TaxTMI 
TaxTMI 
2023 (8) TMI 1178
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....eave to add, amend, alter and/or modify, withdraw all or any of the foregoing grounds of appeal." 3. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a company and is engaged in the business of manufacturing and trading drugs and pharmaceutical formulations, chemicals, and solvents. For the year under consideration, the assessee filed its return of income on 30/11/2014 declaring a total income of Rs. 13,49,81,938. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. In its return of income, the assessee claimed weighted deduction under section 35(2AB) of the Act of Rs 40,27,49,180 being 200% of revenue expenditure incurred on scientific research amounting to Rs. 19,75,62,590 and 200% of capital expenditure incurred on scientific research amounting to Rs. 38,12,000. In support of the claim made under section 35(2AB) of the Act, the assessee furnished the copy of the order of approval in Form No. 3CM given by the Department of Scientific and Industrial Research ("DSIR") and certificate issued by the Ch....
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.... the Act restricted the allowance of weighted deduction section 35(2AB) of the Act to Rs. 1800.89 lakh as approved by the DSIR and disallowed the unapproved expenditure of Rs. 212.85 lakh for the purpose of weighted deduction section 35(2AB) of the Act. 5. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the disallowance of Rs. 212.85 lakh under section 35(2AB) of the Act. While coming to the aforesaid conclusion, the learned CIT(A) placed reliance upon the decision of the Hon'ble Karnataka High Court in Tejas Networks Ltd v/s DCIT, [2015] 60 Taxmann.com 309. Further, the learned CIT(A) also upheld the conclusion of the AO that the DSIR allowed the claim of the assessee only limited to Rs. 1800.89 lakh and therefore the assessee is entitled to claim weighted deduction section 35(2AB) of the Act only to that extent. The learned CIT(A) further held that the assessee has not placed on record any evidence that it has carried out any R&D activity outside the approved in-house R&D facility and expenditure of Rs. 212.85 lakh was in respect of same. Being aggrieved, the assessee is in appeal before us. 6. We have considered the submission....
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....s deduction under section 35(2AB) of the Act are provided in Sub-Rule (1B), (4), (5A) and 7A of Rule 6 of the Rules. These rules read as follows: "(1B) For the purposes of sub-section (2AB) of section 35, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research."; "(4) The application required to be furnished by a company under sub-section(2AB) of section 35 shall be in Form No.3CK."; "(5A) The prescribed authority shall, if he is satisfied that the conditions provided in this rule and in sub-section (2AB) of section 35 of the Act are fulfilled, pass an order in writing in Form No. 3 CM: Provided that a reasonable opportunity of being heard shall be granted to the company 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; ....
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....n the surmise that the prescribed authority has not approved part of the expenditure in Form No. 3CL, prior to the amendment in 2016. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as under:- "45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. 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 a....
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....isions of section 35(2AB) as well as section 43(4) of the Act and held that if any question arises as to what extent, any activity constitutes or constituted or an asset is or was being used for scientific research, then the AO would be required to refer such question to the Board under section 35(3) of the Act for being referred to the prescribed authority and the decision of the prescribed authority would be final. The relevant findings of the Hon'ble Karnataka High Court, in the aforesaid decision, are as under:- "28. It is in this background, sub-section (4) of Section 43 will have to be considered, which defines as to what activities would constitute "scientific research" as indicated under the said Section namely, Section 43(4). As to whether any expenditure incurred in the acquisition of rights in or arising out of scientific research as indicated in clause (ii) of sub-section (4) of Section 43 is an issue which requires to be examined by the prescribed authority itself and it would not be in the domain of the assessing authority to undertake such an exercise. When Section 35(2AB), Section 35(3) and Section 43(4) of the Act are read harmoniously, the irresistible co....
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....equivalence study for the drugs and pharmaceutical formulations manufactured/traded by the assessee. We find that the Hon'ble Gujarat High Court in CIT v/s Cadila Healthcare Ltd, (2013) 263 CTR 686 (Guj.) held that the benefit under section 35(2AB) of the Act is also available in respect of expenditure on clinical trials outside the approved in-house R&D facility. The relevant findings of the Hon'ble High Court, in the aforesaid decision, are reproduced as under:- "11. Revenue has also suggested following question : "D. Whether the Appellate Tribunal has substantially erred in holding that the expenses incurred outside the approved R&D facility would also get weighted deduction based on the word under "on in house" interpreting contradictorily to the finding of coordinate bench in Concept Pharmaceuticals Ltd. v. ACIT (ITAT, Mum) reported at 43 SOT 423?" 12. We may record that question 'E' in the appeal memo is an additional question which has an element of above noted question. We have, therefore, not separately reproduced the same in this order. The issue is whether the assessee who has incurred expenditure for scientific research, which was not ....
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....nder the Patents Act, 1970 (39 of 1970)." 15. Such explanation thus provides that for the purpose of said clause, i.e. clause (1) of section 35(2AB), expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under the Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970. 16. The whole idea thus appears to be to give encouragement to scientific research. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in-house facility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could be put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on. Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company....
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...., therefore, of the opinion that the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises." 14. Therefore, respectfully following the decision of the Hon'ble Gujarat High Court, we are of the view that the assessee is entitled to claim weighted deduction on expenditure of Rs. 184.95 lakh under section 35(2AB) of the Act in respect of the clinical trial expenses incurred outside the approved in-house R&D facility. As regards, the balance expenditure of Rs. 27.90 lakh, as per the assessee the same was in relation to electricity expenses, which are directly related to the R&D centre at the Goa unit. Thus, we are of the view that the said ex....