Income Tax Appellate Tribunal - Bangalore
Fmc India Private Limited, Mumbai vs National Faceless Assessment Centre, ... on 14 March, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"A'' BENCH: BANGALORE
BEFORE Shri N.V VASUDEVAN, VICE PRESIDENT
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
IT(TP)A No.917/Bang/2022
Assessment Year : 2018-19
M/s FMC India Pvt. Ltd., The National Faceless
TCG Financial Centre, 2nd Floor, Assessment Center,
C-53, Bandra Kurla Complex, Delhi.
Bandra (E), Vs.
Mumbai.
PAN NO : AAACF 4579 N
APPELLANT RESPONDENT
Appellant by : Shri Chavalli Narayanan, C.A
Respondent by : Dr. Shankar Prasad K, Addl. CIT (D.R)
Date of Hearing : 07.03.2023
Date of Pronouncement : 14.03.2023
ORDER
PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the final assessment order passed by the AO vide order dated 29/07/2022 , DIN & Order No. ITBA/AST/S/143(3)/2022-23/1044322574(1) with the following grounds of appeal :-
"1. The order of the learned AO is based on incorrect interpretation of law and therefore, is bad in law, and hence liable to be quashed.
2. Disallowance of product development expenses FINR 3,11,88,1081
2.1. The learned AD erred, in law and on facts, in disallowing IT(TP)A No.917/Bang/2022 Page 2 of 20 expenditure amounting to INR 3,11,88,108 debited to the Statement of Profit and Loss as product development expenditure holding the same to be capital expenditure.
2.2. 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 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 ought to have appreciated that if the expenditure leads to IT(TP)A No.917/Bang/2022 Page 3 of 20 the acquisition or creation of a capital asset then depreciation should be allowed for the same as the expenditure has been incurred for the purpose of business. The learned AG ought to have appreciated that depreciation is a mandatory allowance in terms of Explanation 5 to section 32(1) of the Act.
4. Incorrect computation of brought forward losses [INR 2,08,92,349] 4.1 The learned AO/ DRP erred, in law and on facts, in considering the business loss and unabsorbed losses as INR 96,26,53,346 instead of INR 158,32,42,033. The same is consequential to earlier years assessment proceedings.
The Appellant submits that each of the above grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.
2. The brief facts of the case are that the assessee filed return of income on 30/11/2018 declaring a gross total income at Nil after setting off of its profit of Rs.14,21,03,725/- by brought forward losses available to assessee. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. 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, IT(TP)A No.917/Bang/2022 Page 4 of 20 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:-
IT(TP)A No.917/Bang/2022 Page 5 of 20 IT(TP)A No.917/Bang/2022 Page 6 of 20
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, the assessee selected nine companies as comparables for manufacturing of agro chemical segment out of which, only one company Dhanuka Chemicals was accepted. The ld.TPO further observed from the TP study for marketing support services and business support services segment that 11 companies selected by the assessee as comparable but the ld.TPO rejected all the 11 companies. The ld.TPO started fresh search after applying certain filters for MSS segments. 13 companies were selected as comparables, median was calculated at 19.94% and in the case of manufacturing of Agrochemicals segment, 11 companies were selected and median was calculated at 13.03%. A show cause notice was issued to the assessee and assessee filed objections.
IT(TP)A No.917/Bang/2022 Page 7 of 20 The ld.TPO further considered the submissions. The 11 companies were selected for manufacturing segment and median was calculated at 13.03% and in respect of marketing support services, 13 companies were retained as final comparables and median was calculated at 19.94%. Accordingly following adjustments were calculated by the TPO after applying TNMM for manufacturing segment, which is as under:-
IT(TP)A No.917/Bang/2022 Page 8 of 20 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 IT(TP)A No.917/Bang/2022 Page 9 of 20 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 enduring benefits to the assessee company.
Hence, the same is capital in nature. Further on perusal of the details submitted, expenses were incurred for registration studies of carbosulfan, registration studies of various diseases of plants, clomazone new registration studies etc. These expenses leads to same products, which will be commercially utilized. The AO also observed that the similar issue was decided by the ld.DRP in the previous year and observed as under :-
"6.4 Further, with No prejudice to above but Hon'ble DRP, Bengaluru in its direction dated 5.2.2021 rejected similar claims of assessee. Hon'ble DRP clearly directed that such claims are capital in nature as they help in generating Intangible Assets in the form of Patent and IPR. Direction of Hon'ble DRP is reproduced below:
IT(TP)A No.917/Bang/2022 Page 10 of 20 2.9.1 Having considered the submissions, we are in agreement with the AO that these expenses are capital in nature as they are incurred In developing and obtaining g intangible 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 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 lease. Further as per Accounting IT(TP)A No.917/Bang/2022 Page 11 of 20 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 rejected similar claims of assessee. Relevant portion of the judgment is reproduced below for records:
lessor hasn't claimed any depreciation, if we allow these expenses as revenue expenditure, this amounts to the entire cost including interest expense being claimed by the assessee over a period of 4 to 5 years, as the terms of financial lease may be. That cannot be the intention of any law which makes both lessor and lessee claiming depreciation (or whatever other term) over the same asset. Therefore, only the interest expenditure will be allowed as revenue expenditure. The claim of depreciation can only oe considered if the lessor hasn't domed depreciation over these assets. We are unable to grant depreciation as the relevant information are not available on record."
3.5 After considering the entire facts available before the AO, the finance lease debited into profit and loss account was treated as capital in nature and added into the total income of the assessee.
IT(TP)A No.917/Bang/2022 Page 12 of 20 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 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:
IT(TP)A No.917/Bang/2022 Page 13 of 20 • 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 in nature.
1.3 Appellant's Contention The Appellant contended as follows before the Ld AO:
These expenses were incurred with the intention of expanding the existing line of business of FMC India.
Such development expenses did not result in an enduring benefit to the Appellant.
The product development expenditure was an integral part of profit- earning process and was not for acqthston of an asset or a right of permanent character.
The expenditure assisted the Appellant to continuously improve on its portfolio of
2.1 Brief facts The Appellant had taken vehicles on lease and had made annual lease rental payments These vehicles were not added to the block of assets and consequently no depreciation 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.
IT(TP)A No.917/Bang/2022 Page 14 of 20 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 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 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 INR 96,26,53,346 instead of INR 158,32,42,033. The same is consequential to earlier years assessment proceedings. Please refer Page 666 of the paper book outlining the details of Unabsorbed depreciation, scientific research expenditure and brought forward losses credit available to the Appellant as per the return of income filed for the subject AY."
IT(TP)A No.917/Bang/2022 Page 15 of 20
7. In addition to the written submission, he reiterated the submissions made before the lower authorities and submitted that in respect to ground No.2, it is regular expenditure which were incurred for obtaining approval from the CIB and it is ongoing process.
7.1 The 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 .
IT(TP)A No.917/Bang/2022 Page 16 of 20
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 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 viz., Carbosulfan, Clomazone etc. Since the expenses have been incurred for getting approval from Central Insecticides Board and also for commercial utilisation of pesticides, these expenses are not recurring in nature and further it would give enduring benefit to the assessee. Accordingly, he disallowed the above said claim of Rs.4,36,88,418/- . 8.2 The Ld DRP noticed that these expenses have been incurred for registration of patent in the name of the AE or for assignment in favour of AE. Accordingly, the Ld DRP confirmed the disallowance. Since the intangible rights are to be owned 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 IT(TP)A No.917/Bang/2022 Page 17 of 20 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 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.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 confirmed the disallowance. It also held that the assessee cannot be granted depreciation as the relevant information are not available on record.
IT(TP)A No.917/Bang/2022 Page 18 of 20 9.2 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).
10.1 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 in terms with the above judgment. Accordingly, this ground is allowed for statistical purposes.
11. In respect of ground No.4, the assessee raised the issue before us that the lower authorizes have wrongly computed the brought forward losses of Rs.2,08,92,349/-. On going through the DRP order, the ld.DRP has given direction as under:-
"2.51.1 Having considered the submission, we direct the Assessing Officer to verify the records and allow the setting off of brought forward losses, if available for set off, in accordance with the provisions of the Act."
11.1 Since the ld.DRP has given direction to the AO as above, we are in agreement with the direction of the DRP, therefore, the AO is directed to verify the claim of the assessee and allow the set off of brought forward losses if available for set off as per provisions of the Act, therefore, this ground is allowed for statistical purposes.
12. Ground No.1 is general in nature, hence does not require any adjudication.
IT(TP)A No.917/Bang/2022 Page 19 of 20
13. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the court on 14th March, 2023.
Sd/- Sd/-
(N.V Vasudevan) (Laxmi Prasad Sahu)
Vice President Accountant Member
Bangalore,
Dated 14th March, 2023
Vms
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore.
6. Guard file
By order
Asst. Registrar, ITAT, Bangalore