By TIOL News Service

HYDERABAD, JUNE 27, 2018: THE ISSUE BEFORE THE BENCH IS - Whether unit specific expenditure towards R & D work, can be excluded for apportionment of expenses against the units enjoying the benefit of deduction u/s 80IB and 80IC. VERDICT IS YES.

Facts of the case

The assessee-company is a manufacturer in bulk drugs and pharmaceutical products and filed return for the relevant AY by claiming deduction u/s 80IB and 80IC. During the assessment proceedings, the AO noticed that the assessee had incurred some R & D expenditure. The AO was was of the view that the R & D expenditure incurred by the assessee should be allocated, on a pro-rata basis, to all the units including the special unit wherein the assessee claimed deduction u/s 80IB and 80IC of the Act since the benefits of R & D endure to the business as a whole, either in the present or at a later date and hence attributable to all the units. Accordingly, the AO completed the assessment.

On appeal before the CIT(A), the assessee contended that in respect of expenditure pertaining to biologics, a biologic or biotech medicine is defined as a large complex protein molecule derived from living cells and hence the manufacturing process involved is a very long process and time-consuming since it involves steps such as fermentation, clarification, separation and purification. It was also contended that it undertakes broad range of stringent regulations before approval and commercialization. Therefore, it was contended that it was not related to the exempted units and could be excluded for apportionment of expenses. It was also contended that the assessee had set up a separate centre for development and a separate plant for manufacture of biological products. Accordingly, the CIT(A) having noticed the difference between the other research units and the separate unit meant for biological products, concluded that the R & D expenses relating to the biologics were unit specific and could be excluded for apportionment of expenses.

The Tribunal held that,

++ the assessee is engaged in manufacturing and trading in formulations, Generics, Active Pharmaceuticals Ingredients (APIs), Bio-Technology and Custom Pharmaceutical services in its various units; whereas, R & D work, in so far as biologics are concerned, is conducted at different units since it is a very complex and time-consuming process. Thus, CIT(A) accepted the contention of the assessee that the R & D expenditure relating to the biologics deserves to be excluded and should not be apportioned against the units which are enjoying the benefit of deduction under various sections such as 10B, 80IB and 80IC.

(See 2018-TIOL-949-ITAT-HYD)