TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 712
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....0. The AO has made additions towards weighted deduction claimed u/s.35(2AB) and also enhanced the disallowance made towards expenses on earning exempt income u/s.14A r.w.r. 8D. On further appeal, the CIT(Appeals) by order dated 18.9.2013 partly allowed the appeal whereby the enhanced disallowance u/s.14A was deleted and the addition towards weighted deduction claimed u/s.35(2AB) was sustained. Aggrieved the assessee filed appeal before the Tribunal and vide order dated 16.9.2016 the Tribunal set aside the order of the CIT(A) by relying on the decision of the Hon'ble Gujarat High Court in the case of CIT vs Cadila Healthcare Ltd 214 Taxmann 672 disallowance of expenditure. 3. The revenue preferred appeal before the Hon'ble High Court of Karnataka. The High Court has remitted the matter back to the Tribunal with the following observations :- "5. We have considered the submissions made on both 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....
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.... LIMITED -AHMEDABAD 6203250 MANIPAL ACUNOVA LTD -MANIPAL RELIANCE LIFE SCIENCES PVT LTD-MUMBAI 1560520 SEMLER RESEARCH CENTER PVT LTD-BANGALORE 1582600 TRIDENT LIFE SCIENCES LTD-HYDERABAD 5818375 TOTAL 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 sub....
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....on and obtaining approval of any regulatory authority. All the three are clearly different in nature and are not linked by any generic identify. In this context, clinical drug trials are to be conceptually 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 setti....
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.... and development facility belonged to the Appellant as approved. There is no bar even under Section 35(2AB) for such facility as approved even if it is not owned by the Appellant. 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 ....
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....ines, at para 1, recognise the fact that section 35(2AB) was introduced in order to encourage R&D initiatives by the Industry and to make 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....
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....ion under section 35(2AB) at the rate of 200%/150% of the expense incurred. This is a beneficial provision for the benefit of the 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 i....
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....ction 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 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 matt....
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.... the Supreme Court has taken the view that a beneficial provision has to be interpreted 'strictly' and the benefit 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 applicabil....
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....orrectness of the same, had quantified as above. Thus, the clinical trial expenses by virtue of Explanation 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 Tri....
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....in (2020) 425 ITR 337 (SC) supports the claim of the Appellant rather than the Revenue's interpretation. 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 ha....
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.... Sec.35(2AB) were introduced by the Finance Act, 1997 w.e.f. 1.4.1988. 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....
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....before rejecting an application. "(7A) 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....
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....d 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. 34. The learned DR submitted that on a plain readin....
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....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'ble Law makers have introduced this section. Further conside....
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....ns, 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 is distinguishable from external research. For doing internal re....
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....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 renewal of scientific and Industrial research issued by the Government....
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....mount 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 regarding approval of in-house R&D facility to be sent from prescribed authority&....
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....d 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 / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Offi....
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....axmann.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 Assessing Officer is to allow expenditure incurred on in- house R&D facility as weighted deduction under section 35....