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TMI Blog2015 (11) TMI 1827X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure and in the absence of product developed by the assessee having been patented, we find no merit in the order of Assessing Officer in this regard - Decided against revenue Disallowance of premium paid on cancellation of foreign currency cover - CIT-A allowed claim - CIT(A) was of the view that the aforesaid expenditure related to payment of commitment charges for canceling agreement entered into by the assessee for FOREX cover, purchased for Dollar fluctuation relating to repayment of ECB loan and interest, therefore, the same was not in the nature of interest - HELD THAT:- In order to avail the foreign exchange cover offered by Citi Bank, it had to close its agreement with DBS Bank and for pre-mature closure of the offer made by DBS Bank, the prepayment charges / commitment charges relating to the cancellation of the said foreign exchange cover was paid by the assessee. The said commitment charges are not relatable to the acquisition of any foreign assets, but are on account of business agreement entered into by the assessee, which because of its business exigencies, had to be foreclosed, in view of the offer made by the principal lender i.e. Citi Bank. Such commitme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ₹ 11,15,01,210/-. 4. The brief facts of the case are that the assessee was engaged in the business of auto ancillary unit and manufactured the parts needed for the vehicles of different makes. In other words, the assessee was a vendor for automobile manufactures. The major customers of the assessee were Tata Motors Ltd., Bajaj Auto Ltd., Kinetic Engineering Ltd., Mahindra Mahindra Ltd., etc. The claim of the assessee before the authorities below was that in the process of manufacturing a vehicle, such automobile manufacturers first assess the marketability of the vehicle that is in pipe line of designing. Then, the design of vehicle was made and the specification about the auto parts are provided to vendors, that is, the assessee, to manufacture and supply the same. Where the vendor takes the initiative of designing a specially useful product then the same has to be approved by the automobile manufacturer, who is a customer for assessee and without this approval, the design/product developed by vendor would be rendered useless. Further the plea of the assessee was that it had developed the designs principally for development of load body assembly and reduction in weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred for the purchase of land or building or machinery etc., but it had been stated by the Assessing Officer that the aforesaid expenses had resulted into coming into being of processes and designs, which had enduring benefit and therefore was capital in nature. The necessary evidence was filed before the CIT(A) to show that the patents had not been registered on technical ground. The claim of the assessee was that the reliance placed by the Assessing Officer on the decision of CIT Vs. Madras Auto Services Pvt. Ltd., 233 ITR 468 (SC) was not in proper appreciation of facts and law. The aforesaid expenses were in the nature of Revenue expenditure and the CIT(A) was of the view that the explanation of the assessee was more plausible as the research and development was not for a new product or a line of product. Since the assessee was only a vendor and had to manufacture the products as per the requirement of the principal and even if a development was made, the same actually belongs to the principal and could be implemented only on their approval. The monetary benefit received by the assessee also reflected that the same was issued as per the wish and consideration of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. AR that the main customer of the assessee was Tata Motors, which was manufacturing body parts. For the said concern, because of the R D expenses carried on by the assessee, it reduced the cost of the load and against which the assessee also received certain compensation. The learned Authorized Representative for the assessee pointed out that the said expenditure was allowed by the CIT(A) under section 35(1)(i) of the Act, but it is clear that the nature of expenses was not capital in nature. Our attention was drawn to the Notes and activities of the assessee placed at page 159 of the Paper Book and letter of Tata Motors at page 173 of the Paper Book. Further, reliance was placed on the decision of Pune Bench of Tribunal in Opus Software Solutions (P.) Ltd. Vs. ACIT, (2012) 139 ITD 427 (Pune) for the proposition that even if the R D expenses were of enduring benefit, but the same were in revenue field. 9. We have heard the rival contentions and perused the record. The assessee during the year under consideration had in its computation of income claimed expenditure of ₹ 11,15,01,210/-. The expenditure was claimed for initiating, designing product which in turn was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. Where any expenditure has been incurred which is capital in nature, then in such circumstances, the said expenditure is to be capitalized in the hands of the assessee. Looking at the nature of expenditure incurred by the assessee, we are of the view that the same is revenue expenditure allowable as deduction in the hands of assessee either under the provisions of section 35(1)(i) or 37(1) of the Act. The expenditure having been incurred by the assessee by way of research, which resulted in reduction in the weight of body parts and also generation of revenue in the hands of assessee to the extent of ₹ 4.20 crores cannot be said to be capital expenditure. Even if the expenditure is of enduring benefit, but having not been incurred in the capital field, is to be allowed as deduction in view of the ratio laid down by Pune Bench of Tribunal in Opus Software Solutions (P.) Ltd. Vs. ACIT (supra). As referred by us in the paras hereinabove, the nature of expenditure is not such that it can be said to be capital expenditure and in the absence of product developed by the assessee having been patented, we find no merit in the order of Assessing Officer in this regard. Upholding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity and where the assessee had obtained loan from Citi Bank, then there was no occasion to go for contract with DBS Bank for foreign exchange fluctuation cover. Where the foreign exchange fluctuation cover was taken in relation to loan acquired for purchasing fixed assets and foreign acquisition, the expenditure was connected with fixed assets and was capital in nature and not revenue expenditure. The Assessing Officer thus, held that the claim of the assessee that these were liquidated damages for breach of contract and were allowable was mis-placed since the expenditure was not in connection with the breach of contract in respect of sale of material or revenue activities, hence, the proportionate amount of ₹ 67,51,549/- was disallowed as revenue expenditure. 13. The CIT(A) was of the view that the aforesaid expenditure related to payment of commitment charges for canceling agreement entered into by the assessee for FOREX cover, purchased for Dollar fluctuation relating to repayment of ECB loan and interest, therefore, the same was not in the nature of interest. In view thereof, the CIT(A) held that it could not be said that the impugned expenditure was in the nature d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement was up to 25.09.2012. He further pointed out to the early termination letter of DBS placed at pages 283 and 285, under which the agreement was terminated w.e.f. 04.03.2008 subject to payment of commitment charges. Reliance in this regard was placed on the ratio laid down by the Hon ble Supreme Court in DCIT Vs. Gujarat Alkalies Chemicals Ltd., (2008) 299 ITR 85 (SC) and Addl.CIT Vs. Akkamba Textiles Ltd. (1997) 227 ITR 464 (SC). It was further pointed out by the learned Authorized Representative for the assessee that the reliance placed upon by the learned Departmental Representative for the Revenue in the decision of Mumbai Bench of Tribunal in Mahindra Mahindra Ltd. Vs. DCIT (2006) 5 SOT 217 (Mum) is mis-placed as the facts of the said case are at variance. 17. We have heard the rival contentions and perused the record. The issue arising by way of ground of appeal No.2 is in relation to the expenditure of ₹ 67,51,549/- being the proportionate commitment charges paid by the assessee for early termination of foreign exchange cover taken from DBS Bank. In the facts of the present issue raised before us, the assessee had taken loan from Citi Bank of $ 10 millio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctable under section 36(1)(iii) of the Act, which specifically dealt with allowability of interest on borrowed capital for the purposes of business or profession as revenue expenditure. The CIT(A) was of the view that the case of the assessee had to be seen in purview of the provisions of section 37(1) of the Act, which allows any expenditure expended wholly and exclusively for the purpose of business, where the same was not in the nature described in sections 30 to 36 of the Act and was not in the nature of capital expenditure or personal expenditure. Admittedly, th e expenditure is not in the nature described in sections 30 to 36 of the Act, but the question which arises for adjudication before us is whether the expenditure expended by the assessee was in the nature of capital expenditure. Looking to the facts of the present case, loan taken by the assessee was for the purpose of acquisition of shares of foreign companies or the foreign assets and partly for acquisition of assets of Chakan plant. The expenditure relatable to Chakan plant has been allowed by the Assessing Officer itself and only proportionate expenditure of ₹ 67,51,549/- out of total commitment charges paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on of the business by the assessee, are allowable as expenditure under section 37(1) of the Act. We find support from the ratio laid down by the Hon ble Supreme Court in DCIT Vs. Gujarat Alkalies Chemicals Ltd., (supra) and Addl.CIT Vs. Akkamba Textiles Ltd. (supra) for the said proposition. We uphold the order of CIT(A) in this regard. 20. The learned Departmental Representative for the Revenue has placed reliance on the decision of Mumbai Bench of Tribunal in Mahindra Mahindra Ltd. Vs. DCIT (supra). In the facts of the said case, the assessee had taken loan in US Dollars for investment in new project and was to be utilized for the acquisition of capital assets. However, eventually, the assessee did not strictly utilize US Dollars for acquiring capital assets, but its rupee equivalent of swapping was utilized for such purpose. Where the gain arose to the assessee on cancellation of forward cover contract, the Tribunal held that the same was in the nature of capital asset. The facts of the said case are at variance to the facts before us. In the facts of the present case before us, the assessee had taken forward cover contract from DBS Bank, which has not matured during ..... X X X X Extracts X X X X X X X X Extracts X X X X
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