DCIT , CC- 2(4), MUMBAI vs. MACELODS PHARMACEUTICALS LIMITED, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI SANDEEP SINGH KARHAIL (JUDICIAL MEMBER)

I.T.A No.5168/Mum/2018 - A.Y. 2011-12 I.T.A No.5169/Mum/2018 - A.Y. 2012-13 DCIT-CC-2(4) Macelods Pharmaceuticals Room No.802, 8th Floor Limited, 304, Atlanta Arcade Vs. Old CGO, Annex Bldg Marol Church Road, M.K. Road, Andheri (E), Mumbai-400 059 Mumbai-400 020 PAN :AAACM4100C Respondent Appellant

I.T.A No.5092/Mum/2018 - A.Y. 2011-12 I.T.A No.5093/Mum/2018 - A.Y. 2012-13 Macelods Pharmaceuticals DCIT-CC-2(4) Limited, 304, Atlanta Arcade Room No.802, 8th Floor Vs. Marol Church Road, Old CGO, Annex Bldg Andheri (E), Mumbai-400 059 M.K. Road, Mumbai-400 020 PAN :AAACM4100C Appellant Respondent Assessee by : ShriAshok Bansal : Revenue by Smt.Riddhi Mishra [CIT (DR)] Date of Hearing : 10/01/2023 : Date of pronouncement 31/01/2023

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ORDER PER OM PRAKASH KANT, AM PER OM PRAKASH KANT, AM

These cross appeals by the Revenue and the These cross appeals by the Revenue and the These cross appeals by the Revenue and the assessee are directed against a common order dated 27 directed against a common order dated 27th June, 2018 passed by June, 2018 passed by the Ld.Commissioner of Income the Ld.Commissioner of Income-tax (Appeals)-48, Mumbai 48, Mumbai [ In short, the Ld. CIT(A)] short, the Ld. CIT(A)] for Assessment Year 2011-12 & 2012 12 & 2012-13.

“1. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was “1. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was “1. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in deleting the disallowance of Rs. 111,11,70,050/-made on account correct in deleting the disallowance of Rs. 111,11,70,050/ made on account of freebees paid to Doctors, despite the fact that the decision of Hon'ble IT AT on this issue in assessee's to Doctors, despite the fact that the decision of Hon'ble IT AT on this issue in assessee's to Doctors, despite the fact that the decision of Hon'ble IT AT on this issue in assessee's case in respect of A.Y. 2010-11 and A.Y. 2011-12 has not been accepted by the Revenue case in respect of A.Y. 2010 12 has not been accepted by the Revenue and an appeal is pending before the Hon'ble Bombay High Court." and an appeal is pending before the Hon'ble Bombay High Court 3. The grounds raised by the The grounds raised by the assessee in A.Y. 2011 in A.Y. 2011-12 are reproduced as under: under: - “1. The authorities below have erred in law as well as facts in apportioning/ upholding the “1. The authorities below have erred in law as well as facts in apportioning/ upholding the “1. The authorities below have erred in law as well as facts in apportioning/ upholding the apportionment of Research & Development expenses u/s 35(2AB) to units eligible Research & Development expenses u/s 35(2AB) to units eligible Research & Development expenses u/s 35(2AB) to units eligible for deduction u/s 80IB and 80IC. deduction u/s 80IB and 80IC. 2. The authorities below have erred in holding that the appellant has inflated claim of 2. The authorities below have erred in holding that the appellant has inflated claim of 2. The authorities below have erred in holding that the appellant has inflated claim of deduction u/s 801C by inter unit transfer of material at lower prices. deduction u/s 801C by inter unit transfer of material at lower prices. 3. The learned Assessing Officer has erred in initiating penalty proceedings in a case which 3. The learned Assessing Officer has erred in initiating penalty proceedings in a case which has been highly litigated.” has been highly litigated.” 4. Briefly stated, facts of the case are that the assessee company Briefly stated, facts of the case are that the assessee company Briefly stated, facts of the case are that the assessee company was engaged in the business of manufacturing was engaged in the business of manufacturing of formulation formulationsand various pharmaceutical products. In the year under consideration, various pharmaceutical products. In the year under consideration, various pharmaceutical products. In the year under consideration, the assessee filed its return of income electronically on 28/09/2011 the assessee filed its return of income electronically on the assessee filed its return of income electronically on

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declaring declaring total total income income at Rs.15,83,93,089/- -, which was subsequently revised subsequently revised on 11/10/2011 to Rs. 28,69,03,699/ to Rs. 28,69,03,699/- The return of income filed by the assessee was selected for scrutiny turn of income filed by the assessee was selected for scrutiny turn of income filed by the assessee was selected for scrutiny assessment and the Assessing Officer vide order dated 29/01/2014 assessment and the Assessing Officer vide order dated 29/01/2014 assessment and the Assessing Officer vide order dated 29/01/2014 assessed the total income at Rs.85,13,17,680/ assessed the total income at Rs.85,13,17,680/- under section 143(3) of the Income 143(3) of the Income-tax Act, 1961 (in short, ‘the Act’). In the s tax Act, 1961 (in short, ‘the Act’). In the said assessment, the Assessing Officer made one of the disallowances for assessment, the Assessing Officer made one of the disallowances for assessment, the Assessing Officer made one of the disallowances for promotional items, free promotional items, free gifts given to various doctors / medical given to various doctors / medical practitioners etc.

4.1 Subsequently, a search and seizure action under section 132 , a search and seizure action under section 132 , a search and seizure action under section 132 of the Act was carried out on 28/01/ of the Act was carried out on 28/01/2016 and consequently 2016 and consequently assessment under section 153A r.w.s. 143(3) of the Act was under section 153A r.w.s. 143(3) of the Act was under section 153A r.w.s. 143(3) of the Act was completed on 30/12 12/2017. In the said assessment In the said assessment, various additions/disallowances including /disallowances including (i) disallowance of expenses on disallowance of expenses on promotional promotional items items including including free free gifts to to doctors/medical doctors representatives (ii) proportionate withdrawal of deduction under proportionate withdrawal of deduction under proportionate withdrawal of deduction under section 80IB & 80IC section 80IB & 80IC of the Act for apportionment of research and for apportionment of research and development expenses development expensesand (iii) withdrawal of deduction u/s withdrawal of deduction u/s 80IC for inter unit transfer of material inter unit transfer of material were made.

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passed under section 143(3) passed under section 143(3) of the Act) but upheld the upheld the disallowance of deduction under section 80IB / 80IC for allocation of research of deduction under section 80IB / 80IC for allocation of research of deduction under section 80IB / 80IC for allocation of research and development expenses and development expenses and as well as disallowance of deduction and as well as disallowance of deduction u/s 80IC for inter unit inter unit transfer of material. Aggrieved . Aggrieved by the above finding of the Ld.CIT(A), both the parties are in appeal before the finding of the Ld.CIT(A), both the parties are in appeal before the finding of the Ld.CIT(A), both the parties are in appeal before the ITAT (in short, the the Tribunal) by way of raising grounds as way of raising grounds as reproduced above.

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which is much before the date of the search action in the case of ch is much before the date of the search action in the case of ch is much before the date of the search action in the case of the assessee i.e. 28/01/2016 and, therefore, the assessment year the assessee i.e. 28/01/2016 and, therefore, the assessment the assessee i.e. 28/01/2016 and, therefore, the assessment falls under the completed or completed or unabated assessment. unabated assessment. Thus, in view of the Hon’ble Bombay High Court judgment in the case ofCIT the Hon’ble Bombay High Court judgment in the case of the Hon’ble Bombay High Court judgment in the case of vs.Continental Warehousing Corporation (supra), Continental Warehousing Corporation (supra), Continental Warehousing Corporation (supra), no addition could have been made qua the assessment year except based on could have been made qua the assessment year except based on could have been made qua the assessment year except based on any incriminating material. Since we find that in this assessment any incriminating material. Since we find that in this assessment any incriminating material. Since we find that in this assessment year, the issue of free year, the issue of free gifts/promotional items to doctors/ /promotional items to doctors/medical representatives, was raked up in the esentatives, was raked up in the original assessment esentatives, was raked up in the original assessment original assessment proceedings and, therefore, addition proceedings and, therefore, addition made on the same same issue of free gifts to Doctors etc in assessment order consequent to search is not gifts to Doctors etc in assessment order consequent to search is not gifts to Doctors etc in assessment order consequent to search is not a new addition. Actually, the Assessing Officer should have started Actually, the Assessing Officer should have started Actually, the Assessing Officer should have started computation of Total Income under the order passed u/s 153A read computation of Total Income under the order passed u/s 153A read computation of Total Income under the order passed u/s 153A read with 143(3) from the last income assessed or upheld in appellate with 143(3) from the last income assessed or upheld in appellate with 143(3) from the last income assessed or upheld in appellate proceedings, instead, he has repeated the addition d, he has repeated the addition, which was made , which was made in original assessment. inal assessment. Therefore, this issue is not covered by the Therefore, this issue is not covered by the decision of the Hon’ble Bombay High Court in the case of CIT vs decision of the Hon’ble Bombay High Court in the case of CIT vs decision of the Hon’ble Bombay High Court in the case of CIT vs Continental Warehousing Corporation (supra) Continental Warehousing Corporation (supra). As far as this . As far as this addition is concerned, we uphold the finding of the Ld.CIT(A) as the addition is concerned, we uphold the finding of the Ld.CIT(A) as the addition is concerned, we uphold the finding of the Ld.CIT(A) as the issue against the addition made in original assessment proceedings issue against the addition made in original assessment proceedings issue against the addition made in original assessment proceedings has been already deleted by the ITAT in ITA No. deleted by the ITAT in ITA No. 7405.Mum/2014 7405.Mum/2014 for AY 2011-12. The ld. DR submitted that appeal of the Revenue 12. The ld. DR submitted that appeal of the Revenue 12. The ld. DR submitted that appeal of the Revenue on the matter is pending before the Hon’ble Bombay High Court pending before the Hon’ble Bombay High Court pending before the Hon’ble Bombay High Court and, therefore, the decision of the same shall be followed in respect nd, therefore, the decision of the same shall be followed in respect nd, therefore, the decision of the same shall be followed in respect

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of the addition made in proceedings consequent to search. made in proceedings consequent to search. The sole made in proceedings consequent to search. ground of appeal of the Revenue is accordingly allowed. ground of appeal of the Revenue is accordingly allowed. ground of appeal of the Revenue is accordingly allowed.

7.1 As far as the issueschallenged by the assessee is concerned, As far as the issue challenged by the assessee is concerned, we find that there is no reference of any incriminating material qua we find that there is no reference of any incriminating material qua we find that there is no reference of any incriminating material qua the allocation of R&D expense the allocation of R&D expense amongst units eligible for deductions eligible for deductions under sections 80IB and 80IC of the Act. In the absence of any under sections 80IB and 80IC of the Act. In the absence of any under sections 80IB and 80IC of the Act. In the absence of any incriminating material incriminating material found during the course of search qua issue found during the course of search qua issue of allocation of R & D expenses of allocation of R & D expenses, no addition could have been made d have been made on this issue. Similarly, there is no reference on this issue. Similarly, there is no reference of any incriminating any incriminating material qua the disallowance of deduction u/s 80IC for inter unit material qua the disallowance of deduction u/s 80IC material qua the disallowance of deduction u/s 80IC transfer of material. . Therefore, following the finding of the Hon’ble ollowing the finding of the Hon’ble Bombay High Court in the case of CIT vs Bombay High Court in the case of CIT vs. Continental Warehousing Continental Warehousing Corporation (supra), the disallowance of deduction consequent to , the disallowance of deduction consequent to , the disallowance of deduction consequent to allocation of R & D expenses allocation of R & D expenses and for inter unit transfer of mater transfer of material are deleted. Accordingly, additional ground of the assessee Accordingly, additional ground of the assessee Accordingly, additional ground of the assessee is allowed and the ground of appeal of the assessee also stands allowed and the ground of appeal of the assessee allowed and the ground of appeal of the assessee allowed.

1."Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was 1."Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was 1."Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in deleting the disallowance ofRs. 137,62,61,659/- made on account of freebees paid correct in deleting the disallowance ofRs. 137,62,61,659/ made on account of freebees paid to Doctors, despite the fact that the decision of Hon'ble ITAT on this issue in assessee's to Doctors, despite the fact that the decision of Hon'ble ITAT on this i ssue in assessee's case in respect of A.Y. 2010-11 and A.Y. 2011-12 has not been accepted by the Revenue case in respect of A.Y. 2010 12 has not been accepted by the Revenue and an appeal is pending before the Hon'ble Bombay High Court." and an appeal is pending before the Hon'ble Bombay High Court."

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pending as on the date of the search and the assessment got abated pending as on the date of the search and the assessment g pending as on the date of the search and the assessment g due to search dated 28/01/2016 due to search dated 28/01/2016. The Ld. Counsel of the assessee Counsel of the assessee also admitted that in the assessment year under consideration also admitted that in the assessment year under consid also admitted that in the assessment year under consid regular scrutiny assessment proceedings were pending and same regular scrutiny assessment proceedings were pending and same regular scrutiny assessment proceedings were pending and same got abated on account of search. For application of ratio of Hon’ble got abated on account of search. For application of ratio of Hon’ble got abated on account of search. For application of ratio of Hon’ble Bombay High Court in the case Continental warehousing Bombay High Court in the case Continental warehousing Bombay High Court in the case Continental warehousing Corporation (supra), the twin conditions of, firstly no incriminating Corporation (supra), the twin conditions of, firstly no incrimi Corporation (supra), the twin conditions of, firstly no incrimi material and secondly completed or unabated assessment are to be material and secondly completed or unabated assessment are to be material and secondly completed or unabated assessment are to be fulfilled. In the instant case the assessment is undisputedly abated, fulfilled. In the instant case the assessment is undisputedly abated, fulfilled. In the instant case the assessment is undisputedly abated, the said ratio cannot be applied and therefore plea of the assessee the said ratio cannot be applied and therefore plea of the assessee the said ratio cannot be applied and therefore plea of the assessee of no addition in absence of any incriminating of no addition in absence of any incriminating material qua the material qua the assessment year, is rejected. T assessment year, is rejected. Therefore, the additional ground additional ground raised by the assessee raised by the assessee in the year under consideration in the year under consideration is dismissed.

10.10 The reply of the assessee is perused, however, it is not The reply of the assessee is perused, however, it is not The reply of the assessee is perused, however, it is not found to be tenable and the sales promotion expenses on account found to be tenable and the sales promotion expenses on account found to be tenable and the sales promotion expenses on account of freebies to doctors to the tune of ₹1376261659 are disallowed of freebies to doctors to the tune of 1376261659 are disallowed and are hold to be in violation of Explanation I to section. 3 and are hold to be in violation of Explanation I to section. 3 and are hold to be in violation of Explanation I to section. 37(1) of the Act on the following grounds:- the Act on the following grounds:

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medical practitioners and their professional as medical practitioners and their professional as medical practitioners and their professional associations from taking any Gill. Travel facility. Hospitality. Cash or from taking any Gill. Travel facility. Hospitality. Cash or from taking any Gill. Travel facility. Hospitality. Cash or moncary grant from pharmaceutical and allied health moncary grant from pharmaceutical and allied health moncary grant from pharmaceutical and allied health sector industries. sector industries.

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Council (Professio Council (Professional Conduct, Etiquette and Ethics) nal Conduct, Etiquette and Ethics) Regulations, 2002 would only be clarificatory in nature. Regulations, 2002 would only be clarificatory in nature. Regulations, 2002 would only be clarificatory in nature.

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CBDT. The Hon'ble High Court has also observed that any CBDT. The Hon'ble High Court has also observed that any CBDT. The Hon'ble High Court has also observed that any violation of the same will attract the provis violation of the same will attract the provis violation of the same will attract the provisions of explanation to section 37(1) of the Act. explanation to section 37(1) of the Act.

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this regulation is a very salutary regulation which is in this regulation is a very salutary regulation which is in this regulation is a very salutary regulation which is in interest of the patients and the public. This Court is not interest of the patients and the public. This Court is not interest of the patients and the public. This Court is not oblivious to the increasing complaints that the oblivious to the increasing complaints that the oblivious to the increasing complaints that the medical practitioncrs do not prescribe generic medicines and practitioncrs do not prescribe generic medicines and practitioncrs do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifs and prescribe branded medicines only in lieu of the gifs and prescribe branded medicines only in lieu of the gifs and other freebies granted to them by some particular other freebies granted to them by some particular other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited pharmaceutical industries. Once this has been prohibited pharmaceutical industries. Once this has been prohibited by the Medical Council under t by the Medical Council under the powers vested in it. he powers vested in it. Section 37(1) of the Income Section 37(1) of the Income-tax Act comes into play. The t comes into play. The Court further held that the explanation to Section 37 (1) Court further held that the explanation to Section 37 (1) Court further held that the explanation to Section 37 (1) makes it clear that an expenditure incurred by an assessee makes it clear that an expenditure incurred by an assessee makes it clear that an expenditure incurred by an assessee for any purpose which is prohibited by law shall not be for any purpose which is prohibited by law shall not be for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business emed to have been incurred for the purpose of business emed to have been incurred for the purpose of business or profession. Therefore. if the assessee satisfies the or profession. Therefore. if the assessee satisfies the or profession. Therefore. if the assessee satisfies the nssessine authority that the expenditure is not in violation nssessine authority that the expenditure is not in violation nssessine authority that the expenditure is not in violation of the regulations framed by the medical council then it of the regulations framed by the medical council then it of the regulations framed by the medical council then it may legitimately claim a de may legitimately claim a deduction. but it is for the duction. but it is for the assessee to satisty the assessing officer that the expense is assessee to satisty the assessing officer that the expense is assessee to satisty the assessing officer that the expense is not in violation of the Medical Council Regulations not in violation of the Medical Council Regulations not in violation of the Medical Council Regulations

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10.11 Thus, Rs. 1376261659 is disallowed (which has been 10.11 Thus, Rs. 1376261659 is disallowed (which has been 10.11 Thus, Rs. 1376261659 is disallowed (which has been incurred for gifs, providing trave incurred for gifs, providing travel facilities & hospitality to l facilities & hospitality to medical practitioners) from the total expenditure incurred for medical practitioners) from the total expenditure incurred for medical practitioners) from the total expenditure incurred for sales promotion Keeping in view the discussion in paras above sales promotion Keeping in view the discussion in paras above sales promotion Keeping in view the discussion in paras above and added to the total income of the assessee. As apparent and added to the total income of the assessee. As apparent and added to the total income of the assessee. As apparent from the above discussion, it is clear tha from the above discussion, it is clear that the nature of pre and t the nature of pre and post MCI notification expenses for freebees to doctors are post MCI notification expenses for freebees to doctors are post MCI notification expenses for freebees to doctors are iliegal in nature. These illegal practices were later on noticed iliegal in nature. These illegal practices were later on noticed iliegal in nature. These illegal practices were later on noticed by Medical Council of India and Central Board of Direct Taxes by Medical Council of India and Central Board of Direct Taxes by Medical Council of India and Central Board of Direct Taxes which resulted in the amendment made in the Me which resulted in the amendment made in the Medical Council dical Council of India (MCI) Regulations vide Notification dated 10.12.2009 of India (MCI) Regulations vide Notification dated 10.12.2009 of India (MCI) Regulations vide Notification dated 10.12.2009 and Circular No. 05/2012 dated 01.08.2012 issued by the and Circular No. 05/2012 dated 01.08.2012 issued by the and Circular No. 05/2012 dated 01.08.2012 issued by the Central Board of Direct Taxes. New Delhi vide F.No. Central Board of Direct Taxes. New Delhi vide F.No. Central Board of Direct Taxes. New Delhi vide F.No. 225/142/2012 225/142/2012-ITA-II II respectively. respectively. In In absence absence of of these these notification and c notification and circular also. the freebees to doctors are illegal ircular also. the freebees to doctors are illegal in nature and liable to be disallowed us.37() of the Act. in nature and liable to be disallowed us.37() of the Act. in nature and liable to be disallowed us.37() of the Act.”

12.1 The Ld CIT(A) he Ld CIT(A), deleted the addition following the finding of following the finding of the ITAT in order dated 21/09/2016 for AY 2011 the ITAT in order dated 21/09/2016 for AY 2011-12. 12.

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judgment dated 22nd February, 2022 23207 Of 2019 judgment February, 2022has upheld the disallowance of such promotional items of such promotional items. The relevant finding of . The relevant finding of the Hon’ble Supreme Court is reproduced as under: the Hon’ble Supreme Court is reproduced as under:

“36. In the present case too, the incentives (or “36. In the present case too, the incentives (or “36. In the present case too, the incentives (or “freebies”) given by Apex, to the doctors, had a direct result of given by Apex, to the doctors, had a direct result of given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to exposing the recipients to the odium of sanctions, leading to exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are a ban on their practice of medicine. Those sanctions are a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of mandated by law, as they are embodied in the code of mandated by law, as they are embodied in the code of conduct and ethics conduct and ethics, which are normative, and have legally , which are normative, and have legally binding effect. The conceded participation of the assessee binding effect. The conceded participation of the assessee binding effect. The conceded participation of the assessee- i.e., the provider or donor i.e., the provider or donor- was plainly prohibited, as far as was plainly prohibited, as far as their receipt by the medical practitioners was concerned. their receipt by the medical practitioners was concerned. their receipt by the medical practitioners was concerned. That medical practitioners were for That medical practitioners were forbidden from accepting bidden from accepting such gifts, or “freebies” was no less a prohibition on the such gifts, or “freebies” was no less a prohibition on the such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor part of their giver, or donor,

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Department of scientific and industrial research (DSIR). The Ld. Department of scientific and industrial research (DSIR). The Department of scientific and industrial research (DSIR). The Assessing Officer has apportioned the said expenses among the Assessing Officer has apportioned the said expenses among the Assessing Officer has apportioned the said expenses among the units eligible for deduction under section 80IB ligible for deduction under section 80IB and and section 80IC aggregating to ₹ 50, 21, 51, 424/ 50, 21, 51, 424/-. Before the Assessing Officer and . Before the Assessing Officer and the Ld. CIT(A), the assessee claimed that issue of allocation of the assessee claimed that issue of allocation of the assessee claimed that issue of allocation of research and development expenses is covered in its favour by the research and development expenses is covered in its favour by th research and development expenses is covered in its favour by th decision of the Hon’ble Bombay High Court in the case of Zandu decision of the Hon’ble Bombay High Court in the case decision of the Hon’ble Bombay High Court in the case Pharmaceutical Works Ltd Vs. Pharmaceutical Works Ltd Vs. CIT in ITA No. 8 of CIT in ITA No. 8 of 2007.The submission of the assessee before the ld CIT(A) is reproduced as submission of the assessee before the ld CIT(A) is reproduced as submission of the assessee before the ld CIT(A) is reproduced as under: “ B. R&DEXPENDITURE B. R&DEXPENDITURE ……………………….. ………………………..

The LAO has discussed The LAO has discussed the issue in para 11 of the Order from page 10 to 15. The the issue in para 11 of the Order from page 10 to 15. The disallowance is in contrast with the consistent procedure of last many years when the disallowance is in contrast with the consistent procedure of last many years when the disallowance is in contrast with the consistent procedure of last many years when the department has, after comprehensive scrutinies each year, agreed with the appellant's department has, after comprehensive scrutinies each year, agreed with the appellant's department has, after comprehensive scrutinies each year, agreed with the appellant's , apportion the R & D expenditure. contention that there is n contention that there is no need to - , apportion the R & D expenditure.

Moreover, the issue is squarely covered by the Bombay HC judgement in Zandu Moreover, the issue is squarely covered by the Bombay HC judgement in Zandu Moreover, the issue is squarely covered by the Bombay HC judgement in Zandu Pharmaceutical Works Ltd. Vs. CIT in ITA No. 8 of 2007. (Copy enclosed). Also enclosed is Pharmaceutical Works Ltd. Vs. CIT in ITA No. 8 of 2007. (Copy enclosed). Also enclosed is Pharmaceutical Works Ltd. Vs. CIT in ITA No. 8 of 2007. (Copy enclosed). Also enclosed is copy of appellant's submission before the copy of appellant's submission before the LAO explaining, inter- -alia, on page 3 that the company's Research & Development activities are not directly related to its manufacturing unit company's Research & Development activities are not directly related to its manufacturing unit company's Research & Development activities are not directly related to its manufacturing unit as the R & D division is working on future products and future innovation and launches and as the R & D division is working on future products and future innovation and launches and as the R & D division is working on future products and future innovation and launches and not present products ma not present products manufactured by the manufacturing units. Also, R & D expenses are on nufactured by the manufacturing units. Also, R & D expenses are on futuristic research and the result of research is always uncertain and none of the items of futuristic research and the result of research is always uncertain and none of the items of futuristic research and the result of research is always uncertain and none of the items of research was forming part of qualifying undertakings. Further, company's R & D units are research was forming part of qualifying undertakings. Further, company's R & D units are research was forming part of qualifying undertakings. Further, company's R & D units are housed in separate buildings very far away from its manufacturing units and are stand n separate buildings very far away from its manufacturing units and are stand n separate buildings very far away from its manufacturing units and are stand aloneIndependent units and separate financial statements are prepare and audited for the aloneIndependent units and separate financial statements are prepare and audited for the aloneIndependent units and separate financial statements are prepare and audited for the same. It was also pointed out that the appellant has smaller R & D facilities at each man It was also pointed out that the appellant has smaller R & D facilities at each man It was also pointed out that the appellant has smaller R & D facilities at each manufacturing unit where routine R & D activities related to existing products being manufactured at those unit where routine R & D activities related to existing products being manufactured at those unit where routine R & D activities related to existing products being manufactured at those

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respective units are being carried out and that the company is not claiming any weighted units are being carried out and that the company is not claiming any weighted units are being carried out and that the company is not claiming any weighted deduction for these R& D units. deduction for these R& D units.

Also enclosed to the letter s Also enclosed to the letter submitted to the LAO is a detailed tabulation showing year wise ubmitted to the LAO is a detailed tabulation showing year wise details of formulations developed by the R &D wing and status of such products. From the details of formulations developed by the R &D wing and status of such products. From the details of formulations developed by the R &D wing and status of such products. From the same, it is amply same, it is amply clear that the R & D expenditure is totally unrelated to the present manufacturing clear that the R & D expenditure is totally unrelated to the present manufacturing ivities of the appellant. activities of the appellant.

Moreover, in a large number of cases, most notably CIT Vs. Sterling Foods (SC) and Pandian Moreover, in a large number of cases, most notably CIT Vs. Sterling Foods (SC) and Pandian Moreover, in a large number of cases, most notably CIT Vs. Sterling Foods (SC) and Pandian Chemicals Ltd. Vs. CIT (SC), it has been repeatedly held that the words "derived from" used in Chemicals Ltd. Vs. CIT (SC), it has been repeatedly held that the words "derived from" used in Chemicals Ltd. Vs. CIT (SC), it has been repeatedly held that the words "derived from" used in sections 80HH, 801 (and 80IA and 80IC) mea sections 80HH, 801 (and 80IA and 80IC) means that there must be a direct nexus between the ns that there must be a direct nexus between the profits and gains and an industrial undertaking. It must follow equally that there must be a direct profits and gains and an industrial undertaking. It must follow equally that there must be a direct profits and gains and an industrial undertaking. It must follow equally that there must be a direct nexus between the industrial undertaking and the expenses sought to be apportioned to it.” nexus between the industrial undertaking and the expenses sought to be apportioned to it. nexus between the industrial undertaking and the expenses sought to be apportioned to it.

“5.2.1. The assessee has relied on the Bombay High Court 5.2.1. The assessee has relied on the Bombay High Court 5.2.1. The assessee has relied on the Bombay High Court decision in the case of Zandu Pharmaceuticals Ltd., whereby it decision in the case of Zandu Pharmaceuticals Ltd., whereby it decision in the case of Zandu Pharmaceuticals Ltd., whereby it was held that R&D expenses in relation to new drugs cannot be was held that R&D expenses in relation to new drugs cannot be was held that R&D expenses in relation to new drugs cannot be assigned to eligible manufacturing units. assigned to eligible I have considered the facts of the case. The submission of the I have considered the facts of the case. The submission of the I have considered the facts of the case. The submission of the assessee are not acceptable and are in fact contrary to the facts of assessee are not acceptable and are in fact contrary to the facts of assessee are not acceptable and are in fact contrary to the facts of asseseee's case in view of the following:- asseseee's case in view of the following: a) As stated by AO in para 11.3 of his assessment order, As stated by AO in para 11.3 of his assessment order, As stated by AO in para 11.3 of his assessment order, assessee has not submitted any documents to establish ee has not submitted any documents to establish ee has not submitted any documents to establish beyond doubt that these future products will not be formed beyond doubt that these future products will not be formed beyond doubt that these future products will not be formed in the exempted unit. Therefore, basically, the objection of in the exempted unit. Therefore, basically, the objection of in the exempted unit. Therefore, basically, the objection of the AO was that assessee could not prove that these R&D the AO was that assessee could not prove that these R&D the AO was that assessee could not prove that these R&D expenses and the research being undertaken in this centre expenses and the research being undertaken in this centre was in no way related to the eligible units. was in no way related to the eligible units. b) Further, in para 11.5 of the assessment order, AO has Further, in para 11.5 of the assessment order, AO has Further, in para 11.5 of the assessment order, AO has brought out the details of R&D being undertaken by the brought out the details of R&D being undertaken by the brought out the details of R&D being undertaken by the assessee and has held in the subsequent paras that it assessee and has held in the subsequent paras that it assessee and has held in the subsequent paras that it cannot be adduced from any evidence that expenditure cannot be adduced from any evidence that expenditure incurred on R&D has no nexus with the products being incurred on R&D has no nexus with the products being incurred on R&D has no nexus with the products being manufactured in 80IB / 80IC units. manufactured in 80IB / 80IC units.

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c) At the time of appellate proceedings, the details of letter At the time of appellate proceedings, the details of letter At the time of appellate proceedings, the details of letter forwarded by assessee to the Ministry of Science & forwarded by assessee to the Ministry of Science & forwarded by assessee to the Ministry of Science & Technology dated 24.10.2011 were called for, wherein, Technology dated 24.10.201 1 were called for, wherein, details regarding certification of expenses are forwarded to details regarding certification of expenses are forwarded to details regarding certification of expenses are forwarded to the Ministry. The details of formulation for the domestic the Ministry. The details of formulation for the domestic the Ministry. The details of formulation for the domestic market and bulk drugs and the additional products market and bulk drugs and the additional products market and bulk drugs and the additional products undertaken by the assessee as per enclosure I and undertaken by the assessee as per enclosure I and undertaken by the assessee as per enclosure I and enclosure II, forwarded to the Ministry of Science & II, forwarded to the Ministry of Science & Technology, it can be seen that the various medicines and Technology, it can be seen that the various medicines and Technology, it can be seen that the various medicines and the products contain generic as well as chemical names of the products contain generic as well as chemical names of the products contain generic as well as chemical names of the medicines. Apparently, the details are scientific, the medicines. Apparently, the details are scientific, the medicines. Apparently, the details are scientific, however, a little detailed perusal shows that these products however, a little detailed perusal shows that these products are related to development of variants of various medicines are related to development of variants of various medicines are related to development of variants of various medicines being produced by assessee at its various units including being produced by assessee at its various units including being produced by assessee at its various units including exempted units. The details of R&D work show that the exempted units. The details of R&D work show that the exempted units. The details of R&D work show that the drugs like ofloxacin, levofloxcin, azithromycin, ethionamide drugs like ofloxacin, levofloxcin, azithromycin, ethionamide drugs like ofloxacin, levofloxcin, azithromycin, ethionamide tablets, rifampicin, isoniazid, ethambutol, paracetamol etc. lets, rifampicin, isoniazid, ethambutol, paracetamol etc. lets, rifampicin, isoniazid, ethambutol, paracetamol etc. amongst several others are being manufactured at the R8D amongst several others are being manufactured at the R8D amongst several others are being manufactured at the R8D centre and the medicines of the same genre are being centre and the medicines of the same genre are being centre and the medicines of the same genre are being manufactured at the units having exempted income. manufactured at the units having exempted income. manufactured at the units having exempted income. Therefore, the different formulation or different presentation Therefore, the different formulation o r different presentation of the chemical composition or medicines are being produced of the chemical composition or medicines are being produced of the chemical composition or medicines are being produced at the exempted units as well in the R&D centers. Therefore, at the exempted units as well in the R&D centers. Therefore, at the exempted units as well in the R&D centers. Therefore, the detailed perusal of actual R&D work of assessee shows the detailed perusal of actual R&D work of assessee shows the detailed perusal of actual R&D work of assessee shows that R&D is closely related and associated with prod that R&D is closely related and associated with production that R&D is closely related and associated with prod at the exempted units. There are severai illustrations in the at the exempted units. There are severai illustrations in the at the exempted units. There are severai illustrations in the details filed by assessee, which prove that R&D products details filed by assessee, which prove that R&D products details filed by assessee, which prove that R&D products are in no way unrelated to the products at the exempted are in no way unrelated to the products at the exempted are in no way unrelated to the products at the exempted centers. d) In view of this factual revelation of facts R&D work(based on In view of this factual revelation of facts R&D work(based on In view of this factual revelation of facts R&D work(based on actual details of drugs & chemical formulation), it would be ual details of drugs & chemical formulation), it would be ual details of drugs & chemical formulation), it would be very logical & as per law to assign these expenses very logical & as per law to assign these expenses very logical & as per law to assign these expenses proportionately to all manufacturing units. The hollow proportionately to all manufacturing units. The hollow proportionately to all manufacturing units. The hollow argument without verilying actual facts of assessee's R&D argument without verilying actual facts of assessee's R&D argument without verilying actual facts of assessee's R&D work thus fall flat and loses all its strength. work thus fall flat and loses all 5.2.2 The reliance in case of Zandu Pharmaceuticals Ltd. is 5.2.2 The reliance in case of Zandu Pharmaceuticals Ltd. is 5.2.2 The reliance in case of Zandu Pharmaceuticals Ltd. is misplaced as in that case, on the facts, it was decided that R&D misplaced as in that case, on the facts, it was decided that R&D misplaced as in that case, on the facts, it was decided that R&D expenses were in relation to totally new drugs. However, the case expenses were in relation to totally new drugs. However, the case expenses were in relation to totally new drugs. However, the case of assessee is different as has been illustrated above. In view of of assessee is different as has been illustrated ab ove. In view of this, the findings given by AO is found to be correct and the appeal this, the findings given by AO is found to be correct and the appeal this, the findings given by AO is found to be correct and the appeal

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of the assessee in this ground is dismissed. Hence ground no. 2 of of the assessee in this ground is dismissed. Hence ground no. 2 of of the assessee in this ground is dismissed. Hence ground no. 2 of appeal is dismissed.” appeal is dismissed.

“One of the purpose of R&D in a company like the Appellant One of the purpose of R&D in a company like the Appellant One of the purpose of R&D in a company like the Appellant (Macleods) is to develop new variants of formulations from (Macleods) is to develop new variants of formulations from (Macleods) is to develop new variants of formulations from existing resources available in the form of API or bulk dr existing resources available in the form of API or bulk dr existing resources available in the form of API or bulk drugs. If the existing API or bulk drugs are not used for development of the existing API or bulk drugs are not used for development of the existing API or bulk drugs are not used for development of new medicines then more than 98% of pharmaceuticals R&D new medicines then more than 98% of pharmaceuticals R&D new medicines then more than 98% of pharmaceuticals R&D will stop working and there are multiple number of ingredients will stop working and there are multiple number of ingredients will stop working and there are multiple number of ingredients which are present in almost all types of medicines.Hence the which are present in almost all types of medicines.Hence the which are present in almost all types of medicines.Hence the observation that some of the bulk drugs which are already used vation that some of the bulk drugs which are already used vation that some of the bulk drugs which are already used in eligible units are being tested in R&D for different variant is in eligible units are being tested in R&D for different variant is in eligible units are being tested in R&D for different variant is completely misplaced. completely misplaced. Secondly, we had given details of two activities of R&D before Secondly, we had given details of two activities of R&D before Secondly, we had given details of two activities of R&D before LAO and CIT(A) wherein details bulk drugs developed at R&D LAO and CIT(A) wherein details bulk drugs deve loped at R&D and formulations developed at R&D were given. It was clearly and formulations developed at R&D were given. It was clearly and formulations developed at R&D were given. It was clearly mentioned that bulk drugs developed at R&D were used to mentioned that bulk drugs developed at R&D were used to mentioned that bulk drugs developed at R&D were used to manufacture the same at our Sarigam API unit which was not manufacture the same at our Sarigam API unit which was not manufacture the same at our Sarigam API unit which was not eligible for any tax incentive. Formulations were manufactured eligible for any tax incentive. Formulations were manufactured eligible for any tax incentive. Formulations were manufactured at Palghar, Premier, Daman and Baddi units and out of these alghar, Premier, Daman and Baddi units and out of these alghar, Premier, Daman and Baddi units and out of these Baddi unit was an eligible unit for 100% tax incentive. However Baddi unit was an eligible unit for 100% tax incentive. However Baddi unit was an eligible unit for 100% tax incentive. However

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Baddi unit only manufactured formulations and did not produce Baddi unit only manufactured formulations and did not produce Baddi unit only manufactured formulations and did not produce any bulk drugs As regards specific names being given in Appeal order, we As regards specific names being given in Appeal order, we As regards specific names being given in Appeal order, we respectfully submit as under: espectfully submit as under: a) Olloxacin: The appellant manufactured tablets containing Olloxacin: The appellant manufactured tablets containing Olloxacin: The appellant manufactured tablets containing this API Ofoxacin at its eligible unit. However, there was this API Ofoxacin at its eligible unit. However, there was this API Ofoxacin at its eligible unit. However, there was no agile eialed io any tablet containingOfloxacin at its no agile eialed io any tablet containingOfloxacin at its no agile eialed io any tablet containingOfloxacin at its R&D unit. b) Levofloxacin: Our R&D unit was developing a Levofloxacin: Our R&D unit was developing a Levofloxacin: Our R&D unit was developing a tablet containing containing containing Levoffoxacin Levoffoxacin Levoffoxacin which which which was was was approved approved approved by by by regulators but manufacturing of the same did not start. regulators but manufacturing of the same did not start. regulators but manufacturing of the same did not start. Our eligible unit was manufacturing an oral syrup that Our eligible unit was manufacturing an oral syrup that Our eligible unit was manufacturing an oral syrup that contained Levoffoxacin.Appellant has been manufacturing contained Levoffoxacin.Appellant has been manufacturing contained Levoffoxacin.Appellant has been manufacturing this orai syrup since more than 10 years and the R&D this orai syrup since more than 10 y ears and the R&D unit was not undertaking any activity related to this unit was not undertaking any activity related to this unit was not undertaking any activity related to this syrup. c) Azithromycin: Azithromycin: Azithromycin: The The The appellant appellant appellant manufactured manufactured manufactured tablets tablets tablets containing this API Azithromycin at its eligible unit. containing this API Azithromycin at its eligible unit. containing this API Azithromycin at its eligible unit. However, there was no activity related to any tablet However, there was no activity related to any tablet However, there was no activity related to any tablet containing Azithromycin at its R&D unit. containing Azithromyc d) Ethionamide: Ethionamide: Ethionamide: The The The appellant appellant appellant manufactured manufactured manufactured tablets tablets tablets containing this API Ethionamide at its eligible unit. containing this API Ethionamide at its eligible unit. containing this API Ethionamide at its eligible unit. However, there was no activity related to any similar However, there was no activity related to any similar However, there was no activity related to any similar tablet containing Ethionamide as API at its R&D unit. tablet containing Ethionamide as API at its R&D unit. tablet containing Ethionamide as API at its R&D unit. e) Rifampicin: The appellant Rifampicin: The appellant manufactured tablets and manufactured tablets and capsules containing this APIRifampicin at its non capsules containing this APIRifampicin at its non-eligible capsules containing this APIRifampicin at its non unit. However, there was no activity related to any similar unit. However, there was no activity related to any similar unit. However, there was no activity related to any similar tablet containing Rifampicin as API at its R&D unit. tablet containing Rifampicin as API at its R&D unit. tablet containing Rifampicin as API at its R&D unit. f) Isoniazid: The appellant did not manufacture any Isoniazid: The appellant did not manufacture any Isoniazid: The appellant did not manufacture any formulation containing this API at its eligible unit. There n containing this API at its eligible unit. There n containing this API at its eligible unit. There was was was no no no activity activity activity related related related to to to any any any formulation formulation formulation containingIsoniazid as API at its R&D unit. containingIsoniazid as API at its R&D unit. g) Ethambutol: The appellant did not manufacture any Ethambutol: The appellant did not manufacture any Ethambutol: The appellant did not manufacture any formulation containing thisAPI at its eligible unit. There formulation containing thisAPI at its eligible unit. There formulation containing thisAPI at its eligible unit. There was development effort for a combination drug containing development effort for a combination drug containing development effort for a combination drug containing Ethambutol as one of the API at its R&D unit. Ethambutol as one of the API at its R&D unit.

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h) Paracetamol: The appellant manufactured a tablet having Paracetamol: The appellant manufactured a tablet having Paracetamol: The appellant manufactured a tablet having combination of Nimesulide and Paracetamol at its eligible combination of Nimesulide and Paracetamol at its eligible combination of Nimesulide and Paracetamol at its eligible unit. However in R&D we tried to develop a new tablet unit. However in R&D we tried to develop a new tablet having Sustained Release (SR) of Paracetamol having having Sustained Release (SR) of Paracetamol having having Sustained Release (SR) of Paracetamol having 665mg of Paracetamol which was designed to be 665mg of Paracetamol which was designed to be 665mg of Paracetamol which was designed to be completely different from existing combination drug. completely different from existing combination drug. completely different from existing combination drug. However, the LAO has failed to appreciate that the new However, the LAO has failed to appreciate that the new However, the LAO has failed to appreciate that the new tablet being developed at R&D was not approved by tablet being developed at R&D was not a pproved by regulator and hence was never manufactured till date. regulator and hence was never manufactured till date.” regulator and hence was never manufactured till date. 18. On perusal of list of products manufactured in eligible units of list of products manufactured in eligible units of list of products manufactured in eligible units and drug under development and R & D units, we find that and drug under development and R & D units and drug under development and R & D units products manufactured under the units eligible for 80IB and 80IC products manufactured under the units eligible for 80IB and 80IC products manufactured under the units eligible for 80IB and 80IC unit are totally unrelated with the product under development in it are totally unrelated with the product under development in it are totally unrelated with the product under development in R&D units. In some cases, variant of formulation like injectable In some cases, variant of formulation like injectable In some cases, variant of formulation like injectable form etc. have been under development in R & D Units, which are form etc. have been under development in R & D Units, which are form etc. have been under development in R & D Units, which are different from tablet of same drug manufactured in eligible / non- different from tablet of same drug manufactured in eligible / no different from tablet of same drug manufactured in eligible / no eligible units. Moreover, in research and development units the Moreover, in research and development units the Moreover, in research and development units the formulations or the drugs formulations or the drugs developed, firstly, undergo undergo a process of 4 to 5 years, before before those those formulations or drugs drugs undergo undergo manufacturing. From the submission filed before the lower From the submission filed before the lower From the submission filed before the lower authorities, which have been filed before us also, it is verified that authorities, which have been filed before us also, it is ve authorities, which have been filed before us also, it is ve at least in the current assessment at least in the current assessment year, the research and the research and development expenditure incurred is not related to the units eligible development expenditure incurred is not related to the units eligible development expenditure incurred is not related to the units eligible for deduction under section 80IB and 80IC of the Act. The Ld. for deduction under section 80IB and 80IC of the for deduction under section 80IB and 80IC of the CIT(A) has made a general comment that drugs manufactured in CIT(A) has made a general comment that drugs manufactured in CIT(A) has made a general comment that drugs manufactured in exempted unit and research carried out in R&D unit are in respect exempted unit and research carried out in R&D unit exempted unit and research carried out in R&D unit of the same items. The Ld. CIT(A) has not pointed out as to which The Ld. CIT(A) has not pointed out as to which The Ld. CIT(A) has not pointed out as to which drugs or formulation under development drugs or formulation under development in R&D unit has bee R&D unit has been

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manufactured by particular unit eligible under 80IB or 80IC of the manufactured by particular unit eligible under 80IB or 80IC of the manufactured by particular unit eligible under 80IB or 80IC of the Act. Accordingly, the finding of the Ld. CIT(A) being the finding of the Ld. CIT(A) being the finding of the Ld. CIT(A) being contrary to facts, same are set as set aside and the disallowance for deduction under de and the disallowance for deduction under section 80IB and 80IC of the section 80IB and 80IC of the Act corresponding to the ct corresponding to the allocation of R&D expenditure is hereby deleted. R&D expenditure is hereby deleted.

18.1 The ground raised in relation to the deduction u/s 80IC for The ground raised in relation to the deduction u/s 80IC for The ground raised in relation to the deduction u/s 80IC for inter unit transfer of material of material is concerned, same same was notpressed before us, therefore same is us, therefore same is dismissed as infructuous. dismissed as infructuous. 19. In the result, the appeal of the assessee and the Revenue for the appeal of the assessee and the Revenue for the appeal of the assessee and the Revenue for A.Ys. 2011-12 are allowed 12 are allowed, whereas appeal of the assessee for AY , whereas appeal of the assessee for AY 2012-13 is partly allowed and appeal of Revenue for AY 2012 13 is partly allowed and appeal of Revenue for AY 2012-13 is 13 is partly allowed and appeal of Revenue for AY 2012 allowed.

Order pronounced under Rule 34(4) of the ITAT Rules, Order pronounced under Rule 34(4) of the ITAT Rules, Order pronounced under Rule 34(4) of the ITAT Rules, 1963 on 31/01/2023. 1/2023. Sd/- Sd/- Sd/ (SANDEEP SINGH KARHAIL SANDEEP SINGH KARHAIL) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 31/01/2023 Dragon Legal/Pavanan, Sr. P.S (on contract) Pavanan, Sr. P.S (on contract)

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Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, BY ORDER, //True Copy// (Sr. Private Secretary) (Sr. Private Secretary) ITAT, Mumbai ITAT, Mumbai