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Facts
Piramal Enterprises Ltd., a pharmaceutical and R&D company, faced assessments for AYs 2008-09, 2009-10, and 2010-11. The assessee's appeals concerned the reduction of deduction u/s 80IC due to the allocation of R&D and interest expenses to its Baddi manufacturing unit. The Revenue's appeal for AY 2008-09 challenged a disallowance u/s 14A read with Rule 8D(2)(ii) related to expenses incurred for earning exempt income, with the assessee claiming sufficient interest-free own funds for such investments.
Held
The Tribunal deleted the interest allocation made by the Assessing Officer to the Baddi unit for 80IC deduction, finding that the assessee had sufficient own funds from a rights issue. However, the R&D expenditure allocation was remitted to the Assessing Officer for verification of the nexus with the Baddi unit's manufacturing activities, based on new evidence. Regarding the Revenue's appeal, the Tribunal dismissed it, concluding that no disallowance under Section 14A read with Rule 8D(2)(ii) was required as the assessee possessed sufficient interest-free own funds for investments yielding exempt income.
Key Issues
1. Whether the allocation of interest and R&D expenditures to the Baddi unit was justified, thereby reducing the deduction claimed under Section 80IC of the Income Tax Act. 2. Whether a disallowance under Section 14A read with Rule 8D(2)(ii) was warranted for expenses related to exempt income, despite the availability of the assessee's own interest-free funds.
Sections Cited
143(3), 254, 80IC, 115JB, 14A, Rule 8D(2)(ii), Rule 8D(2)(iii), Rule 29
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These four appeals, out of which three filed by assessee and one filed by Revenue are against the orders of Ld. CIT(A)-57, Mumbai, vide the following orders- i) ITBA/APL/S/250/2023-24/1063541049(1), dated 28.03.2024 passed against the assessment order by the Deputy CIT– 8(2)(1), Mumbai, u/s. 143(3) r.w.s 254 of the Income-tax Act (hereinafter referred to as the “Act”), dated 28.09.2021, for Assessment Year 2010-11. ii) ITBA/APL/S/250/2023-24/1063538127(1), dated 28.03.2024 passed against the assessment order by the Asst. CIT(A) – 7(3)(2), Mumbai, u/s. 143(3) r.w.s 254 of the Act, dated 28.09.2021, for Assessment Year 2009-10. iii) ITBA/APL/S/250/2023-24/1063539745(1), dated 28.03.2024, passed against the assessment order by the Asst. CIT(A) – 7(3)(2), Mumbai, u/s. 143(3) r.w.s 254 of the Act, dated 18.12.2019, for Assessment Year 2008-09. iv) ITBA/APL/S/250/2023-24/1063539745(1), dated 28.03.2024 passed against the assessment order by the Asst. CIT(A) – 7(3)(2), Mumbai, u/s. 143(3) r.w.s 254 of the Act, dated 18.12.2019, for Assessment Year 2008-09.
The three appeals filed by the assessee for three Assessment Years are on an identical issue relating to addition made towards reduction of deduction u/s.80IC. The quantum of addition varies for each of the three years, issue remaining the same. Grounds raised by the assessee on this issue is reproduced for one of the year, i.e., Assessment Year 2008-09 in which is taken as lead year for drawing facts and conclusion.
“1. On the facts and circumstances of the case and in law, the M. CITIA) erred in upholding the AO's action of reducing the deduction us 80-1C of the Act by Rs. 13,63,01,000-on account of allocation of R&DExpenditure and Interest Expenditure on the alleged ground that such expenditure are attributable to the Bakli Unit 2. Thus, the Appellant prays that the addition to income on account of reduction of deduction u/s 80-IC of the Act be deleted.”
2.1. Appeal by the Department is on a single issue towards disallowance made u/s. 14A r.w.r. 8D(2)(ii). Ground raised by the Revenue is reproduced as under:
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing that no disallowance under Rule 8D(2)(ii) is required to be made for the purpose of disallowance u/s.14A of the Act, ignoring the fact that the Ld. CIT(A) in its earlier order dated 28.04.2017 has dismissed the appeal of assessee. The Hon'ble ITAT, 'K' Bench, Mumbai, in appeals ITAT No 5471/Mum/2017 & in ITA 5583/Mum/2017 has decided the appeal vide order dated 30.07.2018 on the various issues and some of the issues were set aside to the AO for verification. The AO has passed order u/s 143(3) r.w.s 254 of the Income Tax Act 1961 after due verification of fact.”
Brief facts of the case are that assessee is engaged in pharmaceutical business including its research and development, financial services and information management business through its subsidiaries. Assessee has its manufacturing activities carried out at different plants located at –
Baddi 2. Pithampur 3. Mahad 4. Digwal 5. Ennore 6. VFCD Thane 3.1. Plants located at Baddi, Pithampur & Mahad manufactures Formulation products. Formulations production is carried on to cater Indian Market as well as overseas market. Formulation manufacturing is also done on contract basis for other companies. Digwal and Ennore manufactures APIs Generics & also customized APIs. At VFCD Thane Plant manufacturing is carried on of Vitamins, Food & feed premixes. In the year under consideration apart from sales from manufactured products, there were traded products and service income.
3.2. For Assessment Year 2008-09, assessee filed its return of income on 29.09.2008 reporting total income at Rs.58,66,63,489/- under normal provisions of the Act after claiming deduction u/s.80IC of Rs.247,10,42,003/- and reported book profit of Rs.250,88,46,936/- u/s. 115JB of the Act. Assessee claimed deduction of Rs.247,14,16,642/-u/s. 80IC in respect of Baddi unit. During the original assessment order, ld. Assessing Officer allocated Research and Development (R&D) expenses of Rs. 12,28,00,000/- and interest expenses of Rs. 11,31,00,000/- to the Baddi unit in the ratio of sales. By allocation of such expenses, the claim of deduction u/s. 80IC was reduced by Rs. 23,59,00,000/- The action of ld. Assessing Officer to disallow part of the deduction u/s 80IC was upheld by the DRP. On further appeal, the Tribunal set aside the matter to the file of the ld. Assessing Officer for fresh adjudication, In the set aside proceedings ld. Assessing Officer disallowed deduction u/s 80IC amounting to Rs 23,59,00,000/- as done in the original assessment order. Thus, essentially the common issue in respect of claim of deduction u/s.80IC which has been disallowed pertains to interest and R&D expenditure allocated to Baddi unit.
In so far as it relates to interest allocation, assessee had persistently made submission that its own funds are sufficient rather in excess of the total investment made in Baddi unit. According to the assesse, no borrowed funds were used for setting up of Baddi unit and thus, even a part of interest expenditure cannot be allocated to Baddi unit. Assessee made all the relevant submissions demonstrating the availability of funds which have been utilized for the purpose of setting up of Baddi unit. Over and above, it was also submitted that assessee had come out with rights issue on 24.06.2005. The commencement of operation of activity by the Baddi unit is reported as 10.06.2006 in Form – 10CCB for Assessment Year 2008-09 placed in a paper book at page 252. The proceeds of right issue were deployed in setting up of the Baddi unit.
4.1. The object of this right issue included investment to be made out of the proceeds of right issue for new formulation manufacturing facility at Baddi. This fact was asserted before the ld. Assessing Officer for which necessary details were submitted as stated in para – 8.7.3 (f) at page 15 of the impugned assessment order. For this, ld. Counsel for the assessee furnished the documents relating to the rights issue which contains letter of offer issued for the equity share holders of the assesse. In the said letter of offer, objects for the issue are elaborated. In the said object, it is stated that the assessee proposes to finance capital expenditure for its new manufacturing facilities including Baddi with the proposed expenditure to be incurred up to March, 2007 of Rs.1,650 million for the Baddi unit. The details contained for this capital outlay funded by the proceeds of right issue are extracted below for ready reference:
4.2. We note that this is the most clinching fact which evidently demonstrates the claim of the assessee that no borrowed funds were used for setting up of Baddi unit which has been ignored at all the preceding stages of the proceedings. Having considered this availability of funds by way of right issue, specific for setting up of the Baddi unit, interest attribution by the ld. Assessing Officer out of the total interest expense claimed by the assessee towards Baddi unit is uncalled for. Accordingly, we delete the interest allocation made by the ld. Assessing Officer towards Baddi unit which goes to reduce the claim of assessee u/s. 80IC.
In so far as it relates to R&D expenditure allocation to the Baddi unit, all through out claim of the assessee has been that expenditure towards R&D incurred has no correlation or connection with the products manufactured at Baddi unit. In the course of assessment proceedings, assessee submitted that activities undertaken at Baddi unit are in the scope of formulation manufacturing which is also undertaken on contract manufacturing basis. It had furnished the list of products manufactured at Baddi unit. It was submitted that revenue expenses pertaining to R&D related activity are incurred mainly on process development for customs manufacturing (customized development of specific products). This custom manufacturing has no correlation with the formulation manufacturing activity undertaken at Baddi unit. On the requirement of maintenance of separate books of account for Baddi unit, assessee categorically submitted in its reply that separate book of accounts are drawn for its Baddi unit for identifying the quantum of deduction to be claimed u/s.80IC. It also furnished a copy of audit report in Form No.10CCB with audited accounts and notes, computing the claim of deduction u/s. 80IC. 5.1. The said claim of the assessee has not been entertained by the authorities below and the addition so made resulted into reduction of claim of deduction u/s. 80IC which was sustained.
5.2. Before us, ld. Counsel for the assessee submitted that Baddi unit as a part of the domestic formulation business was transferred and sold to Abbott Pvt. Ltd. in September, 2010 and thus, assessee found it difficult to give further factual clarifications to establish that Baddi unit had no correlation with the R&D unit. Before us, assessee has placed on record, details of allocation of R&D expenditure forming part of the written synopsis as Annexure-1 to the same. The same is reproduced as under:
A.Y. 08-09 Particulars Remarks Amount Corporate Includes cost of employees on corporate 3,32,83,763 payroll who perform
This represents expenditure incurred on the independent New Chemical Entity (NCE) business that was undertaken by Piramal. This business had no linkage to Baddi since the products manufactured at Baddi pertain to on-market formulations. A significant portion of this R&D centre was demerged to Piramal Life Sciences in FY 2007-08 This facility had QLIS a very small component of formulations 16,59,90.866 Goregaon development activity pertaining to on- market formulations which was also transferred to Abbott in 2010 and development activity in respect of Piramal's Active Pharmaceutical ingredient (API) business for developing
Drug Master File (DMF). This DMF development activity was transferred to Rabale and is currently continuing operations.
Also refer screenshots enclosed as Appendix 1 for detailed description as per website of PPL Hyderabad This was the plant related head office for Head the support staff (such as HR, finance, admin and IT) and did not undertake research and development activities and still continues to operate out of Hyderabad within Piramal Pharma Limited (PPL) post the demerger.
Zahirabad Represents development and (Digw manufacturing activities for contract manufacturing business for third party customers. This line of business does not relate to Baddi since the products manufactured at Baddi pertain to the domestic formulation business. This 98,14,003 facility manufactures only APIs and was transferred to PPL by way of slump sale in FY 2020-21.
Also refer screenshots enclosed as Appendix 2 for detailed description as per website of PPL.
Ennore Represents development and manufacturing activities for contract manufacturing business for third party customers. This line of business does not relate to Baddi since the products manufactured at Baddi pertain to the domestic formulation business. This facility manufactures only APIs and was 1,53,07,308 transferred to PPL by way of slump sale in FY 2020-21.
Also refer screenshots enclosed as Appendix 3 for detailed description as per website of PPL
Wellquest Represents our Clinical Research Clinical Organisation (CRO) business that Research conducted clinical research for third party customers. This line of business does not relate to Baddi since the 5,14,15,670 products manufactured at Baddi pertain to the domestic formulation business. This facility was sold to Indoco Remedies in FY 2014-15.
Total amounts as per P & L 27,58,11,610
Total amounts as per P & L (in INR 275.81 Million)
5.3. For this submission, ld. Counsel for the assessee stated that this was not submitted earlier before the authorities due to the transfer of the Baddi unit. This data has been collected subsequently and thus requested to accept the same in terms of Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 (ITAT Rules). Accordingly, ld. Counsel stated that in respect of allocation of R&D expenditure, in the light of details submitted under the Rule 29 of the ITAT rules supported by relevant documentary evidences attached thereto, the ld. Assessing Officer be directed to examine the issue so as to establish the nexus between R&D expenditure at Baddi unit requiring any allocation for the same.
5.4. We have gone through the submissions made before us. Assessee has furnished certain details corroborated by documentary evidences u/r. 29 in respect of R&D expenditure allocation towards Baddi unit which needs verification since claim of the assessee has all along been that R&D expenditure incurred are mainly in the process development for customs manufacturing, which has no relation directly or indirectly with the manufacturing activity carried out at Baddi unit. In the light ofthese fresh submissions made by the assessee u/r 29 of ITAT Rules, we find it appropriate to remit the matter for limited purpose of verification to the file of ld. Jurisdictional Assessing Officer (JAO), so as to ascertain if there is any relation between the R&D expenses incurred by the assessee with the manufacturing activity carried out at the Baddi unit. Ld. Assessing Officer is directed to examine and verify to establish the nexus if any, for allocation of R&D expenses to Baddi unit and accordingly, consider the claim of the assessee in accordance with the provisions of law. Accordingly, ground raised by the assessee is partly allowed.
Since, the issue in other two appeals for Assessment Year 2009- 10 and 2010-11 are identical, except for variation in quantum, our observations and findings in appeal for Assessment Year 2008-09 in aforesaid paragraphs apply mutatis mutandis to these two years also. Thus, appeals for these two years by the assessee are also partly allowed.
We now take up appeal by the Department for Assessment Year 2008-09, where the issue relates to disallowance made u/s.14A r.w.r. 8D(2)(ii). Ld. Assessing Officer had made a disallowance of Rs.2,86,19,000/- u/s. 14A which comprises of Rs.2,52,83,000/- u/r. 8D(2)(ii) and Rs. 33,36,000/- u/r. 8D(2)(iii).
7.1. Ld. Assessing Officer observed that during the year, assessee earned dividend income of Rs.5,00,000/- from NPIL and Rs. 1,96,00,000/- from Allegran, totaling to Rs.200.52 lakhs. Assessee had made investment of Rs. 131.85 crores in sister concerns, subsidiaries and UTI tax free bonds. According to him, it could not happen without managerial and administrative expenses incurred by the assessee. Ld. CIT(A) upheld the decision of ld. Assessing Officer regarding disallowance u/s 14A of the Act. Tribunal had set aside the issue of disallowance u/s 14A r.w.r. 8D(2)(ii) with a direction to ld. Assessing Officer to verify availability of interest free funds for the purpose of making investment in exempt income yielding assets. During the set aside proceedings, ld. Assessing Officer asked the assessee to provide relevant details of investment. Assessee submitted the details that own funds (share capital and reserves and surplus) was Rs. 1,016 crores, whereas investment of Rs.67.60 crores was made in tax free securities, thus, investment was made from its own interest free funds. Ld. Assessing Officer was not convinced with the reply of the assessee. Ld. Assessing Officer computed the disallowance under Rule 8D(2)(ii) at Rs.252.83 lakhs. Ld. Assessing Officer also determined the disallowance under Rule 8D(2)(iii) at Rs.2,18,500/- 7.2. During the appellate proceedings, assessee filed a written submission in which it submitted that the Tribunal, vide order dated 30.07.2018, directed ld. Assessing Officer to verify the availability of sufficient interest free funds for the purpose of making investment in exempt income yielding assets and work out the disallowance under Rule 8D(2)(ii). Assessee reiterated that its own funds (share capital and reserves and surplus) was Rs. 1,016 crores, whereas investment of Rs.67.60 crores was made in tax free securities. Assessee further, submitted that on similar direction given by the Tribunal for AY. 2011- 12, in the case of assessee, ld. Assessing Officer, in the order giving effect to the Tribunal order u/s 143(3) r.w.s. 254 deleted the disallowance under Rule 8D(2)(ii) of the Rules. Assessee also relied upon the decision in the case of South Indian Bank Ltd. vs. CIT (438 ITR 1)(SC). Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) (Bom HC), HDFC Bank Ltd. vs. CIT (366 ITR 505) (Bom HC), CIT vs. Reliance Utilities & Power Ltd. (313 ITR 340) (Bom HC) and other decisions. Thus, assessee submitted that no disallowance u/s 14A r.w.r. 8D(2)(ii) should be made.
7.3. Tribunal had set aside the issue to the file of ld. Assessing Officer for limited purpose of verifying the availability of sufficient interest free funds to make investment in assets which yielded exempt income. Before the ld. Assessing Officer, assessee submitted that it had sufficient interest free own funds (share capital and reserves and surplus). Ld. Assessing Officer has not controverted the fact of availability of interest free funds. The interest free funds available with the assessee are was more than quantum of investment made in the assets which yielded the exempt income. On similar grounds, the Tribunal had set aside the matter to the file of ld. Assessing Officer for AY 2011-12. Ld. Assessing Officer examined the sufficiency of interest free funds availability with the assessee and while giving effect to the order of the Tribunal, he did not make any disallowance under Rule 8D(2)(ii) For AY 2008-09, assessee had sufficient own interest free funds from which investment of Rs.67.60 crores was made and from such investment from exempt income was earned. Thus, assessee was having sufficient interest free funds at its disposal to make investment from which exempt income was earned. The case laws relied upon by the assessee as mentioned above support the contention of the assessee. Further, for Assessment Year 2011-12, on similar facts, ld. Assessing Officer did not make disallowance under Rule 8D(2)(ii). Thus, keeping these facts and judicial precedents in juxtaposition, for Assessment Year 2008-09 also, no disallowance under Rule 8D(2)(ii) is required to be made for the purpose of disallowance u/s. 14A of the Act. Accordingly, ground raised by the Revenue is dismissed.
In the result, all the three appeals of the assessee are partly allowed and appeal of the Revenue is dismissed.
Order is pronounced in the open court on 21st May, 2025