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TMI Blog2017 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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. - ITA No.6720/Mum/2011, ITA No.6755/Mum/2011, ITA No.7592/Mum/2011 - - - Dated:- 22-11-2016 - SRI MAHAVIR SINGH, JM AND ASHWANI TANEJA, AM For The Revenue : Miss. Anupama Singha, DR For The Assessee : Shri J.D Mistry, AR, Shri Sanjiv M. Shah, AR ORDER PER MAHAVIR SINGH, JM: These three appeals by the Revenue are arising out of different orders of the CIT (A)-18, Mumbai in appeal No. CIT(A)-18/ACIT-8(3)/IT-34/2009-10, CIT (A)-18/DCIT-8(3)/IT-361/2009-10 and CIT(A)-18/DC-8(3)/IT-738/2009-10 dated 06-07-2011 and 12-08-2011. Assessments were framed in ITA No. 6720/Mum/2011 by the ACIT Range 8(3), Mumbai for A.Y. 2004-05 vide his order dated 29-12-2006, in ITA No.6755/Mum/2011 and in ITA No.7592/Mum/2011 by the DCIT Range 8(3), Mumbai for A.Y.2005-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Para 2.8 as under:- 2.8 I have considered the facts and the submissions made by the AR of the appellant company. The appellant company has terminated its toll manufacturing arrangement (loan license agreement) with Torrent Pharmaceuticals Ltd. In June 2003 by paying a termination compensation of ₹ 98,65,000/- as per the terms of termination agreement dated 7 th June 2003 read with amendment dated 14 th Feb 2002. The AO has disallowed the said expenditure by holding that the termination compensation paid by the appellant company is a onetime payment which resulted in enduring benefit to the appellant company by way of reduction in manufacturing cost in future the appellant company by way of reduction in manufacturing cost in future years and in the form of safeguarding of its interest. The AO has further reiterated his contention that the termination compensation is a onetime payment resulting in enduring benefit to the appellant company even after perusing third party manufacturing agreements in the remand report dated 16 th June 2008. The appellant s AR rebuttal that once for all payment was not a conclusive test to hold the same as capital expenditure by r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rebates allowed to the customers. We further find that the above terms were amended vide the amendment dated 14.02. 2002 that the consideration was revised from 10% to 16% at the net sales of the products and the definition of 'net sales' was revised. As per the revision of this definition reasonable rebates allowed to the customers were no longer deductible from net sales. The term of the license Agreement was reduced to two years effective from the date of the amendment i.e. up to 13-03-2004. Even in original agreement, in the event of termination of the agreement on account of Government discontinuing issuing/renewing FDA loan License allowing to perform the agreement, it was provided that the parties would discuss the possible remedies. Further, in the amendment agreement it was specified that in the event of termination, the company would pay to Torrent 6% of Net Sales calculated for the remaining period of the Agreement on the average of Net Sales of the past 6 months of the discontinuation of the agreement. This agreement was subsequently terminated vide dated 07-06-2003 with Torrent and terminate the loan license agreement effective as of 30-06-2003 and the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... better conduct and improvement of the existing business and should, therefore Be held to the revenue expenditure Reference may also be made to the observations of this court in CIT Vs Ciba of India Ltd [1968] 69 ITR 69. There is also no single definitive criterion which by itself, is determinative as to whether a particular outlay is capital or revenue The once for all payment test is also inconclusive What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities In a given case, the test of enduring benefit might break down In CIT Vs Associated Cement Companies Ltd [1988] 172 ITR 257 (SC) at p 262, this court said: As observed by the Supreme Court in the decision in Empire Jute Co Ltd Vs CIT [1980] 124 ITR 1 (SC) that 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 principles laid down in this test What is material to consider is the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But, CIT(A) allowed the claim of the assessee by observing as under: - 3.9 I have considered the submissions made by the AR as well as the documents submitted to support the appellant company s claim for product development expenditure u/s 35(1) and u/s 37 of the Act. I am accepting all the fresh documents submitted by the appellant during the appeal proceedings as the AO has not furnished any reason for not taking them on record in two remand reports submitted by him. Upon perusing the service agreements and the dossier submitted, I am of the view that the services rendered by MJ Bio Pharma Pvt. Ltd and Medreich Sterilab Ltd would be in the nature of scientific research covered u/s 35(1) finds support in Hon ble ITAT Delhi decision in the case of Escorts Ltd. Vs. ACIT reported in (2006) 102 TTJ (Del) 522. The Hon ble ITAT concluded that the question whether the expenditure is revenue or capital, loses its significance while considering its deductibility because the nature of expenditure is on account of R D and is admissible u//s 35(1)(iv). It is also noted that the Hon ble Bombay HC in the case of CIT Vs. National Rayon Corp. Ltd, reported in (1983) 140 ITR 143 (Bom) has he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenses. In case, of a pharmaceutical company these expenses are necessarily incurred for the purpose of business. The assessee company is in the business of production, sales of pharmacy products and even if it incurs expenditure for development of new products, it is expenditure on the activities of the existing business and thus it cannot be treated as an expenditure incurred on acquiring new source of business as has been erroneously held by the AO. Needless to say all pharmaceutical companies have to incur product development expenses either in its in-house R D facilities or through others as has been done by the assessee. We are of the view that the expressions Scientific research and Scientific research related to business are defined in section 43(4) of the Act. Reference is being made to the definition at 43(4) (iii) which reads as under :- (iii) References to Scientific research related to business or class of business include (a) any Scientific research which may lead to or facilitate an extension of that business or, as the case may be, all business of that class. 10. We find from the decision of the Hon ble Bombay High Court in the case of CIT Vs. Natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of CIT(A) in deleting the disallowance of product development expenses of ₹ 15.35 lacs and project registration expenses of ₹ 12.43 lacs, thereby the total addition of ₹ 27.77 lacs. For this Revenue has raised following ground:- On the facts and in the circumstances of the case and in law, the CIT (A) erred in treating Product Development Expenses and Product Registration Expenses amounting to ₹ 22,77,600/- as revenue expenditure instead of capital expenditure. 12. As regards the issue of product development expenses, we have already allowed the issue in favour of assessee while adjudicating the appeal in ITA No. 6720/Mum/2011 for the A.Y. 2004-05 in Para 10 of this order. Taking a consistent view, we allow this issue in favour of assessee and this issue of Revenue s appeal is dismissed. 13. As regards to project registration expenses the facts of the case are that these expenses amounting to ₹ 12.43 lacs was disallowed by the AO by holding that they too have resulted in enduring benefit and/or creation/acquisition of intangible asset. The assessee submitted the detail of project registration expenses i.e. an amount of ₹ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No. 6755/Mum/2011 for A.Y. 2005-06 is as regards to exclusion of provision of leave encashment and gratuity amounting to ₹ 36.61 lacs and provision for date expire of stock of ₹ 47,000/- for computing book profit u/s 115 JB of the Act. For this Revenue has raised following ground: - On the facts and in the circumstances of the case and in law, the CIT (A) erred in directing the AO to exclude provision for leave encashment and gratuity of ₹ 36,61,000/- and provision for date expired stock of ₹ 47,000/- for computing Book Profit u/s 115JB. 16. We have heard rival contentions and gone through the facts and circumstances of the case. We find that the AO added the following sums in the assessment order while computing book profit u/s 115 JB of the Act but he has not considered the explanation (1)(c) of Section 115 JB (2) of the Act wherein, the book profit as per net profit is required to be increased by the amount or amounts of provision made for meeting liabilities other than ascertained provision as under:- provision for leave encashment Rs.31,61,000 Provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal is dismissed. 17. The next two issues in ITA No.7592/Mum/2011 for the A.Y. 2006-07 of Revenue s appeal is as regards to the order of CIT(A) deleting the addition of product development expenditure and product registration expenditure. For this Revenue has raised following grounds: - On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in treating Product Development Expenditure of ₹ 74 lakhs as revenue expenditure instead of capital Expenditure. On the facts and in the circumstances of the case and in law the Ld. CIT (A) erred in treating Product Registration Expenditure of ₹ 8.11 lakhs as revenue expenditure instead of Capital Expenditure. 18. As regards the issue of product development expenses and product registration expenses, we have already allowed these two issues in favour of assessee while adjudicating the appeal in ITA No. 6720/Mum/2011 for the A.Y. 2004-05 in Para 10 of this order and in ITA No.6755/Mum/2011 for the A.Y. 2005-06 in Para 14 of this order. Taking a consistent view, we allow these two issues in favour of assessee. Hence these two issues of Revenue s appeal are dismissed. 19. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in respect of Software charges of ₹ 16.88 lakhs paid to Software Spectrum, France. He submitted that out of the iota) payment of ₹ 16.88 lakhs to Software Spectrum, payment of ₹ 10.23 laid was for annual maintenance charges and payment of ₹ 6.65 lakhs was towards cost of acquiring 52 additional Microsoft Enterprise Desktop licenses. The AR pointed out that the annual charges were paid so that the appellant is entitled to get updates/modifications, etc for the said licenses. This being the annual charge, therefore no enduring benefits have accrued to the appellant. Further, the additional Microsoft Enterprise Desktop licenses were acquired for operational purpose and therefore their cost is to be regarded as revenue expenditure. The copies of three invoices of Software Spectrum which are on record clearly show the above facts. I have considered the above and it is seen that expenditure of ₹ 10.23 lakhs represents annual maintenance charges and therefore it cannot be regarded as resulting in enduring benefits. Therefore I delete the et addition of Rs: 4.09 lakhs made on this account. As regard of 52 additional licenses, I allow the same for the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue in ITA No. 7592/Mum/2011 for the A.Y. 2006-07 is as regards to the order of CIT(A) deleting the disallowance of operating and other expenses. For this Revenue has raised following ground: - On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of ₹ 10,00,000/- out of Operation and other Expenditure without appreciating the findings of the AO that from the details furnished by the assessee during the course of assessment proceedings genuineness of the expenses could not be verified. 21. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has claimed operating and other expenses amounting to ₹ 19.34 crores. This includes payment to related concern Aventis Pharma Ltd. on account of service charges amounting to ₹ 2.67 crores. The AO required the assessee to file detail of expenses exceeding ₹ 50,000/- giving brief narrations of expenses. The AO disallowed adhoc sum of ₹ 10,00,000/- stating that the assessee failed to file the requisite deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue s appeal is dismissed. 23. The next issue in this appeal in ITA No. 7592/Mum/2011 for the A.Y. 2006-07 is as regards the order of CIT(A) deleting the disallowance made by AO u/s 43B of the Act on account of service tax outstanding. For this Revenue has raised following ground: - On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance u/s 43B of ₹ 2, 12,858/- being the amount of Service Tax outstanding as on the Balance Sheet date of 31.03.2006 without appreciating the fact that the same was paid after filing of return of income for A.Y. 2006-07 and hence was not allowable in the year under consideration. 24. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed service tax payable at the end of the year amounting to ₹ 2,12,858/- by invoking the provision of Section 43B of the Act. The CIT(A) deleted the disallowance by following the co-ordinate bench decision of ITAT Chennai Bench in the case of ACIT Vs. Real Image Media Technologies P. Ltd. (2008) 9DTR 261 (Chennai), wherein, it is concluded that disallowance of service ..... X X X X Extracts X X X X X X X X Extracts X X X X
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