Weighted Deduction allowable on Bio Equivalence Studies conducted outside the Approved R & D Facility: ITAT [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ), has allowed weighted deduction on Bio Equivalence Studies by holding that the same amount to revenue expenditure. The bench upheld the view of the CIT(A) that the expenses incurred on drug trial outside the approved R&D facility would also be entitled to weighted deduction under section 35(2AB) of the Income Tax Act.

In the instant case, the assessee’s claim for weighted deduction on Bio Equivalence Studies was disallowed by the Assessing Officer. As per Explanation to clause (1) of section 35(2AB), the expenditure on clinical drug tails in relation to drugs & pharmaceuticals is part of scientific research expenditure eligible for weighted deduction.

The assessee contended that for conducting Bio Analytical and Bio Equivalence Studies it requires hospital type facility and hence normally these studies will be conducted in outside facility duly approved for this purpose. It was, therefore, submitted that the expenditure on Bio Analytical and Bio Equivalence Studies which forms part of clinical drug trials and which is must for product / process research and as this expenditure incurred wholly and exclusively incurred for scientific research and development the said amount is entitled for weighted deduction along with other Research Expenditure.

Allowing the contentions of the assessee, the CIT(A) relied on the decision in CIT Vs Cadila Healthcare Ltd wherein the Gujarat High Court held that merely because the prescribed authority segregated the expenditure in two parts, viz; those incurred within the in-house facility and those incurred outside by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act.

The first appellate authority was of the view that the assessee had actually incurred the impugned expenditure on building repairs and maintenance. According to him, it is a revenue expenditure pertaining to the approved R&D facility the assessee is eligible for weighted deduction. He also allowed the alternative claim in terms of section 37 if actually incurred.

The Tribunal bench upheld the above order and held that “By very nature, the Clinical Trials cannot alone be done within research facility as they require cooperation from the Medical Doctors, Hospitals, Volunteers and patients, therefore such expenditure has to be necessarily spent outside the facility, but for the purpose of ‘in-house’ research.”