AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (4) TMI 819
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....der of the Assessing Officer rejecting the claim u/s 80IB(BA) of the Income-tax Act to the extent of Rs. 6,80,65,766/- being the profit determined by the Assessing Officer relating to Bt Cotton Hybrid Seeds without correctly appreciating the facts and the legal position in this regard. 2. That the CIT(A) also erred in not following and discussing the order of her predecessor passed in appeal of the company for AY. 2009-10, which order had also been accepted by the Department and, therefore, there was no reason with the Assessing Officer to make the disallowance in this year and also with CIT(A) to uphold the disallowance. 3. That the CIT(A) erred in holding that the appellant was not carried out research and development activity and it was only coordinating the activities between Mahyco Monsanto Biotech (I) Ltd. (MMB) and was trader of hybrid seeds and, accordingly, the profit derived was not in the nature of profit derived from the research development activities and, therefore, same were not exempt u/s 80IB(8A) of the Income-tax Act. 4. That the CIT(A) failed to correctly appreciate the facts of the case and also the terms of the agreement with MMB for use of their technolo....
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.... on lease at different locations in India. On the basis of its research activities for number of products, such as, cotton, corn pearl millet, hybrid rice, sunflower, pigeon pea, sorghum, okra, tomato, gourds, brinjal, chili, barja, etc., it has developed hybrid seeds. 5. Assessing Officer (AO) following assessment order passed in AY 2009-10 dated 26.12.2011 wherein view was taken that the income of the assessee company is a result of technology it had taken from Mahyco Monsanto Biotech (I) Ltd. (hereinafter referred to as 'MMB') and it was not carrying on any research activities on its own and as such, it is not entitled for deduction under section 80IB (8A) of the Income-tax Act, 1961 (for short 'the Act'). However, aforesaid assessment order for AY 2009-10 has been overruled by the ld. CIT (A) by reaching the conclusion that the assessee company is engaged in the research activities and as such, entitled to deductions u/s 80IB (8A). For AY 2011-12, AO again followed assessment order of AY 2009-10, though overruled by the ld. CIT(A), and denied the deductions u/s 80IB (8A). Again in AY 2011-12, ld. CIT (A) agreeing with the contentions raised by the assessee reached the conclus....
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.... India in the Department of Scientific and Industrial Research. It is also not in dispute that AO/CIT(A) has disallowed the claim of deduction of assessee company u/s 80IB(8A) in A.Y. 2010-11 on the ground that since the assessee company was having an agreement with MMB to whom payment under the head "trait value" is paid for use of their technology and as such, assessee company was not carrying out any research activities rather it was only passing on the technology of the MMB to the parties from whom royalty was being received. It is also not in dispute that the claim of the assessee for deduction u/s 80IB (8A) has been allowed by the AO as well as ld. CIT (A) in AY 2011-12. It is also not in dispute that MMB creates insect tolerance technology for BT Cotton and to avail of that technology, assessee company entered into an agreement with MMB and has been making payment to it called "trait value". 9. In the backdrop of the aforesaid facts and circumstances of the case, the first question arises for determination is :- "as to whether assessee company has not carried out any research activities during the year under assessments rather merely surviving on insect tolerance technol....
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.... projects or programme; (e) is engaged exclusively in scientific research and development activities leading to technology development, improvement of technology and transfer of technology developed by themselves; (f) submits the annual return alongwith statement of accounts and annual report within eight months after the close of each accounting year to the prescribed authority. (2) Every company which is approved under sub-rule (2) of rule 18D shall- (a) sell any prototype or output, if any, from its laboratories or pilot plants with the prior permission of the prescribed authority; (b) intimate the change, if any, in its memorandum of association and articles of association relating to its main objects and forward the altered copy of its memorandum of association and articles of association to the prescribed authority; (c) apply for extension of the approval at least three months before expiry of the approval already granted by the prescribed authority; (d) have a system of monitoring the cost of research and development projects. (3) If, at any stage, it is found that- (a) the approval granted to the company referred to in sub-rule (2) of rule 18D is to avoid pa....
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....cee/assessee company to farmers in the territory. 14. There is another clause no.2.3 in the Agreement which allows sub-licensing of farmers that, "The sale by Sublicensee of Genetically Modified Hybrid Cotton Planting Seed to any purchaser shall include a limited sublicense transferable only to farmers to use such Genetically Modified Hybrid Cotton Planting Seed only to produce a commercial commodity cotton crop within the Territory". 15. Furthermore, clause 2.4 of the Agreement incorporates Prohibition of Modification of Biotech Genes by the licencee which is to the effect that, "Sublicensee shall not reverse engineer, isolate, modify or otherwise use any B.t. Gene or other recombinant DNA (including but not limited to associated regulatory sequences) that is part of the Monsanto Technology that is licensed under this Agreement, without the prior written consent of Sublicensor." 16. In Article 3 para 3.1 sub-licence fee for technology has been settled between the parties to the Agreement as under :- "3.1 TECHNOLOGY AND SUBLICENSE FEES: (a) In consideration for the license rights granted hereunder, Sublicensee shall pay to Sublicensor a one time nonrefundable initial fee of ....
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....anting Seed is not received for a period of five (5) years from the signing of this Agreement or if any government or any government legislation bans the Genetically Modified Hybrid Cotton Planting Seed in the Territory. the initial fee paid by the Sublicensee under Section 3.1 (a) shall be refunded by the Sublicensor to the Sublicensee without interest." 17. In Article 4 of the Agreement, mode of providing technology assistance by MMB to the assessee company is explained as under:- "4.1 SEQUENCE OF ACTIVITIES: Sublicensor shall provide (or cause to be provided) to Sublicensee "Insect Tolerant cotton planting seed embodying Monsanto Technology for use in Sublicensee's Cotton Planting Seed Business. Sublicensee shall then conduct further activities associated with the Hybrid Cotton Seed Business which are directed toward preparation of Genetically Modified Hybrid Cotton Planting Seed for subsequent sale to farmers." 18. On 5th March, 2007, assessee company entered into supplementary and amended Agreement with MMB which is available at pages 51 to 56 of the paper book. Vide supplementary Agreement, assessee agreed to pay "trait value" for Kharif 2007 season onwards till the t....
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....tton Planting Seed which expresses tolerance to glyphosate herbicide due to a transgenic trait unless such trait is obtained from sub-licensor. 20. It is also one of the agreed conditions that it is understood that if sub-licencee and/or its affiliates or any third party acting on behalf of sub-licencee and/or its affiliates conducts any crossing or backcrossing of any such transgenic trait in a parent line that is either used commercially by sub-licencee and/or its affiliates to produce cotton hybrids or which are intended for commercial use to produce cotton hybrids sub-licensee shall be considered to have begun to develop such Hybrid Cotton Planting Seed for purposes of this section 2.5 (b). 21. It is also agreed between the parties as per clause 2.5 (i) that sub-licencee will develop secure temper-proof packaging for packing Genetically Modified Hybrid Cotton Planting Seed in consultation with the sub-licensor and assessee company has been authorized to use the "Bollgard trademark" owned by Monsanto company on a non-exclusive basis in the territory pursuant to a separate trademark sub-licence agreement, attached hereto as Exhibit 'D' without the sub-licencee having to make an....
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....) that sub-licensor shall provide training relevant to sub-licencee's activities under this sublicence to the relevant employees of the sub-licencee in the laboratories of sub-licensor or sub-licencee. 25. Furthermore, when we examine clause 2.6 of sub-licence agreement there are restriction on the assessee company on sale of First Monsanto B.t. Gene which is extracted as under :- "It is agreed that, within three (3) years of governmental approval of the Second Monsanto B.t. Gene and Sublicensee's first line of Cotton Proprietary Germplasm containing S1Jch gene, but in any event no later than five (5) years after the first commercial sale of Hybrid Cotton Planting Seed containing both the First Monsanto B.t. Gene and the Second Monsanto B.t. Gene, Sublicensee will stop selling cotton seed containing only the First Monsanto B.t, Gene and will sell only Genetically Modified Hybrid Cotton Planting Seed containing both the First Monsanto B.t. Gene and the Second Monsanto B.t. Gene." 26. Undisputedly, an amount of Rs. 23,33,76,405/- has been paid to MMB as the trait value which has not been made part of the profit of the assessee company nor part of the expenditure debited to Pr....
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....ny and MMB, a leading Biotech company in USA, goes to prove that the assessee company is developing Hybrid B.t. Cotton Seeds on the basis of Monsanto Technology with inbuilt production for cotton seeds crops against the destructive insects; ii. that as per clause 1.27 of Article 1, Monsanto holding is having patent right of Hybrid Seed Technology to test, produce and sell insect tolerant cotton seed. MMB has sub-licenced the Monsanto / Bollgard technology to certain Indian companies, each of whom introduced Bollgard technology into their germplasm; iii. that assessee company by virtue of the agreement dated 11.08.2003 with MMB technology only developed, tested and sold Genetically Modified Cotton Planting Seed to third parties for its commercial use by the farmers; iv. that MMB is having strict control for the use of its technology by the assessee company, which the assessee company shall not reverse engineered, isolate, modify or otherwise use any B.t. Gene or any other recombinant DNA without the prior written consent of the MMB and it goes to prove that role of assessee company as an approved research company is invisible; v. that when MMB has received trait value on t....
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....ctivities is sine qua non for allowing deductions u/s 80IB; x. that AO as well as ld. CIT (A) have not examined material, if any, placed before prescribed authority under Rule 18DA before approving the assessee company as a research company; xi. that it is also one of the conditions in the sub-licencee agreement that the assessee has to maintain a laboratory as per the requirement of sub-licensor to test the final product and for the quality control tests and the assessee company shall not reverse engineer, isolate, modify or otherwise use any B.t. Gene or other any recombinant DNA which are part of the Monsanto Technology without prior written consent. All these facts go to prove that assessee's functions in order to develop Hybrid Cotton Seeds in the controlled environment are without any discretion of its own rather to work as captive unit of MMB which is not a characteristic of an independent research company; xii. that the AO is required to outsource the expert opinion to reach out the conclusion if the assessee company is independently carrying out research and development activities in order to develop the Hybrid B.t. Cotton Seeds independent of the Monsanto Technology....