TaxTMI 
TaxTMI 
2023 (3) TMI 1522
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.....2. The learned AO/ DRP failed to appreciate that the product development 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 t....
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..... FMC India is engaged in manufacturing and trading of Agro Chemicals and lethium products. In response to the notice, the assessee submitted 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 A....
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....rs Formula Amount (in Rs. ) Taxpayers Operating Revenue OR 209,43,58,581 Taxpayers Operating Cost OC 191,92,77,633 Taxpayers Operating Profit OP 17,50,80,948 Taxpayers PLI PLI=OP/OR 8.36% 35th Percentile Margin of comparable set 9.12% Adjustment Required (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 Require....
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....assets in the form of patent and IPR. 3esides these expenses are incurred for the registration of patent in the name of the AE, or for assignment in favour of the AE, as seen In the Master Agreement. Therefore, the AC is justified in disallowing the same. As these intangible rights are to be owned by the AE the assessee would not be entitled for any depreciation. Accordingly this objection is ejected. 3.2 In view of the above, the 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....
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....to the total income of the assessee. After considering the entire facts, the AO assessed the income at Rs. 15,57,66,143/- and completed the draft assessment order. 4. Aggrieved from the above draft assessment order, the assessee filed objections before the ld. DRP. The ld.DRP considered the submissions and gave marginal relief on Transfer Pricing issue as suggested by the ld.TPO u/s 92CA of the Act and it was restricted to Rs. 1,32,39,876/-. In case of addition 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....
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....was claimed on the same. The interest on such lease payments was disallowed in the tax computation and only annual settlement was claimed as deduction. 2.2 AO's contentions The learned AO disallowed the expense on the ground that the vehicles were taken on lease for the substantial part of its economic life, which gave an enduring benefit to the Appellant. The learned AO contended that the principal payments towards finance lease were incurred for acquiring the capital asset and hence, were not allowable as revenue expenditure. 2.3 Appellant's contentions The Appellant contended as follows before the Ld AO: FMC India had taken vehicles on lease 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 ....
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.... product development expenditure was an integral part of profit-earning process and was not for acquisition of any capital asset. The ld.DRP has wrongly held that the expenditure incurred by the assessee are for the benefit of the AEs. Further in support of disallowance of finance lease, he relied on its own order for the assessment year 2014-15 in ITA NO. 3313/Bang/2018 order dated 25.02.2022. The ld.AR further submitted that in support of ground No.4 the lower authorities have wrongly computed brought forward losses. The details were furnished before the lower authorizes and in spite of that they did not consider the same. He referred to page No.666 of the paper book, which is placed on record. 8. The ld.DR relied on the order of the lower authorities and he further submitted that the assessee was unable 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 co....
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....ned by the AE, the Ld DRP held that the assessee would not be entitled for depreciation also. 8.3 We heard rival contentions on this issue. We notice that the expenses incurred by the assessee under this head consisted of Registration expenses, Field Trial expenses, Cost of samples issued and Testing fee & other charges. We notice that the AO has taken the view that these expenses are capital in nature. On the contrary, the Ld DRP has taken the view that the beneficiary of these expenses is the AE of the assessee. 8.4 Hence, it is necessary to find out as to whether the assessee has incurred all these expenses on its own account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the 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 detail....