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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the Department is directed against the order of Commissioner of Income Tax (Appeals) – 6, Pune dated 09.02.2018 for the assessment year 2013-14.
The brief facts of the case as emanating from records are: the assessee is a partnership firm engaged in manufacturing of dynamometers and automobile testing equipments. The assessee filed its return of income for impugned assessment year on 27.09.2013 declaring loss of Rs.1,08,57,211/-. The case of assessee was selected
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 Act”) was issued
on 08.09.2014. During the course of assessment proceedings, 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 expenditure was
incurred for Product Design Development which would have definitely
resulted in enduring benefit to the assessee. Therefore, the expenditure
cannot be allowed on “Revenue Account”.
Against the assessment order dated 03.03.2016, the assessee
filed appeal before CIT(A). The CIT(A) placing reliance on various
decisions including the decision of Pune Bench of the Tribunal in the
case of Behr India Ltd., Vs. ACIT reported as 118 TTJ 695 (Pune) held
the aforesaid expenditure to be “Revenue”. Against the findings of
CIT(A), the Revenue is in appeal before the Tribunal on following
grounds :
“1. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) was justified in deleting the disallowance of product development expenses of Rs. 1,36,05,544/- without analysing the nature of expenditure?
Whether on the facts and circumstances of the case and in law, the Ld CIT{A} was justified in holding product development expenses as revenue expenditure when the bill wise nature of expenses shows that the product development expenditure conferred enduring benefit to the assessee?
Whether on the facts and circumstances of the case the Ld.CIT(A) erred in inferring that the expenditure was incurred to bring in improvisation & improvement in the product manufactured by the assessee by making changes & at the same time remaining price competitive?
Whether on the facts and circumstances of the case the Ld.CIT(A) was justified in not appreciating that the final outcome of the assessee is definitely of enduring nature in sustenance of the product / designed
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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 Revenue nature?
Whether on the facts and circumstances of the case and in law the Ld.CIT(A) erred in inferring that the expenses were incurred 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?
The appellant craves leave to add, amend or alter any of the above grounds of appeal.”
Shri Suhas Bora appearing on behalf of assessee submitted at
the outset that assessee had incurred expenditure on product
development. The aforesaid expenditure consists of three heads
namely :
Control software development cost Rs.30,69,320/-
PLC programming cost Rs.15,47,492/-
Product development cost Rs.92,88,742/-
Total: Rs.1,39,05,554/-
The Pune Bench of Tribunal in the case of Behr India Limited 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 working of his
business and hence, is allowable as ‘Revenue expenditure’. The ld.A.R.
submitted that in the present case, assessee has incurred 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 :
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Amar Raja Batteries Ltd. Vs. ACIT 91 ITD 280.
JCIT Vs. Modi Olivetti Ltd. 4 SOT 859 (Delhi).
ACIT Vs. Medicamen Biotech Ltd. 1 SOT 347 (Delhi).
Hero Honda Motors Ltd. Vs. JCIT 3 SOT 572 (Delhi).
Charak Pharmaceuticals Vs. JCIT 4SOT 393.
Madras Industrial Investment Ltd. Vs. CIT 225 ITR 802.
Kedatnath Jute Manufacturing Co Ltd. Vs. CIT 82 ITR 363 SC.
Shri M.K. Verma representing the Department submitted that
huge expenditure has been incurred by assessee for product
development which would result in enduring benefit to the assessee
over a period of time. The ld.D.R. placed reliance on the decision of
Hon’ble Gujarat High Court in the case of Torrent Pharmaceuticals
Ltd., Vs. ACIT reported as 230 Taxman 204 to substantiate his
contentions that the product development expenditure by the assessee
is on “Capital Account”.
I have heard the submissions made by rival sides and have
perused the orders of authorities below. I have also considered the
decisions on which both sides have placed reliance. The undisputed
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 development is
imperative. It is not the case of Revenue that assessee has incurred
expenditure for development of a new product or new line of business.
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The expenditure has been incurred by assessee to improve the existing
products.
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 under :
“10. We have heard the rival contentions and perused the record. The assessee was engaged in the business of manufacturing of air conditioners and its components which were in turn used in the automotive industries. The assessee in order to test the validation of the product incurred expenditure on a regular basis to bring in improvisation and modifications in the product as per the requirements 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 incurred in the first year of commencement of business on product development and hence, the expenditure was held to be capital in nature. However, where expenditure on testing of the product which is required to be incurred on a regular basis and which does not result into creation or acquisition of any assets, then there is no merit in holding the expenditure to be of enduring benefit. The assessee is carrying out this exercise of modification and improvisation in the products in order to test suitability in the environment in which it is to be used and hence, the said expenditure is duly allowable in the hands of the assessee as revenue 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 products already being manufactured by the assessee, then such an expenditure which is a regular expenditure incurred by the assessee for smooth and efficient working of its business, is to be allowed as revenue expenditure in its hands. We also find support from the ratio laid down by the Tribunal in Asst. CIT Vs. Spicer India Ltd. (supra) wherein similar 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 the said ratio is not applicable to the facts of the present case. Upholding the order of CIT(A), we dismiss the grounds of appeal raised by the Revenue. 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.”
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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 CIT(A) in holding the expenditure on product development on revenue account.
The ld.D.R. has placed reliance on the decision of Torrent
Pharmaceuticals Ltd., Vs. ACIT (supra). I find that the said decision by
Hon’ble Gujarat High Court is entirely on different set of facts. In the said case, assessee had claimed expenditure on issue of convertible
debentures as Revenue. The Hon'ble High Court held that 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.
In view of the facts and decision discussed above, findings of
CIT(A) on the issue under apepal are upheld and the appeal of Revenue is dismissed being devoid of any merit.
In the result, the appeal of Revenue is dismissed.
Order pronounced on Wednesday, the 16th day of January, 2019.
Sd/- Sd/- (�वकास अव�थी /VIKAS AWASTHY) �या�यक सद�य/JUDICIAL MEMBER
पुणे Pune; �दनांक Dated :16th January, 2019. Yamini
ITA No.904/PUN/2018
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :
अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. CIT(A)-6, Pune. Pr. CIT-5, Pune. 4. 5 �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “एक सद�य” / DR, ITAT, “SMC” Pune; गाड� फाईल / Guard file. 6.
आदेशानुसार/ BY ORDER
// True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.