Boasting of inhouse developed R&D equipment in annual report? Pay tax!

Under the present Schedule VI of the Companies Act 1956, Indian companies need to give an update about their spending on scientific research. Because this is a document that goes to investors, companies would like to paint a rosy picture about their scientific and other prowess. In its annual report, a company

• stated that addition to plant and machinery fixed assets included testing equipments
• boasted in Director's report of having developed a number of testing equipments on its own, with a view to saving forex by avoiding importing from foreign countries.

But to the excise department, it argued that the research for which the machines were assembled was unsucessful, so they had dismantled the machines, which itself proved that the machines were not marketable. But the import substitution claim in the annual report negated that defence, by proving the machines to be marketable. Hence, in Usha Rectifier Corporation vs CCEx(New Delhi), the Supreme Court held in favour of Revenue, that the testing equipments manufactured in house were marketable and therefore subject to excise duty.

This ruling should make the CFOs more cautious of their claims in the annual reports.