2012 (9) TMI 43 - AT - Income Tax

Disallowance of weighted deduction u/s 35(2AB)(1)- expenditure incurred on clinical trials - Held that - Considering the same very issue which was considered by the Tribunal in assessee s own case for assessment year 2006-07 that the expenditure on scientific research eligible for weighted deduction under section 35(2AB) should be the expenditure on scientific research on in-house research and development facilities and therefore the action of the Assessing Officer to disallow weighted deduction of 50% was confirmed - against assessee. Disallowance of weighted deduction on expenditure incurred on rent rate and taxes - Held that - As it is evident that section 35(2AB) excludes from weighted deduction only cost of land and building and not any charges and expenses related to land or building. The repairs rent etc. the expenditure incurred relating to R&D premises cannot form part of cost of land or building. In the absence of any fact that the said claim of the assessee is not the expenditure on rents rates and taxes relating to R&D premises the said expenditure has to form part of weighted deduction as per section 35(2AB) - in favour of assessee. Denial of weighted deduction on the claim as not reported in DSIR certificate thus in the absence of any details submitted no point to interfere with the order of the Commissioner for denial - against assessee. Disallowance of weighted deduction in respect of consulting charges and patent filing charges - Held that - As the consultancy charges had been paid by the assessee in providing technical services regarding the patents obtaining patent information from innovator companies and obtaining innovator samples for R&D purposes thus the payments have been accepted towards research and not towards registering the patents. Therefore these expenditures have been incurred towards research expenses and not towards any patent filing. Explanation to section 35(2AB) specifically provides that the expenditure on scientific research for the purpose of section 35(2AB) shall include filing of application for a patent under The Patent Act 1970 in relation to drugs and pharmaceuticals. Any application for patent foreign country has to be filed in India as per section 7 of The Patent Act 1970 according to patent cooperation treaty. Therefore the said expenditure incurred towards patent filing charges is eligible for weighted deduction under section 35(2AB) - in favour of assessee. The expenditure for registering trade mark in India is a revenue expenditure and not capital expenditure - in favour of assessee. Treatment of expenses paid to the Associated Enterprises - international transaction for registration of Anti National Drug Application (ANDA) in USA - Revenue OR Capital - Held that - As the Department has not disputed the fact that by ANDA registration the assessee has completed the statutory requirement to sell the product in USA market and in the absence of such registration the assessee may not be able to sell its product without hindrance. Considering the above facts it is to be agreed that such expenditure has been incurred by the assessee for the purpose of its business which is to be allowed as revenue expenditure- in favour of assessee.

Issues Involved:
1. Weighted deduction under section 35(2AB)(1) for clinical trials expenses.
2. Weighted deduction for expenses on rent, rates, and taxes.
3. Weighted deduction for claims not reported in DSIR certificate.
4. Treatment of consultancy charges and patent filing charges as research expenditure.
5. Treatment of expenses paid to Trade Mark Attorneys as revenue expenditure.
6. Treatment of expenses for ANDA registration in the USA as revenue expenditure.

Issue-wise Detailed Analysis:

1. Weighted Deduction under Section 35(2AB)(1) for Clinical Trials Expenses:
The primary issue was whether expenses incurred on clinical trials outside the approved R&D facilities qualify for weighted deduction under section 35(2AB). The assessee argued that such trials are integral to the in-house R&D process and are mandated for pharmaceutical research. However, the Assessing Officer (AO) and the Commissioner (Appeals) disallowed the deduction, referencing a Tribunal decision in the assessee's own case for a previous year, which held that only in-house R&D expenses qualify. The Tribunal upheld this view, denying the weighted deduction for clinical trials expenses of Rs. 4,00,32,682.

2. Weighted Deduction for Expenses on Rent, Rates, and Taxes:
The assessee claimed weighted deduction on expenses related to rent, rates, and taxes for R&D facilities. The AO disallowed this based on the DSIR certificate, which did not approve these expenses. The Commissioner (Appeals) upheld this disallowance. However, the Tribunal reversed this decision, noting that section 35(2AB) excludes only the cost of land and buildings, not related expenses. Therefore, the Tribunal allowed the weighted deduction for these expenses amounting to Rs. 62,00,689.

3. Weighted Deduction for Claims Not Reported in DSIR Certificate:
The assessee claimed weighted deduction on R&D expenses not reported in the DSIR certificate, totaling Rs. 1,25,17,261. The AO disallowed this claim, stating that DSIR certification is necessary. The Commissioner (Appeals) upheld this decision. The Tribunal also upheld the disallowance, agreeing that without DSIR certification, the expenses do not qualify for the weighted deduction.

4. Treatment of Consultancy Charges and Patent Filing Charges as Research Expenditure:
The AO disallowed weighted deduction on consultancy charges and patent filing charges, arguing they were not directly related to R&D activities. The Commissioner (Appeals) allowed the deduction, noting these expenses were necessary for R&D projects. The Tribunal upheld the Commissioner (Appeals)'s decision, confirming that consultancy charges of Rs. 8,65,131 and patent filing charges of Rs. 74,38,119 qualify for weighted deduction under section 35(2AB).

5. Treatment of Expenses Paid to Trade Mark Attorneys as Revenue Expenditure:
The AO treated expenses paid to Trade Mark Attorneys as capital expenditure. The Commissioner (Appeals) and the Tribunal both held these expenses as revenue in nature, referencing previous Tribunal decisions in the assessee's favor. Thus, the Tribunal upheld the treatment of Rs. 3,97,373 as revenue expenditure.

6. Treatment of Expenses for ANDA Registration in the USA as Revenue Expenditure:
The AO capitalized expenses incurred for ANDA registration in the USA, treating them as capital expenditure. The Commissioner (Appeals) and the Tribunal held these expenses as revenue in nature, necessary for statutory compliance to sell products in the USA. The Tribunal upheld the Commissioner (Appeals)'s decision, treating Rs. 7,03,927 as revenue expenditure and directing the AO to withdraw the depreciation allowed on this amount.

Conclusion:
The Tribunal's judgment provided a detailed analysis of each issue, considering previous decisions and relevant sections of the Income Tax Act. The decision clarified the scope of weighted deductions under section 35(2AB), particularly emphasizing the necessity of DSIR certification and the exclusion of only land and building costs from weighted deductions. The judgment also reinforced the treatment of certain expenses related to statutory compliance and intellectual property as revenue expenditures.

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