2013 (3) TMI 539 - HC - Income Tax

Deduction u/s 35(2AB) - Expenses incurred outside the approved R&D facility - whether would get weighted deduction based on the word under on in house - whether the assessee who has incurred expenditure for scientific research, which was not in the in-house facility, could be covered for deduction under section 35(2AB)? - Held that - The assessee carried out scientific research in its facility approved by the prescribed authority. It incurred various expenditure including on clinical trials for developing its pharmaceutical products. These clinical trials were conducted outside the approved laboratory facility. The Tribunal observed that the term in-house used in section 35(2AB) must be viewed in the context of which it has been used. If by utilizing the staff or resources of an organization, research is conducted within the organization rather than through utilization of external use of resources or staff, it can be stated to be an in-house research. The Tribunal committed no error. The Explanation to section 35(2AB)(1) provides that for the purpose of said clause, i.e. clause (1) of section 35(2AB), expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority and filing an application for a patent under the Patents Act, 1970. The whole idea thus appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the Revenue would completely make the explanation quite meaningless. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. In favour of assessee.

Issues Involved:
1. Nature of legal and professional expenses.
2. Eligibility for deduction under section 80IC.
3. Determination of fair market value of goods under section 80IA(8).
4. Disallowance expenditure under section 14A.
5. Nature of product registration expenses.
6. Nature of trademark and patent registration fees.
7. Weighted deduction for expenses incurred outside approved R&D facility under section 35(2AB).

Issue-wise Detailed Analysis:

1. Nature of Legal and Professional Expenses:
The court examined whether the Appellate Tribunal erred in holding that the legal and professional expenses incurred were for the expansion or extension of an existing business and not capital in nature. The assessee incurred expenses on expert opinion for manufacturing different pharma products in Uttaranchal state. The Tribunal concluded that these expenses were for the expansion of the existing business and not for acquiring new assets, thus treating them as revenue expenses.

2. Eligibility for Deduction under Section 80IC:
The court addressed whether the Appellate Tribunal erred in holding that the assessee is eligible for deduction under section 80IC on the entire profit of 86%, including the profit already earned (80%) from marketing the same products after purchase from P2P manufacture. The Tribunal found that the increase in profit was only 6% after manufacturing at the Baddi Unit, yet held the entire profit eligible for deduction.

3. Determination of Fair Market Value of Goods under Section 80IA(8):
The court considered whether the Appellate Tribunal erred in holding that the Assessing Officer has no right to determine the fair market value of goods when there is no inter-corporate transfer of goods, despite the provisions of section 80IA(8), which apply to intra-corporate transfer of goods from eligible to non-eligible business of the assessee. The Tribunal's stance was that the Assessing Officer's determination was not applicable in this context.

4. Disallowance Expenditure under Section 14A:
The court examined whether the Appellate Tribunal erred in deleting the addition of Rs.1,18,84,177/- quantified as disallowance expenditure under section 14A, despite the specific provisions of clause (f) of Explanation-I to 115JB. The Tribunal found that the disallowance was not justified under the given provisions.

5. Nature of Product Registration Expenses:
The court reviewed whether the Appellate Tribunal erred in holding that product registration expenses are revenue in nature, given that these expenses to Drug Regulatory Authorities in various countries provide an enduring benefit of exporting registered drugs for many years. The Tribunal held that these expenses were necessary for running the existing business smoothly and did not result in acquiring new tangible or intangible assets.

6. Nature of Trademark and Patent Registration Fees:
The court considered whether the Appellate Tribunal erred in holding that trademark registration fees and patent fees are revenue expenses, despite these being for the registration of trademarks and patents, which are intangible assets under section 32(1)(ii) of the Act. The Tribunal concluded that these expenses were for protecting the results of the assessee's research and did not equate to acquiring new assets. The Supreme Court's decision in 20 ITR 475 supported this view, indicating that registration fees are not capital expenditures.

7. Weighted Deduction for Expenses Incurred Outside Approved R&D Facility under Section 35(2AB):
The court examined whether the Appellate Tribunal erred in holding that expenses incurred outside the approved R&D facility would also get weighted deduction. The Tribunal interpreted the term 'in-house' in section 35(2AB) to include research conducted within the organization using its staff and resources, even if some activities occurred outside the approved facility. The Tribunal's interpretation aimed to encourage scientific research, including clinical trials and obtaining regulatory approvals, which may not always be confined to in-house facilities. The Tribunal rejected the Revenue's contention that only in-house expenses qualify for the deduction, emphasizing the broader legislative intent to support scientific research in the pharmaceutical industry.

← Previous Next →