Gujarat High Court
The Principal Commissioner Of ... vs M/S Sun Pharmaceuticals Industries ... on 25 February, 2020
Author: Bhargav D. Karia
Bench: J.B.Pardiwala, Bhargav D. Karia
C/TAXAP/92/2020 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 92 of 2020
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THE PRINCIPAL COMMISSIONER OF INCOME-TAX, VADODARA-2
Versus
M/S SUN PHARMACEUTICALS INDUSTRIES LTD.
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Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
MR SN SOPARKAR SENIOR ADVOCATE WITH MR B S SOPARKAR(6851)
for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 25/02/2020
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1 This appeal is filed under Section 260A of the Income Tax Act, 1961 at the instance of the Revenue and is directed against the order of the Income Tax Appellate Tribunal, Ahmedabad dated 20th June 2019 passed in ITA No.1689/Ahd/2015 for A.Y. 200809.
2 The Revenue has proposed the following questions of law as substantial questions of law for the consideration of this Court:
"2(a) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in no setting aside the finding of CIT(A) on the issue of disallowance of R&D expenditure after excluding export turnover for the purpose of computing allocation of R&D expenses and also in not upholding the disallowance of weighted deduction u/s. 35(2AB) on revenue expenditure made by the A.O.?Page 1 of 4 Downloaded on : Mon Jun 15 11:20:54 IST 2020
C/TAXAP/92/2020 ORDER
(b) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in directing the Assessing Officer to allow the assessee weighted deduction u/s 35(2AB) of clinical trial expenses incurred outside the approved facility?"
2 So far as question No.2(a) is concerned, similar question is not admitted by this Court in the assessee's own case in Tax Appeal No.983 of 2018 by observing in paras 5 and 6 of the order dated 4th September 2018 as under:
"5. Questions (3) and (4) though pertained to distinct figures of deduction claimed by the assessee by very nature, their considerations overlap. They both pertained to assessee's claim of weighted deduction under section 35(2AB) of the Act for setting up inhouse R&D facilities. They arise out of the Tribunal's judgment confirming the view of the Commissioner of Income Tax (Appeals) granting partial relief to the assessee for the expenditure in relation to R&D facilities granting weighted deduction under section 35(2AB) of the Act. In this respect, Commissioner of Income Tax (Appeals) has split the total expenditure in two parts and granted partial relief where it was established that the expenditure was in relation to setting up inhouse R&D facility. The Tribunal confirmed this view. The entire issue is fact based. In this respect, no question of law arises.
6. Revenue's objection seems to be twofold. Firstly, that such expenditure was incurred by the assessee for and on behalf of the partnership firm and therefore it was not for the purpose of assessee's business. The second objection was with respect to correlation of such expenditure for setting up inhouse R&D facilities. The Commissioner agreed with the first contention in part and granted only prorata relief in terms of the proportionate exports of the assessee. With respect to the second part also, the Commissioner granted partial relief."
3 We therefore do not admit question No.2(a) in this appeal also and is, accordingly, rejected.
4 So far as question No.2(b) is concerned, the the same stands Page 2 of 4 Downloaded on : Mon Jun 15 11:20:54 IST 2020 C/TAXAP/92/2020 ORDER
answered by this Court in Commissioner of Incometax - I vs. Cadila Healthcare Ltd [2013] 214 taxman 672 (Gujarat). This Court has observed in paras 16, 17 and 18 as under:
"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. If we give such restricted meaning to the term expenditure incurred on inhouse research and developoment facility, we would on one hand be completely diluting the deduction envisaged under subsection (2AB) of section 35 and on the other, making the explanation noted above quite meaningless. We have noticed that for the purpose of the said clause in relation to drug and pharmaceuticals, 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 inhouse 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.
17 In the case The Deputy CIT v. Mastek Limited, in Tax Appeal No.242 of 2000 and connected matters, a Division Bench of this Court had touched on the aspect of what can be termed as scientific research. In the context, certain observations made by the Bench may be of some relevance.
"25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) ofthe Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether Page 3 of 4 Downloaded on : Mon Jun 15 11:20:54 IST 2020 C/TAXAP/92/2020 ORDER such scientific research resulted into the ultimate aim for which such research was undertaken. It can be easily envisaged that the scientific research undertaken often times would completely fail to achieve desired results. That by itself does not mean that no scientific research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee."
18 We are, 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 inhouse facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section35(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."
5 In view of the aforesaid, question No.2(b) is also not admitted and the same is, accordingly, rejected.
6 The appeal, therefore, fails and stands dismissed.
(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) CHANDRESH Page 4 of 4 Downloaded on : Mon Jun 15 11:20:54 IST 2020