2023 (8) TMI 720 - AT - Income Tax

Weighted deduction claimed u/s 35(2AB) - expenditure incurred on bio equivalence and clinical study outside the approved facility - whether the expenditure incurred on scientific research outside the research and development facility as approved by the prescribed authority is eligible for deduction u/s 35(2AB)? - HELD THAT - Since the activities of bio equivalence and clinical study cannot be carried out only in the laboratory of the pharmaceutical company and they have to be necessarily carried out outside the research and development facility. However, the prescribed authority approved this expenditure by incorporating the same in form 3CL. We, therefore, respectfully following the decision of Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT and followed by the Co-ordinate Benches of the Tribunal, consistently, hold the issue in favour of the assessee and direct the learned Assessing Officer to delete the addition made on this account. Decided in favour of assessee. Foreign Tax Credit (FTC) - Claim denied on the ground that Form 67 shall be furnished on or before the due date specified for furnishing of the return of income under section 139(1) of the Act and on furnishing the documents specified in Form 67 - case of the assessee is that rule 128 of the tax rules was introduced w.e.f. 01/04/2017 and since it is a new provision, and first year of implementation, by inadvertence, the assessee missed to file Form 67, but it complied with such a provision immediately - HELD THAT - This issue is no longer res integra and we find that in the case of M/s.42 Hertz Software India Pvt.Ltd. 2022 (3) TMI 834 - ITAT BANGALORE decided an identical issue and held that FTC cannot be denied to the assessee, where the assessee filed FTC in Form 67, although belatedly since filing of such Form 67 is not mandatory but directory in nature. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves two main issues. The first issue is whether the weighted deduction claimed under section 35(2AB) of the Income Tax Act is available for the expenditure incurred on bio equivalence and clinical study outside the approved facility. The second issue pertains to the denial of Foreign Tax Credit (FTC) based on the requirement to furnish Form 67 before the due date specified for filing the return of income.

First Issue - Weighted Deduction under Section 35(2AB):
The assessee contended that the bio equivalence and clinical study expenses incurred outside the approved facility should be eligible for deduction under section 35(2AB) if included in form 3CL to establish their relation to research in the approved facility. The argument was supported by a decision of the Hon'ble High Court of Gujarat in a specific case. The Revenue, on the other hand, argued that only expenditure on scientific research within the approved in-house facility is eligible for deduction under section 35(2AB). The Tribunal examined the issue in light of the legislative provisions and previous judicial decisions. Referring to the decision of the Hon'ble Gujarat High Court, the Tribunal held in favor of the assessee, emphasizing the importance of encouraging scientific research and the broad interpretation of what constitutes scientific research in the context of pharmaceuticals.

Second Issue - Foreign Tax Credit (FTC) and Form 67 Requirement:
The second issue revolved around the denial of FTC due to the failure to file Form 67 before the specified due date. The assessee argued that the requirement to file Form 67 was procedural and did not negate the right to claim FTC. Citing relevant precedents, the Tribunal held that the filing of Form 67 is directory in nature and not mandatory. The Tribunal relied on previous decisions where similar issues were addressed, emphasizing that the delay in filing Form 67 should not result in the denial of FTC to the assessee. Consequently, the Tribunal ruled in favor of the assessee on this issue as well.

In conclusion, the Appellate Tribunal ITAT Hyderabad, in the case involving the assessee and the Revenue, decided in favor of the assessee on both issues. The Tribunal directed the Assessing Officer to delete the addition made concerning the weighted deduction under section 35(2AB) and upheld the assessee's right to claim Foreign Tax Credit despite the delayed filing of Form 67. The judgment was pronounced on July 31, 2023, by the members of the Tribunal.