TaxTMI 
TaxTMI 
2020 (4) TMI 819
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.... "1. That the CIT(A) erred in upholding the order 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 ca....
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....s. Assessee company has reportedly been carrying out research activities on agriculture farms owned/taken 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 (8....
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.... development company u/s 80IB (8A) of the Act by the prescribed authorities, namely, the Secretary to the Government of 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....
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....g scientific research and development of its own; (d) has a well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of the 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 approv....
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....pany also includes the right to utilize the services of third parties to act on behalf of sub-licencee in conducting those activities associated with the Hybrid Cotton Planting Seeds business which are directed towards to the production of Genetically Modified Hybrid Cotton Planting Seeds for subsequent sale by sub-licencee/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 cons....
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....t that all appropriate governmental agencies in the Territory have granted nonrevocable approval (to the extent any such approval is required) for the payment to Sublicensor of the fees prescribed in this Article 3 and such approval is on terms satisfactory to the Sublicensor. (d) If government approval (or sale of Genetically Modified Hybrid Cotton Planting 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 direc....
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....5 (a), (b) & (c) it is again one of the conditions that sub-licencee, the assessee company in this case, shall not cross or backcross the B.t. Gene into any third party germplasm which have been crossed or backcrossed with the B.t. Gene. It is also one of the conditions that sub-licencee or its affiliates shall not develop, commercialize, sell, distribute or otherwise commercially handle any Hybrid Cotton 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....
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.... set forth in the Exhibit 'B' prior to sale of that lot. Similarly, it is agreed in clause 2.5 (m) that sub-licensor, MMB in this case, shall provide recommendations for procurement of kits, instruments, or other lab supplies that will be required for sub-licencee to carry out its activities under the licence. 24. It is also agreed between the assessee company and the sublicensor, the MMB, that as per clause 2.5 (l) 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, Subli....
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....cience & Technology since AY 2004-05", answer to the question framed in preceding para 9 of the order is as under :- i. that no doubt, assessee company has claimed that it is having huge research and development infrastructure, detailed at pages 80 to 89 of the paper book, with Dr. Paresh Verma, Ph.D. (Plant Breeding) as Director and is having research labs, cold storage and seed conditioning unit but sub-licencee agreement between assessee company 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....
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....t when assessee is an approved research company by Ministry of Science & Technology, the AO has no role to play to look into the research activities of the assessee company, is concerned, we are of the considered view that provisions contained u/s 80IB (8A) and Rule 8DA are to be read conjointly and are compliment to each other. In other words, conditions of both section 80IB and Rule 18DA are required to be fulfilled for availing of such deductions. Carrying out the scientific & industrial research and development activities 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....