DCIT, BANGALORE vs. M/S DHAANYA SEEDS PVT. LTD.,, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the Revenue is directed against the order dt.16.4.2015 of Commissioner of Income Tax (Appeals)-2, Bangalore for the Asst. Year 2007-08.

4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

5. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.”

3. The only issue arises from the ground raised by the Revenue is regarding disallowance of expenditure of seed cost paid to M/s. Metahelix Life Science Pvt. Ltd. for development of certain seeds and vegetables. The Assessing Officer noted that apart from adopting the technology developed by various organizations, the assessee has entered into a contract with M/s. Metahelix Life Sciences Pvt. Ltd. for development of certain seeds and vegetables for which the assessee paid a sum of Rs.1,67,24,020. The Assessing Officer was of the view that the said payment was capital in nature as the assessee was getting enduring benefit out of the seed development technology. Accordingly, the Assessing Officer disallowed the said expenditure. On appeal, the CIT (Appeals) has allowed the claim of the assessee as revenue expenditure by Tribunal in assessee's own case for the Assessment Year 2005-06.

7. Thus the issue is now covered by the decision of the Tribunal in assessee's own case.

No.65/Bang/2013. Similarly for the Assessment Year 2006-07, the Tribunal has again considered this issue vide order dt.14.11.2014 in ITA No.1234/Bang/2013 in paras 3.4.3 to 3.4.4 as under :

“3.4.3 As submitted by the learned Authorised Representative of the assessee, the very same issue of whether the seed development cost / expenditure was capital or revenue in nature was before the co-ordinate bench of this Tribunal for adjudication in the assessee's own case for Assessment Year 2005-06. In its order in and C.O. No.55/Bang/2013 dt.27.9.2013 the co-ordinate bench of this Tribunal held that the entire expenditure incurred by the assessee as seed development cost is revenue in nature and therefore is an entirely allowable expenditure. The operative portion of the aforesaid order at paras 8.7.1 to 8.7.3 thereof is extracted hereunder :-

“ 8.7.1 We have heard the rival submissions and perused and carefully considered the material on record. The assessee company is in the business of acquiring, producing, manufacturing and development of various seeds and vegetables. For development of seeds, it is using technologies developed by various companies. In this context, the assessee entered into an Agreement with Metahelix dt.15.11.2002 and supplementary agreement dt.31.1.2003 under which Metahelix will develop parent seeds (both male and female) of superior quality. The assessee processes such parent seeds form Metahelix and supplies it to farmers who grow and develop these seeds. The fully developed seeds are received by the assessee from the farmers after 3 to 6 months, and are about 20 times more than the parent seeds received by the assessee from Metahelix. The assessee, after receiving these seeds from the farmers, processes these seeds in its plant which consists of many operations like cleaning, processing, conditioning, chemical treatment, etc. and then does packing of the same. In this process, the damaged and bad seeds are removed and only top quality seeds are packed. 8.7.2 In the light of the activities involved in the ass business model, the following facts emerge :- (i) That Metahelix does research and development leading to development of new technologies enabling new strains in varieties of crops; (ii) The assessee purchases the parent seed from Metahelix, which are the result of the research program of Metahelix; (iii) These parent seeds are given by the assessee to farmers, whereby it is multiplied many times into hybrid seeds; (iv) The parent seeds developed by Metahelix lose its life once it is given to farmers for further development.

(v) The parent seeds are material input for the assessee to develop hybrid seeds and multiply them; (vi) If the development of the parent seeds involve research and development, such activities are carried out by the Metahelix and not by the assessee; (vii) If at all any research activity carried out, it is by Metahelix and not by the assessee.

The above facts clearly indicate that the amounts paid by the assessee to Metahelix is towards procurement of parent seeds, a finding made by the learned CIT (Appeals) as well. It is seen that the learned CIT (Appeals) has also given a finding that the assessee is not engaged in research and development. In the light of the above factual matrix, we are in agreement with the learned CIT (Appeals) that seed development cost is not capital but revenue in nature and hence is allowable expenditure. 8.7.3 We, however, find that the learned CIT (Appeals) after rendering a finding that the assessee is not doing any research and development activity, has held that about of the total reimbursement of expenses made by the assessee to Metahelix, an amount of Rs.7,59,989 has been used by Metahelix for development of seeds and therefore disallowed these expenses as capital in nature. We are unable to agree with this finding of the learned CIT (Appeals). It is an uncontroverted fact that the assessee does not carry out any research and development activity. The facts on record establish that the expenses incurred by the assessee were towards purchase of parent seeds. If a part of the amount paid by the assessee have been utilised by Metahelix for development of seeds, the expenses can be capital in nature for Metahelix but not for the assessee. Merely because the expenses paid by the assessee to Metahelix is towards defraying the expenses of development of parent seeds, it does not change the nature of the expenditure by the assessee which is for procurement of parent seeds. As far as the assessee is concerned, the entire expenditure is incurred towards purchase of parent seeds and therefore it is entirely revenue in nature. There is no enduring benefit to the assessee due to the purchase of parent seeds as they lose their existence and form once they are converted into hybrid seeds. In this view of the matter, we are of the considered opinion that the entire expenditure ofRs.55,18,529 is revenue in nature and are therefore entirely allowable expenditure.” 3.4.4 Following the decision of the co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2005-06 (supra), we hold that the entire expenditure of Rs.1,03,76,490 incurred by the assessee towards seed development cost, is revenue in nature and is therefore an entirely allowable expenditure.”

Order pronounced in the open court on 9.3.2016.