The Gujarat High Court has dismissed the Revenue’s appeals challenging the deduction claimed by M/s Sun Pharma Sikkim under Section 80IE of the Income-tax Act, 1961. The Court upheld the concurrent findings of the CIT(A) and the Income Tax Appellate Tribunal concerning the eligibility of the Sikkim undertaking as well as the computation of its eligible profits.
Sun Pharma Sikkim was constituted as a partnership firm on 15 January 2009 and was engaged in manufacturing and sale of pharmaceutical drugs and medicines. Plant, machinery and other assets relating to the Sikkim unit were transferred to the firm. For Assessment Years 2010-11 and 2011-12, the assessee claimed deduction under Section 80IE and declared nil taxable income. The Assessing Officer denied the deduction, principally alleging that the undertaking had been formed by splitting up or reconstruction of the existing business of Sun Pharmaceutical Industries Ltd. and that the prescribed restriction relating to old or previously used machinery had been breached.
No Splitting Up or Reconstruction of Existing Business
A central question before the Court was whether the Sikkim undertaking satisfied the conditions prescribed under Section 80IE(3). The Revenue contended that the assessee had merely reconstructed an existing business.
The CIT(A), however, after examining the factual record, found that the Sikkim undertaking was not formed by splitting up or reconstruction of an existing business. The Tribunal affirmed this factual finding, observing that the Assessing Officer had failed to bring any specific material on record establishing such splitting up or reconstruction.
The High Court declined to interfere with these concurrent findings.
Revenue Failed to Establish Excess Use of Old Machinery
Another major dispute concerned the requirement that the value of transferred or previously used plant and machinery should remain within the statutory limit.
The Assessing Officer had treated machinery worth approximately ₹14.98 crore as old or second-hand machinery. During appellate proceedings, however, detailed supporting documents, bills and vouchers were examined and remand reports were obtained.
The CIT(A) found that shortcomings such as photocopies or duplicate invoices did not, by themselves, establish that the machinery was old or previously used. Importantly, the Assessing Officer had not conducted independent inquiries from the original suppliers to verify when the machinery was supplied.
The Tribunal consequently held that the Revenue had failed to demonstrate that old machinery exceeded 20% of the total value of plant and machinery. The High Court found no infirmity in this conclusion and upheld the assessee’s entitlement to deduction under Section 80IE.
Section 80IA(10): Mere High Profit Does Not Establish an Arrangement
The Revenue also challenged the computation of the eligible profits by invoking Section 80IE(6) read with Section 80IA(10).
The High Court explained that Section 80IA(10) enables the Assessing Officer to reasonably recompute profits where, because of a close connection or some other reason, the course of business has been so arranged as to produce more than ordinary profits for the eligible assessee.
However, there must be facts demonstrating such an arrangement. The existence of a close connection alone is insufficient.
In the present case, the Assessing Officer had sought to allocate or notionally attribute various expenses incurred by SPIL to Sun Pharma Sikkim, thereby reducing the profits eligible for Section 80IE deduction. These included selling and distribution expenses, research and development expenditure, royalty, management fees and other amounts.
Selling and Distribution Expenses
The Assessing Officer compared expenditure incurred by SPIL with the assessee’s turnover and sought to make a proportionate allocation of selling and distribution expenses.
The Tribunal found that the Assessing Officer had not established the actual distribution network used by the assessee or demonstrated that particular expenses of the assessee had in fact been borne by SPIL. A comparison based simply on turnover and expenditure ratios was therefore insufficient to establish an arrangement producing excessive profits.
Survey Statements Not Evidence Per Se
The assessment also relied upon statements of senior managerial personnel recorded during a survey under Section 133A.
The Tribunal observed that statements recorded during survey proceedings without administration of oath have corroborative or informational value but do not constitute evidence per se. It further noted that the statements relied upon were general in nature and did not establish which specific expenditure relating to Sun Pharma Sikkim had actually been borne by SPIL.
R&D, Royalty and Management Fee Adjustments Rejected
The Revenue sought further reductions from the eligible profits towards research and development expenditure, royalty for use of trademarks, brand and logo, and management fees.
The Tribunal rejected these notional adjustments. In particular, it found no justification for estimating royalty at 8% of turnover merely because the assessee used the logo, trademark or other facilities associated with SPIL. It also noted that remuneration had already been provided to SPIL as working partner for the facilities extended to the assessee.
Similarly, the proposed management fee calculated at 2% of turnover was not sustained.
Central Excise Incentive Treated as Capital Receipt
The proceedings also involved a central excise duty incentive. Following the judicial view considered by the Tribunal, the incentive was treated as a capital receipt and directed to be excluded both from taxable income and from the computation of eligible profits under Section 80IE.
The Tribunal observed that the result was tax neutral in the circumstances because, if treated as revenue receipt, the amount would otherwise have attracted the 100% deduction available under Section 80IE.
Remuneration to Working Partner
Another dispute concerned remuneration paid to SPIL as the working partner pursuant to a supplementary partnership deed.
The CIT(A) deleted the disallowance, noting, among other things, that the assessee had itself disallowed the expenditure in the revised return. Consequently, making the same addition again was not justified. The Tribunal found no reason to interfere with this conclusion.
Gujarat High Court’s Decision
The Gujarat High Court held that the conclusions of the CIT(A) and the Tribunal were based on concurrent findings of fact. It found no ground warranting interference in relation to the assessee’s eligibility for Section 80IE deduction or the Revenue’s proposed allocation of various expenses.
The additional issue concerning rejection of books of account for Assessment Year 2011-12 was held not to survive in view of the Court’s conclusions on the substantive questions.
Accordingly, both Tax Appeal No. 183 of 2020 and Tax Appeal No. 184 of 2020 filed by the Revenue were dismissed.
The judgment is significant in its application of Sections 80IE and 80IA(10), particularly the requirement that the Revenue must establish through concrete material that business affairs were actually arranged to produce more than ordinary profits before eligible profits can be recomputed merely on a notional allocation of expenditure.