Ita/282/2014 Of Commissioner Of Income Tax v. M/S. Quintiles Research

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 14 DAY OF OCTOBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD LT.A. NO.282 OF 2014 BETWEEN: 1.COMMISSIONER OF INCOME-TAX-III C.R.BUILDINGS QUEEN'S ROAD| BANGALORE —- 560 OOL. 2 |DEPUTY COMMISSIONER OF| INCOME-TAX| CIRCLE-12(2) C.R.BUILDINGS QUEEN'S ROAD BANGALORE —- 560 OOL. ... APPELLANTS (BY Mr. E.I. SANMATHI, ADV.,) AND: M/S QUINTILES RESEARCH(INDIA) PRIVATE LIMITEDNO.2B, NITESH BROADWAY|9/3, M.G.ROAD,BANGALORE —- 560 OOL. ... RESPONDENT (BY Mr. PERCY PARDHWALLA, SR. ADV., A/W_Mr. K.R. VASUDEVAN, ADV., ANDMr. K.R. VASUDEVAN, ADV., AND Mr. ANKUR PAI, ADV.,). THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 21.02.2014 PASSED IN [TA|(TP) A NO.1605/BANG/2012 FOR THE ASSESSMENT YEAR 2008-09ANNEXURE-A, PRAYING THAT THIS HON'BLE COURT MAY BE)PLEASED 10: (1)DECIDE THE FOREGOING QUESTION OF LAW AND|OR SUCH OTHER QUESTIONS OF LAW AS MAY BE|FORUMULATED BY THE HON'BLE COURT AS)DEEMED FIT.OR SUCH OTHER QUESTIONS OF LAW AS MAY BE|FORUMULATED BY THE HON'BLE COURT AS)DEEMED FIT.(II)SET|ASIDETHE|APPELLATEORDER|DATED21.02.2014.PASSEDBY|THE|INCOME|TAXAPPELLATE TRIBUNAL, ‘B’ BENCH, BANGALORE INAPPEAL|PROCEEDINGSNO.IT(TP)ANO.1605/BANG/2012 FOR ASSESSMENT YEAR|2008-09 ANNEXURE-A,21.02.2014.PASSEDBY|THE|INCOME|TAXAPPELLATE TRIBUNAL, ‘B’ BENCH, BANGALORE INAPPEAL|PROCEEDINGSNO.IT(TP)ANO.1605/BANG/2012 FOR ASSESSMENT YEAR|2008-09 ANNEXURE-A, THIS ITA COMING ON FOR FINAL HEARING, THIS DAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax| Act, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2008-09. The appeal was admitted by a bench of this Court vide order dated 09.06.2015 on the following substantialquestion of law: Whether, on the facts and in_ thecircumstances of the case, the Tribunal Is—right in law tn holding that the conditions ofRule 18DA(8A) can be looked into only by the prescribed authority and not by the AssessingOfficer, whereas the said Rule prescribes theconditions necessary for allowing deductionunder Section SOIB-8A of the [Income Tax Actand the Assessing Officer is well within Nnisjurisdiction to accept or reject the same basedOf)theconformityadheredto.by theaSSeSSECe? 2. In order to appreciate the factual context, in)which the aforesaid substantial question of law arises forour consideration in this appeal, reference to a few factsis necessary. The assessee iS a company, which isengagedInthepharmaceuticalresearchanddevelopment as well as clinical research for pharmacyproducts. The assessee filed the return of income forthe Assessment Year 2008-09 and claimed deduction ofRs.31,32,49,090/- under Section 80-IB(8A) of the Act. |The Assessing Officer vide order dated 15.10.2012, Inter|aliaDy taking into account the Work Orders dated|31.08.2006 and 13.11.2007inter aliaheld that assesseeIS.notundertaking|anyscientific researcnand. development on its own as_ specified under Rule18DA(1)(c) of the Rules. It was further held thatassessee has not been able to sell any output /prototype till date and undertakes the activities asSpecified in the agreement and transfer the data /information to the customer who in turn may use theSame to develop a technology product/ patent and theassessee itself is not engaged in Scientific, Research &DevelopmentactivitiesleadingtOdevelopment/improvement/ transfer of technology. Thus, it was heldthat the assessee does not meet the prescribedconditions under Rule 80-IB(8A) of the Act. Accordingly,the claim of the assessee for deduction under theaforesaid provision was disallowed. — development on its own as_ specified under Rule18DA(1)(c) of the Rules. It was further held thatassessee has not been able to sell any output /prototype till date and undertakes the activities asSpecified in the agreement and transfer the data /information to the customer who in turn may use theSame to develop a technology product/ patent and theassessee itself is not engaged in Scientific, Research &DevelopmentactivitiesleadingtOdevelopment/improvement/ transfer of technology. Thus, it was heldthat the assessee does not meet the prescribedconditions under Rule 80-IB(8A) of the Act. Accordingly,the claim of the assessee for deduction under theaforesaid provision was disallowed. — 3.Being aggrieved, the assessee approachedthe Dispute Resolution Panel. Tne Dispute ResolutionPanel vide order dated 0Q3.09.2012 rejected theobjections of the assessee. Being aggrieved, theassessee approached the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal’ for short). TheTribunal by an order dated 21.02.2014 allowed theappeal preferred by the assessee and set aside theorder of the Assessing Officer and remitted the questionof determination of the question of Arm’s Length Price(ALP) to the Transfer Pricing Officer (TPO) for freshconsideration. In the result, the appeal was _ partlallowed. In the aforesaid factual background, this appealNas peen filed. 4Learned counsel for the revenue whileinviting the attention of this court to provisions ofSection 80-IB(8A) of the Act as well as Rule 18DA(1)(c)of the Rules and submitted that the assessee is notentitled to deduction under the aforesaid provision asthe assessee does not have adequate infrastructuresuch as laboratory facility, qualified manpower, scale offacilitiesandprototypedevelopmentfacilitiesfor.undertaking scientific research and development of itsown. It is further submitted that without establishing laboratoryfacilitiesand|NeCeSSdyinstruments/equipments it is not possible for the assessee to engagein scientific research and development. It is also pointedout that infrastructure facility referred to by theassessee in Bangalore, Mumbai and Ahmedabad is onlyan office space and not a facility that supports scientificresearch and development activity. It is contended thatthe assessee has entered into agreement with varioushospitals to utilize their facilities / infrastructure and thephrase used in Rule 18DA(1)(c) is of its own and not onits own. It is also Submitted that the assessee has notobtained prior permission of the prescribed authority tosell and prototype of output, if any, from its laboratoriesor pilot plans and therefore, condition contained in Rule18DA(2) of the Rules is not complied with. It is alsopointed out with reference to the agreement enteredinto by the assessee that the assessee’s responsibilitiesunder the agreement were to deal with regulatoryauthorities, preparation of protocol, study materials and identification of laboratory/ investigation sites etc. andaforesaid services cannot be equated with undertakingscientific research and development of its own in termsof Rule 18DA(1)(c) of the Rules. Our attention has alsobeen invited to Clause 1/7 of the Agreement and it ispointed out that the provisions of the agreement clearlyindicate that the assessee was not undertaking anyscientific research and development of its own asspecified in Rule 18DA(1)(c) and Sub-Rule (2) of Rule18D of the Rules. Reference has also been made to'Section 43(4) of the Act, and it has been contended thatscientific research connotes any activity for extension ofknowledge in the fields of natural or applied sciencesand the assessee is not contributing to expansion ofsuch knowledge through its activities and earnings ofthe assessee are more in the nature of job charges andtherefore, assessee is not entitled for deduction. | 5.|It is also argued that Tribunal has failed toappreciatethat|theaSS@CSSCEWaSnotengaged 5.|It is also argued that Tribunal has failed toappreciatethat|theaSS@CSSCEWaSnotengaged exclusively in scientific research and developmentactivities and only provided certain services based onthe requirement of the client and there was no outputgenerated which is owned or in respect of whichassessee can exercise rights. It is also contended thatTribunal failed to appreciate that assessee does notdevelop, improve or transfer technology owned by it andtherefore, conditions mentioned in Rule 18DA(1)(e) ofthe Rules are not satisfied. Our attention has also beeninvited to Memorandum explaining the provisions ofSection 80-IB(8A) of the Act introduced by Finance(No.2) Bill, 1996 which specifically states that deductionhas to be allowed to an undertaking carrying outscientific research and development but in the instantcase, from the material on record, it is evident that theassessee was dealing with regulatory authorities,preparation|Of protocolandstudymaterials,identification of laboratory/ investigation sites etc. It isalso urged that Tribunal ignored the findings of the assessing authority and Dispute Resolution Panel withregard to clauses in the agreement. It is also submittedthat Assessing Officer is competent to ascertain whetherconditions mentioned in Rule 18DA are complied with ornot. Alternatively, it is submitted that the TribunalShould have directed the assessing authority to send areport to prescribed authority for reporting violation andthe prescribed authority after examining the issue ofviolation, could have taken appropriate action and theassessing authority could have passed a final order ofassessment in the light of the action, which may Navebeen taken by the prescribed authority. It is also urgedthat exemption notification of clause should be strictlyconstrued. In support of aforesaid submissions, reliancehas been placed on decision of Supreme Court in“COMMISSIONER OF CUSTOMS (IMPORT) MUMBAIVS. DILIP KUMAR AND CO.’, (2018) 68 GST 239as|well as a decision of this court In‘COMMISSTONER OFINCOMETAXANDANOTHER|VS.MANIPAL ACADEMY OF HIGHER EDUCATION, 357 ITR 114. 6. On the other hand, learned Senior counsel for.the assessee while inviting our attention to provisions ofSection 80-IB(8A) of the Act submitted that admittedly,conditions mentioned in Clauses (i) to (iii) are compliedwith and the dispute is only with regard to compliancewith conditions mentioned in Clause (iv). Reference hasalso been made to Rule 18D and Rule 18DA of theRules, which deals with prescribed authority for approvalof companies carrying on_ scientific research anddevelopment and prescribed conditions for deductionunder Sub-Section (8)(a) of Section 80-IB of the Actrespectively. It is also submitted that the claim underSection 80 -IB(8A) of the Act is allowed upto 2007-08which is evident from para 24 of the order passed by theTribunal. It is also pointed out that renewal has beengranted to the assessee in the year 2006, 2009 and.2012 as well. Reference has also been made to findingsrecorded by the Tribunal and it is pointed out that admittedly, the assessee has been granted approval,which has been renewed from time to time. It Is alsopointed out that no substantial question of law has beenframed with regard to findings recorded by the Tribunalin paragraphs 27, 28 and 30 of the order and the.substantial question of law has been framed only withregard to finding recorded by the Tribunal in paragraph81 of the judgment. It is also urged that clinical trialsfall within the expression ‘scientific research’ and thefinding recorded by the Tribunal is based on meticulousappreciation of evidence on record. It is also argued thatonce the approval has been granted by the prescribedauthority, it is not open for the Assessing Authority toexamine whether or not the conditions have beenfulfilled by the assessee. It is urged that the issue thatthe substantial question of law involved in this appeal isno longer.res integraand has been answered by HighCourt of Gujarat in|‘PRINCIPAL COMMISSIONER OFINCOME-TAX-1 VS. B.A.RESEARCH INDIA LTD.’, (2016) 7O TAXMANN.COM 268 (GUJARAT).In|Support of aforesaid submissions, reliance has beenplaced on decisions in|‘TEJAS NETWORKS LTD. VS.|DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE12(4), BENGALURU’, (2015) 60 TAXMANN.COM309 (KARNATAKA), ‘GESTETNER DUPLICATORSPVT. LTD. VS. COMMISSIONER OF INCOME-TAX’,(1979) 1 TAXMAN 1 (SC)and‘COMMISSONER OFINCOME-TAX VS. PARRYS (EASTERN) (P.) LTD.',(1989) 42 TAXMANN 62 (BOM).J.We nave considered the SUDMISSIONS madeby learned counsel for the parties and have perused therecord. Section 80-IB of the Act provides for deductionin respect of profits and gains from certain industrialundertakings other than infrastructure developmentundertakings. Before proceeding further, we may take.note of the relevant statutory provisions viz., Section80-IB(8A), Rule 18D and Rule 18DA of the Income TaxRules, 1962, wnicn read as under: (Section 80IB(8A) (8A)The amount of deduction in the case of any company carrying on scientific researchand 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—_ (1) Is registered in India; (il) nas Its main object the scientific andinaustrial research and development;inaustrial research and development; (iii) is for the time being approved by theprescribed authority at any time afterthe sist day of Marcn, 2000 butbefore the 1st day of April, 2007;prescribed authority at any time afterthe sist day of Marcn, 2000 butbefore the 1st day of April, 2007; (iv) fulflis such otner conditions as maybe prescribed.be prescribed. From perusal of the aforesaid provision, it is|evident that the case of a company falling on scientific research and development, there would be 100%deduction of the profits and gains of such business for aperiod of 10 consecutive Assessment Years subject to the condition that the company satisfied the conditionsenumerated in sub-Section (8A) of Section 80-IB of the Act. Rule 18D Rule 18D (1) For the purposes of sub-section (8A) of section 80-IB, theprescribedautnorityshal]be.theSecretary, Department of Scientific andIndustrial Research, Ministry of Science.anda Tecnnology, Government of India.section (8A) of section 80-IB, theprescribedautnorityshal]be.theSecretary, Department of Scientific andIndustrial Research, Ministry of Science.anda Tecnnology, Government of India. (2) Tne prescribed authority snail initiallygrant approval to a company carryingon scientific research and developmentfor a period of three assessment yearsandsubject|tosatisfactoryperformanceOF|that|companyOP)Periodicreview.extendtheSaidapproval for a furtner period of threeassessment years so tnat the totalperiod|ofapprovalIS.fortenconsecutiveassessment»Years,beginning from tne initial assessmentYd. Sub-Rule (1) of Rule 18D specifies the prescribed|autnority, wnereas, sub-Rule (2) of Rule 18D providestnat prescribed authority shall initially grant approval toa company for a period of 3 Assessment Years and.subject to satisfaction of the satisfactory performance ofthe company, on period review, extend the approval fora period of three Assessment Years so that total periodof approval is for 10 consecutive Assessment Yearsbeginning from initial Assessment Year. Rule 18DA 18DA. (1) Any company carrying onscientific research anda developmentShall be eligible for deduction specifiedin sub-section (8A) of section 80-IB, ifsuch company— (a) is registered in India; (Db) nas its main object the scientificandindustrialresearchand|development; andindustrialresearchand|development; (c) has adeguate infrastructure sucn as_laboratoryfacilities,gualifiedlaboratoryfacilities,gualified manpower, scale-up facilities and.prototype development facilities for.undertaking scientific research and.development of its own; Rule 18DA 18DA. (1) Any company carrying onscientific research anda developmentShall be eligible for deduction specifiedin sub-section (8A) of section 80-IB, ifsuch company— (a) is registered in India; (Db) nas its main object the scientificandindustrialresearchand|development; andindustrialresearchand|development; (c) has adeguate infrastructure sucn as_laboratoryfacilities,gualifiedlaboratoryfacilities,gualified manpower, scale-up facilities and.prototype development facilities for.undertaking scientific research and.development of its own; (d) has a well formulated research anddevelopment programme comprising oftimebound|research|and|development projects with proper|mechanism for selection and review|of the projects or programme;development programme comprising oftimebound|research|and|development projects with proper|mechanism for selection and review|of the projects or programme; (e) is engaged exclusively in scientific.researcn and development activities|leading to technology development, Improvement|oftechnologyand|transfer of technology developed by themselves;researcn and development activities|leading to technology development, Improvement|oftechnologyand|transfer of technology developed by themselves; (f) submits the annual return alongwithStatement of accounts and annuédlreport witnin eight montns after the.close of each accounting year to the|prescribed authority.Statement of accounts and annuédlreport witnin eight montns after the.close of each accounting year to the|prescribed authority. (2) Every company wnicn is approvedunder sub-rule (2) of rule 18D shall—_under sub-rule (2) of rule 18D shall—_ (a) sell any prototype or output, if any,from its laboratories or pilot plants|from its laboratories or pilot plants| with the prior permission of the.prescribed authority; (b) intimate the change, if any, in Itsmemorandum of association and|articles of association relating to its|mainobjectsand|forweardthealtered copy of its memorandum of.associationand|articlesofassociationto.theprescribedautnority;memorandum of association and|articles of association relating to its|mainobjectsand|forweardthealtered copy of its memorandum of.associationand|articlesofassociationto.theprescribedautnority; (c) apply for extension of the approvalat least three montns before expiryof the approval already granted by.the prescribed authority;at least three montns before expiryof the approval already granted by.the prescribed authority; (ad) have a system of monitoring thecost of research and development.projects.cost of research and development.projects. (3) If, at any stage, it is found that— (a).theapprovalgrantedionthecompany referred to in sub-rule (2).of rule 18D Is to avoid payment of.taxes by its group companies or companies related to its directors or.majority of its snarenolders;company referred to in sub-rule (2).of rule 18D Is to avoid payment of.taxes by its group companies or companies related to its directors or.majority of its snarenolders; (b) any provisions of the Act or the.rules have been violated,rules have been violated, the prescribed authority specified may.withdraw the approval so granted.withdraw the approval so granted. (4) Every company referred to in sub-rule(1) shall make an application to theprescribed authority for the purposesof obtaining approval.|(1) shall make an application to theprescribed authority for the purposesof obtaining approval.| (5) Every application referred to in sub-rule (4) shall be accompanied by—rule (4) shall be accompanied by— (a) memorandum of association andarticles of association incorporating|all amenaments duly certified by the company secretary or managing|director of the company;|articles of association incorporating|all amenaments duly certified by the company secretary or managing|director of the company;| (Db) annual report of the company fortne last three years, if available;|tne last three years, if available;| (4) Every company referred to in sub-rule(1) shall make an application to theprescribed authority for the purposesof obtaining approval.|(1) shall make an application to theprescribed authority for the purposesof obtaining approval.| (5) Every application referred to in sub-rule (4) shall be accompanied by—rule (4) shall be accompanied by— (a) memorandum of association andarticles of association incorporating|all amenaments duly certified by the company secretary or managing|director of the company;|articles of association incorporating|all amenaments duly certified by the company secretary or managing|director of the company;| (Db) annual report of the company fortne last three years, if available;|tne last three years, if available;| (c) pnotocopies of the memoranaum of.understanding relating to ali on-going and future sponsored research|projects or programmes. understanding relating to ali on-going and future sponsored research|projects or programmes. (6) The prescribed authority may call forany information or document whichmay be necessary for consideration ofany information or document whichmay be necessary for consideration of the grant of approval under sub-rule(2) of rule 18D. (7) The prescribed authority shall grantapproval within four months from thedate of receipt of the application :—approval within four months from thedate of receipt of the application :— Provided thatwheretheapprovalISNotgranted,thedecision of tne said authority snallbe communicated to the applicant|within the said period of four|months : Provided|further thatNO|approval shall be refused unless|the applicant nas been given an|opportunity of being heard. 8.|From a conjoint reading of Rule 18D and Rule18DA of the Rules, it is axiomatic that it is for theprescribed authority to examine the nature of researchand scientific development proposed to be or beingcarried out by the company who seeks approval orextension of approval. Once under sub-rule (2) approvalis granted which enures for a period of three years, it can be extended only on satisfactory performance of thecompany, which has to be assessed on periodic reviewby the prescribed authority. The prescribed authority isalso empowered to call for such information'§ odocuments,|whichMaybe|foundNeECESSA/yfor.consideration of application for grant of approval. Evenduring the currency of approval granted by theprescribed authority, the company has to satisfy severalconditions in terms of Rule 18DA(2) of the Rules. Theprescribed authority is also empowered to withdraw theapproval. Thus, the statutory scheme of the Rulesmandates the prescribed authority to be a body, whichcan minutely examine the highly technical and scientificrequirements in case of a company. Therefore, once theprescribed authority grants approval and such approvalholds the field, it would not be open to the AssessingOfficer or any other revenue authority to sit in appealover such approval certificate and re-examine the issueof fulfillment of conditions mentioned in Sub-Rule (1) of Rule 18DA of the Rules. The prescribed authority is aspecialized body having expertise in the field of scientificresearch and development and the requirements beingextremelycomplex,scientificrequirementshave|therefore, being rigntly placed in the hands of the expertbody. There appears to be no plausible reason as to whyAssessing Officer should be allowed to sit in appeal overthe decision of a body, which is prescribed under theRules. In this connection, reference may be made toSection 85C of the Act also, which deals with deductionof tax on royalties etc. received from certain foreigncompanies. Tne assessee in order to claim the benefitof deduction under Section 85C of the Act was requiredto optain approval of the Central Government in respectof an agreement and once the approval is granted by.the Central Government, and Central Governmentsatisfies itself that the other company is a foreigncompany and the services required to be furnished bythe assessee to the other company were technical services, the authorities under the Act ought to haveproceeded accordingly. The aforesaid view was taken byHigh Court of Bombay in Parry’s (Eastern) (P.) Ltd.Supra. Thus, once the approval is granted by prescribedauthority and such approval is valid, it would be nolonger be open to the Assessing Officer to verify theSatisfaction of the conditions prescribed under Rule18DA In order to refuse deduction under Sub-Section(8A) of Section 80-IB of the Act. 9 |The Tribunal, in the instant case, hasexamined tne issue on merits and nas neld tnat Rulesclearly contemplate even sponsored research programand the entire receipts of the assessee are from contractresearch and not of own research. It has further beenheld that any issue with regard to violation of conditionsmentioned in Rule 18DA can be looked into only by theprescribed authority and therefore, the Assessing Officererred in disallowing the deduction. The Tribunal hasrightly held that issue with regard to violation of conditions mentioned in Rule 18DA can be |ooked intoonly by the prescribed authority and not by theAssessing Officer. Admittedly, the approval was grantedto the assessee, which was renewed from time to time,therefore, the question of remand does not arise in thefacts of the case. We are in respectful agreement withthe view taken by the High Court of Gujarat in case ofB.A.RESEARCH INDIA LTDSUDFa. In view of preceding analysis, the substantial|question of law framed by a bench of this court isanswered against the revenue and in favour of the.assessee. In the result, appeal fails and is herebydismissed. Sd/-—JUDGE. Sd/-JUDGE.