Medinomics Health Care Private Limited, Hyderabad V. ACIT, Circle-16(2), Hyderabad

ITA 1031/HYD/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6432 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 02-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 28-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 133A

Judgement Text

1 ITA.NO.1031/HYD/2013 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA.NO.1031/HYD/2013 ASSESSMENT YEAR 2009-2010 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. PAN AABCR9213L VS. THE ACIT, CIRCLE - 16(2) HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. BHUPESH KUMAR DAND FOR REVENUE : MR. M. SITARAM DATE OF HEARING : 0 2 .06.2016 DATE OF PRONOUNCEMENT : 1 7 .06.2016 ORDER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y. 2009- 2010. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A) IN SUSTAINING THE ADDITION OF RS.31,50,436 TREATING THE SAME AS CAPITAL EXPENDITU RE AND ALLOWING 25% DEPRECIATION THEREON. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EXPORT OF PHARMACEUTICALS AND ITS FORMULATIONS TO VARIOUS COUNTRIES. IT FILED RETURN OF INCOME FOR THE A.Y. 2 009-2010 ON 28.09.2009 DECLARING A TAXABLE INCOME OF RS.68,29,640. THERE WAS A SURVEY UNDER SECTION 133A OF 2 ITA.NO.1031/HYD/2013 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. THE ACT IN THE BUSINESS PREMISES OF THE ASSESSEE ON 27.11.2009. DURING THE ASSESSMENT PROCEEDINGS UNDE R SECTION 143(3) OF THE I.T. ACT, THE A.O. CALLED FOR VARIOUS DETAILS WHICH WERE FURNISHED BY THE ASSESSEE. THE A .O. OBSERVED THAT THE ASSESSEE HAS DEBITED TO THE P & L ACCOUNT, AN AMOUNT OF RS.36,06,204 TOWARDS RATES A ND TAXES. FROM THE DETAILS OF THE RATES AND TAXES, TH E A.O. OBSERVED THAT THE SAID EXPENDITURE INCLUDES AN AMOU NT OF RS.31,50,436 INCURRED TOWARDS PRODUCT REGISTRATION CHARGES. FURTHER FROM THE LEDGER ACCOUNT COPY OF TH E PRODUCT REGISTRATION FEES, THE A.O. OBSERVED THAT T HE ASSESSEE HAD INCURRED EXPENDITURE ON VARIOUS DATES FOR GETTING ITS PRODUCTS REGISTERED WITH PHARMACEUTICAL REGULATORY AUTHORITY OF VARIOUS COUNTRIES. HE, THER EFORE, PROPOSED TO TREAT THE PRODUCT REGISTRATION FEES O F RS.31,50,436 AS CAPITAL EXPENDITURE AND ISSUED A SH OW CAUSE NOTICE TO DISALLOW THE EXPENDITURE CLAIMED AS REVENUE IN NATURE. 3. THE ASSESSEE VIDE ITS LETTER DATED 26.12.2011 SUBMITTED THAT THE ASSESSEE, BEING EXPORTER OF VARI OUS PHARMACEUTICALS, DRUGS AND ITS FORMULATIONS, HAVE T O TAKE PERMISSION FROM THE RESPECTIVE COUNTRIES/BOARDS PRI OR TO EXPORT OF GOODS TO THOSE COUNTRIES AND FOR EVERY FORMULATION, WHICH IS EXPORTED BY THE ASSESSEE, THE ASSESSEE HAS TO HAVE PERMISSION FROM THE RESPECTIVE COUNTRY/BOARD. IT WAS SUBMITTED THAT THOUGH THE SAI D FEES IS TERMED AS PROJECT REGISTRATION FEES, IT IS NOT HING BUT PERMISSION/APPROVAL FEES PAID TO THE RESPECTIVE BOA RDS IN 3 ITA.NO.1031/HYD/2013 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. ORDER TO OBTAIN APPROVAL FOR THAT SPECIFIC DRUG OR ITS FORMULATION WHICH IS VALID FOR A MAXIMUM PERIOD OF ONE YEAR. THEREFORE, ACCORDING TO THE ASSESSEE, IT TAKE S THE CHARACTER OF REVENUE EXPENDITURE AS NO ENDURING BEN EFIT ACCRUES TO THE ASSESSEE. THE A.O. WAS HOWEVER, WAS NOT CONVINCED WITH THE SAID CONTENTION OF THE ASSESSEE AND AFTER GOING THROUGH THE SAMPLE COPIES OF RECEIPTS F OR PRODUCT REGISTRATION, HE OBSERVED THAT IN SOME OF T HE COPIES OF THE RECEIPTS, IT WAS NOT MENTIONED THAT F EES WAS BEING PAID FOR A PERIOD OF ONE YEAR ONLY. THEREFORE , IN THE ABSENCE OF ANY SPECIFIC MENTION TO THAT EFFECT, HE HELD THAT IT MAY NOT BE CONSIDERED THAT FEE PAYMENT WAS A REC URRING EXPENDITURE TO BE MADE ON PERIODICAL INTERVALS AND THEREFORE, IT IS THE REVENUE EXPENDITURE. FURTHER, HE HELD THAT THE ASSESSEE HAS ACQUIRED BENEFIT OF ENDURING NATURE WHICH CONSTITUTES ACQUISITION OF AN ASSET AND THERE FORE, TREATED THE SAME AS CAPITAL EXPENDITURE AND ALLOWED THE DEPRECIATION THEREON @ 25%. AGGRIEVED, ASSESSEE PRE FERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE A.O. AND THE ASSESSEE IS IN SECOND APPEAL BEFOR E US. 4. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORI TIES BELOW AND HAS DRAWN OUR ATTENTION TO THE SAMPLE COP IES OF THE RECEIPTS WHEREIN THE APPLICATIONS ARE MADE F OR REGISTRATION DRUG-WISE. IN SOME OF THE LICENSES, TH E REGISTRATION IS VALID FOR A PERIOD OF ONE YEAR WHIL E IN SOME LICENSES, THE DURATION OF THE LICENSE IS NOT MENTIO NED. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS INCUM BENT 4 ITA.NO.1031/HYD/2013 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. UPON THE ASSESSEE TO APPLY FOR A FRESH LICENSE WHEN EVER THERE IS A CHANGE IN THE PRODUCT OR FORMULATION AND HAS TO BE NOTIFIED TO THE PARTY WITHIN 30 DAYS OF THE CHAN GE AT A PRESCRIBED FEE. THUS, ACCORDING TO HIM, THESE LICEN SES OBTAINED BY THE ASSESSEE ARE FOR THE PURPOSE OF EXP ORT OF THE PRODUCTS AND HENCE, THE EXPENDITURE INCURRED FO R OBTAINING THEM HAS TO BE TREATED AS BUSINESS EXPEND ITURE. ACCORDING TO HIM, MERELY BECAUSE THE ASSESSEE HAS DERIVED ENDURING BENEFIT, BY ITSELF WOULD NOT MAKE THE EXPENDITURE CAPITAL IN NATURE. IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE COMPANY LIMITED VS. CIT REPORTED IN 124 ITR 1 (SC) WHEREIN THE HONBLE SUPREME COURT HELD AS UNDER : 'THERE MAY BE CASES WHERE EXPENDITURE EVEN IF INCUR RED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF END URING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE O F ENDURING NATURE ACQUIRED BY THE ASSESSEE THAT BRING S THE CASE WITHIN THE PRINCIPLES LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHEN THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE MERELY CONSISTS MERELY IN FACILITATING TH E ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS T O BE CARRIED OUT MORE EFFICIENTLY OR MORE PROFITABILI TY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITUR E WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANT AGE MAY ENDURE FOR AN INDEFINITE FUTURE . ' 4.1. THUS, IT CAN BE SEEN THAT THE ENDURING BENEFI T IS NOT THE ONLY TEST TO BE APPLIED TO TREAT AN EXPE NDITURE AS CAPITAL IN NATURE. IF THE EXPENDITURE IS INCURRE D FOR 5 ITA.NO.1031/HYD/2013 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. GENERATING REVENUE AND NOT CREATING ANY INFRASTRUCT RE, THEN THE SAID EXPENDITURE HAS TO BE TREATED AS REVE NUE EXPENDITURE. 5. IN THE CASE BEFORE US, IT IS NOT AS IF WITHOUT OBTAINING THE LICENSES OF THE RESPECTIVE COUNTRIES/ BOARDS, THE ASSESSEE CAN EXPORT THE PRODUCTS TO THAT COUNTR Y. ONLY WHEN THE ASSESSEE HOLDS LICENSE OF A PARTICULA R COUNTRY, CAN IT CONTINUE ITS BUSINESS OF EXPORTING DRUGS TO THAT COUNTRY. THUS, ONLY BY OBTAINING THE LICENS E OF SOME COUNTRY THE ASSESSEE CAN DO BUSINESS WITHIN T HAT COUNTRY. THEREFORE, IT CAN BE SEEN THAT PRODUCT REGISTRATION IS NOT FOR CREATION OF THE CAPITAL APP ARATUS WITHOUT WHICH, THE ASSESSEE CANNOT CARRY ON ITS BUS INESS IN ANY COUNTRY. IT IS ONLY A MEDIUM TO CARRY ON ITS BUSINESS IN A COUNTRY OR TO EXPAND ITS BUSINESS TO ANY OTHER COUNTRY. THEREFORE, THIS EXPENDITURE IS FOR GENERATING AND INCREASING ITS REVENUE AND HENCE, HA S TO BE TREATED AS REVENUE EXPENDITURE. IN VIEW OF THE S AME, WE ALLOW THE ASSESSEES APPEAL AND DIRECT THE A.O. TO ALLOW THE REVENUE EXPENDITURE CLAIMED BY THE ASSESSEE. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 17.06.20 16. SD/- SD/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 17 TH JUNE, 2016 VBP/- 6 ITA.NO.1031/HYD/2013 MEDINOMICS HEALTH CARE P. LTD., HYDERABAD. COPY TO : 1. MEDINOMICS HEALTH CARE P. LTD., 15 - 7 - 406, BEGUM BAZAR, HYDERABAD. 2. THE ACIT, CIRCLE - 16(2), HYDERABAD. 3. CIT(A) - V, HYDERABAD. 4. CIT - IV , HYDERABAD. 5. D.R. ITAT A BENCH, HYDERABAD. 6. GUARD FILE