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TMI Blog2023 (3) TMI 1522X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses are not capital in nature. The facts available on record are not clear as to whether these expenses are routine expenses incurred for expansion of existing business or not. If it is so, then the relevant expenses are allowable as revenue expenditure. In the absence of relevant details, we feel it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. Accordingly we restore this issue to the file of AO. Disallowance of finance lease expenses - HELD THAT:- As decided in assessee s own case for the assessment year 2014-15 [ 2022 (2) TMI 1338 - ITAT BANGALORE ] this issue is now settled by Hon ble Supreme Court in the case of ICDS [ 2013 (1) TMI 344 - SUPREME COURT ] wherein the Hon ble Apex Court held that the lessor is the owner of the leased property in case of finance lease and he is entitled to depreciation on it. The contra is that the lessee is eligible to claim the lease payments as deduction. Hence the view taken by the tax authorities are against the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/ DRP erred in not granting depreciation as per the provisions of section 32 of the Act. The learned AD ought to have appreciated that depreciation is a mandatory allowance in terms of Explanation 5 to section 32(1) of the Act. 3. Disallowance of finance lease [INR 1,27,27,1981 3.1. The learned AO has erred, in law and on facts, in disallowing expenditure on finance lease amounting to INR 1,27,27,198 erroneously holding that the lease rent paid is for acquisition of capital assets. 3.2. The learned AO/ DRP ought to have appreciated that the Appellant does not have ownership over the assets and thus the lease rentals are a regular business expenditure allowable under section 37 of the Act. 3.3. The learned AO/ DRP erred, in law and on facts, in alleging that the lease rentals would give enduring benefit to the Appellant without appreciating the fact that the same are payments regularly/ annually incurred for utilization of the vehicles for business purposes. 3.4. Notwithstanding and without prejudice to the above grounds, the learned AO/ DRP erred in not granting depreciation under section 32 of the Act on the expenditure amounting to INR 1,27,27,198. The learned AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental financials of the Taxpayer for the F.Y. 2017-18 as worked out by TPO based on the material available on record is as under: Particulars Manufacture of Agrochemicals R&D & Business Support Services* Sales 204,64,18,813 Service Income 24,41,87,309 Other operating Income 82,36,635 - Forex Gain 3,97,03,133 (22,53,760) Total operating income (A) 209,43,58,581 24,19,33,549 Cost of raw materials consumed 96,67,30,895 28,956 Cost of good purchased 1,90,70,304 - Decrease/increase in Stock 29,17,51,519 - Tolling charges 11,19,41,937 - Product Development expenses 3,11,88,108 - Personnel Cost 17,58,81,412 7,15,38,668 Depreciation 1,61,72,160 1,90,74,409 Selling and Administrative costs 28,76,83,510 11,92,84,344 Bank charges 10,68,736 1,27,526 Bad Debts 1,59,56,900 Add: Recovery of expenses from the AE 1832152 211644 Total operating expenditure (E) 1,91,92,77,633 21,02,65,547 Operating Profit 17,50,80,948 3,16,68,002 PLI(OP/OR) 8.36% PLI(OP/OC) 15.06% 3. From the documents submitted, the ld.TPO observed some deficiency and he did not accepted the filters applied by the assessee. In the TP study report for manufacturing segment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Shortfall being adjustment ALP-OR 1,02,55,948 3.1 The ld.TPO also calculated interest on delayed outstanding receivables of Rs. 37,80,914/- and completed his order on 31/07/2021. The AO after receipt of the TPO's order passed u/s 92CA of the Act, he proceeded to complete the Draft assessment order. During the course of Draft assessment proceedings, the AO noticed that the assessee has claimed product development expenses to the tune of Rs. 3,11,88,108/- and it was claimed as revenue expenditure. The assessee was asked to furnish the details of revenue expenditure on development activities carried out by the assessee. In response, the assessee submitted that expenses incurred are revenue in nature and does not yield any enduring benefits to the assessee. The submission made by the assessee was incorporated by the AO in his order. The submissions of the assessee were considered and the AO noticed that the product development expenditure is incurred for getting approval from Central Insecticides Boards, so that the product is brought into commercial use. As these expenses will lead to commercial utilization of the pesticides, the product development expenditure will give endurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquisition of capital assets i.e for vehicles. As per note 2.3 of the financial statement, finance lease term is 6 years. Further, the finance lease obligations are secured against the respective assets taken on lease. Further as per Accounting Standard 19, the lease has to be recognized as capital asset and liability, deprecation and financial charge is charged in the profit and loss account in place of lease rent payment, therefore, he hold that the lease rent is capital in nature. He further noticed that vehicles taken on lease will be used by the assessee for substantial part of its economic life. Thus finance lease gives enduring benefit to the assessee and cannot be called as operating lease. Further, the assessee was asked to provide more details regarding depreciation claim on the said assets by the lessor, the assessee submitted his inability to produce any confirmation of the same and assessee submitted reply. The similar issue was also raised before the ld. DRP and the they have given direction for the previous year which is incorporated by the AO as under:- "7.5 Further, with No prejudice to above but Hon'ble DRP, Bengaluru in its direction dated 05.02.2021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ('CIB') is mandatory. In this regard, the person seeking registration would have to undertake the below mentioned activities: * Conduct field trials across different soil types, climatic conditions and crops. * Test the product in the government approved laboratory and submit the report highlighting the efficacy, toxicity, etc. to the CIB. * Distribute the product as a free sample to farmers of various regions in order to get the trial on the field. * Submit the trial report to CIB for their further examination and review. Product Development expenses incurred by FMC India include the following: * * Cost of samples issued * Testing fees and charges * Field trial expenses * Registration expenses. 1.2 AO's contentions The learned AO disallowed the expense on the ground that it gave an enduring benefit to the Appellant and was hence capital in nature. The expenses have been incurred for some products which will be commercially released. Since some of the products are already commercially available in the market, the expenses are incurred by the Appellant merely for getting approval from the CIB and hence the expense in not recurring i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 527) (SC). The Appellant wishes to highlight that the Hon'ble Tribunal in the Appellant's own case for AY 2014-15 (ITA No.3313/Bang/2018) has allowed the claim of the Appellant. The Hon'ble ITAT held as below: "This issue is now settled by Hon'ble Supreme Court in the case of ICDS vs CIT (2013) (350 ITR 527) (SC), wherein the Hon'ble Apex Court held that the lessor is the owner of the leased property in case of finance lease and he is entitled to depreciation on it. The contra is that the lessee is eligible to claim the lease payments as deduction. Hence the view taken by the tax authorities are against the decision rendered by Hon'ble Supreme Court." "Accordingly we direct the AO to allow the claim of the assessee in accordance with the decision rendered by Hon'ble Apex Court in the case of ICDS (supra)." In view of the above, the Appellant wishes to humbly submit that the lease rental payments should be allowed to the Appellant. 3.Ground 4: Incorrect computation of brought forward losses FINR 2,08,92,3491 The learned AO/ DRP erred, in law and on facts, in considering the business loss and unabsorbed losses as IN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. The assessee submitted that incurring of this kind of expenses is an integral part of profit earning process and it aids the assessee to continuously improve its portfolio of products. The assessee also relied upon the decision rendered by Chandigarh bench of ITAT in the case of Glaxo Smithkline Consumer Health care Ltd (112 TTJ 94) and also the decision rendered by Hon'ble Karnataka High ITA No.3313/Bang/2018 M/s. FMC India Private Ltd., Bangalore Page 15 of 20 Court in the case of Bharat Earth Movers Ltd (47 CTR 244) and also by Chennai bench of ITAT in the case of Magnetic Meter Systems India Ltd etc. It was submitted that these expenses did not result in any enduring benefit to the assessee. 8.1 The AO did not accept the explanations of the assessee. The AO took the view that these expenses would give enduring benefit to the assessee once the products developed by it are put to commercial use. The AO also examined the nature of expenses and noticed that these expenses have been incurred for registration studies of product Carbosulfan, various diseases of plants, Clomazone etc. He also noticed that the assessee has already started commercially producing the products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Tribunal in assessee's own case for the assessment year 2014-15 in ITA No.3313/Bang/2018. The relevant part of the order is as under:- "9.0 The next issue relates to disallowance of claim of finance lease charges of Rs. 78,41,340/-. The assessee had taken certain vehicles on finance lease and paid lease charges. The assessee claimed the payment of lease charges as expenditure. The assessee did not include the same as its fixed assets in the depreciation schedule and accordingly did not claim depreciation thereon. The AO took the view that the assessee should recognize the assets taken on lease as its capital asset and should have claimed depreciation and finance charges as per Accounting Standard 19 issued by ICAI. He further held that the finance lease gives enduring benefit to the assessee and it cannot be called as operating lease. Accordingly he disallowed the claim for deduction of finance lease charges. In this regard, he took support of the ITA No.3313/Bang/2018 M/s. FMC India Private Ltd., Bangalore Page 17 of 20 decision rendered by Delhi bench of ITAT in the case of Rio Tinto India (P) Ltd (ITA No.363 (Delhi)/2012 dated 22-06-2012. 9.1 The Ld DRP also confir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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