Dr. Reddy’s Laboratories Ltd. @Hash Principal Commissioner Of Central Tax, Hyderabad – GST Commissionerate

After hearing both sides early hearing is granted.

With the consent of both the parties who agreed that the issue is decided by this very Bench for an earlier period in the assessee’s own case,

the appeal is taken up for final hearing today.

The only issue to be decided is whether the appellant is entitled to distribute the Cenvat Credit including Education Cess and SHE cess taken on the

Research & Development services received to their manufacturing units in terms of Rule 7 of Cenvat Credit Rules, 2004.

Show cause notice dated 25.03.2019 was issued by the Revenue and the same was adjudicated by the Principal Commissioner vide impugned order

in original which is impugned by this appeal before us.

Heard Shri S. Thirumalai, Learned Advocate for the assessee appellant and Shri B. Guna Ranjan, Learned DR for the Revenue, also perused the

impugned order and the order of this Bench in the appellant’s own case relied upon by the Learned Advocate. Admittedly, there is no dispute as

regards the facts in the appeal are concerned. This Bench in its earlier Final Order No. A/30883-30885/2020 in respect of the same assessee has

observed as under:

.........The appellant herein is a major manufacturer of bulk drugs (Active Pharmaceutical Ingredients or API) and formulations in India.

Manufacture of pharmaceutical requires a lot of Research & Development in terms of product development, testing, process improvements,

cost reduction and meeting the legal certification requirements of various authorities such as Drugs Controller of India and his

counterparts in other countries.

The appellant has created a single Integrated Product Development Organisation Unit (IPDO) at Bachupally to undertake research and

development activities of their products. It caters to the requirements of various manufacturing units of the appellant. The appellant had

taken CENVAT Credit on the services used in the IPDO. Revenue is of the opinion that the IPDO not being a manufacturer of excisable

goods nor provider of taxable services, no CENVAT Credit is admissible on the input services used in the IPDO. The appellant’s

position is that various input services and inputs used in the IPDO are intrinsically linked to the manufacture of the final products in their

manufacturing units and therefore is a direct corelation between the services used in the IPDO, which is their R&D unit and the

manufacture. Therefore, they are entitled to CENVAT Credit on such services. The question before us is whether the appellant is entitled to

CENVAT Credit on the input services used in the IPDO or otherwise. The appellant had taken registration as Input Service Distributor and

has distributed the credit taken in their IPDO to their units. . . .

We have considered the arguments on both sides and perused the records. Pharmaceutical industry is a specialised industry distinct from

other industries. Not only is the manufacturer required to manufacture the correct drug but is also required to make it of the requisite

quality and standards. Further, a manufacturer is also required to obtain the necessary clearances and certifications from the authorities

before the product can be marketed. Without any of these activities, the product cannot be manufactured and sold. Therefore, for a

marketable pharmaceutical product to come into existence, the certifications and quality control are absolutely essential. Further,

pharmaceutical industry is one which involves a lot of research and development which distinguishes the product of the manufacturer from

those of others. In fact, a large proportion of the cost of any pharmaceutical product is on account of the amounts spent on research and

development both in terms of discovery of a new molecule and also in terms of developing an appropriate formulation containing various

quantities of different drugs. Once a product is developed, the product has to be necessarily certified by the Drugs Controller for it to be

marketable and this involves requisite paper work, clearances and obtaining the certificates without which the product cannot be marketed.

We, therefore, find that as far as pharmaceutical industry is concerned, research & development is an essential part of the entire

manufacturing process. Therefore, the services used in the R&D have a direct nexus with the manufacture of the final products. It is not

necessary that the pharmaceutical industry has a complete R&D facility in each of its manufacturing units. In order to economise and

benefit from the economies of scale, R&D units are set up as independent units for serving various manufacturing units of the

manufacturer. In such a case, the services availed in the R&D units have a direct nexus to the manufacture of the products in various units.

If the assessee is registered as an input service distributor, the CENVAT Credit availed on the services used in the R&D unit can be

distributed to various manufacturing units. The appellant has just done that.

Our view in this regard is consistent with the view taken by the Tribunal Allahabad in the case of Jubiliant Life Sciences Ltd. (supra) and

upheld by the Hon’ble Apex Court. It is also consistent with the decision of this Bench in the case of Aurobindo Pharma Limited (2019-

TIOL-3415- CESTAT HYDERABAD)] and CESTAT Chennai (2018-TIOL-1661-CESTATMAD).

In view of the above, we find that the issue is no longer res integra and stands decided in favour of the appellant by various case laws

cited above. We, therefore, find that the impugned orders are unsustainable and need to be set aside and we do so.

In view of the above clear findings of this very Bench, we find same are equally applicable in all force to the present case as well and hence that the

demand cannot sustain. Accordingly we set aside the demand & the impugned order.

Appeal is allowed with consequential benefits if any as per law.

(Operative part of this order was pronounced in court on conclusion of the hearing)