning of section 10B. Accordingly, he denied the benefit of exemption. In the first appeal, the ld. CIT(A) noted that on a reference made by the Assessing Officer to the Department of Scientific and Industrial Research, he was intimated vide letter dated 13-9-2006 by the Ministry of Communication and Information Techno-logy, Department of Information Technology, that the activities of the assessee were not covered under IT/ITE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company which in this year was done barely for its parent company located in USA. The Assessing Officer further observed that the assessee-company was not involved in the business of either manufacturing or selling any medicinal drugs at its own and benefit of laboratory services was utilized by others and not by assessee in its business. It was still further observed that the result of the work done by the assessee, was sold to its parent company, who, in turn was getting the same patented in USA for itself. He also considered the definition of scientific research given in section 43(4)(iii). Relying on the decision of Hon'ble Bombay High Court in the case of CIT v. National Rayon Corpn. Ltd. [1983] 140 ITR 143, the Assessing Officer opined that the assessee was not entitled to deduction under section 35(1)(iv). The first appeal did not change the fortune of the assessee on this score. 6. Before us, the ld. Counsel for the assessee vehemently argued that the business of the assessee was that of scientific research . While referring to clause (iv) of sub-section (1) of section 35, the ld. Authorised Representative contended that any capital expenditure in the nature of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, formulation analytical and stability study, accelerated/long-term study, dissolution profile, bio-equivalence study and then formulation development report. After development of formula and bio-equivalence study, the development work, when completed, is sent to its parent company, that is, Nostrum, USA. Based on the assessee's report, commercial production is undertaken by the parent company who develops tablets for several diseases. The sum and substance of the assessee's activities, which are restricted in dealing with only its principal and no other outside party, is that it is getting the order from its parent company for development of certain formulations. The assessee undertakes research work for the development of formulations as ordered by its parent company and when the desired result is achieved the same is sent to Nostrum, USA. In other words, the assessee is doing job work in research for its parent company. We have perused the copy of profit and loss account of the assessee and noted that the major chunk of its income is the Product development charges at Rs. 4.50 crores from the parent company and the only other income is that of Rs. 24,000 and odd. As aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research done. From the provisions of this sub-section (2AB), we observe that it deals with allowing weighted deduction to a company which is engaged, inter alia, in the business of manufacture or production of any drugs, pharmaceuticals, etc., on the amount incurred as expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority. So in order to claim the weighted deduction under this sub-section the assessee, apart from being engaged in the manufacture of the specified articles or things, should also have the approval from the prescribed authority, which in this case is Secretary, Department of Scientific Industrial Research, Government of India. Further clause (2) of this sub-section (2AB) provides that no deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of the Act. Thus, the ambit of this sub-section is extended only in respect of in-house research expenditure, to the companies who are engaged in the manufacture of specified things including drugs and have the approval from the prescribed au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to each other, it implies that if the scientific research leads to an extension of the assessee's business, then the deduction cannot be denied. In this background of the facts the ld. AR stated that the assessee has been benefited with the results of its research inasmuch as its business of scientific research has increased. We are not convinced with the interpretation given by the ld. AR to the statutory provisions. Primarily there is difference in the language of clause (iv) of section 35(1) and section 43(4)(iii)(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 nowhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, approve the view taken by him on this issue. This ground is not allowed. 12. In the result, the appeal is dismissed. Assessment year 2004-05 13. The first ground is about denial of deduction under section 10B. Both the sides are in agreement that the facts and circumstances of this ground are mutatis mutandis similar to those of ground No. 1 in the assessment year 2003-04. Following the view taken hereinabove we reject this ground of appeal. 14. Ground No. 2 is directed against the denial of deduction under section 35(1)(iv). Here also both the sides fairly conceded that the facts are similar to those of ground No. 2 in the assessment year 2003-04. Following the view taken hereinabove we do not allow this ground of appeal. 15. The last ground is against the denial of deduction under section 80-IB(8A). In view of the denial of exemption under section 10B, the assessee requested the Assessing Officer for the alternative claim of deduction under section 80-IB(8A) during the course of assessment proceedings. In support of the claim for deduction, the assessee stated that it had received approval from the Department of Science and Industrial Research. Copy of app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 80-IB, which is relevant for our purpose, reads as under:- The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company- (i) is registered in India; (ii) has its main object the scientific and industrial research and development; (iii) is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000 but before the 1st day of April, 2007; (iv) fulfils such other conditions as may be prescribed. 17. There remains no dispute on behalf of the revenue qua the fulfilment of the above four conditions. The ld. CIT(A) has denied the benefit of deduction on the ground that the assessee has not satisfied the requirement of section 80-IB(2)(iii) as it has not manufactured or produced any article not specified in the list given in the Eleventh Schedule. In the opinion of the ld. CIT(A), the assessee, ought to have met this requirement of manufacturing or producing any article, and since nothing was produced or manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X
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