BDR PHARMACEUTICALS INTERNATIONAL PRIVATE LIMITED,MUMBAI vs. DCIT - CIRCLE (1)(1)(1) MUMBAI, MUMBAI

The solitary substantive issue raised by the Assessee is vide Ground No. 1 as mentioned herein above.

As per the facts of the case Assessee is a private limited company engaged in the business of manufacturing and trading in pharmaceutical products, primarily in specialized segments such as Oncology, Critical Care, Gynecology and Neurology.

For the year under consideration, the Assessee maintained two in- house research and development (R&D) facilities situated at Gotri and Padra in the Vadodara district of Gujarat. These in-house R&D facilities were duly approved by the prescribed authority, namely, the Department of Scientific and Industrial Research (DSIR), under Form 3CM dated 16.12.2014. Subsequent renewals were granted vide orders dated 01.04.2016 and 08.03.2017, covering the period up to 31.03.2019. The fact that the in-house R&D facilities were duly approved by the DSIR under Form 3CM is undisputed.

The Assessee filed its Return of Income (ROI) for AY 2017-18 on 12.10.2017, declaring a total income of Rs. 89,15,59,290/-. In its

The aforesaid claim represented weighted deduction in respect of aggregate R&D expenditure of Rs. 965.29 lakhs, comprising revenue expenditure of Rs. 510.07 lakhs and capital expenditure of Rs. 455.22 lakhs. The expenditure and the claim were duly certified by the Tax Auditor in Clause 19 of the Tax Audit Report as well as in the prescribed Form 3CLA submitted to the DSIR.

During the course of assessment proceedings, the AO noted that the DSIR had issued Form 3CL dated 22.11.2018, wherein eligible R&D expenditure was quantified at Rs. 822.92 lakhs, comprising revenue expenditure of Rs. 372.04 lakhs and capital expenditure of Rs. 450.88 lakhs, as against the total expenditure of Rs. 965.29 lakhs claimed by the Assessee. The comparative position was noted by the AO as under:

Thus, the AO restricted the deduction and made an addition of Rs. 146.71 lakhs, comprising Rs. 138.03 lakhs towards revenue expenditure and Rs. 8.68 lakhs towards capital expenditure.

The AO disallowed the weighted deduction of Rs. 1,46,71,000/- solely on the ground that the said amount had not been certified/approved by the DSIR in Form 3CL.

Aggrieved, the Assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) confirmed the disallowance made by the AO, holding that, pursuant to the amendment to Rule 6(7A) of the Income-tax Rules, 1962 (hereinafter referred to as “the Rules”) with effect from 01.07.2016, quantification of eligible scientific research expenditure by the DSIR in Form 3CL was a statutory requirement. Since the DSIR had not certified the expenditure to the extent of Rs. 146.71 lakhs, the ld. CIT(A) held that the AO was justified in restricting the deduction.

Aggrieved by the order of the ld. CIT(A), the Assessee is in appeal before us.

The Ld. AR for the Assessee advanced threefold submissions.

It was further submitted that Rule 6(7A) of the Rules, as amended with effect from 01.07.2016, cannot enlarge, modify or override the substantive provisions of section 35(2AB) of the Act. Reliance was placed on the decision of the Hon’ble Supreme Court in Assam Company Ltd. and Ors. v. State of Assam and Ors. [2001] 248 ITR 567 (SC) and the decision of the Bangalore Bench of the Tribunal in Edgeverve Systems Ltd. v. ACIT [2026] 183 taxmann.com 364 (Bang. - Trib.), wherein it was held that weighted deduction under section 35(2AB) cannot be curtailed merely by relying upon the quantification made in Form 3CL under Rule 6(7A), where the in-house R&D facility is duly approved and the expenditure is genuinely incurred for scientific research.

Secondly, without prejudice to the above, the Ld. AR submitted that the action of the DSIR in reducing the eligible expenditure, without granting any opportunity of being heard to the Assessee and without assigning any reasons or basis for such reduction, was in violation of the principles of natural justice. It was submitted that the DSIR had reduced the eligible expenditure by Rs. 142.37 lakhs, comprising Rs. 138.03 lakhs of revenue expenditure and Rs. 4.34 lakhs of capital expenditure, without issuing any show-cause notice or seeking any explanation from the Assessee. Reliance

Thirdly, without prejudice to the aforesaid submissions, the Ld. AR submitted that, in respect of the capital expenditure of Rs. 4.34 lakhs which was not approved in Form 3CL, 100% deduction is otherwise allowable under section 35(1)(iv) read with section 35(2) of the Act, since the expenditure was incurred on scientific research relating to the business carried on by the Assessee and was duly verified in the audited accounts. Reliance was placed on the decision of the Pune Bench of the Tribunal in MAHLE Behr India (P) Ltd. v. DCIT [2021] 130 taxmann.com 7 (Pune - Trib.).

On the other hand, the Ld. DR strongly supported the orders of the authorities below. The Ld. DR submitted that, with effect from 01.07.2016, Rule 6(7A) of the Rules specifically casts an obligation upon the prescribed authority, i.e. the DSIR, to quantify the eligible R&D expenditure in Part B of Form 3CL.

It was submitted that the Assessing Officer does not possess the requisite technical expertise to determine whether a particular item of expenditure relates to scientific research and development. Therefore, according to the Ld. DR, the legislature and the rule-making authority have

The Ld. DR accordingly contended that the ld. CIT(A) was fully justified in upholding the restriction of the weighted deduction to the amount certified by the DSIR in Form 3CL.

We have heard the rival contentions, perused the relevant material available on record and considered the judicial precedents relied upon by the parties. The undisputed facts emerging from the record are that the Assessee is engaged in the manufacture of pharmaceutical products and has approved in-house R&D facilities at Gotri and Padra, Gujarat. The approval granted by the DSIR in Form 3CM was valid for the assessment year under consideration.

In its return of income, the Assessee claimed deduction under section 35(2AB) in respect of revenue expenditure of Rs. 510.07 lakhs and capital expenditure of Rs. 455.22 lakhs. The claim was supported by the Tax Audit Report, including Clause 19 thereof, and Form 3CLA.

The DSIR, in Form 3CL dated 22.11.2018, quantified the eligible revenue expenditure at Rs. 372.04 lakhs and capital expenditure at Rs. 450.88 lakhs, thereby not certifying revenue expenditure of Rs. 138.03 lakhs and capital expenditure of Rs. 4.34 lakhs. The lower authorities restricted the deduction solely on the basis of the amount quantified in Form 3CL.

On perusal of Form 3CL, we find that the DSIR has reduced the claim of eligible expenditure without assigning any reasons for such reduction. There is also no material on record to demonstrate that the Assessee was afforded any opportunity of being heard or was called upon to furnish any explanation in respect of the expenditure which was ultimately excluded from Form 3CL.

We find that an identical issue arose before the coordinate Bench of this Tribunal in M/s. Asian Paints Limited v. DCIT (ITA Nos. 2936, 3063 & 3083/Mum/2023), wherein the Tribunal considered the position prevailing after 01.07.2016 under Rule 6(7A) and observed as under:

A similar view has also been taken by the coordinate Bench of this Tribunal in DCIT v. M/s. Reliance Industries Ltd. [2023] 109 ITR (Trib) 180 (Mum. - Trib.), wherein it was observed that curtailment of eligible R&D expenditure in an opaque manner, without furnishing reasons or granting an opportunity to the Assessee, violates the foundational principles of natural justice.

The Ld. AR has also advanced detailed submissions on the proposition that delegated legislation cannot override or enlarge the substantive provisions of section 35(2AB) of the Act, relying upon the decisions in Edgeverve Systems Ltd. (supra) and Assam Company Ltd. (supra). However, in the facts of the present case, we find it appropriate to adjudicate the issue on the basis of the undisputed failure to afford an effective opportunity to the Assessee before the eligible expenditure was reduced in Form 3CL.

Where the prescribed authority is entrusted with the statutory function of quantifying eligible expenditure and such quantification has a direct bearing upon the Assessee's claim for deduction, the Assessee must be given a reasonable opportunity to substantiate the nature and allowability of the expenditure sought to be excluded. A quantification which is made without communicating the reasons for exclusion and without affording an opportunity to the Assessee to explain the expenditure cannot be sustained without further examination.

In view of the foregoing discussion and respectfully following the view taken by the coordinate Benches of this Tribunal in M/s. Asian Paints Limited (supra) and M/s. Reliance Industries Ltd. (supra), we deem it just and appropriate to set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the AO with the following directions:

Accordingly, Ground No. 1 raised by the Assessee is treated as allowed for statistical purposes.

In the result, the appeal of the Assessee is allowed for statistical purposes.