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Facts
The Revenue appealed against orders allowing deductions under Section 80IE for A.Y. 2020-2021 and 2022-2023. The core issue was whether Research and Development (R&D) expenses incurred by the assessee's R&D units, which were separate from manufacturing units, should be allocated to manufacturing units claiming deductions under Section 80IE, 80IB, or 80IC. The Assessing Officer had allocated these expenses, reducing the claimed deductions.
Held
The Tribunal held that R&D expenses were not related to the manufacturing units as the R&D divisions were working on future products and innovations, not the current products manufactured. The Tribunal followed its own previous decisions and the decisions of other Benches, concluding that there was no direct nexus between the R&D expenditure and the manufacturing units eligible for deductions.
Key Issues
Whether R&D expenses incurred by a company's separate R&D division can be allocated to manufacturing units claiming tax deductions under Sections 80IE, 80IB, or 80IC, when the R&D is for future products and not directly linked to current manufacturing.
Sections Cited
80IE, 35(2AB), 801C, 80IA, 80IB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
order : 28.03.2025 [ O R D E R [Per Rahul Chaudhary, Judicial Member:
1. 1. These are two appeal preferred by the Revenue against two separate orders pertaining to Assessment Year 2020-2021 and 2021-2022 passed by the first appellate authority. Since identical grounds were raised in both the appeal, the same were heard together, and are, therefore, being disposed off by way of a common order.
2. We would first take up appeal preferred by the Revenue for the Assessment Year 2020-2021 which is directed against the order, dated 27/11/2024, passed by the Commission of Income Tax, Appeals – 48, Mumbai [hereinafter referred to as ‘the CIT(A)’] & 476/MUM/2025 Assessment Year: 2020-2021 & 2022-23 under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had partly allowed the appeals against the Assessment Order, dated 26/03/2022, passed under Section 143(3) of the Act.
The Revenue has raised following ground of appeal: “1. "Whether on the basis of facts and circumstances of the case and in law, the Ld.CIT(A) was correct in deleting the additions of Rs. 147,40,68,856/- made u/s. 801E of the Act without appreciating the fact that the decision of Hon'ble ITAT on this issue in assessee's case in respect of A.Y. 2009-10, 2010-11 & 2012-13 has not been accepted by the Revenue and an appeal is pending before the Hon'ble Bombay High Court"
4. We have heard both the sides, perused the material on record and examine the position in law in view of the submissions advanced.
5. It emerges that the Assessee is a company in the business of manufacturing and dealing in pharmaceutical products. For the Assessment Year 2020-2021, The Assessee filed return of income on 15/02/2021, claiming deduction in respect of manufacturing units at Sikkim under Section 80IE of the Act. During the assessment processing, the Assessing Officer noted that the Assessee had been claiming weight deduction under Section 35(2AB) of the Act on account of research and development expenses. The Assessing Officer was of the view that the aforesaid research and development expenses should be allocated amongst the manufacturing units including units in respect of which Assessee had been claim deduction Section 80IE of the Act. Therefore, the Assessee was asked to show-cause as to why the research and development expenses should not be allocated to the various manufacturing units. In response, the Assessee made submissions reproduced in paragraph 5.2 of the Assessment Order the relevant extract of which reads as under: Assessment Year: 2020-2021 & 2022-23 ˝5.2 During the assessment proceedings, the assesses was required to furnish reasons as to why the R&D Expenses should not be allocated to its various manufacturing units including units eligible for profit linked deductions under sections 80IE of the I.T Act, 1961, In response, the assessee has submitted as under: Sl. No. 02: Non-Apportionment of R&D Expenses This is recurring issue since AY 2009-10 and every year since then the R&D expenditure is being apportioned by the AOs to different manufacturing units of the Company including those which are under tax incentive even though there is no link of R&D Expenses to the manufacturing activities of the units. The assessee Company has contested each of these apportionment at different appellate stages. Recently, for AY 2009-10, the Hon. ITAT Mumbai has allowed Company's claim that these R&D Expenses are not to be apportioned between different units of the Company. Copy of decision is enclosed as Annexure "A" Since the issue has now been settled by the Hon. ITAT. We request your good-self to not to proceed with such apportionment for AY 2020-21. For the sake of ready reference, we reproduce below our contention as to why these R&D Expenses are not required to be apportioned: MPL is a large pharmaceutical manufacturer and is one of India's top 10 pharmaceuticals companies. MPL, as on date, has total 9 manufacturing facilities, namely 5 in Daman, and 1 each in Palghar, Sarigam, Baddi & Sikkim Company's Baddi unit was eligible for desduction under section 801C and Sikkim units were entitled to deduction under section 80IE. Company also has two Research & Development Centres at Andheri East, Mumbai which are both approved by Department of Scientific and Industrial Research As part of its corporate policy, appellant is committed to spend about 5% of its gross revenues on Research & Development for the purpose of developing new ideas and drugs. Company's R&D units are housed in separate buildings very far away from its manufacturing units and are stand alone, independent units and separate financial statements are prepared for the same. Since its inception, Company has not been allocating any of as R&D expenses to the manufacturing units and the same have been consistently accepted by the department in assessments us 143(3). It is humbly submitted that Company's Research & Development activities are not directly related to its manufacturing units as the R&D division is working on future products and future innovation and launches and not present products manufactured by the manufacturing units. Hence the impugned R&D Assessment Year: 2020-2021 & 2022-23 expenditure has no relevance to the working of qualifying undertakings. R&D expenses are on futuristic research and the result of research is always uncertain. None of the items of research was forming part of qualifying undertakings. None of the qualifying undertaking thus benefits from the present research. Research in the field of biotech or bulk drugs will be wholly unrelated even for theoretical reckoning, from impugned qualifying undertakings. Details of products manufactured by the units and products on which R&D is undertaken were on records and which are completely independent from each other. While computing the profits and gains of the concerned eligible undertaking, only expenses relating thereto can be deducted. In other words, the expenses must be incurred, for and on behalf of the concerned undertaking. The expenses attributable to any other unit which have no relevance to the industrial undertaking cannot be deducted in respect of the said undertaking while computing the profits and pains of the undertaking. Details of expenses incurred on products under R&D will demonstrate that these are not related to any of the products commercially manufactured by the company. In fact, for products under R&D it takes typically 6 to 10 years for a product to be launched commercially and that too if the development is successful. There are several cases where the issue of allocution of R&D expenses for Pharmaceutical companies has been discussed at length and the courts and tribunals almost have unanimous view on the same which is in favour of assessees. Most notable among them is jurisdictional Bombay High Court which has very clearly held it in favor of assesseе: Zandu Pharmaceuticals Works Ltd. VL CIT, of 2007, DATE: 12.09.2012, Bombay High Court Section 80IA of Income Tax Act 1961 Whether on the facts and in the circumstances of the case the ITAT was justified in confirming the allocation of Research and Development expenses incurred by the Head Office among the four manufacturing units on the presumption that the expenditure so incurred is for the benefit of these manufacturing units, when in fact such research conducted had no connection with the business of the said units, nor any benefit is received by them from the said research. In the present case, the assesee is carrying on the business of manufacturing of medicines and ointments. The head offices well as the units carry on research and development activities and have their own R & D departments for research. Assessing Officer reduced the appellant claim for the said deductions u/c VI-A. CIT(A) and the Tribunal upheld the assessment order. Assessment Year: 2020-2021 & 2022-23 Further the tribunal held that the expenditure incurred do not pertain to manufacturing units and disallowed the expenses and it is also Important to note that different units manufacture different products and carries out independent R&D work ie there must be a direct nexus between industrial undertaking and expenditure incurred. The High Court held that an enterprise can assign the benefit of research in favor of third party and that presumption of nexus between the R&D activities and industrial units is not well founded. The decision was given in favor of assessee and thus the case got dismissed. It may please be noted that in this case, R&D units were being maintained in the manufacturing units itself and not as an independent units. Other decisions on this subject are as under: Bush Booke Allen India Limited v. ACIT [2005] 273 ITR 152 (Mad.) International Flavors & Fragrances India Ltd v. DCIT [142 of 2005] Madras HC Bush Baoke Allen India Limited v. ACIT [ITA 548 of 2001] (Mad.) Vanaz Engineers Limited [ITA No. 34 & 35/PN/1989] Ponds India Limited [ITA No 2047/Mad/88] Wockardt India Limited [3991/Mum/2005] Wockarh India Limited [71/Mum/2007] FDC Limited v. ACIT 8(1) [6569/Mum/2009] Thus it is apparent that allocation of R&D Expenses on qualified units is not clearly warranted in the case.̋ (Emphasis supplied) 6. After taking into consideration the above submissions, Assessing Officer was not convinced and therefore, the Assessing Officer proceeded to allocate research and development expenses over manufacturing units of the Assessee on the basis of percentage of sales. Thus, the Assessing Officer reduced the deduction as claimed by the Assessee under Section 80IE of the Act by INR.1,26,88,50,907/-.
Being aggrieved, the Assessee preferred appeal before the CIT(A) challenging the above action of the Assessing Officer. Vide, order, dated 27/11/2024, the CIT(A) partly allowed the aforesaid appeal and restored the deduction under Section 80IE of the Act to the amount claimed by the Assessee by placing reliance upon the Assessment Year: 2020-2021 & 2022-23 decision of the Co-ordinate Bench of the Tribunal in the case of the Assessee for the Assessment Years 2010-2011 and 2012-2013.
Being aggrieved by the above relief granted by the CIT(A), the Revenue has preferred the present appeal before the Tribunal.
We have given thoughtful consideration to rival submission. On perusal of the order passed by Co-ordinate Bench of the Tribunal in appeal for the Assessment Years 2010-2011, we find that the Tribunal has, in identical facts and circumstances, concluded that in the case of the Assessee the research and development expenses are not related to the manufacturing unit as the research and development divisions were working for the future products and future innovations. The relevant extract of the decision on the Co- ordinate Bench of the Tribunal reads as under:
12. We have heard the rival contentions and gone through the orders of the Tribunal in the earlier assessment year as well as the impugned order of the Ld. CIT(A). The issue is clearly covered in favour of the assessee in the own case of the assessee for the earlier assessment year, wherein, the Tribunal, after considering the relevant facts, has held that the expenditure incurred in research and development activity at R&D Unit cannot be allocated to the other manufacturing units. No distinguishing facts have been brought on record. In view of this, respectfully following the order of the Tribunal for earlier assessment year in the own case of the assessee, this issue is accordingly decided in favour of the assessee. No other ground or issue raised or argued. The appeal filed by the assessee is accordingly stands allowed.
To the same effect is the decision of the Co-ordinate Bench of the Tribunal in the case of the Assessee for the Assessment Year 2011- 2012 & 2012-2013 [ITA No. 5168/Mum/2018 & 5169/Mum/2018]:
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Ld. CIT(A) has held that research and development carried out with assessee has been applied for manufacturing in units eligible for Assessment Year: 2020-2021 & 2022-23 deduction under section 80IB and 80IC of Act. Before us the Ld. Counsel of the assessee has filed a detailed list of items manufactured by the units eligible under section 801B and 80IC of the Act and also the formulations/items underdevelopment in research and development units. Both these lists are placed on record. Further, the rebuttal of the assessee on finding of the CIT(A) is reproduced as under: “One of the purpose of R&D in a company like the Appellant Macleods) is to develop new variants of formulations from existing resources available in the form of API or bulk drugs. If the existing API or bulk drugs are not used for development of new medicines then more than 98% of pharmaceuticals R&D stop working and there are multiple number of ingredients which are present in almost all types of medicines. Hence the observation that some of the bulk drugs which are already used in eligible units are being tested in R&D for different variant is completely misplaced. Secondly, we had given details of two activities of R&D before LAO and CIT(A) wherein details bulk drugs developed at R&D and formulations developed at R&D were given. It was clearly mentioned that bulk drugs developed at R&D were used to manufacture the same at our Sarigam API unit which was not eligible for any tax incentive. Formulations were manufactured at Palghar, Premier, Daman and Baddi units and out of these Baddi unit was an eligible unit for 100% tax incentive. However Baddi unit only manufactured formulations and did not produce any bulk drugs As regards specific names being given in Appeal order, we respectfully submit as under: a) Olloxacin: The appellant manufactured tablets containing this API Ofoxacin at its eligible unit. However, there was no agile eialed to any tablet containing Ofloxacin at its R&D unit. b) Levofloxacin: Our R&D unit was developing a tablet containing Levoffoxacin which was approved by regulators but manufacturing of the same did not start. Our eligible unit was manufacturing an oral syrup that contained Levoffoxacin. Appellant has been manufacturing this orai syrup since more than 10 years and the R&D unit was not undertaking any activity related to this syrup. c) Azithromycin: The appellant manufactured Assessment Year: 2020-2021 & 2022-23 tablets containing this API Azithromycin at its eligible unit. However, there was no activity related to any tablet containing Azithromycin at its R&D unit. d) Ethionamide: The appellant manufactured tablets containing this API Ethionamide at its eligible unit. However, there was no activity related to any similar tablet containing Ethionamide as API at its R&D unit. e) Rifampicin: The appellant manufactured tablets and capsules containing this APIRifampicin at its non-eligible unit. However, there was no activity related to any similar tablet containing Rifampicin as API at its R&D unit. f) Isoniazid: The appellant did not manufacture any formulation containing this API at its eligible unit. There was no activity related to any formulation containing Isoniazid as API at its R&D unit. g) Ethambutol: The appellant did not manufacture any formulation containing this API at its eligible unit. There was development effort for a combination drug containing Ethambutol as one of the API at its R&D unit. h) Paracetamol: The appellant manufactured a tablet having combination of Nimesulide and Paracetamol at its eligible unit. However in R&D we tried to develop a new tablet having Sustained Release (SR) of Paracetamol having 665mg of Paracetamol which was designed to be completely different from existing combination drug. However, the LAO has failed to appreciate that the new tablet being developed at R&D was not approved by regulator and hence was never manufactured till date.
On perusal of list of products manufactured in eligible units and drug under development and R & D units, we find that products manufactured under the units eligible for 80IB and 80IC unit are totally unrelated with the product under development in R&D units. In some cases, variant of formulation like injectable form etc. have been under development in R & D Units, which are different hath tablet of same drug manufactured in eligible / non-eligible units. Moreover, in research and development units the formulations or the drugs developed, firstly, undergo a Assessment Year: 2020-2021 & 2022-23 process of 4 years, before those formulations or drugs undergo manufacturing. From the submission filed before the lower authorities, which have been filed before us also, it is verified that at least in the current assessment year, the research and development expenditure incurred is not related to the units eligible for deduction under section 80IB and 80IC of the Act. The Ld. CIT(A) has made a general comment that drugs manufactured in exempted unit and research carried out in R&D unit are in respect of the same items. The Ld. CIT(A) has not pointed out as to which drugs or formulation under development in R&D unit has been manufactured by particular unit eligible under 80IB or 80IC of the Act. Accordingly, the finding of the Ld. CIT(A) being contrary to facts, same are set aside and the disallowance for deduction under section 80IB and 80IC of the Act corresponding to the allocation of R&D expenditure is hereby deleted.”
The Assessee has also placed on record the following decisions of the Co-ordinate Bench of the Tribunal in the case of the Assessee which support the decision taken by the CIT(A):
- AY:2009-2010, dated 14/09/2021 - ITA No.3471 to 3474/Mum/2024, AY:2013-2014 to 2016-2017, dated 28/10/2024 - ITA No.1271&1270/Mum/2024, AY:2018-2019 & 2021-2022, dated 10/10/2024 12. There is nothing on record to distinguish the above decisions of the Tribunal either on facts or in law. Even in the ground raised by the Revenue it has been stated that the decision of Tribunal on the issue under consideration in the case of the Assessee pertaining to Assessment Years 2009-2010, 2010-2011 & 2012-2013 has not been accepted by the Revenue and the appeal is pending before the Hon'ble Bombay High Court. Therefore, respectfully following the above decisions of the Co-ordinate Benches of the Tribunal in the case of Assessee, we declined to interfere in the order passed by CIT(A).
Thus, Ground No.1 raised by the Revenue as well as the appeal Assessment Year: 2020-2021 & 2022-23 preferred by the Revenue is dismissed.
Now we will take up appeal preferred by the Revenue for the Assessment Year 2021-2022 arising from the order dated 30/11/2024 passed by the Learned CIT(A).
Both the sides agree that in identical facts and circumstances, identical ground pertaining to computation of deduction under Section 80IE of the Act raised in the appeal preferred by the Assessee against the Assessment Order dated 05/02/2024 for the Assessment Year 2022-2023 was allowed by the CIT(A) leading to filing of the present appeal before this Tribunal by the Revenue. Our finding/adjudication in relation to the appeal preferred by the Revenue for Assessment Year 2021-2022 shall apply mutatis mutandis to the present appeal. Accordingly adopting the reasoning/adjudication given in paragraph 4 to 12 above, Ground No.1 raised by the Revenue as well as the appeal preferred by the Revenue is dismissed.
In result, both the appeals preferred by the Revenue are dismissed.