Section 11 in The Companies (Cost records and audit) Rules, 2014
11. Research and Development Expenses.-
(a)Research and development costs shall include all the costs that are directly traceable to research or development activities or that can be assigned to research and development activities strictly on the basis of (a) cause and effect or (b) benefits received. Such costs shall include the following elements, namely:-i. The cost of materials and services consumed in research and development activities;ii. Cost of bought out materials and hired services as per invoice or agreed price including duties and taxes directly attributable thereto net of trade discounts, rebates, taxes and duties refundable or to be credited;iii. The salaries, wages and other related costs of personnel engaged in research and development activities;iv. The depreciation of equipment and facilities, and other tangible assets, and amortisation of intangible assets to the extent that they are used for research and development activities;v. Overhead costs, other than general administrative costs, related to research and development activities;vi. Costs incurred for carrying out research and development activities by other entities and charged to the entity;vii. Expenditure incurred in securing copyrights or licences;viii. Expenditure incurred for developing computer software;ix. Costs incurred for the design of tools, jigs, moulds and dies; andx. Other costs that can be directly attributed to research and development activities and can be identified with specific projects.(b)Subsidy or grant or incentive and any such payment received or receivable with respect to research and development activity shall be reduced from cost of the cost object in the financial year when such subsidy or grant or incentive and any such payment is recognised as income.(c)Any abnormal cost where it is material and quantifiable shall not form part of the research and development cost.(d)Fines, penalties, damages and similar levies paid to statutory authorities or other third parties shall not form part of the research and development cost.(e)Research and development costs shall not include imputed costs.(f)Credits or recoveries relating to research and development cost, if material and quantifiable, including from the sale of output produced from the research and development activity shall be deducted from the research and development cost.(g)Research and development costs attributable to a specific cost object shall be assigned to that cost object directly. Research and development costs that are not attributable to a specific product or process shall not form part of the product cost.(h)Development cost which results in the creation of an intangible asset shall be amortised over its useful life. Assignment of development costs shall be based on the principle of "benefits received".(i)Research and development costs incurred for the development and improvement of an existing process or product shall be included in the cost of production. In case the research and development activity related to the improvement of an existing process or product continues for more than one accounting period, the cost of the same shall be accumulated and amortised over the estimated period of use of the improved process or estimated period over which the improved product will be produced by the entity after the commencement of commercial production, as the case may be, if the improved process or product is distinctly different from the existing process or product and the product is marketed as a new product. The amount allocated to a particular period shall be included in the cost of production of that period. If the expenditure is only to improve the quality of the existing product or minor modifications in attributes, the principle shall not be applied.(j)Development costs attributable to a saleable service namely; providing technical know-how to outside parties shall be accumulated separately and treated as cost of providing the service.
