2015 (9) TMI 994 - AT - Income Tax

Entitlement to Section 80IB(8A) deduction - whether the assessee s sample storage incomes are to be held as derived from the eligible business for granting the impugned deduction or not? - Held that - There is no dispute about the fact that the assessee is in the research and development field duly approved by the competent authority and already held entitled for Section 80 IB (8A) deduction. It enters into Master Service Agreement with its clients for conducting the above stated clinical studies. The same is a comprehensive document for conducting trial and analysis of clinical samples. This agreement contains a specific clause for samples retention in case of pendency of license approval application. We find that such procedures sometimes take years to complete. One of such an instance placed on record reveals that the assessee completed research study in March 2011, its client applied for drug license in USA and the said authority inspected its premises storing samples in question in May 2014. This letter issued by Department of Health and Human Services, Public Health Service, Food & Drug Administration, Silver Suffering, MD 20993 to this effect is dated 01.07.2015. The Revenue fails to rebut this factual position. The case file further reveals that the assessee s clients have to exercise an option of discarding, returning and retention of samples in lieu of paying the impugned storage studies. We put up a specific query to the Revenue as to whether the assessee stores such sample only after concluding clinical studies for its clients or it collects the same from outside as well. The replies received in favour of the first option only. All these discussions lead us to infer that the assessee conducts its clinical study and stores the relevant samples at its client s behest till the license approval is obtained. The same can t be held to be an activity not forming intrinsic part of its clinical studies conducted. Nor its sample storage income is of such a nature which can be held as not derived from the eligible business. The Revenue s argument is accordingly rejected. Thus the assessee s sample storage income is very much derived from its research and development activity only. - Decided against Revenue.

Summary

Issues involved:
Interpretation of Section 80IB(8A) deduction for sample storage income.

Detailed Analysis:

1. Assessing Officer's Disallowance: The Assessing Officer disallowed the deduction claimed under Section 80IB(8A) for sample storage income, characterizing it as miscellaneous income not derived from the eligible business. The AO observed a lack of evidence regarding pending license approvals and argued that the sample storage income did not qualify for the deduction.

2. CIT(A)'s Decision: The CIT(A) accepted the assessee's contentions, emphasizing that the sample storage income was an integral part of the scientific research and development business. The appellant's activities, including bioequivalence and clinical trial studies, necessitated sample storage as per regulatory guidelines until licensing approval. The CIT(A) held that the sample storage income was directly related to the research activities and, therefore, eligible for the Section 80IB(8A) deduction.

3. Appellate Tribunal's Analysis: The Tribunal considered the arguments of both parties and examined the nature of the sample storage income in question. It noted that the assessee's research and development work involved conducting clinical studies and storing samples until license approvals were obtained. The Tribunal found that the sample storage income was an intrinsic part of the research activities and was derived from the eligible business. Drawing a distinction from a previous case law regarding DEPB license sales, the Tribunal concluded that the sample storage income qualified for the deduction under Section 80IB(8A).

4. Judgment and Dismissal of Appeals: The Tribunal dismissed the Revenue's appeals for assessment years 2007-08 and 2008-09, upholding the CIT(A)'s decision to allow the Section 80IB(8A) deduction for the sample storage income. The Tribunal determined that the sample storage activities were integral to the scientific research and development business of the assessee, making the income eligible for the deduction.

In conclusion, the Tribunal's judgment clarified that the sample storage income, being an essential component of the research and development activities conducted by the assessee, qualified for the Section 80IB(8A) deduction. The decision highlighted the direct connection between the sample storage activities and the eligible business, emphasizing the integral nature of such income to the scientific research endeavors of the assessee.