The Tax Publishers2013 TaxPub(DT) 0494 (Bom-HC) : (2013) 350 ITR 0366 : (2013) 259 CTR 0253 : (2012) 080 DTR 0322

INCOME TAX ACT, 1961

--Head office expenditure--Research and development expenditure No correlation of expenditure with units--The assessee carries on business inter alia of manufacturing ayurvedic medicines and ointments. It has a head office and four units at Unnao in Uttar Pradesh, Vapi in Gujarat, Dadar in Mumbai and Sanjan, near Mumbai. The head office as well as the units carry on research and development (R & D) activities. The head office and each of the units have their own R & D departments equipped with a laboratory. The assessee filed its return of income showing a total income of rupees nil. The return was taken up for scrutiny assessment. The same was processed under section 143(1)(a), determining the total income. For the said assessment year, the assessee claimed deductions under sections 80-I and 80HH in respect of the Unnao unit and under section 80-IA in respect of the Sanjan unit. The assessee in the profit and loss account of the head office, claimed inter alia as R & D expenses in respect of R & D work carried on in the head office. The details of the R & D projects undertaken by the Head Office during the assessment year in question were filed before the Tribunal. The R & D activities related to the development of new medicines and medical formulae. The assessing officer allocated the said R & D expenses debited to the head office to the units proportionate to the turnover of the units. Accordingly, he debited 7.56% and 23.76% of the R & D expenses to the Unnao unit and Sanjan unit on the basis of the proportionate turnover of the said units to the appellant's total turnover. Consequently, the assessing officer reduced the appellant's claim for the said deductions under Chapter VI-A in respect of the said units. The Commissioner (Appeals) and the Tribunal upheld the assessment order. The Tribunal held that the expenditure for the R & D work in the head office had been incurred for the benefit of the manufacturing units; that the head office was maintained for the benefit of the manufacturing units only and therefore, the expenditure incurred in the head office was for the benefit of the manufacturing units; that the head office itself does not have any income, except the income of manufacturing units and that the R & D expenses incurred, although for the development of new drugs were for the benefit of the assessee's manufacturing units. The Tribunal held that there was no justification for the claim that this expenditure ought not to be apportioned among the assessee's units. Incidentally, the Commissioner (Appeals) had also observed that there was a composite fund of the assessee which comprised income from various units and expenditure even in respect of the units was incurred from this composite fund. Based on this the Commissioner (Appeals) rejected the appellant's contention that the R & D expenses incurred by the head office had nothing to do with the units. It is important to note and reiterate certain facts before dealing with the rival contentions. As stated above, the head office and each of the units have their own separate R & D departments, including laboratories. The R & D work related to the development of new medicinal products. None of the units manufactured these products. The manufacturing activities carried on at the units did not pertain to the new drugs developed/to be developed by the said R & D activities. Drug research is a highly technical activity requiring contributions from the different faculties and scientists in various fields such as phytochemists, analytical chemists, pharmaceutical chemists, toxicologists, pharmacologists and clinicians. Each of these activities require specialized laboratory facilities. The details of the R & D work in respect whereof the said expenditure was incurred were enumerated by the appellant. The department has not established any co-relation or connection between the activities of any of the units with the above. Held: in the present case, the said R & D activities were in relation to the new drugs. There is nothing to indicate that in the event of the assessee deciding to commercially exploit the benefits of the R & D work, the products would be manufactured by the said units. The fallacy in the submissions of department proceeds on the hypothetical basis that the said products would be manufactured by each of the units or any one of them. The fallacy of department's view also arises on account of an erroneous presumption that the benefit of any R & D activity can only be exploited by an enterprise utilizing the same in its manufacturing activities. That is not so. An enterprise can always assign the benefit thereof to a third party. It can always grant a licence in respect of any patent or design to a third party. In that event, the other units would not derive any benefit in respect thereof. The presumption of a nexus between the R & D activities and the units is not well-founded.

SUBSCRIBE TaxPublishers.inSUBSCRIBE FOR FULL CONTENT

TaxPublishers.in

'Kedarnath', 7, Avadh Vihar, Near Nirali Dhani,

Chopasni Road

Jodhpur - 342 008 (Rajasthan) INDIA

Phones : 9785602619 (11 am - 5 pm)

E-Mail : mail@taxpublishers.in / mail.taxpublishers@gmail.com