DY. COMMISSIONER OF INCOME TAX, DEHRADUN vs. SCHLUMBERGER ASIA SERVICE LIMITED, GURGAON

PER SATBEER SINGH GODARA, JM: These Revenue’s instant four appeals ITA Nos.254 to 257/DDN/2025 for assessment years 2019-20 to 2022-23, arise against the Commissioner of Income Tax (Appeals) [in short, the “CIT(A)”], Noida-2’s orders, all dated 30.09.2025 having DINs and

ITA Nos.254 to 257/DDN/2025

orders no. ITBA/APL/S/250/2025-26/1081359943(1), 1081360101(1), 1081359838(1) and 1081359112(1), involving proceedings under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’); respectively. Heard both the parties. Case files perused. 2. The Revenue’s “lead” appeal ITA No. 254/DDN/2025 for the first and foremost assessment year 2019-20, raises the following substantive grounds: 1. Whether on the facts and circumstances of the case, the Ld. (CIT(A) has erred in law in deleting the disallowance of expenditure on account of "Cost of material consumed" & "Rate & taxes of Rs. 27,81,01,346/- & Rs. 1,31,18,882/-, respectively, ignoring the fact that the expenses were of large value & capital in nature. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating the findings of the Assessing Officer that the expenditure on account of "repair and maintenance of such large amount, appears to be in the nature of "enduring benefit" to the assessee and is hence capital in nature. 3. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.” 3. Both the parties next invite our attention to the learned CIT(A)’s detailed discussion reversing the Assessing Officer’s action disallowing 20% of the assessee’s expenditure claims i.e. cost of materials amounting to Rs.27,81,01,346/-, reading as under: “5.3.1 Vide these grounds of appeal, the appellant has contended that on the facts and circumstances of the case, the AO has erred in ad hoc disallowing expenditure on the cost of material consumed amounting to Rs. 27,81,01,346/- and rates and taxes (20% of the

2 | P a g e

ITA Nos.254 to 257/DDN/2025

expenditure) amounting to Rs. 1,31,18,882/- alleging the same to be in the nature of capital expenditure. 5.3.2 The relevant part of the submissions of the appellant is reproduced hereunder for better understanding: “The Ld. AO has erred in law and on facts of the case by holding that the expenditure on account of cost of material consumed of such “large amount”, appears to be in the nature of enduring benefit” to the Appellant and can be categorized as capital in nature. “The assessee could not prove that how expenditure of such large amount has been claimed to be current expenses. A perusal of the above clearly show that the expenditure is not in the nature of consumables and also the value of single items is also very large to make it capital in nature. The expenditure appears to be in the nature of enduring benefit to the assessee and its capital assets and thus, cannot be classified as consumables by any means. For example, “Carr Tube” appears to be capital asset and is of large value has been debited under this head. These are beyond any doubt capital in nature and thus, not allowable.” (Page 6 &7 of the Assessment Order)

The Appellant wishes to submit as under: 1. Contrary to the facts of the case, the Ld. AO misled himself in believing that the value of the expenditure is “large value”. At the outset, the Appellant wishes to submit that the Ld. AO has incorrectly assumed that the item “Carr Tube” constitutes a capital expense and, therefore, sought to treat its cost as a capital purchase. The Appellant claims that the expenses incurred are revenue expenses in the normal course of business of the Appellant and are rightly debited to the profit and loss account during the year. The above claim of the Appellant is very well substantiated by the invoice copies submitted with the Ld. AO during the course of assessment proceedings. A copy of invoice no. GU498699 basis on which the Ld. AO has incorrectly assumed the nature of the item “Carr Tube” is enclosed herewith as Annexure-1. Further, a technical note to understand the nature and uses of the Carr Tube is as under: At the outset, the Appellant wishes to submit that Carr/Tube as mentioned in invoice no. GU498699 is an abbreviation/short for “Carrier Gun”. Carrier gun: 3 | P a g e

ITA Nos.254 to 257/DDN/2025

“1. n. [Perforating] A perforating gun, consisting of a loading tube and shaped charges. The shaped charges are housed inside a metal tube or pipe known as a carrier. The carrier protects the charges against well fluids.” The item described as “Carr Tube” refers to a part or tubing used in drilling operations or oilfield servicing, generally: • Used in wireline logging, coiled tubing operations, or mud circulation; • Integrated with consumable tools or tubing assemblies that are replaced frequently; • Subject to wear and tear during each use, and thus does not have an enduring life like a capital asset; • Purchased and consumed in the normal course of operations, with short utility spans and no standalone asset identity. The Ld. AO has incorrectly held that the value of a single item is very large to make it capital in nature. The Appellant wishes to draw your Honor’s attention to invoice no. GU498699 enclosed as Annexure-1, wherein the value single unit of Carrier Gun Tube is mentioned as USD 524.18 only. Thus, it can be substantiated from the invoice itself that the item is consumable in nature. Further, the large quantity of items purchased in the invoice also indicates that the items are not for long-term use but are often discarded, damaged, or replaced after short operational cycles. 1. Judicial precedents in favor of the Appellant 2. The decision of Income Tax Appellate Tribunal, Delhi Bench in the case of Assistant Commissioner of Income-tax v. Parabolic Drugs Ltd., wherein it was held that expenditure related to materials/consumables/spares that are incurred in the course of its business cannot be classified as capital in nature. “All these items are in the nature of materials/consumables in the process of R&D. It is not the case of the AO that the said material was not consumed in the R&D process and some part thereof was remaining in the closing stock. Therefore, these expenditures incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. The next item is "other expenditure directly related to R&D". The details of these expenditure are incorporated at p. 48 of the paper book. It is under the head "Details of other expenditure directly related to R&D". With regard to these expenditures the finding of fact has been recorded by learned CIT(A) 4 | P a g e

ITA Nos.254 to 257/DDN/2025

that these have been incurred by the assessee for registration of products in other countries or towards obtaining technical know-how fee for producing new drugs etc. He has recorded in his order that he has called for and perused the agreements between the assessee company and Ind. Swift Ltd. (which is the major sum of Rs. 1 crore comprising of two items of Rs. 50 lakhs each) for transfer of technical know-how. He has also observed that AO has not given any adverse comment in his report regarding this agreement and such types of agreements for transfer of technical know-how are quite common in pharmaceutical industry due to commercial exigency. These findings of fact have not been controverted by the Revenue by brining any material on record to suggest that such findings of learned CIT(A) are contrary to the facts existing on record. If it is so, then we find no infirmity in the findings recorded by learned CIT(A), whereby following the decisions of Delhi Tribunal in the cases of Modi Olivetti Ltd. (supra) and Medicamen Biotech Ltd. (supra), he has allowed the relief to the assessee. 30. In view of the above discussion, it has to be held that all of these expenditures were incurred by the assessee in the course of its business and none of the expenditures can be classified as expenditure in the nature of capital.” (Emphasis supplied) 1. The decision of Income Tax Appellate Tribunal, Kolkata Bench in the case of ITC Ltd v. ACIT , wherein it was held as under: "I have considered the submissions of the authorized representative of the appellant as well as the assessment order framed in the light of the materials available on record before the assessing officer during the assessment proceedings. The A.R during the remand proceedings before the AO and before undersigned has submitted that the expenditure for Rs. 19,55,000/-was made in respect of charges paid towards spares and consumables required for rearrangement of packing materials to meet day -to-day production requirements, and also furnished details furnished detailed break-up thereof. The AO in his remand report did not object the nature of expenses but disallowed by stating that these tools will give enduring benefit to the assessee and therefore cannot be claimed as revenue deduction. It is very much clear from the details filed by the A.R that the nature of expenditure related to paper board for packing, spares, presentation in factory, courier charges, program maintenance, regular maintenance of Auto- CAD inverter, spare for Focke machine, printing and proofing charges. This expenditure has been debited to the profit and loss a/c as per the existing Accounting Standards and since such expenditure is regular and recurring in nature. In view of above, the AO is directed to delete the addition and this ground of appeal is allowed. Since this ground of appeal is allowed so allowing of depreciation become infractuous." (Emphasis supplied)

5 | P a g e

ITA Nos.254 to 257/DDN/2025

ITA Nos.254 to 257/DDN/2025

It admits of no doubt that mere quantum of expenditure is not by itself decisive of the question whether it is revenue or capital expenditure. A sum of Rs. 59,000 spent by an assessee-company for guniting work done and a sum of Rs. 3,680 being the architect fee paid in connection thereof were held by the Bombay High Court in CIT v. Oxford University Press [1977] 108 ITR 166 as revenue expenditure and allowable deductions.” (Emphasis Supplied) 1. Without prejudice to the above, the test of “enduring benefit” to the business is not a certain conclusive test and cannot be applied blindly by the Ld. AO to categorize the expenditure as capital or revenue in nature. While making the above assertion, the Appellant wishes to place reliance on the decision of the Hon’ble Supreme Court of India in the case of Empire Jute Co. Ltd. v. CIT[ Jwherein it was held: “If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.” (Emphasis supplied) The Ld. AO erred in disallowing a portion of the expenditure claimed under "Rates and Taxes" on an ad-hoc basis, without identifying any specific discrepancy or defect in the books of accounts. The disallowance, being arbitrary and lacking proper justification, is unjustified and bad in law. Detailed breakup and invoices filed as Additional Evidence Under Rule 46A: The Appellant had furnished detailed break-ups and sample invoices for the expenses claimed as ‘Rates & Taxes’ as additional evidence before your Honor, evidencing that the expenses are incurred in the normal course of business and are not capital in nature. The Appellant wishes to submit that the impugned expenses are statutory levies incurred in the ordinary conduct of business and are not for acquiring or improving capital assets. These include mandatory taxes and duties (e.g., stamp duty, permit, license fees, etc.) imposed by law on the business operations. 7 | P a g e

ITA Nos.254 to 257/DDN/2025

In these circumstances, the Ld. AO’s ad-hoc disallowance cannot stand. The ground, therefore, deserves to be allowed. The disallowance under “Rates & Taxes” should be deleted.”

5.3.3 On careful perusal of the assessment order, it is noted that in ITR, the appellant had claim expenditure of Rs. 185,40,08,974/- on account of purchases of stores and spares from related parties. The AO issued the notice to the appellant for submission of related invoices. The appellant submitted bills on sample basis. In assessment order, the AO has mentioned two invoices items of which mentioned therein found by the AO as capital purchases in absence of satisfactory reply by the appellant assessee. Hence, the AO has made disallowance on the cost of material consumed to the extent of 15% by holding that the expenditure on account of cost of material consumed of such “large amount”, appears to be in the nature of “enduring benefit” to the Appellant and can be categorized as capital in nature. Similarly, the AO has made disallowance on rates and taxes to the extent of 20% amounting to Rs. 1,31,18,882/-. 5.3.4 Since the contention in these two grounds is similar, both grounds are being adjudicated upon together for sake of convenience. In its reply, the appellant has submitted that during the course of assessment proceedings, the appellant filed the audit report wherein an independent auditor certified both the correctness of the method of accounting followed and the sufficiency of the internal controls for the valuation of inventory. It has further been submitted that the AO, without bringing out any fault in the financial statements of the appellant, proceeded to make ad hoc disallowance. The appellant has contended that the very basis of the assessment is conjectures and surmises and thus, the assessment deserves to be quashed. The appellant has argued that the AO has not pointed out any specific instance of inflated, non-genuine, or unverifiable expenditure whereas the expenditure claimed was supported by a detailed ledger and invoices submitted during assessment proceedings. 5.3.5 I have carefully gone through the facts of the case, submissions of the appellant and case laws relied upon by the appellant. It is evident from the assessment order that the AO has accepted the financial statements furnished by the appellant during the course of assessment proceedings. The AO has vide the assessment order made ad-hoc disallowances of certain expenses. In respect of cost of material consumed, the AO has only mentioned that the expenditure is not in the nature of consumables and also the value of single items is also very large to make it capital in nature being enduring benefit to the assessee. In respect of rates and taxes, the AO

8 | P a g e

ITA Nos.254 to 257/DDN/2025

has simply stated that the reasons stated in point no. 5 above (i.e. disallowance of cost of material consumed), the appellant is not able to substantiate that the purchases were capital assets or revenue expenses like consumables. During the course of appellate proceedings, the appellant has filed relevant invoices. On perusal of the same, it is seen that the items are consumable in nature. Further, the large quantity of items purchased in the invoice also indicates that the items are not for long-term use but are of regular use and should be allowed as revenue expenditure. 5.3.6 It is matter of fact that the AO in the assessment order has not pointed out that any part of the expenditure in question is either bogus, non-genuine or fictitious and has failed to mention any rationale in arriving at the percentage of disallowance. 5.3.8 In view of the above discussion, ad-hoc disallowances of Rs. 27,81,01,346/-and Rs. 1,31,18,882/- in respect of cost of material consumed and rates & taxes expenses respectively made by the AO are held to be not sustainable. Consequently, addition made on account of such disallowances is deleted. The grounds of appeals 3 & 4 are allowed in favour of the appellant.”

9 | P a g e

ITA Nos.254 to 257/DDN/2025

granting the enduring benefits (supra). We further sought to verify as to whether the learned Assessing Officer had rejected the assessee’s corresponding books and evidence on any specific issue or not therein. No satisfactory reply has come from the Revenue/appellant side. We conclude in this factual backdrop that the learned CIT(A)’s above extracted detailed discussion does not warrant any interference on our part in light of (2018) 99 taxmann.com 284 (SC) Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd. The Revenue fails in its sole substantive ground as well as in the “lead” appeal ITA No. 254/DDN/2025. Same order to follow in the Revenue’s latter three appeals ITA Nos. 255 to 257/DDN/2026 as well in very terms. No other ground or argument has been pressed. 5. These Revenue’s four appeals ITA Nos.254 to 257/DDN/2025 are dismissed in above terms. A copy of this common order be placed in the respective case files. Order pronounced in the open court on 16th September, 2026 Sd/- Sd/- (AMITABH SHUKLA) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 16th September, 2026. 10 | P a g e

ITA Nos.254 to 257/DDN/2025

RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

11 | P a g e