Pr. CIT v. Macleods Pharmaceuticals Ltd.

Case snapshot

Sections / provisions: 80-IB; 80-IC

Questions before the Court / Tribunal

• Allocation of R&D expenditure to eligible units: The case concerns allocation of common research-and-development expenditure while computing deductions for eligible units. The reported approach requires a sufficiently direct nexus before loading expenditure onto the eligible undertaking.

Material facts and background

15. We are in respectful agreement with the judgment, the basis of which is that unless the expenditure incurred on the R & D work relates to the undertaking/unit in question, the same cannot be apportioned to it. 16. Mr. Suresh Kumar submitted that any research and development activity carried out by the head office would automatically enure to the benefit of the units/industrial undertakings. He submitted that the head office itself does not manufacture any medicines, the benefit of the research and development would be utilized for manufacturing the products and the products would obviously be manufactured by the units. 17. The submissions proceeds on an erroneous basis and does not take into consideration the facts of the case at all. As we noted earlier, 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 proceeds on the hypothetical basis that the said products would be manufactured by each of the units or any one of them. 18. The...

The assessees thus submitted that the research and development activities

are not directly related to its manufacturing units, as its research and development division is engaged in developing future products, innovations, and launches, and not the products presently manufactured by the eligible units. A categorical stand was also taken that research and development expenses are on futuristic research and the result of research is uncertain and none of the items on which research is being undertaken, were being manufactured by these undertakings. It was also the assessee’s case that the R&D units were found in separate buildings, far away from its manufacturing units, and are “standalone” independent units. Also independent and separate financial statements are prepared and audited. Further all the data in regard to the detail tabulation showing year wise details of formulations developed by the R&D wing and status of such products were furnished before the Assessing Officer, to contend that it was clear that R&D expenditure was totally unrelateable to the manufacturing activities of the assessee. The CIT(A) accepted the assessees case to hold that on examining the record it was evident that R&D carried out by the assessee has not been applied for...

Appellant / assessee submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Revenue / respondent submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Court / Tribunal analysis and reasoning

80-IA provides that where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount specified therein. Section 80HH provides that whether the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, there shall be in accordance with law and subject to the provisions of the section be allowed in computing the total income of the assessee a deduction from such profits and gains of an amount equal to 20 per cent. thereof. 10. While computing the profits and gains of the concerned 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 or the head office expenses which have no relevance to the industrial undertaking, cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking. 11. In CIT v. Sterling Foods(1999) 237 ITR 579 (SC); (1999) 4 SCC 98, the following...

“18. 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 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 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 Lt. CIT(A) has not pointed out as to which drugs or formulation under development in R&D unit...

Operative decision and relief

are not directly related to its manufacturing units, as its research and development division is engaged in developing future products, innovations, and launches, and not the products presently manufactured by the eligible units. A categorical stand was also taken that research and development expenses are on futuristic research and the result of research is uncertain and none of the items on which research is being undertaken, were being manufactured by these undertakings. It was also the assessee’s case that the R&D units were found in separate buildings, far away from its manufacturing units, and are “standalone” independent units. Also independent and separate financial statements are prepared and audited. Further all the data in regard to the detail tabulation showing year wise details of formulations developed by the R&D wing and status of such products were furnished before the Assessing Officer, to contend that it was clear that R&D expenditure was totally unrelateable to the manufacturing activities of the assessee. The CIT(A) accepted the assessees case to hold that on examining the record it was evident that R&D carried out by the assessee has not been applied for...

Authorities and precedents appearing in the judgment

• In CIT v. Sterling Foods(1999) 237 ITR 579 (SC)

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Allocation of R&D expenditure to eligible units. The operative result is classified as Quashed / set aside. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Allocation of R&D expenditure to eligible units. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Use the judgment as a fact-specific precedent: match the statutory version, assessment period, procedural stage and evidentiary record before relying on the result.
• Check whether a later High Court/Supreme Court order has affirmed, reversed, distinguished or rendered the decision academic.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

Read / download the clean local judgment copy

Related Finin2min guidance