NIVO CONTROLS P. LTD, MUMBAI V. ACIT (OSD) 1(3), MUMBAI

ITA 3007/MUM/2011

• Counselvise Citation: 300719914 RSA 2011
• Duration Of Justice: 2 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 07-02-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 15-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Assessee Lawyers: MIHIR NANIWADEKAR
• Keywords: Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI , ,, , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 3007/MUM./2011 ( &) * !+* / ASSESSMENT YEAR : 200506 ) M/S. NIVO CONTROLS PVT. LTD. 8, MOHATTA BHAVAN OFF DR. E. MOSES ROAD WORLI, MUMBAI 400 018 .. ,- / APPELLANT ) V/S ADDL. COMMISSIONER OF INCOME TAX (OSD), CIRCLE1(3), MUMBAI .... ./,- / RESPONDENT , ./ PERMANENT ACCOUNT NUMBER AAACN6646C &) *1# 2 3 / ASSESSEE BY : MR. MIHIR NANIWADEKAR ! 2 3 / REVENUE BY : MR. O.P. SINGH )! 2 # / DATE OF HEARING 29.07.2013 $ 4+ 2 # / DATE OF ORDER 18.09.2013 $ $ $ $ / ORDER '# $% '# $% '# $% '# $% , ,, , & & & & 5 5 5 5 / PER AMIT SHUKLA, J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE, CHALLENGING THE IMPUGNED ORDER DATED 31 ST JANUARY 2011, PASSED BY THE LEARNED COMMISSIONER (APPEALS)II, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (F OR SHORT THE ACT) FOR MR. BIPIN RAM CHAINANI 2 THE ASSESSMENT YEAR 200506, VIDE WHICH, FOLLOWING GROUNDS HAVE BEEN RAISED: THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) C OMMITTED A GROSS ERROR OF LAW AND FACT IN CONFIRMING THE DISALLOWANCE OF R S.L,133,943/- TOWARDS TECHNICAL CONSULTANCY FEES PAID TO A SWISS NATIONAL AS NOT BEING FOR THE PURPOSE OF BUSINESS AND ALSO NOT ALLOWABLE AS AN EX PENDITURE U/S 35 OF THE ACT. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FA ILED TO APPRECIATE THAT THE PAYMENT MADE TO THE SWISS NATIONAL, WHO WAS TEC HNICALLY QUALIFIED, WAS FOR GUIDANCE RECEIVED FOR DEVELOPMENT/MODIFICATION OF EXISTING PRODUCTS FOR THE IN-HOUSE RECOGNIZED RESEARCH & DEVELOPMENT DEPA RTMENT OF THE APPELLANT AND THAT IT WAS FOR THE BENEFIT OF CARRYI NG ON THE BUSINESS OF THE APPELLANT. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING AND ELECTRONIC PROCESS EQUIPMENTS. THE ASSE SSING OFFICER NOTED THAT THE ASSESSEE HAS SHOWN CONSULTANCY PAYMENT TO ONE, MR. J. BOSS FOR THE PURPOSE OF BUSINESS DEVELOPMENT. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED AS UNDER: EXPENSE INCURRED TOWARDS TECHNICAL CONSULTANCY PAI D TO MR. BOSS OF SWITZERLAND: MR. J. BOSS WAS RETAINED TO GUIDE THE COMPANY FOR DEVELOPMENT OF FLOW METERS (ONE OF THE PRODUCTS BEI NG MANUFACTURED BY THE COMPANY) FOR SUPPLYING IN THE INTERNATIONAL MARKET WITH INTERNATIONAL CERTIFICATION. SINCE HIS GUIDANCE WAS FOR DEVELOPMENT I MODIFICATION OF EXISTING PRODUCTS, AMOUNT PAID TO H IM DURING THE YEAR HAS BEEN CLAIMED AS RESEARCH & DEVELOPMENT EXPENSES U/S 35 OF THE ACT AND THESE HAVE BEEN SHOWN AS DEFERRED REVENUE E XPENDITURE, CONSIDERING THAT BENEFIT FROM MR.BOSSS GUIDANCE AN D CONTRIBUTION WAS OF A LONG TERM NATURE. COPIES OF THE MOU SIGNED WIT H MR.BOSS ALONG WITH THE EXPENSE DETAILS ARE ATTACHED. 3. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTE NTION ON THE GROUND THAT THE AFORESAID EXPENDITURE IS FOR THE PURPOSE O F BUSINESS DEVELOPMENT AND HAS ENDURING AND LASTING VALUE. THIS IS NOT DEP RECIABLE IN NATURE AND THE BENEFIT DERIVED FROM IS NOT LIMITED TO JUST ONE FIN ANCIAL YEAR. ACCORDINGLY, HE TREATED THE SAME AS CAPITAL EXPENDITURE. THUS, THE AMOUNT OF ` 11,33,943, WHICH WAS PAID AS TECHNICAL CONSULTANCY FEES WAS DI SALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. MR. BIPIN RAM CHAINANI 3 4. BEFORE THE LEARNED COMMISSIONER (APPEALS), IT WAS S UBMITTED THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING AND MARKETING OF MAGNETIC FLOW METERS. THESE INSTRUMENTS ARE USED IN MEASUREMENT O F FLOW OF CONDUCTING LIQUIDS PASTE SLURRIES, IN CHEMICALS AND PETROCHEMI CAL, FERTILIZERS, PAPER AND MINING INDUSTRIES. THESE ARE ALSO USED FOR MONITORI NG FLOW OF WATER IN COOLING CIRCUITS IN STEEL PLANTS AND POWER PROJECTS. A TECH NICAL CONSULTANT FROM SWITZERLAND, MR. J. BOSS, WAS ENGAGED TO GUIDE THE ASSESSEE COMPANY FOR DEVELOPMENT OF FLOW METERS FOR SUPPLYING IN THE INT ERNATIONAL MARKETS WITH INTERNATIONAL CERTIFICATIONS. IT WAS CONTENDED THAT GUIDANCE WAS FOR DEVELOPMENT OF MODIFICATION OF AN EXISTING PRODUCT AND, THEREFORE, IT WAS IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENSES ALL OWABLE UNDER SECTION 35, HENCE, IT WAS TREATED AS DEFERRED REVENUE EXPEN DITURE BEFORE THE ASSESSING OFFICER. IT WAS ALSO ARGUED THAT THE SAID CONSULTANT HAD ASSISTED IN DEVELOPING STRATEGY FOR DEVELOPMENT OF MAGNETIC FLO W METERS INCLUDING CONCEPT DESIGN. HE HAD ALSO PROVIDED EXCEL BASED SO FTWARE TOOLS FOR STIMULATION OF RESULTS AND DESIGNS. THUS, THE PRODU CT MANUFACTURED HAVE BEEN UPGRADED TECHNICALLY WITH HIGHER ACCURACY AND REDUCED POWER CONSUMPTION. DURING THE COURSE OF APPELLATE PROCEED INGS, THE LEARNED COMMISSIONER (APPEALS) HAD REQUIRED THE ASSESSEE TO FURNISH EVIDENCE TO THE FACT THAT THE CONSULTANT HAD REALLY ASSISTED IN THE DEVELOPMENT OF THE PRODUCT. IN RESPONSE, THE ASSESSEE SUBMITTED VARIOU S PAPERS CONTAINING STRATEGICAL IDEAS FOR FURTHER DEVELOPMENT OF MAGNET IC FLOW METERS. IN ADDITION, A COPY OF CORRESPONDENCE AND SAMPLE COPIE S OF MONTHLY REPORT OF RESEARCH AND DEVELOPMENT WAS ALSO FILED. HOWEVER, T HE LEARNED COMMISSIONER (APPEALS) OBSERVED THAT THERE IS NO DI RECT RESEARCH UNDERTAKEN BY THE ASSESSEE UNDER THE GUIDANCE OF TE CHNICAL CONSULTANTS. THESE EVIDENCES MERELY GIVES IDEAS TOWARDS DEVELOPM ENT OF NEW IMPROVED PRODUCT. THUS, HE HELD THAT THE GENUINENESS OF THE EXPENDITURE WHETHER INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS HAVE NOT BEEN ESTABLISHED. THUS, THE EXPENDITURE CANNOT BE ALLOWE D AS REVENUE EXPENDITURE. FURTHER, IT CANNOT BE ALLOWED UNDER SE CTION 35 ALSO AS REQUIRED MR. BIPIN RAM CHAINANI 4 CONDITIONS FOR ALLOWABILITY AS SCIENTIFIC RESEARCH INSTITUTION HAD NOT BEEN FULFILLED. ACCORDINGLY, THE ASSESSEES GROUND WAS D ISMISSED. 5. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT INSOFAR AS THE PAYMENT MADE TO TECHNICAL CONSULTANT IS CONC ERNED, THE SAME IS NOT DISPUTED. THE LEARNED COMMISSIONER (APPEALS) HAS HE LD THAT IT IS NEITHER ALLOWABLE AS REVENUE EXPENDITURE NOR UNDER SECTION 35 WHICH IS ON ACCOUNT OF SCIENTIFIC RESEARCH. BEFORE THE ASSESSING OFFICE R AS WELL AS THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE HAS FURNISHED DETAILED EVIDENCE AND DOCUMENTS AS TO WHAT WAS THE NATURE OF TECHNICAL CO NSULTANCY AND HOW IT HAS HELP THE ASSESSEE TO UPGRADE THE PRODUCTS MANUF ACTURED BY IT WHICH IS MAINLY MAGNETIC FLOW METERS. HE SUBMITTED THAT SUCH AN EXPENDITURE IS NOT ONLY ALLOWABLE AS REVENUE EXPENDITURE BECAUSE IT WA S WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, OTHERWISE ALSO, THIS E XPENDITURE IS ALLOWABLE UNDER SECTION 35(1), BECAUSE THE EXPENDITURE WAS ON ACCOUNT OF SCIENTIFIC RESEARCH AND DEVELOPMENT RELATED TO THE BUSINESS CA RRIED ON BY THE ASSESSEE. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RE LIED UPON THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS). 7. WE HAVE HEARD THE RIVAL CONTENTION, PERUSED THE REL EVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE MATERIAL AVAILABLE ON RECORD. BEFORE THE AUTHORITIE S BELOW, THE ASSESSEE HAD SUBMITTED THAT IT HAS BEEN ENGAGED IN THE MANUFACTU RING AND MARKETING OF MAGNETIC FLOW METERS WHICH HAS USED IN VARIOUS KIND S OF INDUSTRIES AND SCIENTIFIC RESEARCH. SINCE THE PRODUCT MANUFACTURED BY THE ASSESSEE IS A HIGHLY TECHNICAL PRODUCT, IT HAS ENGAGED A TECHNICA L CONSULTANT MR. J. BOSS, FOR GUIDING IN DEVELOPMENT AND MODIFICATION OF THE EXISTING PRODUCT. THE SAID CONSULTANT HAD ASSISTED THE ASSESSEE IN VARIOUS WAY S WHICH HAS BEEN SUBMITTED BEFORE THE LEARNED COMMISSIONER (APPEALS) AND HAS ALSO BEEN DISCUSSED BY US IN THE FOREGOING PARAGRAPHS. THE LE ARNED COMMISSIONER (APPEALS) HAS REJECTED THE ASSESSEES CONTENTION MA INLY ON THE GROUND THAT MR. BIPIN RAM CHAINANI 5 DIRECT RESEARCH HAD NOT BEEN UNDERTAKEN UNDER THE G UIDANCE OF THE TECHNICAL CONSULTANT AS HE HAS ONLY GIVEN IDEAS TOWARDS THE D EVELOPMENT OF NEW IMPROVED PRODUCT. IN OUR OPINION, SUCH A REASON FOR REJECTING THE SAID EXPENDITURE IS WHOLLY VITIATED BECAUSE INSOFAR AS T HE SAID PAYMENT TO THE TECHNICAL CONSULTANT, IT DIRECTLY RELATES TO SCIENT IFIC RESEARCH WHICH IN TURN IS RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THE SAME HAS TO BE ALLOWED UNDER SECTION 35. IT HAS NOT BEEN DISPUTED EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED COMMISSIONER (APPEALS) TH AT TECHNICAL CONSULTANT HAS ASSISTED THE ASSESSEE FOR THE RESEARCH AND IMPR OVING THE PRODUCT MANUFACTURED BY THE ASSESSEE WHICH WAS ITS MAIN BUS INESS. THUS, ON THE FACTS DISCUSSED ABOVE, WE HOLD THAT THE ASSESSEES PAYMENT TO TECHNICAL CONSULTANT WAS IN THE NATURE OF EXPENDITURE OF CAPI TAL NATURE OF A SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE AND SUCH EXPENDITURE HAS TO BE ALLOWED AS PER THE PROVISIONS OF SECTION 35(2) R/W SECTION 35(1)(IV). THUS, THE FINDINGS OF THE LEARNE D COMMISSIONER (APPEALS) ON THIS SCORE ARE SET ASIDE AND THE GROUNDS RAISED BY THE ASSESSEE ARE TREATED AS ALLOWED. 8. 1 #6 &) *1# !# 7 ) # 89 : 8. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. $ 2 4+ ; <)6 18 TH SEPTEMBER 2013 2 = ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH SEPTEMBER 2013 SD/- SANJAY ARORA ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, <) <) <) <) DATED: 18 TH SEPTEMBER 2013 MR. BIPIN RAM CHAINANI 6 $ 2 .&#'> ?>+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) ! / THE REVENUE; (3) @ () / THE CIT(A); (4) @ / THE CIT, MUMBAI CITY CONCERNED; (5) >!C= .&#&) , , / THE DR, ITAT, MUMBAI; (6) =D* E / GUARD FILE. /># .&# / TRUE COPY $) / BY ORDER . . FG / PRADEEP J. CHOWDHURY !1H &) F! / SR. PRIVATE SECRETARY I / 8 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI