DCIT, Bangalore V. M/s Dhaanya Seeds Pvt. Ltd., Bangalore

ITA 1033/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8605 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 03-07-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO , JUDICIAL MEMBER I.T.A. NO. 1033 /BANG/201 5 (ASSESSMENT YEAR : 200 7 - 08 ) DY. COMMISSIONER OF INCOME TAX , CIRCLE 2(1)(2), BANGALORE. VS. M/S. DHAANYA SEEDS PVT. LTD., PLOT NO.3 , KIADB, 4 TH PHASE, BOMMASANDRA INDL. AREA, BANGALORE. PAN AABCD 7328L APPELLANT RESPONDENT. APPELLANT BY : DR. P. K. SRIHARI, ADDL. CIT (D.R.) RESPONDENT BY : SHRI V. SRIDHAR, C. A. DATE OF H EARING : 9.2.2016. DATE OF P RONOUNCEMENT : 09. 3 . 201 6 . O R D E R PER SHRI VIJAY P AL RAO, J. M. : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DT.16.4.2015 OF COMMISSIONER OF INCOME TAX (APPEALS) - 2, BANGALORE FOR THE ASST . YEAR 2007 - 08. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS CLEARLY OPPOSED TO LAW AS FAR AS THE FINDINGS ARE PERVERSE, CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND HENCE NOT SUSTAINABLE. 2. THE CIT (APPEALS) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE. THE LEARNED CIT (APPEALS) OUGHT TO HAVE APPRECIATED THE FACT THAT THE AS SESSEE IS IN 2 ITA NO. 1033 /BANG/ 2015 RECEIPT OF EXCLUSIVE MARKETING RIGHTS OVER THE PRODUCTS FOR THE DEVELOPMENT OF SEEDS BEING CAPITAL IN NATURE. 3. THE CIT (APPEALS) HAS ERRED IN NOT CONSIDERING THE FOLLOWING FACTS BACKED BY THE AGREEMENTS ENTERED BETWEEN THE ASSESSEE AND METAHELIX LIFE SCIENCE PVT. LTD. IT IS SEEN FROM THE AGREEMENT THAT THE ASSESSEE COMPANY IS INVOL V ED IN THE RESEARCH AND DEVELOPMENT OF NEW PROPRIETARY VARIETIES AND HYBRIDS IN THE CROPS LIKE RICE, CORN, TOMATOES ETC. IT IS ALSO SEEN FROM THE AGREEMENT T HAT THE ASSESSEE COMPANY GETS ITS EXCLUSIVE MARKETING RIGHTS (EMR) OVER THE PRODUCTS. FURTHER THE SEED DEVELOPMENT TECHNOLOGY ADOPTED BY THE ASSESSEE GIVES ENDURING BENEFIT, WHICH SQUARELY FALLS WITHIN THE AMBIT OF CAPITAL EXPENDITURE. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (APPEALS) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD , ALTER, AMEND AND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. THE ONLY ISSUE ARISES F ROM THE GROUND RAISED BY THE REVENUE IS REGARDING DISALLOWANCE OF EXPENDITURE OF SEED COST PAID TO M/S. META HELIX LIFE SCIENCE PVT. LTD. FOR DEVELOPMENT OF CE RTAIN SEEDS AND VEGETABLES. THE ASSESSING OFFICER NOTED THAT APART FROM ADOPTING THE TECHNOLOGY DEVELOPED BY VARIOUS ORGANIZATIONS, THE ASSESSEE HAS ENTERED INTO A CONTRACT WITH M/S. META HELIX LIFE SCIENCES PVT. LTD. FOR DEVELOPMENT OF CERTAIN SEEDS AND VE GETABLES FOR WHICH THE ASSESSEE PAID A SUM OF RS.1,67,24,020. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAID PAYMENT WAS CAPITAL IN NATURE AS THE ASSESSEE WAS GETTING ENDURING BENEFIT OUT OF THE SEED DEVELOPMENT TECHNOLOGY. ACCORDINGLY, THE ASSESSI NG OFFICER DISALLOWED THE SAID EXPENDITURE. ON APPEAL, THE CIT (APPEALS) HAS ALLOWED THE CLAIM OF THE ASSESSEE AS REVENUE EXPENDITURE BY 3 ITA NO. 1033 /BANG/ 2015 FOLLOWING THE ORDER OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06. 4. BEFORE US, THE L EARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSING OFFICER HAS GIVEN A FINDING THAT THE EXPENDITURE IN QUESTION HAS BEEN INCURRED BY THE ASSESSEE FOR DEVELOPMENT OF NEW SEED TO BE USED FOR FURTHER GROWING OF PLANTS AND PRODUCTION OF SEEDS AND THEREFORE IT WAS NOT FOR RESALE OF SEEDS BUT IT WAS FOR ASSESSEE'S OWN USE FOR FURTHER PRODUCTION OF SEEDS. THEREFORE, THE SAID EXPENDITURE IS CAPITAL IN NATURE. 5. ON THE OTHER HAND, THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 AND THEREAFTER FOR THE ASSESSMENT YEAR 2006 - 07. THUS THE ISSUE IS NOW COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE. 6. HAVING HE ARD THE RIVAL CONTENTIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD, AT THE OUTSET, WE NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 VIDE ORDER DT.29.7.2013 IN ITA NO.152 3/BANG/2012 AND C.O. NO.65/BANG/2013. SIMILARLY FOR THE ASSESSMENT YEAR 2006 - 07, THE TRIBUNAL HAS 4 ITA NO. 1033 /BANG/ 2015 AGAIN CONSIDERED THIS ISSUE VIDE ORDER DT.14.11.2014 IN ITA NO.1234/BANG/2013 IN PARAS 3.4.3 TO 3.4. 4 AS UNDER : 3.4.3 AS SUBMITTED BY THE LEARNED AUTH ORISED REPRESENTATIVE OF THE ASSESSEE, THE VERY SAME ISSUE OF WHETHER THE SEED DEVELOPMENT COST / EXPENDITURE WAS CAPITAL OR REVENUE IN NATURE WAS BEFORE THE CO - ORDINATE BENCH OF THIS TRIBUNAL FOR ADJUDICATION IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005 - 06. IN ITS ORDER IN ITA NO.1523/BANG/2012 AND C.O. NO.55/BANG/2013 DT.27.9.2013 THE CO - ORDINATE BENCH OF THIS TRIBUNAL HELD THAT THE ENTIRE EXPENDITURE INCURRED BY THE ASSESSEE AS SEED DEVELOPMENT COST IS REVENUE IN NATURE AND THEREFORE IS AN ENTIRE LY ALLOWABLE EXPENDITURE. THE OPERATIVE PORTION OF THE AFORESAID ORDER AT PARAS 8.7.1 TO 8.7.3 THEREOF IS EXTRACTED HEREUNDER : - 8.7.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE ASSESSEE COMPANY IS IN THE BUSINESS OF ACQUIRING, PRODUCING, MANUFACTURING AND DEVELOPMENT OF VARIOUS SEEDS AND VEGETABLES. FOR DEVELOPMENT OF SEEDS, IT IS USING TECHNOLOGIES DEVELOPED BY VARIOUS COMPANIES. IN THIS CONTEXT, THE ASSESSEE ENTERED INTO AN AGREEMENT W ITH METAHELIX DT.15.11.2002 AND SUPPLEMENTARY AGREEMENT DT.31.1.2003 UNDER WHICH METAHELIX WILL DEVELOP PARENT SEEDS (BOTH MALE AND FEMALE) OF SUPERIOR QUALITY. THE ASSESSEE PROCESSES SUCH PARENT SEEDS FORM METAHELIX AND SUPPLIES IT TO FARMERS WHO GROW AN D DEVELOP THESE SEEDS. THE FULLY DEVELOPED SEEDS ARE RECEIVED BY THE ASSESSEE FROM THE FARMERS AFTER 3 TO 6 MONTHS, AND ARE ABOUT 20 TIMES MORE THAN THE PARENT SEEDS RECEIVED BY THE ASSESSEE FROM METAHELIX. THE ASSESSEE, AFTER RECEIVING THESE SEEDS FROM T HE FARMERS, PROCESSES THESE SEEDS IN ITS PLANT WHICH CONSISTS OF MANY OPERATIONS LIKE CLEANING, PROCESSING, CONDITIONING, CHEMICAL TREATMENT, ETC. AND THEN DOES PACKING OF THE SAME. IN THIS PROCESS, THE DAMAGED AND BAD SEEDS ARE REMOVED AND ONLY TOP QUALI TY SEEDS ARE PACKED. 8.7.2 IN THE LIGHT OF THE ACTIVITIES INVOLVED IN THE ASS BUSINESS MODEL, THE FOLLOWING FACTS EMERGE : - (I) THAT METAHELIX DOES RESEARCH AND DEVELOPMENT LEADING TO DEVELOPMENT OF NEW TECHNOLOGIES ENABLING NEW STRAINS IN VARIETIES OF CR OPS; (II) THE ASSESSEE PURCHASES THE PARENT SEED FROM METAHELIX, WHICH ARE THE RESULT OF THE RESEARCH PROGRAM OF METAHELIX; (III) THESE PARENT SEEDS ARE GIVEN BY THE ASSESSEE TO FARMERS, WHEREBY IT IS MULTIPLIED MANY TIMES INTO HYBRID SEEDS; (IV) THE PARENT SEEDS DEVELOPED BY METAHELIX LOSE ITS LIFE ONCE IT IS GIVEN TO FARMERS FOR FURTHER DEVELOPMENT. 5 ITA NO. 1033 /BANG/ 2015 (V) THE PARENT SEEDS ARE MATERIAL INPUT FOR THE ASSESSEE TO DEVELOP HYBRID SEEDS AND MULTIPLY THEM; (VI) IF THE DEVELOPMENT OF THE PARENT SEED S INVOLVE RESEARCH AND DEVELOPMENT, SUCH ACTIVITIES ARE CARRIED OUT BY THE METAHELIX AND NOT BY THE ASSESSEE; (VII) IF AT ALL ANY RESEARCH ACTIVITY CARRIED OUT, IT IS BY METAHELIX AND NOT BY THE ASSESSEE. THE ABOVE FACTS CLEARLY INDICATE THAT THE AMOUNT S PAID BY THE ASSESSEE TO METAHELIX IS TOWARDS PROCUREMENT OF PARENT SEEDS, A FINDING MADE BY THE LEARNED CIT (APPEALS) AS WELL. IT IS SEEN THAT THE LEARNED CIT (APPEALS) HAS ALSO GIVEN A FINDING THAT THE ASSESSEE IS NOT ENGAGED IN RESEARCH AND DEVELOPMEN T. IN THE LIGHT OF THE ABOVE FACTUAL MATRIX, WE ARE IN AGREEMENT WITH THE LEARNED CIT (APPEALS) THAT SEED DEVELOPMENT COST IS NOT CAPITAL BUT REVENUE IN NATURE AND HENCE IS ALLOWABLE EXPENDITURE. 8.7.3 WE, HOWEVER, FIND THAT THE LEARNED CIT (APPEALS) AFT ER RENDERING A FINDING THAT THE ASSESSEE IS NOT DOING ANY RESEARCH AND DEVELOPMENT ACTIVITY, HAS HELD THAT ABOUT OF THE TOTAL REIMBURSEMENT OF EXPENSES MADE BY THE ASSESSEE TO METAHELIX, AN AMOUNT OF RS.7,59,989 HAS BEEN USED BY METAHELIX FOR DEVELOPMENT O F SEEDS AND THEREFORE DISALLOWED THESE EXPENSES AS CAPITAL IN NATURE. WE ARE UNABLE TO AGREE WITH THIS FINDING OF THE LEARNED CIT (APPEALS). IT IS AN UNCONTROVERTED FACT THAT THE ASSESSEE DOES NOT CARRY OUT ANY RESEARCH AND DEVELOPMENT ACTIVITY. THE FAC TS ON RECORD ESTABLISH THAT THE EXPENSES INCURRED BY THE ASSESSEE WERE TOWARDS PURCHASE OF PARENT SEEDS. IF A PART OF THE AMOUNT PAID BY THE ASSESSEE HAVE BEEN UTILISED BY METAHELIX FOR DEVELOPMENT OF SEEDS, THE EXPENSES CAN BE CAPITAL IN NATURE FOR METAH ELIX BUT NOT FOR THE ASSESSEE. MERELY BECAUSE THE EXPENSES PAID BY THE ASSESSEE TO METAHELIX IS TOWARDS DEFRAYING THE EXPENSES OF DEVELOPMENT OF PARENT SEEDS, IT DOES NOT CHANGE THE NATURE OF THE EXPENDITURE BY THE ASSESSEE WHICH IS FOR PROCUREMENT OF PAR ENT SEEDS. AS FAR AS THE ASSESSEE IS CONCERNED, THE ENTIRE EXPENDITURE IS INCURRED TOWARDS PURCHASE OF PARENT SEEDS AND THEREFORE IT IS ENTIRELY REVENUE IN NATURE. THERE IS NO ENDURING BENEFIT TO THE ASSESSEE DUE TO THE PURCHASE OF PARENT SEEDS AS THEY LO SE THEIR EXISTENCE AND FORM ONCE THEY ARE CONVERTED INTO HYBRID SEEDS. IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THE ENTIRE EXPENDITURE OFRS.55,18,529 IS REVENUE IN NATURE AND ARE THEREFORE ENTIRELY ALLOWABLE EXPENDITURE. 3.4. 4 FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005 - 06 (SUPRA), WE HOLD THAT THE ENTIRE EXPENDITURE OF RS.1,03,76,490 INCURRED BY THE ASSESSEE TOWARDS SEED DEVELOPMENT COST, IS REVENUE IN NATURE AND IS THEREFORE AN ENTIRELY ALLOWABLE EXPENDITURE. 6 ITA NO. 1033 /BANG/ 2015 7. THUS THE TRIBUNAL HAS C ONSISTENTLY TAKEN A VIEW THAT THIS EXPENDITURE TOWARDS SEED DEVELOPMENT COST IS REVENUE IN NATURE. FOLLOWING THE EARLIER ORDERS OF THE TRIBUNAL, WE D O NOT FIND ANY ILLEGALITY IN THE ORDER OF CIT (APPEALS). 8. IN THE RESULT, THE REVENUE S APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 .3. 201 6 . SD/ - (ABRAHAM P GEOR GE) ACCOUNTANT MEMBER SD/ - (VIJAY PAL RAO) JUDICIAL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, BANGALORE