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TMI Blog2023 (1) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides and have perused the record. From perusal of paragraph 9 of the order passed by the Tribunal, it is evident that the Tribunal has allowed the deduction in respect of expenses incurred by the assessee on scientific research on inhouse research and development facility by placing reliance on the decision of the Gujarat High Court. It is pertinent to mention here that against the aforesaid decision, the revenue preferred special leave petition and the Supreme Court, by order dated 13.10.2015 in SLP No.770/2015 has remitted the matter to the High Court for consideration afresh along with other issues. Since the Tribunal has neither recorded any reasons nor has recorded any findings on the claim of the assessee, we are left with no option but to quash the order of the Tribunal dated 16.02.2016 insofar it pertains to claim of deduction of assessee under Section 35(2)(AB) of the Act and remit the matter to the Tribunal for decision afresh in accordance with law after affording an opportunity of hearing to the parties. Therefore, it is not necessary for us to answer the substantial question of law. 4. In the light of the above directions of the Hon ble High Court, the appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89176870 6. The AO was of the view that the 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. The assessee submitted before the AO that outsourced agencies are approved clinical trial facilities who provide services in connection with the in-house research conducted by the assessee to ensure availability of safe, effective and affordable medicines. The assessee further submitted that there is no restriction provided in section 35(2AB) with respect to outsourcing the clinical trial since the words used in the said section are on in-house research and development facility . The assessee relied on the decision of the Hyderabad Bench of the Tribunal in the case of DCIT vs Bharat Biotech International Ltd in ITA No.1150 1151/Hyd/2014 dated 15.10.2014. 7. The AO however did not accept the submissions of the assessee and held that Section 35(2AB) is concerned only about in-house R D facility. Weighted deduction u/s 35(2AB) has been provided to give incentive for in-house R D facility and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nceptually and semantically linked not to patent application or regulatory approval expenditure mentioned in the explanation, but to the core idea of in-house research development facility mentioned in the main provision i.e. sub-section (1) of Sec. 3 5(2AB). 5.3 The above linkage is also evident from the language of the Auditor's certificate required under the section. The certificate format states that it is further certified that the expenditure do not include the following (original emphasis). (i) Expenditure on outsourced R D activities (ix) Clinical trial activities carried out outside the approved facilities. The certification requirement as above emphasises the fact that outsourced R D activities and clinical trials conducted outside approved facilities are not within the scope of expenditure expected to be covered u/s. 3 5(2AB). To read a broader scope into the language of the explanation would defeat the very purpose of the deduction, which is to encourage setting up of R D facilities of the highest quality with government approval for conducting research in the interest of the country. It is notable that the process for claiming deduction star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant. As stated earlier, the expenditure also does not qualify that it should be incurred only in the in-house facility of the Appellant. In the circumstances, the claim that the expenditure on clinical trial incurred outside the approved facility of the Appellant is also eligible for weighted deduction. In this connection, we rely on the following judgments: 1) DCIT vs. Bharat Biotech International Ltd (ITA No.1150 1151/Hyd/2014 dt. 15.10.2014) Paper Book at Page Nos.89 98. 2) DCIT vs. Aurobindo Pharma Ltd (ITA No.1604 1605/Hyd/2016 dt. 20.08.2018) 3) Intas Pharmaceuticals Ltd vs. DCIT (807 to 809/Ahd/2010 20/Ahd/2011 dt. 14.08.2015) Paper Book at Page Nos.99-124. 4) Intas Pharmaceuticals Ltd vs. DCIT (Guj High Court) - Paper Book at Page Nos.97-98. 5) ACIT vs. Torrent Pharmaceuticals Ltd (ITA No.3569/Ahd/2004 dt. 13.11.2009) 6) Apollo Tyres Ltd vs. ACIT (2017) 88 taxmann.com 656 (Cochin-Trib) 7) USV Ltd vs. ACIT (ITA No.6747/Mum/2012 4248/Mum/2013 dt 20.02.2015). No doubt, in the case of Intas Pharmaceuticals Ltd, Apollo Tyres Ltd, the judgment of the Gujarat High Court in Cadila has been referred to. The Tribunal in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R D an attractive proposition. It is a settled principle that once the eligibility conditions for the claim of deduction is satisfied on a strict interpretation, the provision has to be interpreted liberally with regard to other conditions so as to advance the purpose and not frustrate the same. [ Ramnath Co v CIT [2020] 116 taxmann.com 885 (SC)] In the present case, the eligibility to claim deduction under section 35(2AB) is not in dispute with the approval granted by the DSIR. Thus, clinical trial expenses incurred where ever, for the benefit of in-house R D facility should be allowed a weighted deduction. 12. The ld DR submitted that though the assessee has claimed a total expenditure of Rs19.39 Cr (150%) on R D in Form 3CL, the expenditure certified by DSIR as having been spent on in-house facility is only 4.01 Cr which does not include clinical trials conducted by external agencies to the tune of Rs 8.91 Cr which is specifically mentioned in Form 3CL report that Rs 8.91 is spent on clinical trial conducted outside the approved facility not included in the above. The ld DR further submitted that the assessee s reliance of on the decision of Gujarat HC in the case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to encourage research and development in India. According to the ld. DR, now, if the intent of the Act was to allow the assessee deduction under section 35(2AB) for expenses incurred on clinical trials with respect to facilities belonging to third parties, the Act would have specifically mentioned either in the section or by way of an explanation other such facility approved by prescribed authority . In absence of such a phase in the section, one cannot give a liberal interpretation that in-house facility includes those approved facilities of other assessee's as well. 16. The alternate contention of the ld DR is construing that expenses incurred outside approved facility of the assessee as eligible for weighted deduction u/s.35(2AB) would have other problems. The assessee would be getting clinical trials done in other approved facilities. Now, the assessee would be making payments to these entities whose clinical trial facilities are being used by the assessee. As such, these entities are required to reduce any amount received by way of income from R D activities out of its eligible facilities from the total expenses under section 35(2AB). This shall not be a be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, the AO has to refer the matter to the Central Board of Direct Taxes (CBDT), which in turn, will refer the question to the prescribed authority. The decision of the prescribed authority would be final. 18. The Hon'ble Court has further stated that as per Rule 6(1B) of the Rules, it would be clear that the prescribed authority for the purpose of Section 35(2AB) is the Secretary, DSIR. The prescribed authority would examine the claim for grant of approval under Section 35(2AB) of the Act. On reference to the facts of the present case, it indicates that the application had been filed by the taxpayer with the DSIR for the benefit of Section 35(2AB) of the Act and after calling for documents/information from the taxpayer, and on examination and scrutiny of such documents/information furnished by the taxpayer, the DSIR had granted order of approval in favour of the taxpayer. Further, perusal of Section 35(3) of the Act indicates that where the AO does not accept the claim of the taxpayer made under Section 35(2AB) of the Act. the AO has to refer the matter to the CBDT. which in turn will refer the question to the prescribed authority. The decision of the prescribed authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of an ambiguity in its interpretation should go to the Revenue. The Hon'ble Court held that the 'principles of liberalism for interpreting an 'Incentive based deduction provision' is not a 'sound statement of law ; rather, such a provision must be interpreted `strictly' and any ambiguity in interpretation of such a provision would be tipped in favour of the Revenue. Though the issue involved in the case of Ramnath Co ( Supra) was section 80, nonetheless the following observations of the Hon'ble Supreme Court on the issue of interpretation of statute is relevant for the instant case:- (i) While accepting that section 80-0 was an incentive provision, with an objective of earning foreign exchange by imparting technical know-how or furnishing the information concerning industrial, commercial, scientific knowledge, or rendering of technical or professional services to foreign countries, the Hon'ble Supreme Court, nevertheless, held that this deduction provision ought to be interpreted strictly; the burden of proving its applicability was on the assessee and in case of ambiguity, the benefit thereof cannot be claimed by the assessee, rather it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Section 35(2AB) are liable to be allowed. The learned DR was not correct in inferring that the said expenditure was not liable to be allowed especially quantification of relief was not required to be done by the prescribed authority prior to the amendment to Rule 6(7A)(b) with effect from 01.07.2016. 25. The ld. AR further submitted that there was no quarrel with the revenue s proposition relying on the judgment of the Karnataka High Court referred to supra for the proposition that the amount provided in the report of the prescribed authority cannot be disturbed by anybody including the Department authority. In the case of the assessee, the expenditure incurred under in-house facility towards research and also the clinical trial expenses outside the approved facility of the assessee are recorded. As stated earlier, there is no ineligibility of the expenses recorded by the prescribed authority since the allowance of expenditure is not in their forte before 01.07.2016. Accordingly, the ratio of the High Court of Karnataka referred is not relevant to the issue before the Tribunal in the case of the assessee. The learned DR had made a reference to Section 35(2AB) read with Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Hon ble Supreme Court has also referred to the judgment of its own in the case of Wood Papers Ltd (1991) 83 STC 251 (SC). The principle laid down in Dilip Kumar and Co (supra) was taken note of by Supreme Court in Ramnath And Co (supra). 27. Thus, the ld. AR submitted that in order to decide the exemption or deduction to be provided strict interpretation is required to be done and once the eligible deduction is decided in favour of such person who claims the deduction, it should be construed liberally with regard to other requirements which may be formal or directory in nature. In the case of the Appellant, the eligibility of deduction is not under dispute and once the eligibility is decided, quantification has to be decided in accordance with the provisions of the Act and the prescribed authority has no jurisdiction to decide the quantification of the deduction until the Rule stood amended with effect from 01.07.2016. The prescribed authority is required to certify the expenses incurred under various categories for consideration of quantification. This is precisely what has been done in Form 3CL in the case of the Appellant and also in the other cases referred to by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1988. It is worthwhile noticing that while expenditure on scientific research whether done in house or outsourced were eligible to deduction of 100% of the expenditure prior to 1.4.1988 u/s.35(1) of the Act, the legislature thought it fit to give more benefits for in house scientific research and preferred to give a weighted deduction of 150% of the expenditure on scientific research. The statement of objects and reasons for introduction of the aforesaid provisions makes this purpose evident and it reads thus: Weighted deduction in respect of expenditure on in-house R D Under section 35 of the Income-tax Act, certain deductions are allowed in respect of expenditure on scientific research. The Bill proposes to introduce a new sub-section(2AB) to allow a company, a deduction of a sum equal to 1-1/4th times the sum paid on any expenditure incurred by a company on scientific research including an expenditure of capital nature related to the business. This deduction will be available to the companies having in-house Research Development facility approved for the purpose of this section by the prescribed authority and engaged in the business of manufacture or production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely:- (a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature; (b) The prescribed. authority shall submit its report in relation to the approval of inhouse Research and Development facility in Form No. 3CL to the Director General (Income Tax Exemptions) within sixty days of its granting approval; (c) The company shall maintain a separate account for each approved facility; which shall be audited annually and a copy thereof shall be furnished to the Secretary, Department of Scientific and Industrial Research by 31st day of October of each succeeding year; Explanation:-For the purposes of this sub-rule the expression audited means the audit of accounts by an accountant, as defined in the Explanation below sub-section (2) of section 288 of the Incometax Act, 1961. (d) Assets acquired in respect of development of scientific research and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. Clinical trial activities carried out outside the approved facilities. xi. Contract research expenses duly certified by chartered accountant. xii. Expenditure on any payments made to members of the board of Directors or any other part time employees working for R D. Signature Seal of the Statutory Auditor Date : Place: 33. The auditor is required to specifically certify in terms of clause (i) and (x) that the expenditure claimed does not include expenditure on outsourced Research and development and clinical trial activities carried out outside the approved facilities. It is the stand of the revenue that even though the term in house scientific research has not been defined in the Act for the purpose of sec.35(2AB), the natural meaning of the term in-house coupled with intrinsic evidence available in the form of the Rules and the form of certificate of auditor is sufficient to hold that expenditure on outsourced research and development and clinical trials carried out outside the approved facility will not be entitled to weighted deduction u/s.35(2AB) of the Act but will be entitled to only 100% deduction in terms of Sec.35(1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s case, there is no dispute that the assessee has fulfilled all the conditions for the purpose of section 35(2AB). This fact has been accepted by the revenue which is evidenced by the AO s order of assessment where he has allowed the deduction towards the impugned amount @ 100% as against the 150% claimed by the assessee. Therefore the issue for consideration is limited to whether the expenditure incurred on clinical trials which were conducted by the external agencies is eligible for weighted deduction u/s.35(2AB) or only 100% as allowed by the AO. In other words the issue before us is limited to whether weighted deduction u/s.35(2AB) is available to expenses incurred towards clinical trials conducted not in the in-house approved facility but outside approved facilities. We notice that the Ahmadabad Bench of the Tribunal in the case of Cadila Healthcare Ltd vs ACIT [2012] 21 taxmann.com 483 (Ahd.) has considered a similar issue and held that 4.5 We have heard both the side and carefully perused the law applicable in the light of the compilation filed and explanation tendered. For the promotion of scientific research so as to give a boost to such activity the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lass;' 4.7 In the background of these two applicable provisions, we have noticed that the A.O.'s main concern was that when the law prescribes research to be done in-house then the weighted deduction should be allowed to that extent only. According to him as per settled proposition of law no word is superfluously used in a Statute book. Because of this main reason of disallowance, we have examined the term in-house which can be termed, in the present context, that by utilizing the staff of an organization or by utilization of resources of the organization if a research is conducted within the organization; rather than utilization of external resources or staff; then it can be called as in-house research. To further elaborate; say for an example a ship is built in-house in a dockyard does not mean that all the component have to be made within the four-walls of a ship-yard. An in-house job is that when a job is done within the organization and not by any other organization. The Corporates thus depend upon their own Research Development to be an inside-job . To innovate new products such Corporates feel that inside-job is more dependable. Therefore, an internal research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the datas so collected by them is to be brought into the in-house research facility and on the basis of those collected datas or clinical trials carried out the team of experts thereafter arrived at a result. Therefore, for the purpose of conducting scientific research the requirement is that in-house research and development facility is to be created or established by an organization. Even by the introduction of Explanation the scope of expenditure on scientific research was defined which is required to be in relation to drug and pharmaceutical and thus include expenditure incurred on clinical drug trial. In the compilation, the assessee has placed several approvals through which the Directorate General of Health Services has accepted the bioequivalence report of the studies in respect of new drugs form the assessee's laboratory. One of the approval is from The Drug Controller General (India). Like wise, Directorate General of Health Services (Drug trial section), Nirman Bhavan, New Delhi has informed that the said Directorate continued to accept the protocols and the report of the studies conducted by the assessee's laboratory. Before us, there was a recognition of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the certificate of the auditor wherein the auditor has certified the said amount to be not part of expenses eligible for weighted deduction u/s.35(2AB) and therefore the disallowance made by the AO is justified. 39. The provisions of Sec.35(2AB) of the Act contemplate approval by the prescribed authority of the in house Scientific Research facility but not the quantum of expenditure. After 1.4.2016, the law has been amended to the effect that even the quantum of expenditure on in house Scientific Research has to be certified by the prescribed authority. The question is whether prior to 1.4.2016, expenditure incurred on in house scientific research where part of the expenditure includes payment to external agencies for conducting research which is necessary and linked to the in house Scientific Research , should also be entitled to weighted deduction u/s.35(2AB) or only 100% deduction u/s.35(1) of the Act. 40. The contention of the ld AR is that prior to the amendment with effect from 1.7.2016, the prescribed authorities were not required to quantify the amount eligible for weighted deduction u/s.35(2AB) and that form No.3CL is only a report in the form of intimation re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act. The issue which is raised before us relates to pre-amended provisions and question is where the facility has been approved by the prescribed authority, can the deduction be denied to the assessee under section 35(2AB) of the Act for non issue of form No.3CL by the said prescribed authority or the power is with the Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction under section 35(2AB) of the Act. The first issue which arises is the recognition of facility by the prescribed authority as provided in section 35(2AB) of the Act. ..The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ahmedbad Bench of the Tribunal in the case of Sun Pharmaceutical Industries Ltd. v. Pr.CIT [2017] 77 taxmann.com 202/162 ITD 484 as approved by the Hon'ble Gujarat High Court vide its decision reported at 250 taxmann 270, it has been held that the objective of Form 3CL is limited to the forwarding of the intimation of the approval of the unit; that Form No. 3CL is a mere report for intimation of approval of R D facility. In this regard, as rightly pointed out, such aspect stands confirmed by sub-rule (7A) of Rule 6 of Income Tax Rules, as within subsisting (now amended w.e.f. 01.07.2016), to provide for quantification of expenditure as well. The Finance Act, 2015 as amended to sub section (3) of section 35 w.e.f. 01.04.2016, providing for furnishing of reports in the manner to be prescribed. It is, thus, w.e.f. 01.04.2016 that the provision has been made for approval of quantum of expenditure, for the first time. 42. Similar view is held by the Mumbai Bench of the Tribunal in the case of Omni Active Health Technologies Ltd. v. ACIT [2020] 117 taxmann.com 229 (Mumbai - Trib.) held that Once in-house R D facility is recognized by prescribed authority, role of Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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