2012 (9) TMI 620 - BOMBAY HIGH COURT

AO allocated the R & D expenses debited to the head office to the units proportionate to the turn over of the units. - Consequently the AO reduced the appellant's claim for the said deductions under Chapter VI-A in respect of the said units. - Held that:- In the present case, the said R & D activities were in relation to the new drugs. There is nothing to indicate that in the event of the assessee deciding to commercially exploit the benefits of the R & D work, the products would be manufactured by the said units. The fallacy in the submissions proceeds on the hypothetical basis that the said products would be manufactured by each of the units or any one of them. - Allocation of head office expenses on R&D activity among the manufacturing units is not correct to re-calculate the deduction u/s 80IA. - In favor of assessee.

The fallacy also arises on account of an erroneous presumption that the benefit of any R & D activity can only be exploited by an enterprise utilizing the same in its manufacturing activities. An enterprise can always assign the benefit thereof to a third party. It can always grant a licence in respect of any patent or design to a third party. In that event, the other units would not derive any benefit in respect thereof. The presumption of a nexus between the R & D activities and the units is not well founded - in favour of assessee.