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

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business of manufacturing and dealing in pharmaceutical products, namely tablets, capsules, liquids, injectables, etc. For the assessment year 2018-19, the assessee filed its return of income on 29/11/2018 declaring a total income of Rs.274,07,25,380. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the year under 2 & 1270/MUM/2024 (A.Y.: 2018-19, 2021-22) Macleods Pharmaceuticals Limited consideration, the assessee claimed a deduction in respect of manufacturing units at Sikkim under section 80-IE of the Act. During the assessment proceedings on perusal of the details furnished by the assessee, it was noticed that the assessee has claimed a weighted deduction under section 35(2AB) of the Act on account of R&D expenses. Accordingly, the assessee was asked to show cause as to why the R&D expenses should not be allocated to various manufacturing units including the units eligible for deductions under section 80-IE of the Act. In response, the assessee submitted that the assessee’s R&D activities are not directly related to the manufacturing units as the R&D division is working on future products and future innovations and launches and not present products manufactured by the manufacturing units. Accordingly, it was submitted that R&D expenditure has no relevance to the working of the qualifying undertakings and the said expenditure is on futuristic research and the result of research is always uncertain. Thus, it was submitted that none of the items of research was forming part of the qualifying undertakings. The Assessing Officer (“AO”) vide order dated 06/04/2021 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that the assessee has not submitted any substantive supporting reasons and documents to establish beyond doubt that the future products and future innovations will not be manufactured in the exempted units during the year under consideration. It was further submitted that there is also no documentary evidence available to prove that the amount spent on research to improve upon its existing products to compete in the market and also to bring in new & 1270/MUM/2024 (A.Y.: 2018-19, 2021-22) Macleods Pharmaceuticals Limited enhancement to the existing category of products has not been done from the standalone R&D centres.The AO further held that as a result of research and development work carried out by the assessee, it has benefited by way of better acceptability by customers and the development of bulk drugs that were earlier imported by the assessee company. The AO also held that the research expenditure incurred by the assessee is inextricably linked with the business of the assessee, including the business relating to products that are manufactured in the units entitled to deductions under Chapter VIA of the Act. Accordingly, the AO concluded that it would be logical to allocate an appropriate part of the expenditure to various units for computing the profits derived from an eligible unit for the purpose of deduction under section 80- IE of the Act. As a result, the allowable deduction under section 80-IE of the Act was reduced by Rs. 80,46,24,067.

The learned CIT(A), vide impugned order, following the judicial precedents in the case of the assessee for the assessment years 2009-10 and 2010-11 allowed the ground raised by the assessee on this issue. The relevant findings of the learned CIT(A) are reproduced as follows: –

During the hearing, the learned Authorised Representative (“learned AR”) submitted that the issue under consideration had been decided in favour of the assessee by the Tribunal in the preceding assessment years. Further in order to substantiate its claim that none of the products developed in its R&D unit were manufactured in the Sikkim unit, which is entitled to claim deduction under section 80-IE of the Act during the year under consideration, the learned AR placed on record an affidavit executed by the Managing Director of the assessee company. Along with the affidavit, the assessee has also annexed a list of products developed in the R&D centre during the relevant financial year. Further, vide its submission dated 02/09/2024, the assessee also placed on record the list of products manufactured in the eligible Sikkim unit. Accordingly, based on the aforesaid documents, the learned AR submitted that none of the products manufactured in the Sikkim unit were developed in the R&D centre during the year under consideration.

On the contrary, the learned Departmental Representative submitted that during the assessment proceedings, the assessee did not submit any substantive supporting documents to establish that the products developed in the R&D unit will not be manufactured in the exempted units during the year under consideration.

We have considered the submissions of both sides and perused the material available on record. The assessee is a pharmaceutical manufacturer and has a total of 8 manufacturing facilities, namely 5 in Daman, one each in Palghar, Sarigam and Baddi. The assessee’s Baddi unit is eligible for deduction under section 80-IC and the Sikkim unit is eligible to claim deduction under section 80-IE of the Act. Further, the assessee also has two R&D centres at Andheri East, Mumbai which are both approved by the Department of Scientific and Industrial Research. As per the assessee, its corporate policy requires it to spend about 5% of its gross revenue on R&D for the purpose of development of new ideas and drugs. Further, its R&D units are housed in separate buildings and are standalone, independent units having separate financial statements. As per the assessee, its R&D activities are not directly related to its manufacturing units as the R&D division is working on future products and future innovations and launches, not present products manufactured by the manufacturing units. Hence, the R&D expenditure has no relevance to the working of the qualifying undertakings during the year under consideration. As is evident from the record, the Revenue did not agree with the submissions of the assessee and & 1270/MUM/2024 (A.Y.: 2018-19, 2021-22) Macleods Pharmaceuticals Limited treated the R&D expenditure to be inextricably linked with the business of the assessee including the business relating to the products that are manufactured in the unit for which deductions were claimed under section 80-IE of the Act.

In order to substantiate its claim that the products developed in its R&D units are different from the products manufactured in the eligible units during the year under consideration, the assessee has placed on record the list of products. From the perusal of the lists placed on record by the assessee in respect of the products developed in the R&D centre during the year under consideration, we find that the same is completely unrelated to the list of products manufactured and sold by the Sikkim unit of the assessee (eligible unit under section 80-IE). Moreover, it is pertinent to note that products in the R&D undergo a process of 6 to 10 years before these formulations or drugs undergo manufacturing at the eligible unit. This aspect is equally important to any improvement in the existing products or any enhancement to the existing category of products as the same requires years of testing and multiple approvals/accreditations by the concerned department/authority for mere change in the composition of the medicine. It is pertinent to note that pharmaceutical products cannot be equated with any other off-the-shelf products since they require years of testing before the commercial launch and that too if the development is successful. Thus, we find no merit in the findings of the AO that the products developed in the R&D unit were manufactured in the eligible units during the year under consideration. Even though the research expenditure may have some 7 & 1270/MUM/2024 (A.Y.: 2018-19, 2021-22) Macleods Pharmaceuticals Limited linkage with the products ultimately manufactured in the eligible units, however the same cannot lead to the conclusion that the expenditure incurred on R&D during the year under consideration is for the products manufactured in the eligible units during the year under consideration. Thus, we find no basis in the general assumption adopted by the AO while allocating R&D expenditure for computing the deduction claimed under section 80-IE of the Act.

We find that a similar issue has been coming up for consideration before the coordinate bench of the Tribunal in the assessee’s own case for the preceding years, wherein a similar allocation of R&D expenses was made by the Revenue while computing the deduction under Chapter-VIA of the Act. In the latest order in the assessee’s own case for the assessment years 2011-12 and 2012-13, in Macleods Pharmaceuticals Ltd v/s DCIT, in and 5093/Mum./2018, the coordinate bench of the Tribunal while deciding the issue in favour of the assessee observed as follows: –

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 801C 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 from 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 process of 4 to 5 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 anddevelopment 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.”

Therefore, in view of the facts and circumstances of the present case as noted above, we find no infirmity in the impugned order passed by the learned CIT(A) in deleting the allocation of R&D expenditure to the units eligible for deduction under section 80-IE of the Act. Accordingly, the impugned order on this issue is upheld and the sole ground raised in the Revenue’s appeal for the assessment year 2018-19 is dismissed.

Since similar ground has been raised by the Revenue in its appeal for the assessment year 2021-22, our findings/conclusions as rendered in the Revenue’s appeal for the assessment year 2018-19 shall apply mutatis mutandis. Accordingly, the sole ground raised by the Revenue in its appeal for the assessment year 2021-22 is dismissed. 10 & 1270/MUM/2024 (A.Y.: 2018-19, 2021-22) Macleods Pharmaceuticals Limited

In the result, the appeal by the Revenue for the assessment years 2018-19 and 2021-22 are dismissed. Order pronounced in the open Court on 10/10/2024