DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI vs. MRF LIMITED, CHENNAI

4. The Ld. CIT(A) erred in relying on the judgment of Hon'ble ITAT in assessee's own case of the Asst Year 2017-18 to 2019-20 in ITA (TP) A. No. 64 & 65/Chny/2022 & 41/Chny/2023 dated 20.09.2024, which erroneously held that the AO cannot sit in judgment over the report submitted by the prescribed Authority in Form 3CL.

1. Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘) for both the assessment years despite the AO disallowing Rs.17,54,07,659/- for AY 2013-14; and Rs.34,79,69,346/- for AY 2014-15. The main grievance as evidenced from a reading of the grounds of appeal raised by the Revenue are that the disallowance made by the AO was based on the finding of the survey team u/s.133A of the Act conducted in the premise of the assessee at Thiruvottiyur & Trichy on 20.11.2019; Consequently, the Ld.CIT(A) erred in following the decision of this Tribunal in the assessee’s own case for AY 2017-18, 2018-19 & 2019-20 wherein the Tribunal held that the AO can’t sit in judgment over the report submitted by the DSIR in Form No.3CL.

5. The brief facts for AY 2013-14 are that the assessee company is engaged in the business of manufacturing and selling of automobiles tyres, tubes, flaps and other rubber products. The assessee company is noted to have filed its original Return of Income (RoI) for the AY 2013-14 on 28.11.2013 admitting total income of Rs.790,92,17,440/-. Later, the case was selected for scrutiny under CASS and assessment proceedings was completed u/s.143(3) r.w.s.92CA of the Act on 29.12.2016 assessing total income of Rs.861,75,63,920/-. Later, the case was re-opened u/s.147 of the Act and reassessment proceedings had been completed vide order passed u/s.143(3) r.w.s.147 of the Act on 03.12.2019 revising & 55/Chny/2025 (AYs 2013-14 & 2014-15) M/s.MRF Ltd. the income at Rs. 837,17,84,527/-. Thereafter, a survey operation u/s.133A of the Act was carried out at the premises of the assessee company on 20.11.2019 and pursuant to it, inter-alia the assessment for AYs 2013-14 & 2014-15 was re-opened by issue of notice u/s.148 of the Act and after hearing the assessee on the issue of deduction claimed u/s.35(2AB) of the Act, the AO is noted to have made disallowance of deduction claimed u/s.35(2AB) of the Act to the tune of Rs.35,63,69,370/- for AY 2013-14 [and for AY 2014-15 similar disallowance was made to the tune of Rs.34,79,69,346/-].

6. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who was pleased to delete the disallowance/addition made in respect of the deduction claimed u/s.35(2AB) of the Act.

Vice President [Materials] in his statement recorded on 22.11.2019 wherein he had purportedly admitted that R & D Lab was mainly for sample testing for various vendors and which was for vendor selection.

According to the AO, this statement given goes on to show that the assessee’s R & D Lab was not doing any high-end R & D. Further, according to the AO, the survey team has found that the concerned officials doesn’t possess required technical knowledge/expertise.

Therefore, the AO disallowed 70% of the weighted deduction claimed towards manpower employed which works out to Rs.18,09,61,711/- [70% of the weighted deduction towards manpower] and likewise, reduced claim at Rs.25,85,16,730/- in respect of its R & D Unit, Thiruvottiyur.

Further, according to the AO, the assessee has claimed R & D expenses at Thiruvottiyur Unit without doing any R & D work by observing that the assessee company was not doing any rethreading of tyres but only manufacturing the same. Thus, the AO concluded that the assessee didn’t incur any expenditure on scientific research/in-house R & D as per sec.35(2AB) of the Act. Therefore, 50% of the weighted deduction claimed u/s.35(2AB) of the Act [other than manpower] in respect of the R & D at Thiruvottiyur Unit to the tune of Rs.17,54,07,659/- [50% of the weighted deduction of Rs.35,08,15,318/- was disallowed]. Thus, he framed the re-assessment order on 30.03.2023 by disallowing total & 55/Chny/2025 (AYs 2013-14 & 2014-15) M/s.MRF Ltd. deduction u/s.35(2AB) of the Act to the tune of Rs.35,63,69,370/- [Rs.18,09,61,711/- plus Rs.17,54,07,659/-].

:: 8 :: basis of which, the AO in the present case has also made disallowance] and the Tribunal is noted to have discussed about this issue as under:

12.5 Issue No.2: Disallowance on the basis that the Appellant is not doing any high-end R&D activities in the Thiruvottiyur R&D unit. Contention of AO/DRP: The AO has come to the conclusion that there is no high-end R&D activity carried on in Thiruvottiyur R&D unit of the Appellant and only sample testing activities were carried out. For this he relies on a statement made by Mr. Mohan Kurian during the survey proceedings (Pg No. 571 of the factual paper book).

Relevant extracts of the final order:

"Shri. Mohan Kurian, Vice-president, Procurement operation of MRF Ltd., Chennai, stated in his statement recorded u/s. 131 of Income tax Act, 1961 on 22.11.2019 that the R&D Lab were meant mainly for sample testing for various vendors and this resulted in only vendor selection which is against the guidelines laid down by DSIR" - Pg No. 25 and 26 of the final order.

Relevant extracts of the DRP order: "Having perused the submissions of the assessee and the conclusions arrived at by the AO, the Panel is of the opinion that although the prescribed Authority for quantification of the Expenditure eligible for weighted deduction u/s.35(2AB) of the Act is DSIR, the findings of the Survey carried out by the Department u/s 133 A cannot be ignored." - Para No. 10.5 in Pg No. 36 and 37 of the DRP order.

12.5.1 The Ld.AR submitted that it is not the jurisdiction of the AO to sit on judgment of what constitutes high-end R&D activity and what doesn't. This is exactly why the DSIR exists and for the AO to superimpose and substitute the DSIR is beyond the provisions of the Act read with Rules. It is also pertinent to mention that the assessee as part of the approval by DSIR must submit reports on the activities undertaken in their R&D Unit every year. There is no finding by the DSIR that the activities carried out by the Appellant in their R&D Unit is of inferior quality as has been erroneously deduced by the AO based on his own interpretation of survey statements. Therefore, there is no basis for the AO to conclude that there is no high-end R&D activity in the Thiruvottiyur R&D unit.

12.5.2 Further, the Ld. AR argued that the sworn statement relied on by the AO deals with an entirely different issue i.e., transaction of the assessee with its subsidiary towards purchase of raw materials. The person examined was in charge of acquisition of raw materials for the assessee company. In Question No.5 of the statement recorded (Pg No. 572 of the factual paper book) requires Mr.Mohan Kurian to explain in detail the role of the assessee in procuring materials through their Singapore subsidiary. In fact, in none of the questions, there is any reference to activity of the R&D by the assessee. Therefore, the Ld.AR stated that it is not clear as to how from these queries regarding purchase of raw material, can the AO conclude that there is no high- end R&D activity carried on in their Thiruvottiyur R&D Unit.

& 55/Chny/2025 (AYs 2013-14 & 2014-15) M/s.MRF Ltd.

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12.6 Issue No. 3: Disallowance that the employees are not technically qualified in the Thiruvottiyur unit:

Contention of AO/DRP:

Following from the above sworn statement by Shri Mohan Kurien(Pg 571 of paper book) supra, the AO has also come to the conclusion that employees are not technically qualified for carrying out R&D facilities.

Relevant extracts of the final order:

"The assessee company was not doing any high-end R&D and examination of the man power clearly indicated that the employees who did not possess technical knowledge formed bulk of the man power." (Pg No. 26 of the final order).

Relevant extracts of the DRP order:

"Having perused the submissions of the assessee and the conclusions arrived at by the AO, the Panel is of the opinion that although the prescribed Authority for quantification of the Expenditure eligible for weighted deduction u/s.35(2AB) is DSIR, the findings of the Survey carried out by the Department u/s 133 A cannot be ignored." (Para No. 10.5 in Pg No. 36 and 37 of the DRP order).

12.6.1 The Ld.AR submitted that it is not the jurisdiction of the AO to sit on judgment of what qualification the assessee's personnel ought to have for conducting R&D activity. The capacity and competence of R&D facility and the work carried out was to be approved only by the DSIR and not by some ad-hoc conclusion by the AO. Further, the Ld.AR stated that it is to be noted that the assessee had provided sample Educational certificates wherein the employees have degree in B.E., B.Tech, M.Tech, B.Sc, M.Sc, and Ph.D. etc. (as provided in Page 682 of the factual PB) which is as per DSIR guidelines. The AO thus has grossly erred in making an ad-hoc disallowance in this regard.

12.6.2 Further, the Ld.AR stated that the sworn statement relied by the AO deals with an entirely different issue (i.e., transaction of the assessee with MRF SG) and it does not deal with the technical qualification of the employees of the assessee and hence, the conclusion arrived at by the AO is erroneous.

& 55/Chny/2025 (AYs 2013-14 & 2014-15) M/s.MRF Ltd.

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12.7 Issue No.4: Disallowance due to capitalisation of assets in advance in the Thiruvottiyur R&D unit:

Contention of AO/DRP:

The AO has examined, a sample of TWO machineries purchased for the R&D unit and has stated that the "acceptance letter" for the machinery was dated in the next FY, whereas the assessee has capitalised the same in the current year. He has relied on the sworn statement of one Mr. Anindya Kundu. (Question No.2 in Page 584 of the Factual paper book).

Relevant extracts of the final order:

"The response of the Shri. AnindyaKundu, Chief accounts Manager of MRF of Thiruvottiyur plant, to Q.2 of statement recorded during the course of survey proceedings u/s. 133A of Income tax Act, 1961 on 21.11.2019 clearly shows that in assets where there were no installation certificates were pushed to be capitalized early in A Y 2017-18 itself." (Pg No. 25 of the final order)

Relevant extracts of the DRP order:

"Having perused the submissions of the assessee and the conclusions arrived at by the AO, the Panel is of the opinion that although the prescribed Authority for quantification of the Expenditure eligible for weighted deduction u/s.35(2AB) of the Act, is DSIR, the findings of the Survey carried out by the Department u/s.133A of the Act cannot be ignored." (Para No. 10.5 in Pg No. 36 and 37 of the DRP order).

12.7.1 The Ld.AR of the assessee stated that it is the assessee's submission that the AO has wrongly interpreted the term 'Acceptance certificate'. The machinery was capitalised on the date of commissioning, and they were put to use from the date of test run and NOT on date of acceptance certificate (which calls for optimum utilization requiring a minimum learning time criteria and hence is always subsequent to put-to-use date (Refer the answer to Q No. 2 given by Mr. AnindyaKundu in Page 584).

12.7.2 The Ld.AR further stated that for one of the machineries chosen by the AO (namely, Aircraft Dynamometer machine)- The Acceptance certificate also was issued during the relevant previous year itself. This has been missed by the AO and it is not clear how the AO concluded that the machinery was not put to use and hence the assessee is not entitled to deduction u/s.35(2AB) of the Act.

12.7.3 The Ld.AR summarised and stated that in any case, as pointed out in the beginning what is to be examined is the expenditure incurred during the year towards capital or revenue expenditure. It does not matter whether machinery was installed and put to use in a particular AY for claiming deduction u/s.35 including Section 35(2AB) as held in the following decisions of the hon’ble courts; & 55/Chny/2025 (AYs 2013-14 & 2014-15) M/s.MRF Ltd.

:: 11 :: - Rane Brake Linings Ltd [2002] 255 ITR 395 (Madras HC) - Navin Fluorine International Ltd [2019] 178 ITD 201 (Mumbai); - Gujarat Aluminium Extrusions (P.) Ltd [2003] 184 CTR 297 [Guj HC]

12.7.4 In view of the above facts, the Ld.AR stated that the AO having finalized by himself disallowances of R&D expenditure which are without any basis and grossly against the provisions of the Act do not warrant a re-look and hence prayed for deleting the disallowance and the claim as approved by DSIR should be allowed.

12.7.5 Per contra the Ld.DR relied on the orders of the AO / DRP and stated that the data and details found during the survey proceedings cannot be ignored and hence the action of the AO/DRP is in accordance of law and hence the assessee’s ground on this issue be dismissed.

12.7.6 We have heard the rival contentions and gone through the relevant materials and orders of the authorities below. It is admitted fact that, during the Assessment year 2017-18, the assessee has incurred certain expenditure of both revenue and capital in nature, towards its R & D division for the 2 units situated at Thiruvottiyur and Trichy. Accordingly, in the relevant A.Y. 201718 the assessee has claimed weighted deduction of an expenditure on Scientific Research U/s.35(2AB) of the Act, to the tune of Rs.276,70,98,974/- on Revenue Expenditure of Rs.40.63 Crores (Weighted deduction of Rs.81.26 Crores) and Capital Expenditure of Rs.97.72 crores (Weighted deduction of Rs.195.44 Crores) with respect to its 2 R&D units situated at Thiruvottiyur and Trichy. Further, the DSIR as per Form 3CL issued dated 08/04/2021, has approved eligible R & D Expenditure as per Section 35(2AB) of the Act in the case of assessee is as follows: a) Revenue Expenses Rs.34.80 Cr : Weighted deduction as certified Rs.69.60 Crores b) Capital Expenses Rs.97.72 Cr : Weighted deduction as certified Rs.195.44 Crores Total a) + b) Rs.132.53 Cr : Rs.265.04 Crores

12.7.7 We note that the excess claim of weighted revenue expenditure to tune of Rs.5,83,00,000/- made by the assessee has been disallowed by the AO/DRP after considering amounts certified in the Form 3CL issued by the DSIR on 08/04/2021. According to Ld.AR, the AO / DRP has accepted the Form 3CL issued by DSIR dated 08/04/2021 in respect of above disallowance. However, allowing the claim of the assessee in respect of capital expenditure of the 2 units u/s.35(2AB) of the Act, the AO/DRP has rejected the amount certified in Form 3CL issued by DSIR dated 08/04/2021, thereby the order of the lower authorities is disallowing the capital expenditure is erroneous by discriminating in accepting the Form 3CL.

Firstly, let us understand the provisions of the Section 35(2AB) of the Act and rules thereon:

Manner of verification of the claim under section 35(2AB) by the DSIR

The Company had submitted before the learned AO that the provisions of section 35(2AB) of the Act, as applicable for FY 2016-17 (relevant to the subject AY), provides that where a company is engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, incurs any & 55/Chny/2025 (AYs 2013-14 & 2014-15) M/s.MRF Ltd.

:: 12 :: 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 a authority then, there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred.

Further, Rule 6 of the Rules prescribes that the DSIR, which is a nodal body administering various research and development activities in the country, is the authority to review and approve the benefit.”

Coming back to the issue of capital expenditure incurred by the assessee for R&D at situated at Thiruvottiyur and Trichy. The assessee has claimed capital expenditure during the A.Y. 2017-18 of Rs.97.72 crores with respect to its 2 R&D units situated at Thiruvottiyur of Rs.65.56 Crores and Trichy of Rs.31.85 Crores.

12.7.8 We note that the assessee’s at Thiruvottiyur R & D unit has applied for and granted recognition initially in the year 1974. Subsequently it had applied for obtaining renewal of recognition multiple times with the latest renewal granted in the year 2018 up to the year 2021. The Trichy R & D unit had applied for and obtained recognition from DSIR in the year 2018 upto the year 2021. During the course of survey proceedings U/s.133A of the Act, held on 21/11/2019 and statements recorded from the employees of the company and revenue authorities obtained certain information in respect of the expenditure incurred by the assessee towards R&D units. The Assessee has furnished before the DSIR, the details of various research projects undertaken by the R&D units, the details of the scientific equipment used by these units, the qualification of people involved in the research and the same have been taken into consideration by the DSIR before granting the above recognition.

12.7.9 According Ld.AR as a part of the recognition process, the DSIR authorities have visited the premises of R&D centres situated at Thiruvottiyur and Trichy in 2018, to satisfy themselves of the research activity carried out by the assessee at such units. The detailed presentation explaining the existing and proposed R&D activities of the assessee was also been made before the DSIR authorities. The assessee also been regularly filing and receiving approval from the DSIR for claiming expenditure under section 35(2AB) in the prescribed format and diligently meeting all the requirements for claiming deduction u/s.35(2AB) by following the procedure/process as under:

The recognition and approval of in-house R&D units and approval for the expenses granted by the DSIR is based on certain guidelines laid down by DSIR which includes presence of independent infrastructure, adequate technically qualified manpower, well defined time bound R&D programs and projects, exclusion of certain activities from R&D as a negative list, maintenance of separate books of accounts, third part audit of expenses incurred etc. The details of expenses were filed with DSIR along with an Audit report from an independent accountant in Form 3CLA. Based on review of all information, multiple rounds of clarifications as required, multiple discussions and meetings where the nature· of expenditures were· justified to the DSIR, the authorities provided approval for the amount of capital and revenue expenditure that can be claimed as a deduction in Form 3CL, dated 8 April 2021.

"12.1 We have carefully gone through the order passed by the Assessing Officer and by the TPO and objections filed by the assessee as well as the records of the case of the assessee. has already been decided in para 11 above that where the express provisions of the Act exclude certain kind of expenditure from the purview of section 3 5 of the Act such expenditure cannot be allowed under section 35 of the Act and when certain expenditure does not fall in the scope of section 35 of the Act, the report of prescribed authority cannot be considered as far as such excluded expenditure is considered. The certificate of the prescribed authority cannot overrule the express provisions of the Act. It has also been held that product development expenditure gives rise to patents on products/processes which are intellectual property rights and therefore such expenditure is capital in nature ( capital work in progress as the project is incomplete) and cannot be allowed u/s 35 of the Act. The arguments of the assessee in the said objection are essentially the same as in objection raised in para 11 above. Therefore principle decided while dealing with such objection squarely applies to this objection also."

Accordingly, the assessing officer disallowed the deduction claimed by the assessee under Section 35(2AB) of the Act incurred by assessee in a sum of Rs.48,41,82,071/- as against the total deduction Rs.89,35,48,193/- claimed by the assessee under Section 35(2AB) of the Act.

:: 15 :: assessee for weighted deduction in its return of income, the prescribed authority allowed a sum of Rs. 6,904 lakhs only though the Audit Certificate dated 10.04.2013 - Annexure - E issued by the auditor of the assessee indicated Rs.7,009 lakhs as weighted deduction.

prescribed authority. The decision of the prescribed authority in this regard would be final, inasmuch as, the certification of such expenditure is being examined by an expert body and undisputedly, such exercise has been outsourced by the Revenue under the Act itself, since the prescribed authority being possessed of requisite expertise, it would be in a better position to certify as to whether such expenditure claimed by the assessee under Section 35(2AB) would fall within the said provision or outside. This exercise of examining the correctness of the Certificate issued by the prescribed authority is not available to the Assessing Officer as could be seen from scheme of Section 35 the Act.

28.It is in this background, sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute "scientific research" as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out of scientific search as indicated in clause (ii) of sub-section (4) of Section 43 is an issue which requires to be examined the prescribed authority itself and it would not be in the domain of the assessing authority to undertake such an exercise. When Section 35(2AB), Section 35(3) and Section 43(4) of the Act are read harmoniously, the irresistible conclusion that has be drawn would be that assessing officer cannot sit in judgment over the re port submitted by the prescribed authority in Form No. 3CL. This view is also supported by the judgment of the High Court of Gujarat in Mastek Ltd.'s case (supra),