DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 8, PUNE vs. M/S. DYNOMERK CONTROLS, PUNE

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.

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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”.

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?

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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?

the outset that assessee had incurred expenditure on product

development. The aforesaid expenditure consists of three heads

namely :

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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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”.

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.

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.

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.

CIT(A) on the issue under apepal are upheld and the appeal of Revenue is dismissed being devoid of any merit.

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

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आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :

आदेशानुसार/ BY ORDER

// True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.