DCIT CIRCLE-19(1), NEW DELHI V. PENTAIR THERMAL MANAGEMENT INDIA PRIVATE LIMITED, NEW DELHI

ITA 7416/DEL/2019

AI Insights

The case involves two appeals: one by the assessee, nVent Thermal India Pvt. Ltd, and another by the revenue, against the orders of the Commissioner of Income Tax (Appeals)-38, New Delhi. The appeals pertain to the assessment year 2015-16 and arise from the order of assessment passed under section 143(3) of the Income-tax Act, 1961. The primary issues in the appeals included the non-consideration of the revised return filed by the assessee and the disallowance of certain expenditures by the Assessing Officer. The tribunal found that the revised return was validly filed and should be considered, and upheld the lower authorities' decisions on the disallowance of certain expenditures.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 37197 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2015-2016
• Other Referred Cases: Walchand and Co. (P.) Ltd. (65 ITR 381), Dhanrajgirji Raja Narasingirji (91 ITR 544), Sassoon J. David & Co. Pvt. Ltd. (118 ITR 261), Microsoft Corporation of India (P.) Ltd.(176 Taxman 395)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARPREET KAUR HANSRA
• Assessee Lawyers: VISHAL KALRA
• Keywords: Capital asset; Revised return; Revenue expenditure; Depreciation; Rule of consistency; Commercial expediency; Capital expenditure; Bogus
• Section: 143(3); 143(2); 139(1); 115JB; 37(1); 139(5)

Judgement Text

"INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “F”: NEW DELHI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA No.6689/Del/2019 (Assessment Year: 2015-16) nVent Thermal India Pvt. Ltd, (earlier known as Pentair Thermal Management India Pvt. Ltd) Gate No. 2, 2nd Floor, Sucheta Bhawan, 11-A, Vishnu Digamber Marg, New Delhi Vs. ACIT, Circle-19(1), Delhi (Appellant) (Respondent) PAN:AACCT8358B ITA No.7416/Del/2019 (Assessment Year: 2015-16) DCIT, Circle-19(2), Delhi Vs. nVent Thermal India Pvt. Ltd, (earlier known as Pentair Thermal Management India Pvt. Ltd) Gate No. 2, 2nd Floor, Sucheta Bhawan, 11-A, Vishnu Digamber Marg, New Delhi (Appellant) (Respondent) PAN:AACCT8358B Assessee by : Shri Vishal Kalra, Adv Ms. Reema Grewal, CA Ms. Snigdha Gautam, Adv Revenue by: Ms. Harpreet Kaur Hansra, Sr. DR Date of Hearing 14/01/2025 Date of pronouncement 29/01/2025 O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in ITA No.6689/Del/2019 filed by the assessee and ITA No. 7416/Del/2019 by the revenue for AY 2015-16, arise out of the ld. Commissioner of Income Tax (Appeals)-38, New Delhi [hereinafter referred to ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 2 as „ld. CIT(A)‟, in short] in Appeal No. Appeal No. CIT(A), Delhi-38/10291/2018- 19 AY 2015-16 Α.Νο.293/2018-19 dated 06.06.2019 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 27.12.2017 by the Assessing Officer, ACIT, Circle-19(1), Delhi (hereinafter referred to as „ld. AO‟). 2. Ground No. 1 raised by the assessee is general in nature and does not require any specific adjudication. 3. Ground Nos. 2 to 2.7 raised by the assessee are only challenging the denial of the lower authorities in not considering the revised return filed by the assessee. 4. We have heard the rival submissions and perused the material available on record. The assessee is a service based company inter alia engaged in the business of devising heat management systems. The assessee earned revenue as “income from services rendered” as well as “revenue from contract jobs”. As part of its job contracts, the assessee performs Electronic Heat Tracing (EHT) and Insulation on Engineering and Procurement (EP), Engineering and Procurement and Construction Management (EPCM) basis. The nature of services performed by the assessee as parts of its job contract as follows:- a. design and engineering b. supplying material (EHT material, controllers & EHT accessories, power distribution items- panels power cables, insulation material etc) c. installation using the material supplied (the material is utilized to install on pipes and/ or tanks at site depending upon the scope awarded to the assessee i.e. on EP, EPC or EPCM basis) d. testing & commissioning of the system ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 3 5. The original return of income was filed by the assessee based on unaudited financial statements on 28.11.2015 u/s 139(1) of the Act declaring loss of Rs. 7,73,22,591/- u/s 115JB of the Act. Notice u/s 143(2) of the Act was issued on 05.04.2016. Another notice u/s 143(2) of the Act was issued on 06.02.2017. The accounts of the assessee got audited after finalization and accounts were duly signed on 13.06.2016. The Tax Audit Report was finalized and signed on 07.11.2016. Accordingly, the assessee filed a revised return on the basis of audited financials and tax audit report wherein, business loss was reduced due to adoption of Accounting Standards to Rs. 6,30,66,979/- under normal provisions of the Act and book profit of Rs. 7,01,10,664/- u/s 115JB of the Act. This revised return was filed within the time permitted u/s 139(5) of the Act. Both the lower authorities had completely ignored the said revised return on the ground that the same was filed by the assessee after issuance of notice u/s 143(2) of the Act to the assessee. In our considered opinion, there is no prohibition or bar for the assessee from filing revised return of income. Issuance of notice u/s 143(2) of the Act does not put bar on assessee from filing revised return of income. In the instant case, admittedly the original return of income was filed u/s 139(1) of the Act based on unaudited financials. As and when the accounts were duly audited, the assessee had filed the revised return within the time permitted u/s 139(5) of the Act. Hence, we hold that the said revised return filed on 31.03.2017 to be a valid return and direct the ld AO to consider the same while passing giving effect order to this appellate order. Accordingly, Ground Nos. 2 to 2.7. raised by the assessee are hereby allowed. 6. In the result, the appeal of the assessee is allowed. ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 4 ITA No. 7416/Del/2019-Revenue Appeal 7. The ground No. 1 raised by the revenue is challenging the deletion of addition of Rs. 5,66,59,889/- made by the ld AO on account of disallowance of cost of construction. 8. We have heard the rival submissions and perused the material available on record. The business profile of the assessee had already been reproduced hereinabove. The assessee in the light of work undertaken during the year claimed cost for contract amounting to Rs. 16,77,03,783/- based on Percentage of Completion Method (POCM) as prescribed in Accounting Standard-7- Construction Contracts-(AS-7) issued by the Institute of Chartered Accountants (ICAI). Under this method, the contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. Moreover, contract revenue is to be recognized as revenue in the statement of profit and loss account in the accounting periods in which the work is performed under POCM. Similarly contract expenditure are to be recognized as an expense in the profit and loss account in the accounting period in which the work to which they relate is performed. The ld AO disregarding the submissions of the assessee made an ad hoc addition of Rs. 5,66,59,889/- on account of costs of contract job holding the same were excessive when compared to previous year expenditure. 9. Aggrieved, the assessee preferred an appeal before the ld CIT(A), wherein, the ld CIT(A) deleted the addition by observing as under:- “4.3.16 I have carefully considered the contentions of the AO, and the submissions made by the Appellant to counter the same. A perusal of the details submitted by the Appellant during the course of the hearing demonstrates the genuine nature of the expenses incurred by the Appellant with sufficient factual evidence. Further, the method adopted by the Appellant for accounting for contract costs is the prescribed method as per the ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 5 Accounting Standards and that the AO has no justifiable reason for disregarding the books of accounts. In light of the B submissions made by the Appellant, and the factual evidence submitted in support of the same, I am of the opinion that the AO has erred in disallowing the contract costs of the Appellant. The AO has disregarded the fact that the Appellant's books of accounts are prepared in accordance with Accounting Standards, and has tried to step into the shoes of the Appellant to determine what kind of costs a company should incur and what should be its profit margins. 4.3.17 The AO has not accepted the business decision taken by the Appellant, and has put himself in a businessman's shoes to form an opinion as to how the Appellant should run its business. The AO has erred in assuming that if there is dip in the revenue, there should be a corresponding reduction in the costs as well. This understanding of the AO is not correct and cannot be accepted as reason for disallowing the contract costs. 4.3.18 This principle has been upheld by various courts, including the Hon'ble Supreme Coun, where it has been held that the assessing officer cannot step into the shoes of assessee to re-fix the amount of expenditure that should have been paid. The Supreme Court, in the case of Walchand and Co. (P.) Ltd. (65 ITR 381) has held that: \"In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. The ITO was of the view that there was no adequate increase in the earnings of the assessee, for the increase in remuneration was not reflected in the increase in profits of the assessee and that it appeared that, as compared to the previous years, the business profits disclosed by the assessee had fallen by Rs. 2 lakhs and, therefore, the increase in expenditure could not be justified as laid out wholly and necessarily for the purposes of the business. But an employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business and a host of other related circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer was, erroneous.\" 4.3.19 The above-mentioned ruling squarely applies to the case of the Appellant. In the case of Appellant, the learned AO has disallowed a part of the contract costs incurred on the basis that there was no corresponding increase in revenue and profits. Relying on the ruling of the Supreme Court, the action ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 6 of the AO to disallow contract costs in the absence of increase in revenue seems unjustified. 4.3.20 Reliance is also placed on the decision of the Supreme Court in the case of Dhanrajgirji Raja Narasingirji (91 ITR 544), where it was held that: \"It was for the assessee to decide how best to protect his own interest...It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.\" The Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. (118 ITR 261) has held that: \"it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incur red for promoting the business and to earn profits, the assessee is entitled to deduction even though there was no compelling necessity to incur such expenditure.\" The jurisdictional Delhi High Court in the case of Microsoft Corporation of India (P.) Ltd.(176 Taxman 395) has also held that: “8.3 To determine whether an expense incurred is wholly and exclusively for the purposes of business, according to us, can be ascertained only, if it meets the test of commercial expediency, and that too, from the point of view of the assessee who is engaged in the business and, not from the point of view of an outsider who is unaware of the needs of the business.\" In light of the above-mentioned rulings of the Supreme Court, which have been followed by various other courts, I am in agreement with the Appellant's argument that the AO cannot step into the shoes of a businessman to determine whether an expenditure is reasonable or not. 4.3.21 The Appellant has placed on records enough evidence to substantiate the genuine nature of the contract costs incurred by it, and the AO has not provided any findings as to why the evidence provided by the Appellant is not acceptable/ not genuine. 4.3.22 Accordingly, I am of the view that the action of the AO for disallowing the contract costs incurred by the Appellant as bogus expenditure, without any cogent reasoning, is incorrect. Resultantly, the Appellant's appeal is allowed.” ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 7 10. From the above, it could be seen that the addition made by the ld CIT(A) has been deleted on the ground that details submitted by the assessee demonstrated the genuine nature of expenditure incurred and there is no justifiable reason for the ld AO for disregarding the books of account of the assessee. Further, the method adopted by the assessee for recognizing the revenue and expenditure i.e. POCM is one of the recognized methods prescribed in AS-7-Construction Contracts issued by ICAI, which is mandatory for the assessee company to follow as per the Companies Act. In the instant case, the ld AO had merely tried to step into the shoes of the assessee to determine what kind of costs a company should incur and what should be its profit margins. Having done so, the ld AO proceeded to disallow the cost of contract incurred by the assessee. The decision of the Hon'ble Supreme Court in the case of CIT Vs. Dhanrajgirji Raja Narasinghirji reported in 91 ITR 544 (SC) had categorically held that “it is not open to the income tax department to prescribe what expenditure an assessee and what circumstances he should incur that expenditure”. Every businessman known his interest best”. Further the basis of commercial expediency vis-à-vis the incurrence of expenditure for the purpose of business is to be viewed from the point of view of the businessman and not from the point of view of the revenue. Hence, the ld CIT(A) was justified in deleting the disallowance made on account of cost of contract. Further, the assessee have been reflecting the cost of contract in the similar manner in AYs 2013-14 and 2014-15 wherein, no addition has been made by the ld AO in the assessment framed u/s 143(3) r.w.s 144C(3) of the Act dated 19.01.2017 for AY 2013-14 (enclosed in pages 258 to 262 of the Paper Book and order u/s u/s 143(3) of the Act dated 31.10.2016 for AY 2014- 15 (enclosed in pages 265 to 269 of the Paper Book). Hence even going by the principle of consistency, there is no justification for the revenue to make disallowance on account of cost of contract in the instant case. This error of the ld AO have been duly rectified by the ld CIT(A) by granting relief to the ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 8 assessee on which we do not find any infirmity. Accordingly, ground No. 1 raised by the revenue is dismissed. 11. Ground No. 2 raised by the revenue is challenging deletion of trade mark royalty in the sum of Rs. 25,65,716/- on the ground that the same is to be treated as capital in nature. 12. We have heard the rival submissions and perused the material available on record. During the year under consideration, the assessee debited a sum of Rs 34,20,955/- towards royalty for use of 'Pentair trademark‟ to Pentair Flow Services AG amount of INR (\"Pentair AG\") as per the terms of the Trademark License agreement dated 1-10-2012 (\"Royalty Agreement\") between the assessee and Pentair AG. The Pentair trademark is owned by and registered in the name of Pentair Flow and all companies of the Pentair Group pay royalty to Pentair Flow for use of the said trademark. The assessee paid royalty towards the license to use the trademark during the impugned year and not for acquisition of any capital asset. Thus, the payment of royalty was considered as revenue expenditure under section 37(1) of the Act while computing taxable income. However, the ld AO vide assessment order dated 27-12-2017, wrongly disallowed deduction under section 37(1) of the Act and made an addition of Rs 25,65,716/- to the income of the assessee, after allowing Rs 8,55,239/- (25% depreciation on the total expenditure of Rs 59,90,517/-). Thereby, the ld AO erred in treating royalty paid for use of trademark as a capital expenditure without appreciating that no capital asset is created, and an annual royalty is paid depending on percentage of sales of the assessee. 13. The ld CITA appreciated the contentions of the assessee and deleted the disallowance. The copy of Trademark License Agreement is enclosed in page 26 of the Paper Book filed before us. The ld DR vehemently relied on the order of the ld AO and stated that the assessee has entered into an agreement for one ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 9 year. This was buttressed by the ld AR before us by stating that the agreement has been renewed from time to time. We find that on perusal of the agreement, assessee had merely acquired license to use trade name in return of an annual fee based on the percentage of sales in the relevant year. The assessee had actually paid royalty towards license to use the trade mark during the year and not for acquisition of any capital asset. Further, the assessee was not entitled to become the exclusive owner of the trade mark at any point of time and right to use tradename was not perpetual and no benefit or right accrued to the assessee in perpetuity. Hence, there is no question of any enduring benefit to the assessee for the capital field. Hence, the same cannot be treated as capital expenditure. This issue is no longer res integra in view of the decision of the Hon‟ble Jurisdictional High Court in the case of CIT Vs. JK Synthetics Ltd reported in 309 ITR 371 (Del) wherein, it was held that royalty paid for access to use of a particular technology is not equivalent or same as transfer of technology and hence, the same is to be construed as revenue expenditure. 14. We also find that similar payment made by the assessee and renewed the same from time to time on the same terms and condition were allowed by the ld AO in the scrutiny assessment proceedings for AYs 2013-14 and 2014- 15. Hence, even on the principle of consistency this disallowance was rightly made by the ld CIT(A) on which we do not find any infirmity. Accordingly, Ground No. 2 raised by the revenue is dismissed. 15. Ground No. 3 raised by the revenue is general in nature and does not require any specific adjudication. ITA No.6689/Del/2019 ITA No.7416/Del/2019 nVent Thermal India Pvt. Ltd 10 16. To sum up, the appeal of the assessee is allowed and appeal of the revenue is dismissed. Order pronounced in the open court on 29/01/2025. -Sd/- -Sd/- (VIKAS AWASTHY) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 29/01/2025 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi "