2017 (2) TMI 31 - AT - Income Tax

Compensation paid for pre-mature termination of agreement - nature of expenditure - revenue or capital - Held that - As said in the case of Alembic Chemical Works Co. Ltd 1989 (3) TMI 5 - SUPREME Court and the facts of the present case that the assessee Co. decided that instead of manufacturing the products, for which it had manufacturing licenses under toll arrangements, it was advantageous to have contract manufacturing arrangements. Accordingly, the assessee terminated pre-maturely the agreement with the Torrent Pharmaceuticals Ltd. and paid compensation as per the terms of agreement, as discussed above in detail. The compensation paid for pre-mature termination of agreement to reduce the cost and increase profitability is a business decision and assessee is already in the product of line of the business and not a new product is developed by the assessee by virtue of payment of this compensation. Accordingly, we are of the view that this is a revenue expenditure and allowable as deduction. We find no infirmity in the order of CIT(A) and hence the same is confirmed. This issue of Revenue s appeal is dismissed. Disallowance on account of product development expenses u/s 37(1) r. w. s 35(1) - Held that - We are of the view that the product development expense is a necessity for running of fast moving goods because of competition and continuing changes in consumer choices. This expenditure is a recurring expenditure and need not be incurred only once for all. This expenditure merely results in enabling the assessee to carry on the business in a more efficient profitable manner being responsive to the needs of consumers but did not lead to creation of any fixed asset. Alternatively also, we have to point out that in the case of CIT Vs. Ciba of India Ltd. (1967 (12) TMI 3 - SUPREME Court ) and in several other High Court decisions it is held to the effect that where the expenditure on research was carried on for and on behalf of the assessee, the expenditure laid out or expended was expenditure on research related to business. The Supreme Court has also observed that nonetheless, the expenditure so incurred could be allowed as deduction u/s 37 of the Act. Even otherwise, it cannot be overlooked that u/s 35(1)(iv) of the Act is capital expenditure and is also allowable. Disallowance of project registration expenses - Held that - We find that this issue is now covered by the decision of co-ordinate bench in the case of ITAT Chandigarh bench in the case of Glaxo Smith Kline Consumer Health Care Ltd. Vs ACIT (2007 (3) TMI 300 - ITAT CHANDIGARH-A ) wherein the Tribunal has clearly held that mere development and introduction of new varieties of product and consequent registration charges do not create any new line of business or fixed asset and hence these type of expenses are to be held as Revenue expenditure. MAT computation - exclusion of provision of leave encashment and gratuity and provision for date expire of stock for computing book profit u/s 115 JB - Held that - We find that the CIT(A) after conceding the provision of section 115 JB of the Act to explanation (1)(c) of the Act, noted that the provision for contingent liabilities debited to the profit and loss A/c are required to be added to the book profit. He also noted that the provision for leave salary encashment and gratuity was made by the assessee on the basis of actuarial valuation done by actuary and these are considered as ascertained liabilities and allowable expenses as relying on the decision of Hon ble Supreme Court in the case of Bharat Earthmovers Vs.CIT (2000 (8) TMI 4 - SUPREME Court). We find no infirmity in the order of CIT(A) and hence the same is confirmed. Software expenditure is an allowable revenue expenditure. See CIT Versus Raychem RPG Ltd. 2011 (7) TMI 953 - Bombay High Court Allowance of operating and other expenses - Held that - We find that the assessee has filed details along with letter dated 27-11-2009 and 01-09-2009 whereby, compete details as required by the AO were filed. The additional CIT during remand proceedings admitted that the AO has received the information vide above mentioned two letters. We find that the CIT(A) has considered this fact and allowed the claim of the assessee. We find no infirmity in the order of CIT(A) Disallowance u/s 43B on account of service tax outstanding - Held that - Respectfully, following Hon ble Bombay High Court in the case of Ovira Logistics P. Ltd. (2015 (4) TMI 684 - BOMBAY HIGH COURT ) wheren held that section 43B does not contemplate liability to pay the service tax before actual receipt of the funds in the account of the assessee. In our view, liability to pay service tax into the treasury will arise only upon the assessee receiving the funds and not otherwise. Accordingly, when services are rendered, the liability to pay the service tax in respect of the consideration payable will arise only upon the receipt of such consideration and not otherwise, hence confirm the order of CIT(A) deleting the disallowance Revenue appeal dismissed.

Summary

Issues Involved:
1. Acceptance of additional evidence in contravention of Rule 46A.
2. Treatment of premature termination compensation as revenue expenditure instead of capital expenditure.
3. Disallowance of product development expenses.
4. Disallowance of project registration expenses.
5. Exclusion of provisions for leave encashment, gratuity, and date expired stock for computing book profit under Section 115JB.
6. Disallowance of software expenses.
7. Disallowance of operating and other expenses.
8. Disallowance under Section 43B for service tax outstanding.

Issue-wise Detailed Analysis:

1. Acceptance of Additional Evidence in Contravention of Rule 46A:
The Revenue contended that the CIT(A) erred in accepting additional evidence in contravention of Rule 46A of the I.T. Rules. However, this point was not elaborated further in the judgment, and the Tribunal did not specifically address this issue in its final decision.

2. Treatment of Premature Termination Compensation:
The AO treated the premature termination compensation of ?98,65,000 as capital expenditure, arguing it provided an enduring benefit by reducing future manufacturing costs. The CIT(A) disagreed, treating it as revenue expenditure, citing the Supreme Court's decisions in Alembic Chemical Works Co. Ltd. and Empire Jute Co. Ltd. The Tribunal upheld the CIT(A)'s view, emphasizing that the compensation was aimed at reducing manufacturing costs, thus integral to the profit-earning process and not for acquiring a permanent asset.

3. Disallowance of Product Development Expenses:
The AO disallowed ?92,98,000 claimed as product development expenses, treating it as capital expenditure. The CIT(A) allowed the claim, referencing the Bombay High Court's decision in National Rayon Corp. Ltd. and the ITAT Chandigarh Bench decision in Glaxo Smith Kline Consumer Healthcare Ltd., which supported the view that such expenses are related to the existing business and thus are revenue in nature. The Tribunal confirmed this, noting that product development expenses are necessary for running a pharmaceutical business efficiently.

4. Disallowance of Project Registration Expenses:
The AO disallowed ?12.43 lakhs as capital expenditure. The CIT(A) allowed the claim, referencing the ITAT Chandigarh Bench decision in Glaxo Smith Kline Consumer Healthcare Ltd., which held that such expenses do not create a new line of business but are necessary for the existing business. The Tribunal upheld this view, confirming the CIT(A)'s decision.

5. Exclusion of Provisions for Leave Encashment, Gratuity, and Date Expired Stock for Computing Book Profit under Section 115JB:
The AO added provisions for leave encashment, gratuity, and date expired stock to the book profit. The CIT(A) deleted these additions, considering them ascertained liabilities based on actuarial valuation and thus allowable expenses, referencing the Supreme Court decision in Bharat Earthmovers. The Tribunal confirmed this, finding no infirmity in the CIT(A)'s order.

6. Disallowance of Software Expenses:
The AO treated ?74 lakhs spent on software as capital expenditure. The CIT(A) allowed it as revenue expenditure, referencing the ITAT Delhi Special Bench decision in Amway India Enterprises and the Bombay High Court decision in Raychem RPG Ltd., which held that software expenses aimed at improving business efficiency are revenue in nature. The Tribunal upheld the CIT(A)'s decision.

7. Disallowance of Operating and Other Expenses:
The AO made an adhoc disallowance of ?10 lakhs from operating and other expenses, questioning their genuineness. The CIT(A) deleted this disallowance, confirming that the required details were provided and the expenses were genuine. The Tribunal found no infirmity in the CIT(A)'s order and confirmed it.

8. Disallowance under Section 43B for Service Tax Outstanding:
The AO disallowed ?2,12,858 of service tax payable at the end of the year under Section 43B. The CIT(A) deleted this disallowance, referencing the ITAT Chennai Bench decision in Real Image Media Technologies and the Bombay High Court decision in Ovira Logistics P. Ltd., which held that service tax liability arises only upon receipt of funds. The Tribunal upheld the CIT(A)'s decision, confirming that the disallowance was not justified.

Conclusion:
The Tribunal dismissed all three appeals by the Revenue, confirming the CIT(A)'s decisions on all issues. The compensation for premature termination, product development expenses, project registration expenses, and software expenses were treated as revenue expenditure. Provisions for leave encashment, gratuity, and date expired stock were excluded from book profit computation under Section 115JB, and the disallowance of service tax under Section 43B was also deleted. The Tribunal found no merit in the Revenue's contentions and upheld the CIT(A)'s orders comprehensively.