New guidelines for approval of in-house R&D centres and submission of report under section 35(2AB) issued year 2016

In Brief

The Department of Scientific and Industrial Research (DSIR) has recently issued new guidelines dated July 2017  for approval of in-house research and development (R&D) centres and submission of the prescribed report under section 35(2AB) of the Income-tax Act, 1961 (the Act).

Recently in 2016 finance bill, Indian industry has faced a decrease of weighted tax deduction u/s 35(2AB) from 200% to 150% effective from 1st April 2017 till 31st March 2020, after which it has proposed to phase out this deduction to 100% only.

While the new guidelines are broadly in line with the extant guidelines issued in 2014 and CBDT amendments, there are a few additional conditions specified with regard to the claim of weighted deduction under section 35(2AB) of the Act.

The additional conditions and amendments are as under:

Amendments to the policies and documents:

  1. There have been no changes in company’s eligibility for approval, however, there have been few changes in Conditions (subject to which approval is given), the same are stated as under:
Points Earlier (May 2014 ) New (July 2017) Explanation
Point no 4 (iv) Annual R&D expenses needs to be submitted as per Annexure IV Now the Annexure-IV has been changed to Section-C of the guidelines as Annexure II Format of the annexure has been changed with FORM 3CLA added into the Section as amended by CBDT
Point no 4 (x)  “quality control, tool room etc. incurred on such functions as attending meetings providing advice/directions, ascertaining customer choice/response to new

products under development and other liaison work shall not qualify”

“quality control, tool room etc. and expenses incurred on manpower engaged in non R&D activities such as attending consultation meetings, ascertaining customer choice/response to new products under development and other liaison work shall not qualify” Any R&D manpower engaged in non R&D activities (as stated) is not going to qualify for claim.
Point 4(X) Not available “Capitalized expenditure of intangible nature and expenditure reported as Capital Work In Progress (CWIP) will not be eligible for weighted deduction” Company now cannot show any R&D fixed assest as Work in progress in R&D and can get claim of it
Point no 4 (xiii) Manpower under the category of retainer ship/consultants and manpower on a contract will not be admissible for weighted tax deduction. Manpower under the category of retainer ship / trainees/ consultants and manpower on contract (may include trainees based on employment status) will not be admissible for weighted tax deduction. Manpower designated as “Trainee” in R&D are not allowed for weighted tax deduction
Other No comment on R&D vehicle Vehicle under R&D are not allowed.0 There has been doubt in industry to claim the vehicle used for R&D or not. The same has been disallowed now.

 

There has been an addition of new rule where company have more than 1 Cr. Expenses in R&D preceding to the F.Y. in which company applied for approval, is stated as under:

  1. Submit the request for claim of such expenditure in the covering letter at the time of application in Form 3CK for approval u/s 35(2AB) of IT Act, 1961.
  2. Provide complete breakup & details of capital equipment investment on R&D of more than Rs one Crore excluding expenditure on land and building, in the financial year preceding the year in which the firm applied to the prescribed authority for the approval.

However, experts at SCPL were already following such practices while submitting these kind of claims. There have been procedural changes where DSIR has changed the PART B and PART C of the FORM 3CK and asking additional information as Annexure I for each R&D centre.

Key take-aways-:

 

  • Form 3CK format has been changed, in Part A, PART-B, Part- C
  • Additional information needs to be submitted along with approval application as Annexure I for each R&D centre separately
  • Annexure V which was earlier for seeds companies has been changed to Annexure III.
  • Annexure III, earlier it was additional information as DSIR application has been merged with Annexure I as an appendix.
  • For Submitting R&D annual expenditure companies now have to submit Annexure II and Annexure III of Section-C DSIR guidelines.
  • Draft of FORM 3CL also has been changed and now has been divided into two parts.
  • Apart from Auditor certificate company now has to submit FORM 3CLA as given by CBDT after getting signature by statutory auditor.
  • Clarity on procedure for claiming “more than one crore expenses clauses”

 

To sum it up, all the changes are welcome but there has been no update on electronic submission of these documents as DSIR website has come online recently after more than 6 months of maintenance work. The amendments to guidelines are going to provide stringent conditions for eligibility of expenditure and giving more clarity towards process. Clarity on procedure for claiming “more than one crore expenses clauses” are welcome.

 

The new guidelines can be accessed from the following link:

http://dsir.gov.in/index.html#files/12plan/bird-crf/FI_G_2016_E.html

Let’s talk

For a deeper discussion of how this issue might affect your business, please contact:

letstalk@scinnovation.in

 

 

Nitesh Singh

(Lead Consultant, Head R&D incentives)

nitesh@scinnovation.in

 

Rajesh Ravindranathan

(Client Acquisition Specialist)

+91-9962696204

letstalk@scinnovation.in

 

Head Office

7E, Apeejay House, 2nd floor, 3, DinshawVacha Road,

Churchgate, Mumbai-400020. (INDIA)

Phone: +91-7303712300 (24*7)

Fax: 91-22-22029967

Email: letstalk@scinnovation.in

GST and its implications on Intellectual Property Rights

GST is expected to become a significant reform in the country when it comes to indirect taxes. Multiple tax levied and collected by the state and the central government will now be replaced with a single tax called Goods and Service Tax (GST). GST is a multi-stage value-added tax levied on the consumption of goods or services or both.

For all the transactions that take place within the state, both central and state government shall levy tax

There are two components of GST, for all the transaction that takes place within the state, both the central and the state government will levy tax, mainly;

Central tax: (CGST)

State Tax: (SGST)

Additionally, for all inter-state trade or commerce, before the commencement of GST, Central Sales Tax (CST) was regulating the inter-state trade or commerce. Only parliament was authorised to levy tax on exports of goods and services outside the state and/ or outside the country for that matter, till now. But the CST had downfalls such as the collection of tax was retained by the origin state but the taxpayer is the consumer of the destined state in case of import of goods or services and said tax must accrue to the destination state. Piles of tax resulting out of cascading of tax in the supply chain as Input tax credit was not available to the buyer. Compliance cost in addition for a business that affects free flowing of trade. Lastly, huge difference in the VAT and CST levied by the interstate and the Intra-state sales respectively felt the need of IGST.

IGST shall monitor the inter-state trade of goods and services and ensure the SGST component accrues to the consumer state. IGST would be levied by the Central Government on all interstate transactions, including Jammu & Kashmir, of taxable goods and services.

Intellectual property right and taxation has always been a debatable matter in the country. Back in 2003, the government waived off excise duty on patented products for a period of 3 years from the date of commencement of the manufacturer, provided the manufacturer was Indian, under Central Excise Tariff 1985. Furthermore, to promote  Intellectual property and benefit the taxpayers earning from royalty out of IP transfers/ licensing, the income tax payable to the assessee for the income obtained from such royalty was reduced to 10% effective from 1 st April 2017.

Whereas GST implements temporary transfer or permit of use or enjoyment of IPR and designing, upgrading, adapting, implementing activities, etc, related to software to be classified as service for levy of service tax. Software products (electronic downloads) to be charged 18% (Serial no 36 – residuary category of the GST rate for services).  Software products sale is usually right to use and not transfer of copyright itself. Also, Temporary transfer or permitting the use or enjoyment of any Intellectual Property (IP) to attract the same rate as in respect of permanent transfer of IP – 12% (serial no 20 of the GST rate for services). It is unclear that how software downloads license and use of IP right and royalty be affected by GST.

For trademarks which are not registered under Trademarks Act, 1999, will not attract 5% of GST on staple foods like rice, wheat etc. The famous brand “India Gate” is tax-free as the brand name is not a registered trademark. KRBL owns the brand India Gate rice and have applied many times for trademark but was objected or refused as Vikram Roller Flour Mills Ltd was holding the trademark until 2013. Whereas McCormick and Co, that sells Kohinoor packaged rice in India had to pay 5 % GST, thus making their products more expensive. It will also affect trademark filing in India, if manufacturing companies will interpret GST this way.

This generalized tax change has contradicted the provisions made by the government in the amendments made in the Income-tax act this year, moreover, we seek clarity on the scope of taxability on transactions between a taxable person (IP owner claiming royalty at 10 % income tax rate) and the licensee in GST ACT 2017.

Article Written by: Krupali Rane, Lead Consultant, Scinnovation Consultants Pvt. Ltd.

Refrences:

https://community.nasscom.in/community/discuss/current-issues/gst/blog/2017/05/26/gst-rates-announced-by-the-gst-council-and-its-relevance-to-the-it-sector

http://www.thehindu.com/business/Industry/GST-may-shut-down-local-intellectual-property-firms/article14623297.ece

http://www.cbec.gov.in/resources//htdocs-cbec/gst/cgst-rules-01july2017%20.pdf

http://www.financialexpress.com/opinion/intellectual-property-gst-expected-to-deal-with-dual-taxation-in-time-but-clarity-needed-in-interim/516358/

Dilemma of DSIR recognized R&D centres on Custom duty exemption

When we are seeing conflicted views on The Goods and Services Tax (GST) , implemented since 1st July 2017, by Indian public and industry, the companies which are recognized by Department of Scientific and Industrial Research (DSIR) are in dilemma with the exemption of Custom duty on purchase of capital goods under original Notification no 51/96 followed by amendments in year 2007 as Notification No 24/2007 and Notification no 24/2014 in year 2014

In brief under above stated notification if a research institution (other than a hospital) is registered with the Government of India with the Department of Scientific and Industrial Research (DSIR), on purchase of any goods (equipment, consumables, computer software, prototypes etc) for conducting R&D, company doesn’t have to pay any Custom duty on the same. Having said that, it was only custom duty which was exempted but not the other indirect taxes such as (cess, VAT etc).

For example: If a good is worth Rs. 100 as Gross value and the indirect taxes levied were Rs. 20 (including Rs. 10 for custom duty, and Rs. 10 for cess, VAT etc). Then its only Rs.10 which was exempted under said notification.

But now GST implemented all the indirect taxes gets included under IT, therefore the dilemma is that, the whole Rs. 20 is going to be exempted or its going to be only custom duty Rs. 10. If it’s going to be only Custom duty then what is going to be happen to cess VAT etc, and if it’s full indirect taxes exemption (Custom, cess VAT etc) then it’s going to be a loss of revenue for a Govt. as now all indirect taxes are merged into GST.

Though we have not till now received any official notification from the Govt on these kind of custom or excise exemption, because of industry is not clear stated exemption. As a feedback provided by one of our big pharma client where they mentioned that “on purchase of any goods for R&D, neither the custom officials are accepting the old notification certification nor they are providing the updated information on the same”. Due to which the DSIR recognized companies and R&D centres are facing issues on import of an R&D equipment/goods.

By this article we want to put Govts focus on these kind of special exemptions, where it should be clear that how these kinds of exemptions are going to be implemented under GST.

Written by Nitesh Singh

——-Lead Consultant, Scinnovation Consultants Pvt Ltd.

DSIR’s In house R&D centre recognition scheme- An introduction In brief

The Indian scientific infrastructure covers a chain of national laboratories, specialized R&D centers, various academic institutions which continuously provide expertise and technological support to the vision of “Make in India”. Various policy measures have been introduced from time to time, to meet the changing innovation ecosystem requirements of the industry. The Government has been giving special attention to promote and support innovation in the Indian industry. Several tax incentives have also been provided which encourage and make it financially attractive for industrial units to establish their own in-house R&D units.

The Department of scientific & industrial Research (DSIR) is operating a scheme for granting recognition, registration & approval to In-house R&D units established by corporate industry.

To encourage R&D incentives by industries and to make R&D an attractive proposition, the finance act, is having this section of 35(2AB), providing weighted deduction of 150% (till 2017, 150% from 2017 till 2020) of expenditure incurred by a company engaged in the business of manufacturing or production of any article or product, on scientific research.

The in-house R&D units applying for recognition to DSIR are expected to be engaged in innovative research & development activities related to the line of business of the firm, such as, development of new technologies, design & engineering, process/product/design improvements, developing new methods of analysis & testing; research for increased efficiency in use of resources, such as, capital equipment, materials & energy; pollution control, effluent treatment & recycling of waste products or any other areas of research.

Benefits:

  1. Income Tax benefits
  • Super income tax deduction @ 150% ((till 2017, 150% from 2017 till 2020) of dedicated R&D expenditure both revenue & capital u/s 35 of income tax act as deduction from income
  • Revenue expenses are allowed 150% (till 2017, 150% from 2017 till 2020) by the Tax authorities even if the R&D project has not been fruitful
  • Revenue expenses viz. raw material used for making proto samples, R&D manpower salary, travel, utility bills, software AMC and other incidental expenses etc. of the R & D personnel are eligible for 150% (till 2017, 150% from 2017 till 2020)
  • Capital equipment for R&D center are eligible for a one time weighted deduction (accelerated depreciation) of 150% (till 2017, 150% from 2017 till 2020) of their cost price
  1. Custom Duty / Excise Duty waiver for R&D capital equipment
    • Custom and Excise Duty will be waived off on capital equipment such as design & simulation software, proto development, validation equipment, lab furniture either imported or bought locally for R&D use
  2. Excise Duty exemption on new product launch
  3. When an R & D Centre is approved, it is eligible for Grants/soft loans from the Government on Project to Project basis
  4. Tenders have pre-qualification which includes DSIR recognition for R&D centers.
  5. With focus on “MAKE IN INDIA” campaign which is tightly linked to R&D capabilities, there are policy decisions, likely to be made on further benefits to DSIR recognized R&D centers.

 

Eligibility:

  • The applicant should be a company registered under the Companies Act, 1956.
  • The company shall be eligible for consideration only after the completion of three financial years after formation.
  • The applicant should have regular source of income at least during the last two years to sustain the business and this needs to be elaborated in the application.
  • The companies seeking recognition to their in-house R&D units should be engaged in manufacture or production or in rendering technical services.
  • Companies fully engaged in contract research are also eligible for consideration provided independent infrastructure is available for research activities. Those engaged in research only at present but have plans to start manufacture at a later date may also be considered for the recognition, if there is a potential
  • At the time of application, the R&D unit(s) should be functional and should have well defined, time-bound R&D programs leading to development of innovative products and/or technology (ies).

Though this scheme is providing huge benefits to Indian industrial R&D units, surprisingly only 1800 companies are recognized till date under this scheme.

This scheme is can provide huge tax benefits to the companies who are involve in any research activity. For more information or clarification please contact at nitesh@scinnovation.in

Start-up India Scheme Backed up By DSIR for Bio-tech Startups

Prime Minister Narendra Modi announced the ambitious “Startup India” Movement, the government programme which has main objectives like giving full support and filling the gaps in Indian R&D infrastructure, economy for growth and development of startups, to mention a few. DSIR (Department of Scientific & industrial research), a part of the Ministry of Science and Technology, which has a mandate to carry out the activities relating to indigenous technology promotion, development and utilization, backs this decision. In Nov 2015, it announced a relaxation in 3 years of existence for granting short-term recognition to Biotech startups whereas,  it was hitherto mandatory that a company has to have minimum 3 years of existence.

The biotechnology sector is, in itself, a multidisciplinary sector which is divided into various subsectors such as Bio-pharma, Bio-services, Bio-Agri, Bio-industrial, Bio-informatics etc. In these start-ups, most of them are either dependent on public/private funded research Institutes or Techno Parks not only for infrastructure facilities but also for mentorship, thus leveraging the ecosystem of the Incubators.  Most of these start-ups work with academia/incubators with cutting-edge technologies to innovate and develop novel products which ultimately results in generating Intellectual property. On the same page, these kinds of research involve high risk and concentrated investment for which they require more incentives, funding & support.

Charged up by this initiative and understanding the need of high capital investments for Biotech Startups, DSIR has relaxed the condition of 3 years of incorporation and ownership of infrastructure in the case of biotech startups for in-house R&D recognition. This positive step will further support these startups in getting funds from other funding agencies where DSIR recognition is mandatory.

Generally, when schemes of these types, are announced, lapses in the execution of the same are profound, but in this case, by giving and holding afloat high hopes, DSIR has been successfully implemented this scheme from Nov 2015.

Through an RTI application, it has been found that till Nov 2016, DSIR received a total number of 15 applications from Biotech startups, out of which 11 companies got short-term recognition and 3 are under process.

The start-ups desirous of seeking recognition of DSIR are required to send an email to rdi@nic.in, enclosing profile of the company with a request to allow submission of online application for recognition.

Basic eligibility criteria for the getting short-term recognition are as follows:

  1. The applicant should be a Biotech start-up company conducting high-end research with a scope for generating IPs and revenues out of it.
  2. The start-up should have qualified R&D manpower and basic minimum R&D infrastructure.
  3. The Company should have focused research objectives based on innovative and recent advanced technologies, a clear business model and sources of funds for sustainability.
  4. The Company should furnish documents/details of collaborations, agreements, MOUs etc. with the Incubator Centre or Technology Parks.
  5. The Company should furnish a list of Biotechnology based project proposals submitted/approved for Government of India funding.

By having various interviews with the companies which already got this recognition, it has been established that most of these startups are already funded and are working with Govt incubators with minimum infrastructure & qualified manpower. In addition to that, the process of getting recognition is the same as for obtaining existing “in-house R&D recognition” for companies that have been in existence for more than three years. The application is based on R&D achievements, R&D projects for future along with video & presentation on the same followed by personal meeting cum interview as DSIR office in Delhi.

In the end, we hope for sunnier days ahead, as more schemes related to projecting India as a world-class innovation generation hub are in the pipeline. With such kind of initiatives, we are optimistic that new start-ups are encouraged in the Indian Innovation Ecosystem.

BENEFITS/ INCENTIVES of DSIR RECOGNITION & APPROVAL

Content
1. Benefits/ incentives of DSIR Recognition & Approval
2. Basic eligibility criteria for the companies on the basis of compliances
3. Basic eligibility criteria for the companies on the basis of R&D activities

Example: Shoe Industry

BENEFITS/ INCENTIVES of DSIR RECOGNITION & APPROVAL

The benefits/ incentives available for approved R & D Centres are:

A. Direct Tax benefits

 Super income tax deduction @ 150% of dedicated R&D expenditure both Operational Expenses & Capital Expenditure u/s 35 of income tax act as deduction from income
 Operational Expenses viz. raw material used for making proto samples, R&D manpower salary, travel, utility bills, software AMC and other incidental expenses etc. of the R & D personnel are eligible for 150%
 Capital Expenditure viz. equipment for R&D centre are eligible for a one time weighted deduction (accelerated depreciation) of 150% of their cost price

B. Other Financial Benefits:
 Excise duty exemption for product sold in India which have patent granted in two countries out of India, USA, Japan & any country in European Union for a period of 3 years after approval
 Once you are an approved R & D Centre, you are eligible for Grants/Soft Loans from the Government on Project to Project basis

C. Other advantages
 Govt. Tenders have pre-qualification which includes DSIR recognition for R&D centres
 Increases company’s credibility in case of International collaborations

Basic Eligibility criteria for the Companies on basis of Compliances

1. The applicant should be a company registered under the Companies Act, 1956 or 2013.
2. The company shall be eligible for consideration only after the completion of three financial years after formation.
3. The applicant should have regular source of income at least during the last two years to sustain the business and this needs to be elaborated in the application.
4. The companies seeking recognition to their in-house R&D units should be engaged in manufacture or production or in rendering technical services.
5. Companies fully engaged in contract research are also eligible for consideration provided independent infrastructure is available for research activities. Those engaged only in research at present but have plans to start manufacture at a later date may also be considered for the recognition, if there is potential.
6. The R&D unit(s) should not be located in residential areas but should be operating in premises authorized by the relevant Central/State Government. (Proof for such authorization needs to be furnished).
7. Independent infrastructure for research activities and adequate technically-qualified manpower should be available.
8. At the time of application, the R&D unit(s) should be functional and should have well defined, time-bound R&D programmes leading to development of innovative products and/or technology(ies).

Basic Eligibility criteria for the Companies on basic of R&D activities

The In-house R&D units applying for recognition to DSIR are expected to be engaged in innovative research & development activities related to the line of business of the firm, such as, development of
a. New technologies which may be present at the market but new to the company. Example:
i. For Pharma Companies: New molecules/product development on basis of new technology
ii. For Engineering Companies: New component development on new technology
iii. Other sectors: New products development
b. Design & engineering,
c. Process/product/design improvements,
d. Developing new methods of analysis & testing;
e. Research for increased efficiency in use of resources, such as, capital equipment, materials & energy;
f. Pollution control, effluent treatment & recycling of waste products or any other areas of research

Example for shoe industry:
R&D activities in Shoe industry which can fall under Research definition for DSIR In-house R&D recognition:
1. Conceptualization:
a. On the basis of market/ client research/requirement conceptualization of the new shoe design
b. Selection of the BOM for the concept which company is looking for.
c. Validation of the concept on the basis of the study and checking the feasibility of new product in the market.
2. Drawing & Designing of the shoes as per the requirement of the project
a. Designing of baby product
b. Sketch drawing on software or manual
c. Fabric selection activities
d. Making of sew samples
e. Designing of the pattern for the shoe
f. Finalization of design of the shoes
3. Basic simulation of the design prepared on software
a. Durability test
b. Fabric test
c. Sticking test
4. Proto Development/ sample preparation:
a. Cutting of the Fabric
b. Machining
c. Stitching
d. Development of minimum numbers of samples for testing
5. Sample validation/ testing
a. Physical testing of the shoe samples
b. Activewear Testing
c. Chemical Testing
d. Color Testing
e. Waterproof Testing
f. Wear trials
g. Sole Testing
h. Sole adhesion Testing
After the above activity, the shoe gets developed and sent for replicating the process for mass production and sale of the same.

Therefore whatever activity as Shoe Company does before the mass production of the particular product can be covered in R&D definition of DSIR for getting in-house R&D centre recognition and tax benefits.

Some of the Shoe Companies which are already recognized by DSIR:
1. Bata India Ltd (3 R&D centres)
2. Haryana leather chemicals limited (1 R&D centre)
There are various textile companies which are also recognized
1. Arvind Ltd
2. Abhay Cotex Pvt Ltd.
3. Eastern Silk Industries Ltd.
4. Eastman Exports Global Clothing (P) Ltd
5. Greaves Cotton Ltd.
6. Kesoram Industries Ltd.
7. Mafatal industries Ltd
8. The Century Textiles & Industries Ltd.
9. Zip Industries Pvt. Ltd.
……. And more
Please note currently only 1800 companies are recognized so far in all the sectors across India since the start of this program.

It may be noted that market research, work & methods study, operations & management research, testing & analysis of routine nature for operation, process control, quality control and maintenance of day to day production, maintenance of plant are not considered as R&D activities

Glad to share that Co-Founder Rajeev Surana’s article on R & D tax benefits for companies has been published on yourstory.com

Co-Founder Rajeev Surana’s poignant article on the plethora of tax benefits available to companies securing DSIR (Department of Scientific and Industrial Research)recognition has been published on yourstory.com. Please visit the link to access the article published.
http://yourstory.com/2016/06/tax-benefits-india