Deputy Commissioner of Income-tax, Circle - 8, Pune V. M/s. Dynomerk Controls, Pune

ITA 904/PUN/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7732 (ITAT-PUNE)
• Duration Of Justice: 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2013-2014
• Appeal Filed On: 18-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M K VERMA
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE BEFORE , SHRI VIKAS AWASTHY, JM . / ITA NO.904/PUN/2018 ' # $# / ASSESSMENT YEAR : 2013-14 THE DY.COMMISSIONER OF INCOME TAX, CIRCLE-8, PUNE. . / APPELLANT. V/S M/S. DYNOMERK CONTROLS, S-BLOCK, NO.101, BHOSARI, PUNE 411 026 PAN : AAAFD8448D . / RESPONDENT ASSESSEE BY : SHRI SUHAS BORA. REVENUE BY : SHRI M.K. VERMA. / ORDER PER VIKAS AWASTHY, JM : THIS APPEAL BY THE DEPARTMENT IS DIRECTED AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS) 6, PUNE DATED 09.0 2.2018 FOR THE ASSESSMENT YEAR 2013-14. 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS A RE: THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN MANUFACTURING OF DYNAMOMETERS AND AUTOMOBILE TESTING EQUIPMENTS. THE ASS ESSEE FILED ITS RETURN OF INCOME FOR IMPUGNED ASSESSMENT YEAR ON 27.0 9.2013 DECLARING LOSS OF RS.1,08,57,211/-. THE CASE OF ASSESSEE WA S SELECTED / DATE OF HEARING : 10.01.2019 / DATE OF PRONOUNCEMENT: 16.01.2019. 2 ITA NO.904/PUN/2018 FOR SCRUTINY UNDER CASS AND ACCORDINGLY, NOTICE U/S 143( 2) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE AC T) WAS ISSUED ON 08.09.2014. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, AO OBSERVED THAT ASSESSEE HAS INCURRED EXPENDITURE OF RS .1,39,05,544/- TOWARDS PRODUCT DEVELOPMENT COST. THE ASSESSEE CLAIMED THE SAID EXPENDITURE AS REVENUE. THE AO HELD THAT THE EXPEND ITURE WAS INCURRED FOR PRODUCT DESIGN DEVELOPMENT WHICH WOULD HAVE DEFINITELY RESULTED IN ENDURING BENEFIT TO THE ASSESSEE. THEREFORE, T HE EXPENDITURE CANNOT BE ALLOWED ON REVENUE ACCOUNT. 3. AGAINST THE ASSESSMENT ORDER DATED 03.03.2016, THE A SSESSEE FILED APPEAL BEFORE CIT(A). THE CIT(A) PLACING RELIANCE ON VARIO US DECISIONS INCLUDING THE DECISION OF PUNE BENCH OF THE TRIBUN AL IN THE CASE OF BEHR INDIA LTD., VS. ACIT REPORTED AS 118 TTJ 6 95 (PUNE) HELD THE AFORESAID EXPENDITURE TO BE REVENUE. AGAINST THE FIN DINGS OF CIT(A), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL ON FOLLO WING GROUNDS : 1. WHETHER ON THE FACTS AND C I RCUMSTANCES OF THE CASE AND IN LAW , THE LD CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE O F PRODUCT DEVELOPMENT EXPENSES OF RS . 1,36 , 05,544/ - WITHOUT ANALYSING THE NATURE OF EXPENDITURE? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT{A} WAS JUSTIFIED IN HOLDING PRODUCT DEVELOPMENT EXPENSES AS REVENUE EXPENDITURE WHEN THE BILL WISE NATURE OF EXPENSES S HOWS THAT THE PRODUCT DEVELOPMENT EXPENDITURE CONFERRED ENDURING BENEFIT TO THE ASSESSEE? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD . CIT(A) ERRED IN INFERRING THAT THE EXPENDITURE WAS INCURRED TO BRIN G IN IMPROVISATION & IMPROVEMENT IN THE PRODUCT MANUFACTURED BY THE ASSE SSEE BY MAKING CHANGES & AT THE SAME TIME R EMAIN I NG PR I CE COMPETITIVE? 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE LD.CIT(A) WAS JUSTIFIED IN NOT APPRECIATING THAT THE FINAL OUTCOM E OF THE ASSESSEE IS DEFINITELY OF ENDURING NATURE IN SUSTENANCE OF THE PRODUCT / DESIGNED 3 ITA NO.904/PUN/2018 DEVELOPED BY THE ASSESSEE AS WELL AS IN MAINTAINING CUSTOMER RELATIONSHIP AND MAINTAINING GOODWILL OF THE ASSESSEE IN MARKET , THEREFORE THESE EXPENDITURE CANNOT BE CONSIDERED AS EXPENSES OF REV ENUE NATURE? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND I N LAW THE LD . CIT(A) ERRED IN INFERRING THAT THE EXPENSES WERE IN CURRED ON ACCOUNT OF SUBJECTING THE ASSESSEE'S PRODUCT TO TESTING WHICH IS DONE ON ONGOING BASIS EVERY YEAR TO CATER TO THE NEEDS OF CUSTOMERS & THAT THE EXPENSES IS INCURRED FOR TESTING & TRIALS OF PRODUCTS ALREADY BEING MANUFACTURED & SOLD BY THE ASSESSEE? 6. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE ABOVE GROUNDS OF APPEAL . 4. SHRI SUHAS BORA APPEARING ON BEHALF OF ASSESSEE SUB MITTED AT THE OUTSET THAT ASSESSEE HAD INCURRED EXPENDITURE ON PRODUCT DEVELOPMENT. THE AFORESAID EXPENDITURE CONSISTS OF THREE H EADS NAMELY : 1. CONTROL SOFTWARE DEVELOPMENT COST RS.30,69,320/- 2. PLC PROGRAMMING COST RS.15,47,492/- 3. PRODUCT DEVELOPMENT COST RS.92,88,742/- TOTAL: RS.1,39,05,554/- THE PUNE BENCH OF TRIBUNAL IN THE CASE OF BEHR INDIA LIMIT ED VS. ACIT (SUPRA) HAS HELD THAT THE EXPENDITURE INCURRED FOR IMPROVEMENT OF PRODUCTS ALREADY BEING MANUFACTURED BY ASSESSEE, SUCH EXPENDITURE INCURRED BY THE ASSESSEE IS FOR SMOOTH AND EFFICIENT WORKIN G OF HIS BUSINESS AND HENCE, IS ALLOWABLE AS REVENUE EXPENDITURE . THE LD.A.R. SUBMITTED THAT IN THE PRESENT CASE, ASSESSEE HAS INCURR ED EXPENDITURE ONLY FOR DEVELOPMENT OF EXISTING PRODUCTS AND NOT OR NEW LINE OF BUSINESS OR NEW PRODUCTS. THE LD.A.R. VEHEMENTLY DEFENDED THE ORDER OF CIT(A) AND PRAYED FOR DISMISSING THE APPEAL OF REVENUE. IN SUPPORT OF HIS CONTENTIONS, THE LD.A.R. PLACED RELIANCE ON FOLLOWING DECISIONS : 4 ITA NO.904/PUN/2018 1. AMAR RAJA BATTERIES LTD. VS. ACIT 91 ITD 280. 2. JCIT VS. MODI OLIVETTI LTD. 4 SOT 859 (DELHI). 3. ACIT VS. MEDICAMEN BIOTECH LTD. 1 SOT 347 (DELHI). 4. HERO HONDA MOTORS LTD. VS. JCIT 3 SOT 572 (DELHI). 5. CHARAK PHARMACEUTICALS VS. JCIT 4SOT 393. 6. MADRAS INDUSTRIAL INVESTMENT LTD. VS. CIT 225 ITR 802. 7. KEDATNATH JUTE MANUFACTURING CO LTD. VS. CIT 82 ITR 363 SC. 5. SHRI M.K. VERMA REPRESENTING THE DEPARTMENT SUBMITTE D THAT HUGE EXPENDITURE HAS BEEN INCURRED BY ASSESSEE FOR PRO DUCT DEVELOPMENT WHICH WOULD RESULT IN ENDURING BENEFIT TO THE ASSESSEE OVER A PERIOD OF TIME. THE LD.D.R. PLACED RELIANCE ON THE DE CISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF TORRENT PHA RMACEUTICALS LTD., VS. ACIT REPORTED AS 230 TAXMAN 204 TO SUBSTAN TIATE HIS CONTENTIONS THAT THE PRODUCT DEVELOPMENT EXPENDITURE B Y THE ASSESSEE IS ON CAPITAL ACCOUNT. 6. I HAVE HEARD THE SUBMISSIONS MADE BY RIVAL SIDES AND HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW. I HAVE ALSO CON SIDERED THE DECISIONS ON WHICH BOTH SIDES HAVE PLACED RELIANCE. THE UN DISPUTED FACT THAT EMERGES FROM THE RECORD IS THAT ASSESSEE HAD INCURRED EXPENDITURE TOWARDS PRODUCT DEVELOPMENT. THE ASSESSEE IS ENGAGED IN MANUFACTURING OF COMPONENTS FOR AUTOMOBILE INDUSTRY THAT IS HIGHLY COMPETITIVE FOR WHICH CONTINUOUS RESEARCH AND DEVELOPMEN T IS IMPERATIVE. IT IS NOT THE CASE OF REVENUE THAT ASSESSE E HAS INCURRED EXPENDITURE FOR DEVELOPMENT OF A NEW PRODUCT OR NEW LINE OF BUSINESS. 5 ITA NO.904/PUN/2018 THE EXPENDITURE HAS BEEN INCURRED BY ASSESSEE TO IMPR OVE THE EXISTING PRODUCTS. 7. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BEHR INDIA LIMITED VS. ACIT (SUPRA) HAD AN OCCASION TO DEAL WITH SIMILAR ISSUE. THE TRIBUNAL AFTER CONSIDERING VARIOUS DECISIONS CONCLUDED AS UNDE R : 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURI NG OF AIR CONDITIONERS AND ITS COMPONENTS WHICH WERE IN TURN USED IN THE AUTOMOTIVE INDUSTRIES. THE ASSESSEE IN ORDER TO TES T THE VALIDATION OF THE PRODUCT INCURRED EXPENDITURE ON A REGULAR BASIS TO BRING IN IMPROVISATION AND MODIFICATIONS IN THE PRODUCT AS PER THE REQUIRE MENTS OF THE CUSTOMERS. THE SAID EXERCISE WAS CARRIED OUT BY THE ASSESSEE IN ORDER TO TEST THE MARKET SUITABILITY OF THE PRODUCTS WHEREIN THE PRODUCTS WERE SENT TO GERMANY IN ORDER TO TEST ITS VALIDATION, SINCE, THE FINAL PRODUCT WAS BEING SOLD TO AE. IN THE FIRST ROUND OF ASSESSMENT PROCEEDINGS THE SAID EXPENDITURE WAS CONNECTED WITH THE EXPENDITURE INCU RRED IN THE FIRST YEAR OF COMMENCEMENT OF BUSINESS ON PRODUCT DEVELOPMENT AND HENCE, THE EXPENDITURE WAS HELD TO BE CAPITAL IN NATURE. HOWEV ER, WHERE EXPENDITURE ON TESTING OF THE PRODUCT WHICH IS REQU IRED TO BE INCURRED ON A REGULAR BASIS AND WHICH DOES NOT RESULT INTO CREATI ON OR ACQUISITION OF ANY ASSETS, THEN THERE IS NO MERIT IN HOLDING THE EXPEN DITURE TO BE OF ENDURING BENEFIT. THE ASSESSEE IS CARRYING OUT THIS EXERCISE OF MODIFICATION AND IMPROVISATION IN THE PRODUCTS IN ORDER TO TEST SUIT ABILITY IN THE ENVIRONMENT IN WHICH IT IS TO BE USED AND HENCE, TH E SAID EXPENDITURE IS DULY ALLOWABLE IN THE HANDS OF THE ASSESSEE AS REVE NUE EXPENDITURE. THE BILL WISE NATURE OF EXPENSES ARE TABULATED AT PAGE 6 OF THE ORDER OF CIT(A) AND PERUSAL OF THE SAME REFLECTS EXPENDITURE TO BE REVENUE IN NATURE. ONCE, THE EXPENDITURE HAS NOT BEEN INCURRED FOR THE DEVELOPMENT OF NEW PRODUCT BUT IS FOR THE IMPROVISATION OF THE PRODUCT S ALREADY BEING MANUFACTURED BY THE ASSESSEE, THEN SUCH AN EXPENDIT URE WHICH IS A REGULAR EXPENDITURE INCURRED BY THE ASSESSEE FOR SM OOTH AND EFFICIENT WORKING OF ITS BUSINESS, IS TO BE ALLOWED AS REVENU E EXPENDITURE IN ITS HANDS. WE ALSO FIND SUPPORT FROM THE RATIO LAID DOW N BY THE TRIBUNAL IN ASST. CIT VS. SPICER INDIA LTD. (SUPRA) WHEREIN SIMI LAR EXPENDITURE WAS ALLOWED AS REVENUE EXPENDITURE IN THE HANDS OF THE SAID ASSESSEE . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE HAS PLACED RELIANCE ON THE RATIO LAID DOWN IN COMMISSIONER OF INCOME TAX VS. SARAVANA SPG. MILLS (P.) LTD. (SUPRA) WHICH WAS A CASE OF CURRENT REPAIRS TO THE PLANT AND MACHINERY WHICH STAND ON A DIFFERENT FOOTING AND TH E SAID RATIO IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. UPHOLD ING THE ORDER OF CIT(A), WE DISMISS THE GROUNDS OF APPEAL RAISED BY THE REVE NUE. WE FIND THAT THE RATIO LAID DOWN BY THE CO-ORDINATE BENCH OF THE TRIBUNAL SQUARELY APPLIES ON THE FACTS OF THE PRESENT CASE. THUS, IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD.CIT (A) IN HOLDING THE PRODUCT DEVELOPMENT EXPENDITURE AS REVENUE. 6 ITA NO.904/PUN/2018 I FIND THAT THE RATIO LAID DOWN IN THE CASE OF BEHR INDIA LTD., (SUPRA) SQUARELY APPLIES ON THE FACTS OF THE PRESENT CASE . THUS, IN VIEW OF THE ABOVE, I DO NOT FIND ANY INFIRMITY IN THE DECISION OF C IT(A) IN HOLDING THE EXPENDITURE ON PRODUCT DEVELOPMENT ON REVENUE ACCOU NT. 8. THE LD.D.R. HAS PLACED RELIANCE ON THE DECISION OF TORRENT PHARMACEUTICALS LTD., VS. ACIT (SUPRA). I FIND THAT THE SA ID DECISION BY HONBLE GUJARAT HIGH COURT IS ENTIRELY ON DIFFERENT SET O F FACTS. IN THE SAID CASE, ASSESSEE HAD CLAIMED EXPENDITURE ON ISSUE OF C ONVERTIBLE DEBENTURES AS REVENUE. THE HON'BLE HIGH COURT HELD TH AT SUCH EXPENDITURE IS DIRECTLY RELATED TO EXPANSION OF CAPITAL OF THE BUSINESS OF COMPANY AND HENCE, IT IS A CAPITAL EXPENDITURE. THE SAID DECISION DOES NOT SUPPORT THE CAUSE OF REVENUE. 9. IN VIEW OF THE FACTS AND DECISION DISCUSSED ABOVE, FINDIN GS OF CIT(A) ON THE ISSUE UNDER APEPAL ARE UPHELD AND THE AP PEAL OF REVENUE IS DISMISSED BEING DEVOID OF ANY MERIT. 10. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 16 TH DAY OF JANUARY, 2019. SD/- SD/- ( /VIKAS AWASTHY) / JUDICIAL MEMBER PUNE; #$ DATED :16 TH JANUARY, 2019. YAMINI 7 ITA NO.904/PUN/2018 &'()*$( / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. 4. 5 6. CIT(A)-6, PUNE. PR. CIT-5, PUNE. %&' (),+ (), , / DR, ITAT, SMC PUNE; './0/ GUARD FILE. / BY ORDER // TRUE COPY // 1234(5 / SR. PRIVATE SECRETARY + (), / ITAT, PUNE.