Dr. Reddy’s Laboratories Limited Vs DCIT (ITAT Hyderabad)
The case of the assessee, all through, was that R & D expenditure was incurred by the assessee in a separate unit known as ‘IPDO’, which is meant for carrying on R & D. It is also not in dispute that formulations / products arising out of it may or may not be utilised in the special units wherein the assessee is eligible for deduction / It is not controverted that formulations / products arising out of it can be sold in the open market and need not necessarily be utilised in the existing special units. The Hon’ble Bombay High Court in the case of Zandu Pharmaceuticals Limited (350 ITR 366) considered an identical issue wherein the assessee carried on business of manufacture of Ayurvedic medicines which had four units in Uttar Pradesh and Head Office separately. Each of the units had their own R & D unit equipped with laboratory. The Head Office also had their own R & D Department. The AO allocated R & D expenditure, debited to the Head Office, to the units proportionate to the turnover of the units. The Revenue could not prove that any of the units were benefited by the R & D activities pertaining to new drugs. Only on the presumption the AO sought to allocate R & D expenses to all the units, irrespective of whether there is any existing activity connected to R & D, in any of the units. Under these facts and circumstances, the Court observed that R & D activities were in relation to new products and there is nothing to indicate that in the event of assessee commercially exploiting the benefits of R & D works, the products would be manufactured by the said units. Since the Revenue’s stand is based on hypothetical basis that the said products would be manufactured by each of them or any one of them, the Court concluded that it is an erroneous presumption that the benefit of any R & D activity can be exploited by an enterprise, by utilising the same in its manufacturing activity. The Court also noted that an enterprise can always assign the benefit thereof to a third party. It can grant a license in respect of any patent or design to a third party in which event the other units would not derive any benefit and thus there can be no nexus between R & D units and the units wherein the assessee is carrying on activity with regard to the existing products. Similar view was taken by the Hon’ble Madras High Court in the case of Bush Boake Allen (India) Pvt Ltd vs. ACIT (273 ITR 152) wherein the Court observed that there cannot be any presumption that any technology about new flavours or essence will automatically be utilised in other units.
