Friday, March 29, 2013

Exp. on ‘clinical drug trial’ is deductible even if the impossible “incurred in-house” condition isn’t satisfied

Explanation to Section 35(2AB)(1) does not require that the expenses which are included in this explanation are essentially to be incurred inside an in-house research facility because it is not possible to incur these expenses for in-house research facility

In the instant case, the issue that arose for consideration of HC was as under:
"Whether the expenditure which was not incurred in an in-house research facility could be discarded for weighted deduction under sec. 35(2AB) of IT Act?”

Deliberating on the issue, the HC held in favour of assessee as under:

1) The Explanation to section 35(2AB)(1) provides that expenditure on scientific research in relation to drugs and pharmaceuticals shall include expenditure incurred on clinical drug trials, 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 its very nature, 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;

2) 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;

3) 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;

4) The activities of obtaining approval of the authority and filing of an application for patent necessarily have to be outside the in-house research facility. Thus, the restricted meaning suggested by the Revenue would completely make the explanation quite meaningless;

5) Segregation of the expenditure by prescribed authority into two parts, namely, those incurred within the in-house facility and outside, by itself would not be sufficient to deny the benefit to the assessee under section35(2AB) of the Act - Cadila Healthcare Ltd. v. CIT [2013] 31 300 (Gujarat)

Related case:
Exp. on ‘drug trials’ can’t be disallowed even if it isn’t incurred in-house as trials can be carried outside labs only - Cadila Healthcare Ltd. v Addl CIT [2013] 29 229 (Ahmadabad - Trib.)

No comments: