CIT vs. Cadila Healthcare Ltd;(2013) 31 taxman.com 300(Guj)
The assessee carried out scientific research in its facility approved by the prescribed authority. It incurred various expenditure including on clinical trials for developing its pharmaceutical products. These clinical trials were conducted outside the approved laboratory facility. The assesee’s claim for weighted deduction u/s. 35(2AB) of the Income-tax Act, 1961 was rejected by the Assessing Officer on the ground that such expenditure not having been incurred in the approved facility could not form part of the deduction provided u/s. 35(2AB). The Tribunal allowed the assessee’s claim and held that merely because an expenditure was not incurred in the in-house facility, it could not be discarded for the weighted deduction u/s. 35(2AB)
On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:
“i) Section 35(2AB) provides for deduction to a company engaged in business of bio-technology or in the business of manufacture or production of any article or thing notified by the Board towards expenditure of scientific research development facility approved by the prescribed authority. The Explanation to section 35(2AB) (1) 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.
ii) The whole idea 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.
iii) 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. If one gives such restricted meaning to the term expenditure incurred on in house research and development facility, one would on one hand be completely diluting the deduction envisaged u/s.s. (2AB) of section 35 and on the other, making the Explanation quite meaningless.
iv) As noticed earlier that for the purpose of the said clause in relation to drug and pharmaceutical, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the revenue would completely make the Explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an Explanation.
v) Therefore, 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 were incurred outside, by itself would not be sufficient to deny the benefit to the assessee u/s. 35(2AB). It is not as if that the said authority was addressing the issue for deduction u/s. 35(2AB) 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.” Therefore, no question of law arises.”
