ITAT allows weighted Income Tax Deduction u/s 32(2AB) wrt expenses incurred on clinical trials [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT )  allowed the weighted deduction in respect of the expenses incurred on clinical trials and held that the assessee is entitled to deduction under Section 35(2AB) of the Income Tax  Act, 1961.

The assessee, Aurobindo Pharma Ltd, had filed its income tax return for the assessment year 2016-17 on 28/11/2016. The Assessing Officer ( A O)  passed the draft assessment order after the transfer Pricing Officer ( TPO ) suggested incorporating upward adjustments regarding the international transactions of corporate guarantee fees and interest on receivables. The assessee being aggrieved by the final assessment order appealed before the Commissioner of Income Tax  ( Appeals ) [ CIT(A) ]. Through an impugned order, CIT(A) disposed of the appeal giving part relief on all three points, in respect of which both the assessee and Revenue preferred these appeals.

The appeal has been filed before the (ITAT) and there are three issues involved in this case and they include additions made in respect of the Corporate Guarantee commission and interest on receivables. The third issue is regarding the disallowance of weighted income tax deduction under Section  32(2AB) of the Income Tax Act, 1961 and expenses incurred on clinical trials.

The assessee submitted before the TPO  that the corporate guarantee is not an international transaction and that interest on receivables is not covered under the definition of international transaction  The assessee further submitted that a corporate guarantee was given as part of its parental duty to its subsidiaries and as a way of complying with procedures for the subsidiaries to be able to obtain credit facilities for the benefit of the group as a whole and it falls within the category of shareholding service.

 BG Reddy representing the assessee company contended that the corporate guarantee at 0.53% determined by the learned CIT(A) is high and not acceptable. He argued that the particulars of this transaction are not covered under the definition of international transaction according to Section 92B of the Income Tax Statute.

The bench also considered the case of  CIT vs. Vegetable Products, where the Supreme Court reached the conclusion that the assessee is eligible to claim a deduction under section 35(2AB) of the  Income  Tax Act, 1961  since once the clinical trial expenses incurred outside the approved R&D facilities, were approved by the prescribed authority.

The two-member bench, comprised of  K. Narasimha Chary (Judicial Member) and  Madhusudan Sawdia  (Accountant Member), based on the facts and previous decisions, held the issue in favour of the assessee and allowed weighted deductions in respect of the expenses incurred on clinical trials. The bench dismissed the appeal filed by the revenue, and the appeal of the assessee was allowed in part.

To Read the full text of the Order CLICK HERE

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