Scientific research – Special deduction u/s 80-IB(8A) – Jurisdiction to examine nature of research – Prescribed authority under Act alone has power to examine nature of scientific research and determine whether assessee is entitled to special deduction u/s 80-IB(8A) – A.O. has no power to determine questions

32. CIT vs. Quintiles Research (India) Private Ltd. [2020]
429 ITR 4 (Kar.) Date
of order: 14^th October, 2020 A.Y.:
2008-09

Scientific
research – Special deduction u/s 80-IB(8A) – Jurisdiction to examine nature of
research – Prescribed authority under Act alone has power to examine nature of
scientific research and determine whether assessee is entitled to special
deduction u/s 80-IB(8A) – A.O. has no power to determine questions

aged in
pharmaceutical research and development as well as clinical research for
pharmacy products. For the A.Y. 2008-09 the assessee claimed deduction of Rs.
31,32,49,090 u/s 80-IB(8A). The A.O. held that the assessee is not undertaking
any scientific research and development on its own as specified under rule
18DA(1)(c) of the Rules. It was further held that the assessee has not been
able to sell any output / prototype till date and undertakes the activities as
specified in the agreement and transfers the data / information to the customer
who in turn may use the same to develop a technology product / patent and the
assessee itself is not engaged in scientific research and development
activities leading to development / improvement / transfer of technology. Thus,
it was held that the assessee does not meet the prescribed conditions u/s
80-IB(8A). Accordingly, the claim of the assessee for deduction under the
aforesaid provision was disallowed.

The
Dispute Resolution Panel rejected the objections of the assessee. The Tribunal
allowed the appeal preferred by the assessee and set aside the order of the
A.O. In the appeal filed by the Revenue, the following question of law was
raised before the Karnataka High Court:

‘Whether,
on the facts and in the circumstances of the case, the Tribunal is right in law
in holding that the conditions of rule 18DA can be looked into only by the
prescribed authority and not by the A.O., whereas the said rule prescribes the
conditions necessary for allowing deduction u/s 80-IB(8A) and the A.O. is well
within his jurisdiction to accept or reject the same based on the conformity
adhered to by the assessee?’

The
Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i)    Section 80-IB provides for
deduction in respect of profits and gains from certain industrial undertakings
other than infrastructure development undertakings. Under sub-section (8A) in
the case of an assessee engaged in scientific research and development, there
would be 100% deduction of the profits and gains of such business for a period
of ten consecutive assessment years subject to the condition that the company
satisfied the conditions enumerated in sub-section (8A) of section 80-IB. From
a conjoint reading of rules 18D and 18DA of the Income-tax Rules, 1962 it is
axiomatic that it is for the prescribed authority to examine the nature of
research and scientific development proposed to be or being carried out by the
company who seeks approval or extension of approval. Once under sub-rule (2)
approval is granted which enures for a period of three years, it can be
extended only on satisfactory performance of the company, which has to be
assessed on periodic review by the prescribed authority. The prescribed
authority is also empowered to call for such information or documents which may
be found necessary for consideration of the application for grant of approval.
Even during the currency of the approval granted by the prescribed authority,
the company has to satisfy several conditions in terms of rule 18DA(2) of the
Rules. The prescribed authority is also empowered to withdraw the approval.
Thus, the statutory scheme of the Rules mandates the prescribed authority to be
a body which can minutely examine the highly technical and scientific
requirements in the case of a company.

ii)    Therefore, once the
prescribed authority grants approval and such approval holds the field, it
would not be open to the A.O. or any other Revenue authority to sit in appeal
over such approval certificate and re-examine the issue of fulfilment of
conditions mentioned in sub-rule (1) of rule 18DA of the Rules. The prescribed
authority is a specialised body having expertise in the field of scientific
research and development and the requirements being extremely complex,
scientific requirements have, therefore, been rightly placed in the hands of
the expert body.

iii)   There is no plausible reason
why the A.O. should be allowed to sit in appeal over the decision of a body
which is prescribed under the Rules. An issue with regard to violation of
conditions mentioned in rule 18DA can be looked into only by the prescribed
authority and not by the A.O.’