Royalty cost allocation for Section 80IB deduction requires pro rata apportionment when no unit-specific exploitation is proved.

Net royalty expenditure, after setting off royalty received, is treated as a common business cost for Section 80IB deduction where the technology is not shown to have been actually exploited by a particular eligible unit. Although the agreement permitted commercial use at the Jammu plant and elsewhere, the evidence did not establish actual exploitation by any manufacturing unit. On that basis, the royalty cost was required to be allocated across the manufacturing units on a reasonable pro rata basis, rather than confined only to the Jammu unit, for computing the deduction.

---

---

Issues: Whether the net royalty payment, after adjusting royalty received, was to be apportioned among the assessee's manufacturing units on a pro rata basis or confined only to the Jammu unit for computing deduction under Section 80IB.

Analysis: The assessee's agreement permitted commercial exploitation of the technology at its Jammu plant and other locations, but the evidentiary record, including excise materials and machinery details, showed that the technology was not in fact exploited at any of the manufacturing units. The allowability of royalty itself was not in dispute before the Tribunal; the dispute was only as to the unit-wise allocation of the net royalty cost for the purpose of deduction under Section 80IB. On the facts, the royalty expenditure, net of licence fee received, was treated as a corporate expense requiring allocation on the same basis as other common expenses.

Conclusion: The net royalty payment was held to be apportionable among the manufacturing units on a pro rata basis, and not confined to the Jammu unit.

Final Conclusion: The assessee succeeded on the issue remanded by the High Court, and the Revenue's challenge to the unit-wise allocation failed.

Ratio Decidendi: Where royalty expenditure is a common business cost and the technology is not shown to have been actually exploited by a particular eligible unit, the net royalty cost must be allocated across the manufacturing units on a reasonable pro rata basis for computing deduction under Section 80IB.

---