The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) in the case of Dr. Reddy’s Laboratories Ltd. v. DCIT holding in favor of the assessee was of the view that Tax Authorities were not justified in apportioning R&D expenditure and ESOP cost to the units which claimed exemption under Section 10B, 80IB and 80IC of the Income Tax Act.
The facts of the case are that the assessee is a company engaged in the business of manufacture and sale of bulk drugs, APIs, Formulations and other pharmaceutical products. It declared its income claiming deductions on the same under sections 10B, 80IB and 80 IC etc. The case was selected for scrutiny on the grounds that certain transfer pricing adjustments were not made and expenditure on ESOPs was not proper on which deductions were claimed. The Assessing Officer (AO) and the Commissioner of Income Tax (CIT) both held against the assessee and hence the present appeal.
The assessee submitted that the company is carrying on R&D activities under three business segments and R&D of a product would be initiated in a common location. Hence, expenditure incurred cannot be attributed to a specific plant since the same is incurred in a specific unit known as the ‘IPDO’. He contended that the expenditure incurred on R&D and ESOP costs have no nexus with the products manufactured in the exempted units. Furthermore, it was contended that the AO and the CIT did not consider the fact that the said units are self-sustaining units and such allocation is not required in terms of Sections 10B, 80IB and 80IC of the Act.
The Tribunal relying upon a number of cases of the superior courts was of the view that Tax Authorities were not justified in apportioning R&D expenditure and ESOP cost to the units which claimed exemption u/s 10B, 80IB and 80IC of the Act.
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