TaxTMI 
TaxTMI 
TaxTMI 
2023 (3) TMI 1522
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....pment expenditure primarily pertains to registration expenses, testing fees and incidental charges and therefore allowable as deduction under section 37(1) of the Act. 2.3. The learned AO/ DRP failed to appreciate that the product development expenditure while being necessary for running of its business does not bring any asset into existence. 2.4. The learned DRP, without appreciating that such expenses are incurred in relation to registration expenses, testing charges and other incidental charges which merely aids in enabling the Appellant to trade in such chemicals, erred in holding that the expenses are incurred for registration of patent in the name of the associated enterprise or for assignment in favour of the associated enterprise. 2.5. Notwithstanding and without prejudice to the above grounds, should the expenditure be treated as capital in nature, the learned 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 h....
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.... all required documents through e-assessment of ITBA Module time to time. The one of the CASS reasons for selection of scrutiny is pertaining to transfer pricing risk parameter, therefore, the case was transferred to the TPO in order to determine the arms length price and reference was made to the TPO after obtaining approval from the ld.Pr.CIT u/s 92CA of the Act for determination of ALP in respect of international transactions. After receiving reference, the ld.TPO issued notices for seeking documents maintained u/s 92D of the Act. In response, the assessee filed the documents and from the documents, the functional profile was noticed by the TPO is that the assessee company provides resources and development support services and business support services to its overseas affiliate entity. From the finance documents, the ld.TPO calculated segmental results as under:- 4.2 The segmental 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 82,36,6....
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....ired (if PLI< 35TH Percentile Yes Median Margin of comparable set M 13.03% Arm's Length Cost ALC = (1-M%)*OR 182,14,63,658 Price Received OC 191,92,77,633 Shortfall being adjustment OC-ALC 9,78,13,975 14.5 The above shortfall of Rs. 9,78,13,975 is treated as Transfer Pricing adjustment u/s 92CA in respect of the Taxpayer's International Transactions with regard to Manufacturing and Sales of Agrochemical Products. MSS SEGMENT Particulars Formula Amount (in Rs. ) Taxpayers Operating Revenue OR 24,19,33,549 MSS SEGMENT Particulars Formula Amount (in Rs. ) Taxpayers Operating Revenue OR 21,02,65,547 Taxpayers Operating Profit OP 3,16,68,002 Taxpayers PLI PLI=OP/OC 15.06% 35th Percentile Margin of comparable set 18.21% Adjustment Required (if PLI< 35th Percentile Yes Median Margin of comparable set M 19.94% Arm's Length Price ALP = (1 + M%)*OC 25,21,92,497 Price Received OR 24,19,33,549 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 ord....
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....he Product Development Expenditure to the tune of Rs. 3,11,88,108/- is disallowed for being capital in nature u/s 37 of the Act and added to the total income of the assessee. 3.3 The AO further noted that the assessee has reduced Rs. 1,27,27,198/- towards finance lease in the ITR under head 'any other amount allowed as deduction'. In this regard, the assessee furnished reply and incorporated by the AO as under:- "7.2 Assessee has submitted that said amount is towards finance lease rent of vehicle. Reply of the assessee is reproduced below: The said amount is towards finance lease rent of vehicles. Though the vehicles have been capitalized in the audited financial statements, since the assessee does not become the owner of the vehicles and pays annual rent towards the same, the annual rent has been claimed as deduction. No depreciation has been claimed in relation to said vehicles." 3.4 After considering the reply, the AO noticed that the lease rent is paid 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 leas....
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....ddition towards disallowance of product development expenses and disallowance of finance lease, the ld. DRP did not accept the objections of the assessee and accordingly, they passed order on 29/06/2022. After receipt of the direction from the ld.DRP, the AO passed final assessment order and assessed income of Rs. 5,71,51,182/- and brought forward loss was allowed to the extent of assessed income. 5. Aggrieved from the above order, the assessee filed appeal before the ITAT except the issue on addition made u/s 92CA. 6. The ld.AR filed written synopsis which is as under:- Summary of the Corporate Tax grounds 1. Ground 2: Disallowance of product development expenses rlNR 3,11,88,1081 Following is a summary of facts submitted before the learned AO and the DRP (Page 427, Page 445, Page 651, and Page 901 of the paper book): 1.1 Brief facts The sale of pesticides in India is governed by the Insecticide Act, 1968. The approval from the Central Insecticide Board ('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 cr....
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....e and had made annual lease rental payments. The payments were for the purposes of utilizing the vehicles on lease basis and not for acquisition of a capital asset. The vehicles taken on finance lease were put to use purely for business purposes and were deductible under section 37(1). Reliance placed on the CBDT Circular No. 2 dated 9 February 2001 which provides, inter-alia, that the accounting treatment of leases would not impact the allowance of depreciation on assets. Position has been accepted by the learned AO in the past AYs - cannot change the position in the absence of change in facts. 2.4 DRP Directions The objections filed before the Hon'ble DRP were disposed off The DRP held that the payment for finance lease is capital expenditure not allowable as deduction. Brief contentions It is submitted before your Honors, that this ground of appeal is squarely covered by Hon'ble Supreme Court in the case of ICDS vs CIT (2013) (350 ITR 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 hel....
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....ble to establish that the product development expenditure is revenue expenditure and the AEs will not get benefit and the AO has not examined other relevant provisions of the law e.g. TDS provisions etc. . He further submitted that the similar issue has been decided by the Co- ordinate bench of the Tribunal in assessee's own case for the AY 2014-15 at para No. 8.4 . 9. After considering the rival submission and perusing the entire materials available on record and facts narrated above, we noticed that the ground No.2 is a similar issue, which has been decided by the coordinate bench 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:- "8.0 The next issue relates to the disallowance of Product development expenses of Rs. 4,36,88,418/-. The assessee submitted before the AO that it has incurred these expenses with the intention of expanding the existing line of business. 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....
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....t 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. 9.1 Since the issue involved in the impugned assessment year is akin to the order cited supra in the assessee's own case, therefore, respectfully following the above judgment, we give direction to the AO to decide the issue afresh in above terms as per law. Accordingly, this ground is allowed for statistical purposes. 10. In respect of ground No.3 also similar issue has been decided by the coordinate bench 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.....