TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 31
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....tion by treating pre-mature termination compensation as Revenue expenditure. For this Revenue has raised following two grounds:- "1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in accepting additional evidence in contravention of Rule 46A of the I.T. Rules. 2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in treating Premature Termination Compensation of Rs. 98,65,000/- as revenue expenditure instead of capital expenditure." 3. Briefly stated facts are that the AO during the course of assessment proceedings required the assessee to explain pre-mature termination compensation claimed as Revenue expenditure. The AO also issued show-cause as to why the payment of compensation be not treated as capital expenditure. The assessee replied that it has decided in May 2003 that instead of manufacturing products for which it has manufacturing license under toll arrangement, it was advantageous to have contract manufacturing arrangement. The assessee company having manufacturing license for Cordarone, Valparine, Fortagesic, Jumex, Ladogal, Tyklid but having no manufacturing facility and accordingly it entered into a tol....
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.... paid with a view to reduce the cost of manufacturing. I am in agreement that this was relatable to carrying on/conduct of the business and hence it should be regarded as an integral part of the profit earning process. I also agree with the proposition that the payment of termination compensation has not resulted in the acquisition of an asset or any right of a permanent character to the appellant company. In the absence of acquisition of an asset, the capital structure of the appellant company has not changed. Therefore, in my considered view, the addition of Rs. 98,65,000/- made in the assessment cannot be sustained. Accordingly, I direct the AO to delete the same from the assessed income." Aggrieved, Revenue came in second appeal before Tribunal on this issue. 4. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee Shri J D Mistry, Senior Advocate referred to loan license agreement dated 12-09-1996, amended loan license agreement dated 14-02-2002 and termination agreement dated 07-06-2003. It was argued that the amended agreement provided for the validity of the main agreement for two yea....
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....assessee and AO disallowed the claim on the ground that the assessee got enduring benefit by way of reduction in the manufacturing cost in coming years. According to him the expenditure was capital in nature because the assessee had made onetime payment of compensation to Torrent Pharmaceuticals Ltd., for termination agreement to avoid any loss of recurring nature in the future by way of payments under the toll manufacturing agreement. But we are of the view that onetime payment was not conclusive test of enduring benefit. For this Ld. Counsel relied on the decision of the Hon'ble Supreme court in the case of Alembic Chemical Works Co. Ltd., Vs. CIT (1989) 177 ITR 377 (SC). For this, we are of the view that since the early termination compensation was paid with view to reduce the cost of manufacturing, it was related to carrying on/conduct of the business of the assessee and thus it was to be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character or the possession of which is a condition of the carrying on of the business and hence the expenditure was allowable as revenue expenditure. For this view of ours,....
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....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. 7. The next ground in this appeal of Revenue in ITA No. 6720/Mum/2011 for the A.Y. 2004-05 is against the order of CIT(A) deleting the disallowance made by AO on account of product development expenses u/s 37(1) r. w. s 35(1) of the Act. For this Revenue has raised following ground:- "On the facts and in the circumstance....
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....t development expenses paid to two parties and not incurred in their own in-house research centre is fully supported by this Hon'ble Bombay HC's decision. Further, it is noted that the appellant is in the business of Pharmaceutical products. The product development expenses are incurred for introducing new products in the same business line and therefore could not be considered as capital expenditure as such expenditure is incurred to increase the efficiency of the business. This conclusion finds support in Hon'ble ITAT Chandigarh Bench in the case of Glaxo Smith Kline Consumer. Healthcare Ltd. Vs. ACIT, reported in (2007) 112 TTJ (Chd) 94. The Hon'ble ITAT has decided this case by relying on apex court's decision in the case of Empire Jute Co. Ltd. It has held that mere development and introduction of new varieties of products do not result in creation of a new line of business. It has observed by the Bench that prior to development and introduction of the new productions and post development and introduction of new products, the business of the assessee remains the same. Relying on this decision, the appellant company's claim is well supported. Therefore, in my considered view, t....
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....be properly regarded as related to the business of the company. To take any other view must be regarded as impractical and contrary to commonsense. In the present case, we mention that assessee's company expenditure on product development has to be regarded as the expenditure covered u/s 35(1) of the Act as held by Bombay High Court in the case referred to hereinbefore. The findings of revenue that the product development expenditure resulted in the creation of new source of income is also not justified since in the definition of the research related to business such expenditure is covered and the decision of the Bombay High Court only supports the claim of the assessee. 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 ....
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.... considered the submissions made by the AR as well as the documents submitted to support the appellant company's claim for product registration being allowable expenditure. u/s 37 of the Act, upon pursuing the nature of expenses, submissions made, I am of the view that the product registration expenses are in the nature of revenue expenses. The appellant company's claim u/s 37 finds support in Hon'ble ITAT Chandigarh case of Glaxo Smith Kline Consumer Healthcare Ltd. Vs ACIT, reported in (2007) 112 TN (CM) 94. The Hon'ble ITAT has decided this case by relying on apex court's decision in the case of Empire Jute Co. Ltd. It has held that mere development and introduction of new varieties of products do not result in creation of a new line of business. It is observed by the Bench that prior to development and introduction of the new products and post development and introduction of new products, the business of the assessee remains the same. Relying on this decision, the appellant company's claim is well supported. Therefore, in my considered view, the addition of Rs. 12.42 lacs made in the assessment cannot be sustained. Accordingly, I direct the AO to delete ....
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....nses. The CIT(A) mainly relied on the decision of Hon'ble Supreme Court in the case of Bharat Earthmovers Vs.CIT (2000) 245 ITR 482 (SC). The CIT(A) allowed the claim of assessee after considering the submissions of the assessee as under: - "The AR has also filed extract of Notes to Accounts for the F.Y. 2004-05 (A.Y. 2005-06) and draws my attention particularly to Note 1(f) which has spelt out that additional liability for gratuity arising out of difference between the actuarial valuation and the amount contributed to LIC has been provided and also the liability for leave encashment benefits has been provided on the basis of valuation carried out by an independent actuary. He has further stated both these liabilities have been provided in accordance with the normally accepted accounting standard. The AR only reiterates his submission with regard to provision for date expired stock made in the foregoing ground 3 of the appeal and sys that such adjustment is not even warranted to determine normal taxable income. In view of all these submissions, he concludes that adjustments to book profit u/s 115JB is not in accordance of the law and has to be deleted. I have considered the subm....
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.... in this case. The appellant is using SAP in The business as a tool to run the same more efficiently and not as an apparatus for profit earning; The Hon'ble Special Bench, Delhi ITAT has stated that before classifying the expenditure as capital or revenue expenditure, one has to apply the functional test vis-a-vis the nature of business of the assessee. It has observed that "software normally functions as a tool enabling the business to be carried on more efficiently". However, if the software is used as profit earning apparatus, then it could be classified as capital expenditure. The Hon'ble Special bench ITAT Delhi, has held that software expenditure was capital expenditure since the software was used to impart training to the students which was a part of the profit making apparatus of the assessee. This was concluded by the Special Bench as the assessee was engaged in the business of software development and training centre,imparting specialized training to the students in software technology. The Hon'ble Delhi Special Bench decision is based on the principle laid down by Supreme Court in the case of Empire Jute Company vs. CIT, reported in 124 ITR l(SC) that all expendi....
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.... for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus : "7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is an enterprises resources planning (ERP) package and hence it facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit-making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs. 20.60 lakhs is revenue expenditure. We hold so....
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....response to the Addl. CIT's report dated 03.08.2011. In response, the appellant's A.R. has submitted vide his letter dated 12.08.2011 that the appellant had submitted the details as required by the A.O. and no further queries were received from A.O. Further he also points out that the A.O. has not considered appellant's letter dated 03.12.2008 and 27.11.2009 along with which the required- details were-submitted. In fact, the A.O. has made a disallowance by relying on appellant's letter dated 25.11.2008. 4. I have considered the submission made by the AR as well as the statement of details of expense exceeding Rs. 50,000/- field before the AO and copies of which were again shown to me including debit notes in respect of expenses reimbursed to Aventis Pharrna Limited. I have also considered that A.R reply to the remand report. On perusing the letters submitted to the A.O. and also few high value bills and debit notes of Aventis Pharma Limited, I do not find any merit in making a surmise that the operations and other expenses debited to the P&L account are not genuine. I therefore delete the ad hoc disallowance of Rs. 1000,000/- made by the AO direct him the same fro....