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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeal filed by the revenue is directed against the order passed by the Commissioner of Income Tax (Appeals)-21, Mumbai, dated 17.04.2017, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income-tax act, 1961 (for short „Act‟), dated 30.03.2016, for the A.Y. 2013-14. The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal:-
2 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd. “1. Whether on the facts and circumstances of the case and in Law, the Ld. CIT(A) was correct in directing to allow the Products Registration expenditure of Rs. 39,81,96,235/- as revenue expenditure.
Whether on the facts and the circumstances of the case and in la, the ld. CIT(A) was correct in deleting the depreciation allowed to the assessee on the disallowance of the Products Registration expenditure of Rs. 39,81,96,235/- as capital expenditure.
3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored 4. The appellant craves leave to add, amend or alter all or any of the grounds of appeal
.”
2. Briefly stated, the assessee company which is engaged in the business of trading in agrochemicals, dyes, V-belts, dye intermediates, converter belts etc. had e-filed its return of income for A.Y. 2013-14 on 28.09.2013, declaring income of Rs. 90,57,38,880/-. Thereafter, the assessee company e-filed a revised return of income on 30.09.2013, declaring income of Rs. 90,43,85,740/- wherein the disallowance under Sec. 14A r.w. Rule 8D was rectified. Subsequently, the case was selected for scrutiny assessment under Sec. 143(2) of the Act.
The issue involved in the present appeal revolves around the issue as regards the allowability of product registration expenses of Rs. 39,81,96,235/- claimed by the assessee as a revenue expenditure. During the course of the assessment proceedings, it was observed by the A.O that the assessee had earlier claimed depreciation @ 25% on the assets shown as “Products Registration”, which however was subsequently claimed as an expense in the computation of income filed along with the revised return of income.
The assessee on being called upon by the A.O to justify the allowability of the product registration expenses, furnished its reply therein explaining the nature and the purpose for incurring the said 3 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd. expense. It was submitted by the assessee that as the agrochemicals/pesticides which were exported by it worldwide to various countries viz. Europe, USA, Brazil etc. contained certain composition of chemicals which might be toxic in nature, therefore the same could be marketed in the importing countries only after completing certain formalities and availing approvals/registrations from the regulatory authorities in the said respective countries. The registrations were termed as “Product Registration” in the books of accounts and were written off over a period of 5 years. Further, once the approval was received by the assessee company, the product registration would be transferred out of capital work in progress to product registration account. It was the contention of the assessee that without obtaining the requisite registrations the sale of the agrochemicals/pesticides would not be possible in the countries to which exports were made.
The A.O after deliberations was however not persuaded to subscribe to the aforesaid claim of the assessee. The A.O was of the view that as a registration of a product is a long drawn process which takes 1 to 4 years and vests an enduring benefit with the assessee, thus the same was in the nature of a capital expenditure. Further, it was observed by the A.O that the assessee had earlier been treating the product registration expense as a capital expenditure, and it was only in A.Y. 2012-13 that it had changed its stance in the course of the assessment proceedings and claimed the same as a revenue expenditure. The A.O noticed that the aforesaid claim of expenditure was declined by his predecessor while framing the assessment for A.Y. 2012-13. On the basis of his aforesaid deliberations, the A.O declined to accept the claim of the product registration expenditure as a revenue expenditure and characterized the same as being in the nature 4 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd. of a capital expenditure. In the backdrop of his aforesaid observations the A.O restricted the entitlement of the assessee only to the extent of depreciation on the amount of the capitalized product registration expenses.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) observed, that a similar disallowance by the A.O of the product registration expenses which was claimed by the assessee as a revenue expenditure was vacated by his predecessor while disposing off the appeals of the assessee for A.Y. 2011-12 and A.Y. 2012-13. Being of the view that the facts and the issue involved in the present case remained the same, the CIT(A) following the view taken by his predecessor, therein held the product registration expenditure of Rs. 39,81,96,235/- as a revenue expenditure in the hands of the assessee.
The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Authorized Representative (for short „A.R‟) of the assessee, at the very outset of the hearing of the appeal submitted that the only issue involved in the present appeal was as to whether the product registration expenditure was in the nature of a revenue expenditure as claimed by the assessee, or a capital expenditure as held by the A.O. It was submitted by the Ld. A.R that the issue was squarely covered by the order passed by a coordinate bench of the Tribunal viz. ITAT “F” Bench, Mumbai in the assesses own case for A.Y. 2011-12 and A.Y. 2012-13 i.e. DCIT- 13(2)(2), Mumbai Vs. M/s Sharda Worldwide Exports Pvt. Ltd. (now known as Sharda Cropchem Ltd, Mumbai) [ITA No. 3804 & 3805/Mum/2016; dated 16.03.2018]. Per contra, the Learned Departmental Representative (for short „D.R‟) relied on the order passed by the A.O.
5 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd.
We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeal has been sought by the revenue to adjudicate upon the validity of the order passed by the CIT(A), wherein he had concluded that the product registration expenses are in the nature of a revenue expenditure. We have perused the records and find that the assessee had claimed the product registration expenses as a revenue. However, the A.O being of the view that product registration expenses incurred by the assessee vested an enduring benefit with the assessee, thus the same were held by him as being in the nature of a capital expenditure. On the basis of the aforesaid observations, the A.O restricted the entitlement of the assessee only to the extent of depreciation on the amount of the capitalized value of product registration expenditure. We have deliberated at length on the issue under consideration, and find that the issue involved in the present appeal is squarely covered by the order passed by a coordinate bench of the Tribunal viz. ITAT “F” Bench, Mumbai in the assesses own case for A.Y. 2011-12 and A.Y. 2012-13 i.e. DCIT-13(2)(2), Mumbai Vs. M/s Sharda Worldwide Exports Pvt. Ltd. (now known as Sharda Cropchem Ltd., Mumbai) [ITA No. 3804 & 3805/Mum/2016; dated 16.03.2018]. We find that the Tribunal while disposing off the aforementioned appeals concurred with the view taken by the CIT(A), and had concluded that the product registration expenditure was rightly allowed by him as a revenue expenditure, observing as under :
“5.1.1.We find that one of the major objections of the AO was that the assessee was getting enduring benefit by incurring PRE. We have taken note of the fact that assessee is a trader and not a manufacturer of the products exported by it. It is not having any brand or patent rights over the exported commodities. The expenses incurred by it were in the field of selling and marketing activity rather than manufacturing. Without incurring PRE the assessee could not have exported the products. Thus, essentially 6 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd. the expenses were in the field of day to day business activities of the assessee. After registration process was over, the sale of product would depend upon the procurement of goods from third parties and the prices prevailing in the respective markets. In short, the PRE would not bring any benefit of enduring nature. Besides, the data exercises paid by it were for a right to access the data-it did not give right over the data. It is also found that assessee was incurring such expenditure is year after year. It had incurred PRE of Rs.17.46 crores,Rs.23.73 crores,Rs.39.82 crores and Rs. 28.05 crores for the AY.s 2011-12 to 2014-15 respectively. So, it can safely be held that the PRE was of recurring nature. As far as quantum of expenditure is concerned we would like to mention that the full bench of Hon'ble Apex Court has decided the issue long back in the case of MK Brothers Private Ltd.(supra).The relevant portion of the judgment the as under: "The answer to the question as to whether an amount paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by installments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the question or the manner of the payment which would prove decisive. If the subject of making the payment is to acquire a capital asset, the payment would partake of the character of a capital payment even though it is made not in lump sum but by installments over a period of time. On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically." Respectfully following the above, we hold that to solve the knotty issue of capital/revenue expenditure the aim and object of the expenditure is to be considered not the quantum. As far as entries in the books of accounts and claiming depreciation in the earlier years is concerned, it is suffice to say that entries made in the books of accounts do not decide the true nature of expenditure. We would like to rely upon the case of Bhor Industries of the Hon'ble Bombay High Court (264 ITR 180). 5.2. The Hon'ble Courts are of the view that the issue of capital versus revenue expenditure has to be seen from the angle of an assessee rather than an AO. In the case of Edward Keventer (P) Ltd., the honourable Calcutta High Court has held as follows : "The legitimate business needs of the company must be judged from the view-point of the company itself and from the view-point of a prudent businessman. It is not for the Income-tax Officer to dictate what the business needs of the company should be. The term "benefit" to a company in relation to its business has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pounds, shillings and pence in all cases. Both these points have to be considered 7 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd. judiciously and dispassionately from the view-point of a reasonable and honest person in business without any bias of any kind......" 5.3.We find that in the cases of Panacea Biotech Ltd. (supra)and Cadila Healthcare Ltd (263 CTR 686) the Hon'ble Delhi High Court and the Hon'ble Gujarat High Court has clearly held that PRE had to be allowed as revenue expenditure. We are reproducing the relevant portion of judgment of Cadila Healthcare Ltd. and it reads as follow: "9. With respect to the expenditure incurred for production registration charges, we agree with the view of the Tribunal that the assessee did not acquire any new asset. As per the rules and regulations, it was essential that the product, before marketing, would be registered with the regulating authorities. Any expenditure in the process would not be stated to ensure procurement of a new asset to the assessee. We are informed that a Division Bench of this Court in the case of CIT v. Torrent Pharmaceuticals Ltd, (2013) 263 CTR(Guj)683 :[2013] 87 DTR (Guj) 54 (2013) 29 taxmann.com 405 (Gujarat) also in somewhat similar facts had upheld the decision of the Tribunal." We would also like to rely upon the following portion of the judgment of the Hon'ble Apex Court in the matter of Empire Jute Mills: "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitability 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." Considering the above, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. So, we are not inclined interfere with it. Effective ground of appeal is decided against the AO”
We have perused the aforesaid order passed by the Tribunal, and finding ourselves as being in agreement with the view therein taken, 8 DCIT-13(2)(2) Vs M/s Sharda Crop. Chem Pvt. Ltd. thus respectfully follow the same. We thus in terms of our aforesaid observations are of the considered view that no infirmity emerges from the well reasoned order of the CIT(A), who had rightly concluded that the product registration expenses were allowable as a revenue expenditure. We thus, uphold the order of the CIT(A) and dismiss the appeal of the revenue.
The appeal of the revenue is dismissed.