2022 (7) TMI 155 - AT - Income Tax

Deduction u/s 80IC - allocation of R D expenditure - R D expenditure nexus to the Baddi units - As per CIT-A no apportionment of R D expenses to Baddi unit is required for computing deduction u/s 80IC - HELD THAT - Assessee is having six units and deduction under section 80IC of the Act is being claimed qua one unit only namely Baddi unit No.1 and the assessee company is having two approved R D facilities one at Mahape and another one at Sinnar. At the same time, it is also undisputed fact on record that the assessee does not have any R D centers at Baddi. 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. In the subsequent assessment years 2010-11 to 2013-14 identical issue has been decided by the Revenue in favour of the assessee by holding that R D expenses incurred by the assessee company at Mahape and Sinnar units are not allocable to Baddi unit as there is no direct nexus between the R D activities carried out and product manufactured by the assessee company at Baddi unit 1. 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. Also 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 lapse of such period there can still be no commercial production. But at the same time it is admitted fact that none of the products being manufactured by the assessee company at Baddi units has any nexus with the R D activities being carried out at Mahape and Sinnar units. So we are of the considered view that when there is no direct nexus between the expenditure incurred on R D activities by the assessee company at its Mahape and Sinnar units and manufacturing activity at the Baddi Units are not sustainable in the eyes of law. We are of the considered view that the Ld. CIT(A) has returned the findings on facts in the light of the decisions rendered by Hon ble Bombay High Court in case of Zandu Pharmaceutical Works ( 2012 (9) TMI 620 - BOMBAY HIGH COURT ) and Bush Boake Allen (India) Ltd. 2003 (12) TMI 10 - MADRAS HIGH COURT . So we find no ground to interfere into the impugned order passed by the Ld. CIT(A). Resultantly, appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Admission of additional evidence by CIT(A) without assigning reasons.
2. Apportionment of R&D expenses to Baddi unit for computing deduction under section 80IC.
3. Reliance on the decision of the Hon'ble jurisdictional High Court in the Zandu Pharmaceuticals Works Ltd. case.

Issue-wise Detailed Analysis:

1. Admission of Additional Evidence by CIT(A):
The Revenue contended that the CIT(A) erred by admitting additional evidence during appellate proceedings without providing reasons or addressing the objections raised by the AO in his remand report. However, the CIT(A) clarified that the AO had examined all additional evidence during the remand proceedings and did not find any direct nexus between the R&D expenses incurred at Mahape and Sinnar units and the products manufactured at the Baddi unit. Thus, the CIT(A) concluded that the additional evidence was properly considered.

2. Apportionment of R&D Expenses to Baddi Unit:
The primary issue was whether R&D expenses incurred at Mahape and Sinnar units should be allocated to the Baddi unit for computing the deduction under section 80IC of the Income-tax Act, 1961. The Tribunal had previously remanded the case to the AO to determine if there was a direct nexus between the R&D expenses and the Baddi unit. The AO, in his remand report, confirmed that the R&D activities at Mahape and Sinnar had no connection with the products manufactured at Baddi. The CIT(A) relied on this report and the comprehensive list of products manufactured at Baddi, which showed no overlap with the R&D activities at the other units. Additionally, the CIT(A) highlighted that similar allocations of R&D expenses in subsequent assessment years (2010-11 and 2013-14) were deleted by CIT(A), reinforcing the decision not to allocate these expenses to Baddi.

3. Reliance on Zandu Pharmaceuticals Works Ltd. Case:
The Revenue argued that the CIT(A) erroneously relied on the Zandu Pharmaceuticals Works Ltd. decision, where each unit had a separate R&D unit, unlike the assessee's case where R&D was centralized. The CIT(A) and the Tribunal, however, found that the principles from the Zandu case applied here as well. The Zandu case established that R&D expenses should not be apportioned to units unless there is a direct nexus between the R&D activities and the unit's manufacturing activities. The CIT(A) found no such nexus in this case, as the R&D at Mahape and Sinnar did not benefit the Baddi unit's products. This was further supported by the Madras High Court's decision in Bush Boake Allen (India) Ltd. vs. ACIT, which emphasized the necessity of a direct connection for such allocations.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that no R&D expenses incurred at Mahape and Sinnar units should be allocated to the Baddi unit for computing the deduction under section 80IC. The Tribunal found that the CIT(A) had correctly applied the principles from the Zandu Pharmaceuticals and Bush Boake Allen cases and that the AO's remand report supported the absence of any direct nexus between the R&D activities and the Baddi unit's manufacturing. Thus, the appeal filed by the Revenue was dismissed.