ITAT Ahmedabad Allows Reckitt Benckiser's Appeals on Section 80-IC, Goodwill Depreciation and Transfer Pricing for AY 2014-15 to 2017-18
ITAT Ahmedabad allows assessee's cross-appeals across four assessment years, dismisses Revenue's challenge to 100% section 80-IC deduction for Baddi Unit after substantial expansion.
The Income Tax Appellate Tribunal, Ahmedabad “D” Bench, in a common order pronounced on 14 May 2026, allowed all four appeals filed by Reckitt Benckiser Healthcare India Private Limited and dismissed all four cross-appeals filed by the Revenue for assessment years 2014-15 to 2017-18. The disputes spanned transfer pricing adjustments on delayed receivables from associated enterprises, disallowance of depreciation on goodwill arising from amalgamation, disallowance of product registration expenditure, reduction of deduction under section 80-IC by notional brand royalty allocation, exclusion of scrap income from eligible profits, and the rate of deduction available after substantial expansion of the Baddi Unit. The Tribunal, following the binding judgment of the Supreme Court in Aarham Softronics, held that substantial expansion of an eligible undertaking gives rise to a fresh initial assessment year entitling the assessee to 100% deduction under section 80-IC.
The Assessee and the Disputes Before the Tribunal
Reckitt Benckiser Healthcare India Private Limited, registered at Gurgaon, Haryana, is engaged in manufacturing and trading of healthcare and consumer healthcare products. The company filed returns for AY 2014-15 to 2017-18 declaring losses under normal provisions and book profits under section 115JB. Each year was selected for scrutiny and a reference under section 92CA(1) was made to the Transfer Pricing Officer for examination of international transactions with associated enterprises.
Assessment proceedings were completed under section 143(3) read with sections 92CA and 144C. The Assessing Officer made several additions and disallowances across the four years. The assessee and the Revenue both appealed to the Commissioner of Income Tax (Appeals)-13, Ahmedabad, whose orders dated 10 July 2025, 11 July 2025 and 15 July 2025 gave partial relief to the assessee. Both sides then filed cross-appeals before the Tribunal.
Transfer Pricing Adjustment on Delayed Receivables
The Transfer Pricing Officer examined the aging analysis of receivables arising from export sales and royalty transactions with associated enterprises. Finding that receivables remained outstanding beyond the stipulated credit period, the Transfer Pricing Officer treated the delay as a financing arrangement — effectively an unsecured loan advanced by the assessee to its associated enterprises without arm's length interest. Invoking section 92B read with the Explanation inserted by the Finance Act, 2012 with retrospective effect from 1 April 2002, the Transfer Pricing Officer benchmarked the delayed receivables independently using LIBOR-based rates with mark-up for credit and foreign exchange risks. Upward adjustments of Rs. 8,70,362/-, Rs. 89,49,166/-, Rs. 52,48,817/- and Rs. 25,80,516/- were proposed for the four assessment years respectively.
Before the CIT(Appeals), the assessee argued that the international transactions had already been benchmarked under the Transactional Net Margin Method and the assessee had earned an operating margin of 56.69%, well above the working capital adjusted margins of comparable companies at 19.13%. Once working capital adjustment was granted under TNMM, the impact of outstanding receivables was already embedded in the profitability analysis and any further notional interest adjustment would duplicate the income. The assessee relied on the Ahmedabad Tribunal's decision in Micro Inks Ltd. v. Assistant Commissioner of Income-tax and the Delhi High Court's judgment in Kusum Health Care (P.) Ltd. v. Assistant Commissioner of Income-tax. It was also argued that trade receivables cannot be recharacterised as loans merely because realization exceeded the credit period, and that separate benchmarking distorts the aggregation principle under Rule 10A(d) and Rule 10B of the Income-tax Rules.
The CIT(Appeals) upheld the adjustment, relying on the Explanation to section 92B and the Delhi High Court's judgment in Pr. Commissioner of Income-tax v. Cotton Naturals (I) (P.) Ltd. The CIT(Appeals) held that excessive delay beyond the agreed credit period constitutes a separate financing arrangement independent of routine working capital differences.
Depreciation on Goodwill Arising from Amalgamation
The Assessing Officer disallowed depreciation of Rs. 3,72,32,55,681/- claimed on goodwill arising from amalgamation. The amalgamation had been accounted for under the pooling of interest method as approved by the Punjab and Haryana High Court. The Assessing Officer held that under this method no excess consideration over net assets is recognised as goodwill, and that the alleged goodwill was merely a self-generated intangible not eligible for depreciation under section 32(1)(ii). The assessee had also not furnished a separate valuation report quantifying business rights, customer relationships or distribution infrastructure acquired.
The CIT(Appeals) disagreed. Following the Supreme Court's ratio in Commissioner of Income-tax v. Smifs Securities Ltd., the CIT(Appeals) held that goodwill represents commercial rights falling within “any other business or commercial rights of similar nature” under section 32(1)(ii) and directed the Assessing Officer to allow the depreciation claim. The Tribunal found no infirmity in this direction.
Product Registration Expenditure and Scrap Income
The Assessing Officer disallowed product registration and regulatory approval expenditure of Rs. 5,27,000/- under section 37(1), treating it as capital expenditure on the ground that it conferred enduring commercial advantage. The CIT(Appeals) held that such expenditure was recurring, did not create any transferable capital asset, and merely enabled the assessee to carry on its existing business. Relying on Commissioner of Income-tax v. Cadila Healthcare Ltd. and earlier orders in the assessee's own case, the CIT(Appeals) deleted the disallowance and allowed the expenditure as revenue in nature. The Tribunal upheld this finding.
On scrap income of Rs. 75,39,057/-, the Assessing Officer had excluded it from eligible profits under section 80-IC on the ground that scrap sales lacked the direct first-degree nexus with manufacturing activity required by the expression “derived from” in section 80-IC. The CIT(Appeals) examined this issue as part of the broader section 80-IC adjudication.
Reduction of Section 80-IC Deduction by Notional Brand Royalty
The most contested issue concerned the Assessing Officer's decision to reduce the deduction under section 80-IC for the Baddi Unit in Himachal Pradesh. The Assessing Officer observed that the unit's profitability was abnormally high compared to ordinary manufacturers and attributed this to brand value, marketing intangibles, advertising infrastructure and distribution networks maintained at the corporate level outside the eligible undertaking. Invoking the underlying principles of sections 80IA(8) and 80IA(10), the Assessing Officer allocated notional royalty and brand usage charges at 15% of sales generated by the Baddi Unit and reduced the eligible profits accordingly.
The CIT(Appeals) rejected this approach in detail. It found that the Assessing Officer had not disputed the genuineness of manufacturing activities, raw material consumption, production process or sale of finished goods from the Baddi Unit. Section 80-IC grants deduction on profits derived from manufacture by an eligible undertaking, and once manufacturing activity is accepted as genuine, profits cannot be artificially dissected on hypothetical considerations without specific statutory authority. The CIT(Appeals) found that no comparable data, industry analysis, third-party agreements or scientific valuation had been undertaken to justify the 15% figure, which was entirely ad hoc and arbitrary. It further held that sections 80IA(8) and 80IA(10) can be invoked only where a specific arrangement or manipulation of transactions is demonstrated with tangible material, not on general assumptions about high profitability. The statute does not contemplate bifurcation of manufacturing profits into brand profits and production profits in the absence of a specific statutory mandate. The Tribunal agreed with the CIT(Appeals) on all these points.
Rate of Section 80-IC Deduction After Substantial Expansion
The Revenue's appeals challenged the CIT(Appeals)' direction to allow deduction under section 80-IC at the rate of 100% following substantial expansion of the Baddi Unit. The CIT(Appeals) had followed the Supreme Court's judgment in Aarham Softronics, which held that substantial expansion undertaken by an eligible industrial undertaking itself gives rise to a fresh “initial assessment year” entitling the assessee to claim deduction at 100%, subject only to the overall cap of ten assessment years under section 80-IC(6).
Before the Tribunal, the Departmental Representative relied on the assessment order. The assessee's counsel submitted that the controversy stands conclusively settled by Aarham Softronics and that the Supreme Court's declaration of law operates retrospectively. Reliance was also placed on the dismissal of Revenue's SLP in Pr. CIT v. SBS Biotech following Aarham Softronics.
The Tribunal held that the controversy is no longer res integra. The Supreme Court in Aarham Softronics categorically held that section 80-IC contemplates two separate triggering events capable of constituting an initial assessment year: establishment of a new industrial undertaking and substantial expansion of an existing undertaking. Once substantial expansion is carried out, the assessee becomes entitled to deduction at 100% from the year of expansion. The Revenue had not brought any material on record to dispute that the Baddi Unit had in fact undertaken substantial expansion. The dispute was therefore purely legal and stood fully answered against the Revenue by the binding Supreme Court judgment.
Outcome
The Tribunal, by its common order dated 14 May 2026, allowed all four appeals filed by Reckitt Benckiser Healthcare India Private Limited bearing ITA Nos. 1845 to 1848/Ahd/2025 for assessment years 2014-15 to 2017-18. The Revenue's four cross-appeals bearing ITA Nos. 1867 to 1870/Ahd/2025 for the same assessment years were dismissed. The order was pronounced in open court by the D Bench comprising Dr. BRR Kumar, Vice President, and Shri Siddhartha Nautiyal, Judicial Member.