2018 (7) TMI 1867 - AT - Income Tax

Weighted deduction u/s 35(2AB) on the clinical trials conducted outside the in-house R & D facility - claim disallowed by A.O. on the reason that the same was not certified by Prescribed Authority (DSIR) in Form 3CL - Held that - In the decision of Concept Pharmaceuticals Ltd 2010 (11) TMI 147 - ITAT, MUMBAI the Coordinate Bench did not allow the expenditure spent outside the R & D unit but the Bench has not considered the explanation introduced with reference to Clinical Trials . By very nature, the Clinical Trials cannot alone be done within research facility as they require cooperation from the Medical Doctors, Hospitals, Volunteers and patients, therefore such expenditure has to be necessarily spent outside the facility, but for the purpose of in-house research. This issue was examined by the Coordinate Bench which was subject matter of appeal before the Gujarat High Court and Gujarat High Court in CADILA HEALTHCARE LTD 2013 (3) TMI 539 - GUJARAT HIGH COURT has approved the same. As seen from the order of the Supreme Court 2015 (11) TMI 496 - SUPREME COURT the grievance of Revenue with reference to non-framing of three questions were considered as those three questions are considered to be substantial question of law and referred to the Hon ble High Court to hear the aforesaid three questions of law. However, the judgment already passed by the Gujarat High Court has not been set-aside. As Ld. CIT(A) has followed the Coordinate Bench decision, which was approved by the Gujarat High Court and as no contrary High Court judgment has been placed on record, we approve the order of the CIT (A) and reject the Revenue contentions. - Decided in favour of assessee.

Issues Involved:
1. Weighted deduction under Section 35(2AB) for clinical trials conducted outside the 'in-house R&D facility'.
2. Consideration of the Gujarat High Court decision in the case of Cadila Healthcare Ltd.
3. Inclusion of Rates & Taxes and Travelling Expenses in the weighted deduction.
4. Methodology and quantification of disallowed expenditure.
5. Legal precedents and their applicability.

Issue-wise Detailed Analysis:

1. Weighted Deduction under Section 35(2AB) for Clinical Trials Conducted Outside the 'In-house R&D Facility':
The primary issue in these appeals is whether the weighted deduction under Section 35(2AB) of the Income Tax Act, 1961, is allowable for clinical trials conducted outside the 'in-house R&D facility'. The Assessing Officer (A.O.) disallowed the weighted deduction claimed by the assessee for expenditures on Bio Analytical and Bio Equivalence studies conducted outside the in-house R&D facility, as these were not certified by the Prescribed Authority (DSIR) in Form 3CL. The CIT(A) allowed the deduction, relying on the Gujarat High Court decision in the case of Cadila Healthcare Ltd, which held that merely because the prescribed authority segregated the expenditure into two parts, it would not be sufficient to deny the benefit under Section 35(2AB).

2. Consideration of the Gujarat High Court Decision in the Case of Cadila Healthcare Ltd:
The CIT(A) relied on the decision of the Gujarat High Court in Cadila Healthcare Ltd., which supported the view that expenditures on clinical trials outside the in-house R&D facility are eligible for weighted deduction under Section 35(2AB). The Revenue argued that this decision had not reached finality as the Apex Court had remitted the issue back to the Gujarat High Court for fresh adjudication. However, it was noted that the Supreme Court had not set aside the judgment already given by the Gujarat High Court.

3. Inclusion of Rates & Taxes and Travelling Expenses in the Weighted Deduction:
The CIT(A) also allowed the inclusion of Rates & Taxes and Travelling Expenses in the weighted deduction, which were incurred in connection with clinical drug trials conducted outside the in-house R&D facility. The CIT(A) referred to judicial pronouncements, including the case of Intas Pharmaceuticals Ltd v. DCIT, which supported the inclusion of such expenses as part of the R&D expenditure eligible for weighted deduction.

4. Methodology and Quantification of Disallowed Expenditure:
The A.O. disallowed the excess weighted deduction claimed by the assessee for the years under consideration, amounting to ?26,32,50,000/- for A.Y. 2011-12 and ?34,00,02,000/- for A.Y. 2012-13. The CIT(A) noted that the assessee did not dispute the methodology and quantification of the disallowed amount but argued that the expenditure on Bio Equivalence Studies and other expenses were integral to the in-house R&D activities and should be eligible for weighted deduction.

5. Legal Precedents and Their Applicability:
The CIT(A) and the Tribunal considered various legal precedents, including the Gujarat High Court decision in Cadila Healthcare Ltd., the ITAT Ahmedabad decision in Intas Pharmaceuticals Ltd v. DCIT, and others. The Tribunal noted that the decision of Concept Pharmaceuticals Ltd, which did not allow the weighted deduction for expenditures outside the R&D unit, had not considered the explanation introduced with reference to 'Clinical Trials'. The Tribunal upheld the CIT(A)'s decision, stating that clinical trials, by their nature, require cooperation from external entities and thus, expenditures incurred outside the facility should be considered for the purpose of 'in-house' research.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decision to allow the weighted deduction under Section 35(2AB) for clinical trials conducted outside the in-house R&D facility, including Rates & Taxes and Travelling Expenses. The Tribunal relied on the Gujarat High Court decision in Cadila Healthcare Ltd., and other judicial pronouncements, and noted that the Supreme Court had not set aside the Gujarat High Court's judgment. The decision emphasized that expenditures on clinical trials necessary for product development should be eligible for weighted deduction, irrespective of whether they were incurred within or outside the in-house R&D facility.

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