ITAT Directs AO to Verify R&D Expense Allocation for Piramal Enterprises Amid Unproven Link to Baddi Unit’s Manufacturing [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) to verify the allocation of research and development (R&D) expenses claimed by Piramal Enterprises Ltd., amid an unproven connection with the Baddi unit’s manufacturing activities.

Piramal Enterprises Ltd,appellant-assessee,was involved in pharmaceutical manufacturing, research and development, financial services, and information management through its subsidiaries. It had manufacturing plants at Baddi, Pithampur, Mahad, Digwal, Ennore, and VFCD Thane.

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The Baddi, Pithampur, and Mahad plants made formulation products for India and abroad, including contract manufacturing. Digwal and Ennore produced APIs and customized APIs, while VFCD Thane made vitamins and food premixes. The assessee also earned income from trading and services.

The assessee argued that the R&D expenses for the Baddi unit were not related to the products made there. It said the Baddi unit focused on formulation manufacturing, including contract manufacturing. The R&D costs were mainly for developing custom products, which had no link to the Baddi unit’s manufacturing.

The assessee maintained separate books of account for the Baddi unit to support its deduction claim under section 80IC and provided an audit report with the accounts.

Despite this, the authorities rejected the claim, made an addition, and reduced the section 80IC deduction, which was upheld.

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The assessee counsel submitted that the Baddi unit was sold to Abbott Pvt. Ltd. in September 2010. Because of this, it was difficult to provide more details to prove the Baddi unit was not connected to the R&D unit.

Later, the assessee submitted details showing that the R&D expenses were for other units like new drug development, contract manufacturing, and clinical research, which had no link to the Baddi unit. The total R&D expenses were about ₹27.58 crores.

The counsel said this information was not given earlier due to the sale of the Baddi unit and asked the tribunal to accept it under Rule 29. The counsel requested the Assessing Officer to review the R&D expenses and confirm none should be allocated to the Baddi unit.

The two member bench comprising Beena Pillai (Judicial Member) and Girish Agrawal (Accountant Member) reviewed the submissions and noted that the appellant-assessee provided documents under Rule 29 about R&D expenses for the Baddi unit that needed checking. The assessee had said these R&D costs were for custom manufacturing and not connected to Baddi’s manufacturing.

The tribunal sent the case back to the AO to check if any R&D expenses related to Baddi’s manufacturing and to decide the claim according to the law.

The tribunal partly allowed the assessee’s claim.

To Read the full text of the Order CLICK HERE

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