DCIT 13(2)(2), MUMBAI vs. SHARDA WORLDWIDE EXPORTS P. LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार -PER RAJENDRA, AM- अनुसार Challenging the orders dated 07/03/2016,of the CIT (A)-12,Mumbai, the Assessing Officer (AO) has filed appeals for the above-mentioned two assessment years(AY.s).The assessee has filed Cross Objection(CO)for the AY.2011-12.As the issue involved in both the appeals filed by the AO are identical,so,we are adjudicating them together along with the CO.Assessee-company is engaged in the business of trading/exporting dyes, dyes intermediates, pesticides,agrochemicals etc. The details of dates of filing of returns, returned incomes, dates of assessments, assessed incomes can be summarised as under:

A.Y. ROI filed on Returned Income Assessment dt. Assessed Income 2011-12 23/09/2011 Rs.32.25 crores 30/03/2014 Rs.32.28 crores 2012-13 29/09/2012 Rs.72.03 crores 19/06/2014 Rs.72.25 crores

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ITA/3804/Mumbai/2016-AY.2011-12:

2.Effective ground of appeal is about Production Registration Expenses (PRE). During the assessment proceedings, the AO found that the assessee,in the original return of income,had capitalised the PRE,that it had claimed depreciation at the rate of 25% for such expenses,that in the revised return it claimed the PRE (Rs. 17.45 crores) as revenue expenditure. It was claimed that the deduction was made on the basis of judgments of Penacea Biotech Ltd (324 ITR 311) and Cadila Healthcare (56 SOT 89). He called for an explanation of the assessee in that regard. After considering the same,the AO held that the assessee had made the nuclear after filing its return of income, that claim was not made by filing a valid revised return, that such a claim could not be considered in light of the judgment of the Hon’ble Supreme Court, delivered in the case of Goetze India Ltd. (284 ITR 323), that the registration of products was a long-term process which took 1-4 years,that there were various steps involved in process which took longtime efforts and money to get the product registered. The AO gave details of various steps taken by the assessee for registration and held that it was not a case of simply registering the product, that it involved satisfying the authorities about the nature and effect of the product through scientific data, studies, field trials as per the requirements of that particular country, that the registration of the product gave assessee a right to sell its products in that respective country, that it was a right which gave enduring benefit to the assessee, that such a right was obtained after a long-term process of registration, that at the close of the year the assessee had capital work in progress of Rs.31.57 crores for the project registration, that out of which capital work in progress of Rs. 20. 36 crores pertained to those which had opening capital work in progress to amounting to Rs. 11. 66 crores,that product registrations were received after a long and costly journey involving years in the process plus huge costs,that after a product was registered it was easily renew from time to time,that for renewal the company had to only fill of the renewal forms in some countries, that in other countries the registration was granted was valid for 7 -9 years, that the initial product registration was granted to the assessee of long and laborious efforts,that the registrations gave assessee right to sell its products in a particular country,that those products could not be sold without proper registration, that the registration granted to it gave the assessee an advantage of enduring nature by entitling it to sell its products, the form the basis of capital structure of the assessee enabling it to run its business of selling the products on the basis of the registration of the product,that it was a capital expenditure and was not allowable as revenue expenditure,that the major part of the product registration assets pertained to data access rights obtained by it,

3804, 3805/M/16;C.O.115/16-Sharda Worldwide Exports P.Ltd. that the that the price will study or research done by other parties in respect of a particular active substance,including the testing done on the animals,that access to the data was essential for registration of products. He referred an agreement entered into by the assessee by which it purchased data access rights wherein Rs. 1.26 crores were paid and observed that the data right in respect of a particular substance gave the assessee were right to use the study for registration of its products, which contained that particular substance, that the data rights were either for use forever or was a very long period, that the rights would be used to register multiple products enabling it to sell these products, that the rights clearly provided benefits of enduring nature to the assessee and would add the capital structure, that the expenses incurred for obtaining the same were to be capitalised.Finally,he held that PRE were capital nature, that the same were correctly capitalised as fixed assets by the assessee. He further held that decisions relied upon by it were factually distinguishable.Finally,he rejected claim made by the assessee with regard to PRE and held that same was capital in nature.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions. It also relied upon certain case laws. After considering the available material, he held that claim about PRE was not made in the original letter,that same was made before the AO in the assessment proceedings,that the assessee also filed a revised return on 7/11/2013 in the course of assessment proceedings, that the return was held to be invalid since it was beyond the time permissible under section 139 (5), that to that extent no fault can be found with the decision of the AO, that the claim could be made and considered in appellate proceedings. He referred to the case of Pruthvi Brokers and Shareholders (349ITR336) and held that claim for revenue expenditure on PRE, made in the assessment proceedings could be considered in the appellate proceedings, that the claim made by the assessee was backed by the judgements of higher judicial forums. He further observed that the expenses in question were in the nature of obtaining permission to sell products in various countries, that the assessee had to comply with regulations of respective countries/European Union, that the business of the assessee was export of Agro- chemicals and Pesticides to various countries, that the expenses incurred by it were business expenses, that the AO had not found the expenses to be nongenuine/bogus, that it was earlier claiming the expenses as revenue expenses, that in the AY. 2006-07 the AO held that same were in the nature of capital expenses, that he disallowed the claim made by the assessee in that regard and allowed depreciation at the rate of 25%, that thereafter for next five years the assessee claimed depreciation on the expenses, that in the year under consideration it claimed 3

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PRE as revenue expenses and withdrew the claim of depreciation, that in the subsequent years it was claiming the expenses as revenue expenditure, that many of the expenses were clearly renewal expenses, that in some cases the registration validity expired in 2013, that while others were expiring in different years up to 2090, that in some cases it was valid for ever, that the assessee would select appropriate generic products and would identify appropriate country in which the product could be exported, that there were barriers to entry in as much as the products had to be registered in the respective country, that the field trials were expensive, that it was convenient to obtain data rights from parties which obviated the need to conduct field trials for the specific chemical molecules. He referred to the case of Panacea Biotech Ltd. (supra), Torrent Pharmaceuticals Ltd (29 taxmann.com 405) USV Ltd (54 SOT615) and Cadila Healthcare Ltd (supra) and held that the assessee was engaged in export of petrochemicals and pesticides at generic products, that such products had to meet the regulatory approval of the countries in which it was proposed to be sold, that without such approvals the products could not be sold, that the expenditure incurred was not in the nature of research and development/patents which were then licensed,that the expenses were akin to regulatory expenses and fell under marketing expenses,that the expendi -ture was large and often spread over several years,that it would not alter the essential nature of the expenses, that the expenses were of recurring nature incurred from year to year for new chemicals entering new markets and even in many cases is annual fees for same chemicals in the same market, that in the context of the business of the assessee the claim made by it about PRE had to be allowed as revenue expenditure.

4.During the course of hearing before us, the Departmental Representative (DR) contended that in the earlier years PRE was claimed as capital expenditure,that without filing a revised return it claimed that same was of revenue nature,that the process of registration was very long,that the assessee would get rights to deal in that product,that process and the product were the determinative factors,that it had derived enduring benefit,that cases relied upon by the FAA were distinguishable facts,that the expenditure did not relate to purchasing of goods,that the assessee had acquired source of income,that the earning capacity of the assessee had increased because of the PRE.The Authorised Representative (AR) supported the order of the FAA and argued that no new right was acquired by the assessee by incurring the PRE,that it was not a manufacturer,that the assessee was a mere trader,that it had to incur such expenses every year,that the DR had wrongly referred to the cases.He relied upon the cases of Panacea Biotech Ltd. (supra), Torrent Pharmaceuticals Ltd (supra) USV Ltd (supra) 4

3804, 3805/M/16;C.O.115/16-Sharda Worldwide Exports P.Ltd. and Cadila Healthcare Ltd (supra), Essar Oil Ltd (Income Tax Appeal 921 of 2006), Aarti Drugs Ltd. (ITA/5526/Mumbai/2011), MK Brothers Private Ltd (86 ITR 38) Tata Engineering and Locomotive Co Ltd. (201 ITR 1036).

5.We have heard the rival submissions and perused the material before us.We find assessee was exporting agrochemicals and pesticides,that it had to obtain the permission/grants from the countries of export,that it would make payment to the parties who had made research about generic products,that the entities having data about such products would allow the assessee to use the same for making exports to various countries after charging fees,that for registration it had to undergo a lot of formalities and had to spend huge amounts, that initially the disputed expenditure was claimed as revenue expenditure,that the AO negated the claim and allowed depreciation, that for next five years the assessee was claiming depreciation for PRE, that for the year under consideration in the original assessment,the assessee treated PRE capital expenditure, that during the assessment proceedings,a request was made to the AO to allow the same as revenue expenditure,that later on a revised return was filed which was barred by time-limit of the provisions of section 139 (5),that the AO rejected the claim made by the assessee, that he held that assessee was getting benefit of enduring nature,that considering the quantum of expenditure and efforts and time taken in registration process,that the AO rejected the claim had by the assessee for treating the PRE as revenue expenditure,that the FAA allowed the appeal of the assessee. 5.1.We find that the first objection of the AO was about not making the claim in the revised return. In our opinion,the stand taken by the AO in light of judgment of the Hon’ble apex court in the case of Goetze India Ltd.(supra)was as per prevailing law.It is also true that the appellate authorities,including the FAA, can admit new claim,even if same was not made the original return of income. In that regard we would like to refer to judgment of the Hon’ble tradition High Court in the case of Prithvi Brokers and Shareholders (supra) where in the Hon’ble court has held as under: “An assessee is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before them. The appellate authorities have the discretion to permit such additional claims to be raised. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words “could not have been raised” must be construed liberally and not strictly. There may be several factors justifying the raising of a new plea in an appeal and each case must be considered on its own facts…..the orders of the Commissioner (Appeals) and the Tribunal clearly indicated that both the appellate authorities had exercised their jurisdiction to consider the additional claim. The conclusion that the 3804, 3805/M/16;C.O.115/16-Sharda Worldwide Exports P.Ltd. error in not claiming the deduction in the return of income was inadvertent could not be faulted for more than one reason. 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 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 instalments, 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 instalments 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 : 6

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“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 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 wouldnot 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.

6.ITA/3805/Mum/2016,AY.2012-13:

6.1.Facts and circumstances for the year under consideration are identical to the facts of earlier years-except the amount involved.Therefore, following the orders for the AY.2011- 12,we decide the effective ground of appeal against the AO.

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7.CO/115/Mum/2016,AY.2011-12: 7.Solitary ground of the CO is about grant of interest u/s.244A of the Act in respect of the refund arising out of self assessment tax.In the appellate proceedings,the FAA held that he would prefer to follow the judgment of Engineers India Ltd.(55 taxmann.com1)rather than the judgment of Stock Holding Corporation of India Ltd.(53 taxmann.com 106). 7.1.During the hearing before us,it was brought to our notice by the AR that the judgment of Stock Holding Corporation of India Ltd.was delivered by the Hon’ble Bombay High Court whereas the other judgment was of Delhi High Court.He further held that issue of refund was not arising out of the assessment order.It was also stated,with regard to issue not arising out the of the order of the AO,that assessee should be granted liberty to raise the issue as and when it arises.The DR left the issue to the discretion of the Bench.

7.2.We are of the opinion that the FAA should have followed the judgment of the Hon’ble Bombay High Court only.To that extent the ground raised by the assessee is maintainable.But,for the later part of the issue,we hold that the assessee would be at liberty to raise the issue as and when arises.The ground of CO is allowed for statistical purposes. As a result, appeals filed by the AO for both the years stand dismissed and CO of the Assessee is allowed of statistical purposes.

फलतः िनधा�रती अिधकारी �ारा दोन� िन.व.के िलए दािखल क� गई अपील� नामंजूर क� जाती जाती ह� और िनधा�रती �ारा दािखल क� �कया गया � या"ेप सांि%यक� �योजन� के िलए मंजूर �कया जाता है. Order pronounced in the open court on 16th March, 2018. आदेश क� घोषणा खुले �यायालय म� �दनांक 16 माच�, 2018 को क� गई । Sd/- Sd/- (रिवश सूद रिवश सूद /Ravish Sood) (राजे�� / RAJENDRA) रिवश सूद रिवश सूद �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; �दनांक/Dated : 16 .03.2017. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ� 2. Respondent /��यथ� 8

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