ACIT (LTU)-1, MUMBAI vs. M/S GLENMARK PHARMACEUTICALS LTD., MUMBAI

The appellant, Asst. Commissioner of Income Tax (LTU), Mumbai (hereinafter referred to as ‘the Revenue’) by filing the present appeal, sought to set aside the impugned order dated 22.11.2019 passed by Commissioner of Income Tax (Appeals)-3, Mumbai [hereinafter referred to as the CIT(A)] qua the assessment year 2009-10 on the grounds inter alia that :-

Briefly stated facts necessary for adjudication of the controversy at hand are : the assessee is into the business of manufacturing and marketing pharmaceutical products and the related R&D activities. The assessee filed return of income for the year under consideration declaring total income at Rs.3,28,68,36,540/- (after claiming deduction of Rs.97,06,74,306/- under section 80C) and book profit under section 115JB of the Income Tax Act, 1961 (for short ‘the Act’) at Rs.2,38,55,12,770/-. Original assessment was framed under section 143 of the Act at the total income of Rs.35,06,06,77,780/- under normal provisions of 3 M/s. Glenmark Pharmaceuticals Ltd. the Act and book profit at Rs.2,41,55,12,770/- under section 115JB of the Act. The assessee carried the matter before the Ld. CIT(A) who has decided the issue against the assessee. Feeling aggrieved with the order passed by the Ld. CIT(A), cross appeals have been filed by both the assessee as well as the Revenue on various issues including issue as to whether R&D expenses need to be allocated to unit claiming deduction under section 80IC of the Act.

This is second round of litigation as in the earlier round Tribunal has remanded the case back to Assessing Officer (for short ‘the AO’) vide order dated 27.02.2015 passed in for A.Y. 2009-10 to decide the issue as to the Research & Development (R&D) expenditure by giving directions as under: “Decide the issue of allocation of R&D expenditure after giving specific finding whether any part of such expenditure has any direct nexus to the Baddi Unit and then decide the issue in the light of judgment of Hon’ble Bombay High Court in the case of Zandu Pharmaceuticals Works Ltd. vs. CIT (350 ITR 366)”

Tribunal, however, remitted the case back to the AO to return the definite findings of the fact “as to whether any part of such R&D expenditure has direct nexus to the Baddi units and then decide the issue in the light of the judgment of Hon’ble Bombay

Then AO passed an order under section 143(3) read with section 254 of the Act by holding that the R&D expenses are allocated to Baddi unit No.1. Then assessee again carried the matter before the Ld. CIT(A) who has decided the issue in favour of the assessee by allowing the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.

In the backdrop of the aforesaid facts and circumstances of the case and grounds raised

However, on the other hand, the Ld. A.R. for the assessee to repel the arguments addressed by the Ld. D.R. for the Revenue relied upon the order passed by the Ld. CIT(A) by contending inter alia that R&D expenses incurred by the assessee at approved center at Mahape and Sinnar units had no connection or nexus with any pharmaceutical products manufactured at Baddi unit; that there is a gestation period of 10-14 years before any commercialization of product is achieved or even after lapse of such period there can be no commercial production and at the same time there was no R&D activities in Baddi unit; that the profits derived by the assessee from Baddi unit only, exclusively on standalone basis to be computed qua the deduction under section 80IC of Baddi unit; that during the remand proceedings the assessee has brought on record comprehensive list of products manufactured at Baddi unit out of which none of the R&D activities are being carried out at Mahape and Sinnar units; that in A.Y. 2010-11 & 2013-14 similar allocation by the AO of R&D expenses to Baddi unit for computing deduction under section 80IC of the Act were deleted by Ld. CIT(A) and relied upon the decisions rendered by Hon’ble Bombay High Court in case of Zandu Pharmaceutical Works (2012) 350 ITR 366 and the decision rendered by Hon’ble Madras High Court in case of Bush Boake Allen (India) Ltd. vs. ACIT (2005) 272 ITR 152.

The Ld. CIT(A) decided the issue in favour of the assessee by returning following findings: “6. I have carefully considered the facts of the case, AO's contentions, remand report as well as appellant's submissions. I find that the AO in his Remand Report between para 5 and 5.5, has stated to have perused through and examined the specific list of the products manufactured in Baddi Unit during the relevant period. In the remand report at para 5.2the AO clearly stated that alt the documents submitted by the appellant were carefully perused by him. It is obvious therefore, that all the additional evidences / documents stand examined by him during the remand proceedings. Further, in the remand report at para 5.3 the AO has further stated that the R&D expenses were incurred by the appellant only at Mahape and Sinnar Units. As per appellant's contention, none of these R&D expenses had any connection or nexus with any pharmaceutical products manufactured at Baddi unit. In the remand report the AO has also commented on the appellant's contention that there is a gestation period of 10- 14 years before any commercialization of product is achieved or even after lapse of such period there can still be no commercial production. It is not in dispute that there was no R & D activity in Baddi unit, since actually there was none. 6.1. The Hon'ble Bombay High Court in case of Zandu Pharmaceuticals Works Limited vs. ClT (2012) 80 DTR 322 has stated that the profits derived from the eligible unit only, exclusively, on stand-alone basis, has to be taken into consideration for computing the deduction u/s 801C. The AO has in the Remand Report not been able to put forward any contra evidence to establish any direct nexus of R & D expense of some other units with the manufacturing unit at Baddi, or to rebut the appellant's contentions. 6.2. The table at para 5.3above shows the exhaustive list of all the products manufactured in and sold from the Baddi Unit (claiming benefit u/s 80IC of the Act) along with the sales revenue and its specification. The evidence contains data on the projects ongoing or newly undertaken by the 8 M/s. Glenmark Pharmaceuticals Ltd. assessee throughout the year. The same have been furnished for 3 assessment years i.e. A.Y. 2007-08, A.Y. 2008-09 and A.Y. 2009-10. 6.3. Thus, the above confirms that the R&D expenses incurred at Mahape and Sinnar units have no nexus with the Baddi unit since the products manufactured at Baddi are different. The appellant, in the paper book, has filed the details of every product at Baddi in the form of annexures to prove its point. 6.4. Further the pharmaceutical products that were actually manufactured and sold from the Baddi Unit during A.Y. 2009-10 were diligently perused. From the records, it is observed that none of the products for which research and development activities were carried on by the assessee, in its R&D facility located at Mahape & Sinnar in the A.Y. 2009- 10 have materialized into commercial production of pharmaceutical products at the Baddi Unit claiming benefit u/s 80IC of the Act. 6.5. There is no direct nexus which is a requirement for bringing into the purview of "derived from" the expenditure on R &D activities carried out at Mahape and Sinnar units on one hand & manufacturing operation at Baddi unit on the other. The case of Zandu Pharmaceutical Works Ltd vs. CIT squarely applies to the appellant's case. Therefore, any apportionment of R&D expenses by the AO to Baddi unit is not correct. 6.6. in view of the above facts and legal considerations, especially the Jurisdictional High Court order in case of Zandu Pharmaceuticals, the specific guideline to the AO by the IT AT, and the AO's remand report on evidences furnished by the appellant, it is safely deduced and held that no R & D expenses (incurred at Mahape and Sinnar) is to be allocated to the profits derived at / from the eligible industrial undertaking the independent unit (at Baddi), for calculating the deduction u/s 80IC for Baddi unit, and thus the AO is directed to do the needful accordingly. 6.7. Further, in A.Y 2010-11 & 2013-14, on merits, similar allocation by AO of R & D expenses to Baddi unit, for computing deduction u/s 80 1C. were deleted by the CIT (A)

We have perused the impugned order passed by the Ld. CIT(A) in the light of the decision rendered by Hon’ble Bombay High Court in case of Zandu Pharmaceutical Works (supra) and Hon’ble Madras High Court in case of Bush Boake Allen (India) Ltd. vs. ACIT (supra) on the identical issue as well as in the light of the decision rendered by co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 2010-11 and 2013-14 qua the identical issue.

Hon’ble Bombay High Court in case of Zandu Pharmaceutical Works (supra) has decided the identical issue as to how and under what circumstances how the R&D expenses are to be apportioned to the assessee having multiple manufacturing units by returning following findings: Held, allowing the appeal, that the assessee had not established any co-relation or connection between the activities of any of the units with the research and development work carried on in the head office. It was not the assessee's case that any of the units had benefited by the research and development activities pertaining to the new drugs or had utilized the resultant benefit thereof, if any, in any manner whatsoever. It was not the assessee’s case that the existing activities of any of the units in fact benefited from or could benefit from the research and 10 M/s. Glenmark Pharmaceuticals Ltd. development activities. Each of the units manufactured different items and, therefore, also carried out independent research and development work. The research and development activities were in relation to the new drugs. There was nothing to indicate that in the event of the assessee deciding to commercially exploit the benefits of the research and development work, the products would be manufactured by the units. The expenses could not be apportioned to the units.”

Identical issue has been decided by the Hon’ble Madras High Court in case of Bush Boake Allen (India) Ltd. vs. ACIT (supra) by returning following findings: “Held, that for the purpose of determining as to whether at all there was research and development undertaken regarding the product manufactured in the Chittoor unit, the matter was remitted to the Tribunal. If it did pertain to the product manufactured at Chittoor, only then would the allocation of the expense to the Chittoor unit be justified.”

Ratio of the judgment of Hon’ble Bombay High Court in case of Zandu Pharmaceutical Works (supra) and Hon’ble Madras High Court in case of Bush Boake Allen (India) Ltd. vs. ACIT (supra) is the R&D expenses could be apportioned to the units in the event of assessee deciding to commercially exploit the benefits of the research and development work qua the products being manufactured by the units. In other words when research and development carried out at one unit having nothing to do with another unit manufacturing different products allocating the expenses to other unit would not be justified.

During the remand proceedings the assessee has brought on record list of top products manufactured and sold from Baddi during the year under assessment which are as under:

The Ld. CIT(A) has returned factual finding that no R&D activities have been carried out by the assessee company in its Mahape and Sinnar R&D facilities qua the products/drugs manufactured by the assessee company on its Baddi units during the year under assessment.

Even the AO in his remand report discussed by the Ld. CIT(A) in para 5.1 of the impugned order categorically mentioned that the assessee’s “list of products manufactured at Baddi plant during the year under assessment show that the R&D expenses incurred at approved R&D centers situated at Mahape and Sinnar pertain to different products and not to the ones being manufactured at Baddi unit”. This contention of the assessee has not been controverted by bringing on record any fact or evidence by the AO by filing any counter reply. Rather the AO has mentioned in its remand report that he has perused all the documents submitted by the assessee carefully.

Even otherwise one more fact has been brought on record by the assessee company that there is a gestation period of 10/14 years before any commercialization of product is achieved or even after