We are pleased to
release a Tax Alert which summarizes a recent decision of the Karnataka High
Court (HC) in the case of Tejas Networks Ltd. (Taxpayer) on the issue of
weighted deduction under the Indian Tax Laws (ITL) for scientific research and
development (R&D) expenditure.
The ITL grants weighted deduction for capital and revenue R&D expenditure incurred on “in-house” R&D facility which is approved by Department of Scientific and Industrial Research (DSIR). The issue before the HC was that once DSIR approves R&D expenditure claim, whether the Tax Authority can still disallow the same on the basis that the same does not qualify within definition of “scientific research” within the ITL. On an examination of the scheme of the ITL and rules prescribed thereunder, the HC ruled that the approval of R&D expenditure for “in-house” R&D facility has been entrusted to DSIR under the ITL and the Tax Authority has no jurisdiction to assess the expenditure claim. In case, the Tax Authority has any reservation on approval granted by DSIR, it should approach the apex tax administrative body, viz., the Central Board of Direct Taxes (CBDT), which would thereafter, resolve the same with DSIR.
The HC also ruled that since the Tax Authority, in the present case, by disallowing R&D expenditure approved by DSIR had exceeded its jurisdiction, the Taxpayer could directly approach the HC by filing writ petition even though the Taxpayer had an alternate appellate remedy before the Tribunal.
The present HC ruling reiterates that DSIR, being an expert body, has been entrusted by the ITL with the statutory duty of approving weighted deduction claim for in-house R&D facility. Since this function has been entrusted to DSIR, neither the Tax Authority nor DRP or even CBDT is competent to question the correctness or otherwise of DSIR’s certificate. DSIR’s approval is binding on the Tax Authority. If the Tax Authority has any grievance, it has to request CBDT to refer the issue to DSIR itself which alone can decide on the issue.
The above proposition makes inclusion of R&D expenditure items in DSIR certificate critical for allowance of taxpayer’s weighted deduction claim.
The ITL grants weighted deduction for capital and revenue R&D expenditure incurred on “in-house” R&D facility which is approved by Department of Scientific and Industrial Research (DSIR). The issue before the HC was that once DSIR approves R&D expenditure claim, whether the Tax Authority can still disallow the same on the basis that the same does not qualify within definition of “scientific research” within the ITL. On an examination of the scheme of the ITL and rules prescribed thereunder, the HC ruled that the approval of R&D expenditure for “in-house” R&D facility has been entrusted to DSIR under the ITL and the Tax Authority has no jurisdiction to assess the expenditure claim. In case, the Tax Authority has any reservation on approval granted by DSIR, it should approach the apex tax administrative body, viz., the Central Board of Direct Taxes (CBDT), which would thereafter, resolve the same with DSIR.
The HC also ruled that since the Tax Authority, in the present case, by disallowing R&D expenditure approved by DSIR had exceeded its jurisdiction, the Taxpayer could directly approach the HC by filing writ petition even though the Taxpayer had an alternate appellate remedy before the Tribunal.
The present HC ruling reiterates that DSIR, being an expert body, has been entrusted by the ITL with the statutory duty of approving weighted deduction claim for in-house R&D facility. Since this function has been entrusted to DSIR, neither the Tax Authority nor DRP or even CBDT is competent to question the correctness or otherwise of DSIR’s certificate. DSIR’s approval is binding on the Tax Authority. If the Tax Authority has any grievance, it has to request CBDT to refer the issue to DSIR itself which alone can decide on the issue.
The above proposition makes inclusion of R&D expenditure items in DSIR certificate critical for allowance of taxpayer’s weighted deduction claim.
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