Expenditure of R&D unit cannot be apportioned to EOU units which has no connection with R&D unit

The assessee is engaged in business of manufacturing of agrochemical and Pharma products. For the year under consideration, assessee filed its return of income declaring net loss at Rs. 2,06,12,394. The assessee has manufacturing units situated at various locations which are EOU units and are eligible for deduction under section 10B of the Act. The assessee has other manufacturing units, which are non-EOU units.

The Assessing Officer passed an order under section 143(3) of the Act and allocated total expenses amounting to Rs. 50,82,383 of Dombivali plant to EOU Taloja unit after noting that as Dombivali incinerator plant was providing its services to Taloja unit (EOU unit) and there was loss in Dombivali unit during the year in consideration.

The Tribunal held that as all aspects of this issue have not been examined by any of the lower authorities and in such a scenario so the order passed by AO was set aside. The tribunal also deemed it appropriate to remand this issue to the file of Assessing Officer for de novo adjudication after examination of all the aspects as mentioned above. If upon fresh examination, it is found that any service was rendered by the Dombivali unit to EOU Taloja unit then the expenditure, to the extent, same pertain to such services shall be allocated to EOU Taloja unit. However, if upon examination it is found that the EOU Taloja unit of the assessee has not availed any service from Dombivali unit during the year under consideration, and expenditure has already been incurred by the EOU unit then no additional expenditure is required to be allocated to the Taloja EOU of the assessee. Thus, this ground of appeal was allowed for statistical purpose.

With respect to issue pertaining to allocation of R and D expenditure to EOU units, the tribunal found that the Co-ordinate Bench of Tribunal in assessee’s own case in M/s Hikal Ltd. vs ACIT, for assessment year 2006–07, had decided the issue in favour of assessee saying that R & D unit was an independent unit, activity carried out at the unit are totally different from that carried out at the other units and had a separate electric meter, has independent staff, unit requires independent inputs or raw materials etc. Separate books of accounts are maintained for this unit so as to deduce the division wise profitability. It functions independently having its own customers and capable of generating independent revenue on its own. Hence, expenditure of R&D unit cannot be apportioned to EOU units which has no connection with R&D unit. The tribunal followed the judicial precedent as there was no change in facts and law for the alleged relevant assessment year. For the issue pertaining to setting off of loss of non-EOU against income from EOU the tribunal held that the business losses of a non-eligible unit, whose income is not eligible for deduction u/s 10A of the Act, cannot be set off against the profits of the undertaking eligible for deduction u/s 10A for the purpose of determining the allowable deduction u/s 10A of the Act. Therefore, the appeal by the assessee was partly allowed for statistical purposes.