2023 (1) TMI 712 - AT - Income Tax

Weighted deduction u/s.35(2AB) - research development expenses incurred on laboratory Clinical Trial - As per AO expenses towards clinical trial conducted outside the approved facility is not included in the amount of cost of in-house Research Facilities and that weighted deduction u/s.35(2AB) is available only for in-house R D facility - CIT(A) upheld the disallowance of weighted deduction that the expenditure incurred on outsourced R D activities is not eligible for weighted deduction - HELD THAT - The entire amount is incurred towards outsourced clinical trial activities and considering the facts of the present case in our view the impugned issue in assessee s is covered by the decision in the case of Cadila Healthcare Ltd 2012 (6) TMI 13 - ITAT AHMEDABAD . Accordingly the expenses incurred towards clinical trial conducted outside the approved facilities would be eligible for weighted deduction u/s.35(2AB). Amount as mentioned separately in Form 3CL is not eligible for weighted deduction - The various benches of the Tribunal have been taking a view that prior to amendment introduced w.e.f. 01/07/2016, the deduction u/s 35(2AB) of the Act would be available to an assessee having an approved in-house R D facility by the prescribed Authority Act and that Form 3CL is only an intimation sent to the department that the facility is approved that is eligible for weighted deduction towards expenditure incurred on scientific research. Prior to 1.7.2016 there is no requirement by DSIR to certify the amount eligible for weighted deduction and the assessee cannot be denied the weighted deduction for the reason that the amount claimed is more than what is mentioned in Form 3CL. There can be merit in revenue s contention that the reason behind the requirement for the auditor to certify that the amount for the purpose of section 35(2AB) does not include expenses towards clinical trial conducted outside the approved facility mentioned in Form 3CL separately is that the said amount is not eligible for weighted deduction u/s.35(2AB). However based on the binding effect of the various judicial rulings discussed herein above we are inclined to take a view that prior to 1.7.2016 Form 3CL does not certify the amount of deduction and therefore the same cannot be the reason for restricting the amount eligible for weighted deduction. We see merit in the alternate submissions of the ld AR and accordingly we are of the considered view that the amount as mentioned in Form 3CL as expenses incurred towards clinical research outside facility would also be eligible for weighted deduction u/s.35(2AB) on this count also. Accordingly the disallowance made in this regard is deleted.

Summary

Issues Involved:
1. Eligibility of weighted deduction under Section 35(2AB) for expenses on clinical trials conducted outside the approved in-house R&D facility.
2. Interpretation of the term "in-house" in Section 35(2AB).
3. Validity of Form 3CL issued by the Department of Scientific and Industrial Research (DSIR) for quantifying eligible expenses.
4. Jurisdiction of the Assessing Officer (AO) versus DSIR in determining eligible R&D expenses.

Detailed Analysis:

1. Eligibility of Weighted Deduction under Section 35(2AB) for Expenses on Clinical Trials Conducted Outside the Approved In-House R&D Facility:
The core issue was whether expenses on clinical trials conducted by external agencies outside the approved in-house R&D facility are eligible for weighted deduction under Section 35(2AB). The AO had disallowed the weighted deduction for these expenses, allowing only a 100% deduction under Section 35(1). The CIT(A) upheld this disallowance, interpreting that Section 35(2AB) intended to incentivize only in-house R&D activities. The Tribunal, however, referenced the Cadila Healthcare Ltd. case, which held that clinical trials, even when conducted outside the approved facility, are integral to scientific research and thus eligible for weighted deduction under Section 35(2AB).

2. Interpretation of the Term "In-House" in Section 35(2AB):
The Tribunal examined the term "in-house" and concluded that it does not strictly confine the research activities within the physical premises of the company. The Tribunal interpreted that the term "on in-house research and development facility" allows for some external activities, such as clinical trials, as long as they are an integral part of the in-house R&D process. This interpretation was supported by the Explanation to Section 35(2AB), which includes clinical trials as part of scientific research.

3. Validity of Form 3CL Issued by DSIR for Quantifying Eligible Expenses:
The DSIR's Form 3CL, which quantifies eligible R&D expenses, was another point of contention. The AO and CIT(A) relied on this form to disallow the expenses on clinical trials conducted outside the approved facility. The Tribunal noted that prior to the amendment effective from 1.7.2016, Form 3CL did not quantify the eligible expenses but was merely an intimation of approval. Various Tribunal decisions, including Cummins India Ltd. and Force Motors, supported the view that the quantification requirement by DSIR was introduced only after the amendment and should not affect claims for periods before this date.

4. Jurisdiction of the Assessing Officer (AO) versus DSIR in Determining Eligible R&D Expenses:
The Tribunal referenced the Karnataka High Court's decision in Tejas Networks Ltd., which held that the AO cannot scrutinize the DSIR's certification of R&D expenses. The prescribed authority (DSIR) has the final say in certifying the R&D expenses, and the AO must accept this certification. This principle further supported the Tribunal's decision to allow the weighted deduction for clinical trial expenses, as certified by DSIR in Form 3CL.

Conclusion:
The Tribunal allowed the appeal, ruling that the expenses on clinical trials conducted outside the approved in-house R&D facility are eligible for weighted deduction under Section 35(2AB). The Tribunal emphasized that prior to the amendment effective from 1.7.2016, DSIR's Form 3CL did not quantify eligible expenses, and the AO must accept the DSIR's certification. The Tribunal's interpretation of "in-house" and reliance on judicial precedents underscored the broader scope of Section 35(2AB) to include necessary external activities integral to the R&D process.