2013 (3) TMI 539 - GUJARAT HIGH COURT

Deduction u/s 35(2AB) - Expenses incurred outside the approved R&D facility - whether would get weighted deduction based on the word under "on in house" - whether the assessee who has incurred expenditure for scientific research, which was not in the in-house facility, could be covered for deduction under section 35(2AB)? - Held that:- 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 Tribunal observed that the term 'in-house' used in section 35(2AB) must be viewed in the context of which it has been used. If by utilizing the staff or resources of an organization, research is conducted within the organization rather than through utilization of external use of resources or staff, it can be stated to be an in-house research.

The Tribunal committed no error. 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 and filing an application for a patent under the Patents Act, 1970.

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. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. 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.

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 by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. In favour of assessee.