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 taxmann.com 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 taxmann.com 229 (Ahmadabad - Trib.)

No embargo on TPO to search for any number of comparables as longs as he selects only relevant one

The provisions of Transfer Pricing do not fix any upper limit on no. of comparables that can be selected by TPO. Further there are no restrictions on the powers of TPO in carrying out fresh search for the relevant comparables 

In the instant case, the assessee was providing Information Technology Enabled Services (ITES) to the Associated Enterprises. TPO accepted 8 out of the 11 comparables of assessee. However, he felt that the number of comparables were insufficient. Consequently, he conducted a fresh search and added 22 comparables to the list of 8 and made TP adjustment. Assessee contended that TPO having accepted 8 comparables selected by assessee, he cannot search for fresh comparables.

On appeal, the Tribunal held as under:

1) Under the TP regulations, there is no embargo on the powers of the TPO in carrying out fresh search for gathering more relevant information, documents etc., while determining the ALP in relation to international transactions;

2) Assessee’s contention that TPO can not search for fresh comparables can’t be accepted as the sufficient number of comparables depends upon the facts and circumstances of the each case .There cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP;

3) To get an adequate result and better representation, the size of sample must be large enough. The same rule is applicable in the case of number of comparables selected for representing the true and correct ALP in relation to the international transaction;

4) Under the Transfer Pricing Regulations, the number of comparables may be one or more than one, but there is no upper limit prescribed under section 92C of the IT Act;

5) However, the first proviso to section 92(2) indicates that more than one price can be considered for determination of ALP and in such a case, the ALP shall be taken to be arithmetic mean of such price. Therefore, the size of number of comparables has not been prescribed under TP Regulations provided under the IT Act; and

6) Where the number of comparables available is large, then it is always better to consider as many as possible number of comparables which can give an adequate and proper representation of the price prevailing in open market in the said industry, business, trade etc., to which the comparables and international transactions belong – Willis Processing Services (I) (P.) Ltd. v. Dy.CIT [2013] 30 taxmann.com 350 (Mumbai - Trib.)

In addition to the issue as discussed above, the Tribunal has dealt with following issues as well:

a) Whether merger and demerger of entities can be a ground for their exclusions from the comparables?

b) What should be the tolerable limit of related party transactions in comparables?

c) Whether loss making and high-profit making entities to be excluded from comparables?

d) Whether turnover criteria is relevant for exclusion of comparables?