TaxTMI 
TaxTMI 
2012 (9) TMI 620
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....acturing units, when in fact such research conducted had no connection with the business of the said units, nor any benefit is received by them from the said research ? 2) Whether on the facts and in the circumstances of the case and in law the ITAT failed to consider the fact that the business of the four manufacturing units had no correlation with the expenses on the Research and Development incurred by the Head Office and that no benefit out of such expenses has been obtained by such units during the year ?" 3. The appellant carries on business inter-alia of manufacturing ayurvedic medicines and ointments. It has a head office and four units at Unnao in Uttar Pradesh, Vapi in Gujarat, Dadar in Mumbai and Sanjan, near Mumbai. The head office as well as the units carry on research and development (R & D) activities. The head office and each of the units have their own R & D departments equipped with a laboratory. 4(A). On 16.12.1993, the appellant filed its return of income showing a total income of rupees nil. The return was taken up for scrutiny assessment. The same was processed under section 143(1) (a), determining the total income of Rs.5,28,084/-. For the said assessment ....
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....ffice and each of the units have their own separate R & D departments, including laboratories. The R & D work related to the development of new medicinal products. None of the units manufactured these products. The manufacturing activities carried on at the units did not pertain to the new drugs developed / to be developed by the said R & D activities. Drug research is a highly technical activity requiring contributions from the different faculties and scientists in various fields such as phytochemists, analytical chemists, pharmaceutical chemists, toxicologists, pharmacologists and clinicians. Each of these activities require specialized laboratory facilities. 6. The details of the R & D work in respect whereof the said expenditure of Rs.38,70,000/- was incurred were enumerated by the appellant as follows :- 1) To grow Glycyrrhiza roots in the country and to manufacture industrial medicinal and food products from Glycyrrhiza roots. 2) To develop Ayurvedic drug garden-cum-farm. 3) Evaluation of Safety and efficacy of an Ayurvedic antiarthritic formulation. 4) Evaluation of Safety and efficacy of an Ayurvedic antiarthritic formulation for periheral vascular disorders. 5) Safet....
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....nit or the head office expenses which have no relevance to the industrial undertaking, cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking. 10. In CIT vs. Sterling Foods, (1999) 4 SCC 98 = (1999) 237 ITR 579, the following question was considered by the Supreme Court :- "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the receipt from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief under Section 80-HH of the Income Tax Act, 1961?" The question therefore, was converse to the one before us. The Supreme Court held as under :- "12. Crude petroleum is refined to produce raw naphtha. Raw naphtha is further refined, or cracked to produce the said products. This is not controverted. It seems to us to make no difference that the appellants buy the raw naphtha from others. The question is to be judged regardless of this, and the question is whether the intervention of the raw naphtha would justify the finding that the said products are not 'derived from refining of crude petroleum'. The refining....
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....h as the research and development undertaken at the Madras unit had no connection with the products manufactured in the Chittoor unit. The Chennai High Court held that the question had not been dealt with by the authorities. It was held that the apportionment of the expenses on the activities of the research and development to the Chittoor unit merely on the presumption that the products manufactured at the Chittoor unit also had the benefit of the research made at the Chennai R & D department, was not proper. It was further held that the authorities had proceeded on the presumption that any technology about new flavours and essences would automatically be utilized in the Chittoor unit without examining whether R & D carried out in Chennai was of use to the unit at Chittoor. The matter was therefore, remanded to ascertain whether the R & D undertaken related to the products manufactured in the Chittoor unit. 12. We are in respectful agreement with the judgment, the basis of which is that unless the expenditure incurred on the R & D work relates to the undertaking / unit in question, the same cannot be apportioned to it. 13. Mr.Suresh Kumar submitted that any research and developm....