C/TAXAP/92/2020 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 92 of 2020 PRINCIPAL COMMISSIONER OF INCOME-TAX, VADODARA-2 Versus M/S SUN PHARMACEUTICALS INDUSTRIES LTD. Appearance: MR.VARUN K. PATEL (3802) for Appellant(s) No. 1 MR SN SOPARKAR SENIOR ADVOCATE WITH MR B S SOPARKAR (6851) for Opponent(s) No. 1 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 Income Tax Act, 1961 at instance of Revenue and is directed against order of Income Tax Appellate Tribunal, Ahmedabad dated 20th June 2019 passed in ITA No.1689/Ahd/2015 for A.Y. 2008 09. 2 Revenue has proposed following questions of law as substantial questions of law for consideration of this Court: 2(a) Whether on facts and in circumstances of case, learned ITAT has erred in law and on facts in no setting aside finding of CIT(A) on issue of disallowance of R&D expenditure after excluding export turnover for purpose of computing allocation of R&D expenses and also in not upholding disallowance of weighted deduction u/s. 35(2AB) on revenue expenditure made by A.O.? Page 1 of 4 Downloaded on : Tue Mar 03 16:00:13 IST 2020 C/TAXAP/92/2020 ORDER (b) Whether on facts and in circumstances of case, learned ITAT has erred in law and on facts in directing Assessing Officer to allow assessee weighted deduction u/s 35(2AB) of clinical trial expenses incurred outside approved facility? 2 So far as question No.2(a) is concerned, similar question is not admitted by this Court in assessee's own case in Tax Appeal No.983 of 2018 by observing in paras 5 and 6 of order dated 4th September 2018 as under: 5. Questions (3) and (4) though pertained to distinct figures of deduction claimed by assessee by very nature, their considerations overlap. They both pertained to assessee s claim of weighted deduction under section 35(2AB) of Act for setting up in house R&D facilities. They arise out of Tribunal s judgment confirming view of Commissioner of Income Tax (Appeals) granting partial relief to assessee for expenditure in relation to R&D facilities granting weighted deduction under section 35(2AB) of Act. In this respect, Commissioner of Income Tax (Appeals) has split total expenditure in two parts and granted partial relief where it was established that expenditure was in relation to setting up in house R&D facility. Tribunal confirmed this view. 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 assessee for and on behalf of partnership firm and therefore it was not for purpose of assessee s business. second objection was with respect to correlation of such expenditure for setting up in house R&D facilities. Commissioner agreed with first contention in part and granted only pro rata relief in terms of proportionate exports of assessee. With respect to second part also, 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 same stands Page 2 of 4 Downloaded on : Tue Mar 03 16:00:13 IST 2020 C/TAXAP/92/2020 ORDER answered by this Court in Commissioner of Income tax I vs. Cadila Healthcare Ltd [2013] 214 taxman 672 (Gujarat). This Court has observed in paras 16, 17 and 18 as under: 16 whole idea thus appears to be to give encouragement to scientific research. By 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 assessee and approved by prescribed authority. Before pharmaceutical drug could be put in market, regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of drug and so on. Extensive clinical trials, therefore, would be intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in laboratory of pharmaceutical company. If we give such restricted meaning to term expenditure incurred on in house research and developoment facility, we would on one hand be completely diluting deduction envisaged under sub section (2AB) of section 35 and on other, making explanation noted above quite meaningless. We have noticed that for purpose of said clause in relation to drug and pharmaceuticals, expenditure on scientific research has to include expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing application for grant of patent. activities of obtaining approval of authority and filing of application for patent necessarily shall have to be outside in house research facility. Thus restricted meaning suggested by Revenue would completely make explanation quite meaningless. For scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, Legislature appears to have added such explanation. 17 In case Deputy CIT v. Mastek Limited, in Tax Appeal No.242 of 2000 and connected matters, Division Bench of this Court had touched on aspect of what can be termed as scientific research. In context, certain observations made by Bench may be of some relevance. 25. It can thus be seen that term scientific research in context of 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 ultimate goal with which it may have been undertaken. Often times in field of research and invention, 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 : Tue Mar 03 16:00:13 IST 2020 C/TAXAP/92/2020 ORDER such scientific research resulted into ultimate aim for which such research was undertaken. It can be easily envisaged that 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 Legislature desired to encourage by granting deduction under section 35(1) of Act was scientific research and not necessarily only successful scientific research undertaken by assessee. 18 We are, therefore, of opinion that Tribunal committed no error. Merely because prescribed authority segregated expenditure into two parts, namely, those incurred within in house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny benefit to assessee under section 35(2AB) of Act. It is not as if that said authority was addressing issue for deduction under section 35(2AB) of Act in relation to question on hand. certificate issued was only for purpose of listing total expenditure under Rules. Therefore, no question of law arises. 5 In view of aforesaid, question No.2(b) is also not admitted and same is, accordingly, rejected. 6 appeal, therefore, fails and stands dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) CHANDRESH Page 4 of 4 Downloaded on : Tue Mar 03 16:00:13 IST 2020 Principal Commissioner of Income-tax, Vadodara-2 v. Sun Pharmaceuticals Industries Ltd