Income Tax Appellate Tribunal - Chennai
Simpson & Company Ltd., Chennai vs Department Of Income Tax on 16 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER]
I.T.A.No.11/Mds/2011
Assessment year : 2002-03
The ACIT vs M/s Simpson & Company Ltd
Large Taxpayer Unit 861/862, Anna Salai
Chennai Chennai 600 002
[PAN AAACS4909F]
(Appellant) (Respondent)
Appellant by : Shri Vikramaditya, Jt. CIT
Respondent by : Shri Vikram Vijayaraghavan,
Advocate
Date of Hearing : 16-07-2012
Date of Pronouncement : 17-07-2012
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the Revenue against the order of the CIT(A), Large Taxpayer Unit, Chennai, dated 30.09.2010, by raising the following grounds:
"1. The order of the learned CIT(A) is contrary to law and facts of the case.
2.1. The learned CIT(A) erred in allowing the claim of the assessee and . holding that the reassessment proceedings were not valid.
2.2. The learned CIT(A) ought to have seen that as per explanation 1 to section 147 , production before the Assessing Officer of account books or other evidence' from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure.
:- 2 -: I.T.A.No. 11/112.3 Having regard to the Hon'ble Delhi High Court judgment in the case of Consolidated Photo And Finvest Ltd.vs ACIT (281 ITR 394), the decisions the Hon'ble Supreme Court in the cases of the CIT(A) ought to have dismissed the appeal.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored."
2. In all the above grounds of appeal, the Revenue has challenged the order of the CIT(A) holding the re-assessment proceedings as invalid.
3. The brief facts of the case are that the assessee is engaged in the business of manufacture of Diesel Engines. For assessment year 2002-03, the assessee filed return of income on 30.10.2002 at an income of ` 35,29,22,361/- which was revised on 20.3.2003 at an income of ` 35,18,34,020/-. The assessment u/s 143(3) was completed on 31.1.2005. subsequently, notice u/s 148 was issued on 20.3.2009 and in the re-assessment completed u/s 143(3) r.w.s 147 dated 11.12.2009, the assessment was made at an income of ` 35,94,45,355/-. In the re-assessment, the Assessing Officer disallowed the expenditure towards technical assistance fee as capital in nature.
4. Aggrieved by the said order of the Assessing Officer, the assessee filed appeal before the CIT(A) and challenged the re-opening of assessment u/s 147 of the Act.
:- 3 -: I.T.A.No. 11/115. The CIT(A) has noted the reasons for re-opening of assessment as under:
"It is noticed from the expenditure incurred for Research and Development that the assessee company has paid an amount of Rs.66,95,385/- for the purpose of technical assistance fees for the development of SJ Series Engines and the above expenditure has been claimed as a revenue expenditure as the above expenditure falls under the ambit of technical know-how paid to AVL List GMBH.
But it is noticed from the agreement entered by the assessee with AVL List GMBH during the reassessment proceedings for the AY 2001-02 that the cooled and naturally aspirated 3 cylinder diesel tractor engine 91. 4mm dia x 127 mm stroke (2.50 l). Further the AVL was requested to perform corresponding design calculation and development work aimed at 4 engine versions as per customer request. It is also essential to note that, as per Article 5 of the Agreement, it is clear that the above technical know-how given by the AVL should not be shared with the other third part except to AVL's sub- suppliers.
From the above facts. it is clear that the above technical assistance fees has been paid for the purpose of development of proto type diesel engine as per the request of the assessee company. Subsequent in the development of proto type engine, drawings, designs have been supplied to the assessee company for the mass scale production of diesel engines in India with the supervision and consultancy of AVL List GMPH. Hence, it is a capital expenditure.
Therefore, it is clear that the assessee has not produced the material facts fully and truly before the tax authorities.
Hence, I have the reason to believe that the income has escaped the assessment by way of excess claim of deduction."
6. The CIT(A) has further recorded the submissions of the assessee before him, as under:
:- 4 -: I.T.A.No. 11/11"For the above Assessment year the appellant has claimed a sum of Rs.2,06,54,543/-as product Development expenses which included a sum of Rs. 69,95,385/ - as technical assistance fee with M/s.AVL List GMBH Austria for manufacture of SJ Series Engine. During the course of scrutiny assessment a notice u/s 143(2) was issued on 09-09-2003 requesting to furnish the details with respect to product development expenses and a detailed NOTE with regard to the claim of this expenditure as Revenue. The Appellant vide letter dated 28-09-2004 & 09-12-2004 furnished the details as required by the Assessing officer and the Assessing officer after considering the reply completed the assessment u/s. 143(3) dated 31.01.2005 without making any disallowance.
7. Now the Assessing officer has reopened the assessment by issue of notice u/ s.148 on 12-06-2009 to disallow the technical assistance fee paid to AVL List GMBH as capital in nature. All the facts were available with the Assessing officer at the time of completing the scrutiny assessment. Therefore reopening of assessment on the same set of facts which were available on record at the time of original assessment is only a mere change of opinion and also barred by limitation. Under proviso to sec.147 an assessment completed u/s.143 (3) cannot be reopened beyond 4 years' unless there is failure on the part of The assessee to disclose fully and truly all the material facts. In the present case all the materials were disclosed at the time of original assessment hence reopening of assessment is bad in law."
8. The CIT(A), after considering the submissions of the assessee, has held as under:
"4.2. I have carefully considered the facts of the case and the contentions the Id AR of the appellant. The AO while completing the assessment u/s 143 had asked vide a detailed questionnaire dated-17.09.2004 regarding the product development expenditure which was duly furnished by the appellant in his replies on different dates. Thus, the AO has passed the order after considering all the relevant facts on the subject matter. Therefore, reopening of assessment on the same set of facts which were available on record at the time of original assessment is only a mere change of opinion. I also find that similar issue was involved for the earlier A.Y. 2001-2002 in ITA no. 39/08 dated 8.03.2010 which was decided in favour of the appellant by holding under::- 5 -: I.T.A.No. 11/11
"4.3 I have carefully considered the rival submissions and the material on record. At the time of regular assessment, the assessee has furnished fully particulars about the claim for deduction of technical service fee of Rs.1,82,75,250/- paid to AVL List GMBH, Austria. The AO had sought clarification on this issue vide his letter dated 09.02.2004 which was duly explained by the appellant by giving the break up of expenditure including technical assistance fee paid to AVL List GMBH, Austria. The AO has sought clarification and after considering details and explanation allowed the Claim of the assessee. This being so, it cannot be said that there was any failure on the part of the assessee to furnish full and complete particulars on the basis of which the assessment order passed. There is also no mention in the reopened assessment as to what was not furnished by the assessee which has resulted in reopening. In the circumstances the reopening of the assessment to treat technical fee originally allowed as revenue expenditure as capital expenditure is merely a change of opinion of the A. 0., held Madras High Court in the case of CIT V. Cholamandalam Investment and Finance Co. Ltd 305 ITR 310, the AO cannot reopen the assessment beyond four years from the end of the assessment year if the assessee had filed all the particulars necessary for making assessment. The other decision cited by the assessee also supports this view. The Hon'ble Supreme Court in a decision in the case of CIT, Delhi v. M/s. Kelvinator of India Limited (2010-TIOL-06-SC-IT-LB) has held that the AO can reopen the assessment only if there is "tangible material" to come to the conclusion that there is escapement of income and not on change of opinion. Also the AO has no power to review and has the power to only re-assess. In view of the above authoritative precedents, I am of the considered opinion that the reassessment proceedings were not valid. Accordingly, the ground of appeal is allowed. The appellant succeeds on this ground.
4.3 I find no reasons to deviate from the finding given by me in the earlier year in the appellant's own case, which has since been confirmed by the Hon'ble ITAT in I.T.A.No.857/2010 dated 19.8.2010. Accordingly, this ground of appeal is allowed."
9. The DR vehemently argued and supported the action of the Assessing Officer in re-opening the assessment.
:- 6 -: I.T.A.No. 11/1110. On the other hand, the A.R of the assessee submitted that on similar ground, re-opening of assessment was made in assessment year 2001-02. The CIT(A), in assessment year 2001-02, has held the reopening of the assessment as invalid. The Revenue appealed against the said order of the CIT(A) before the Tribunal and the Tribunal, vide order dated 19.8.2010 in I.T.A.No. 857/Mds/2010 confirmed the order of the CIT(A). It was the submission of the A.R of the assessee that payment of technical fee was made to the very same party for the very same services rendered to the assessee as was in assessment year 2001-02. He submitted that there is no change of fact in the year under appeal. Therefore, following the order of the Tribunal in assessment year 2001-02, the appeal of the Revenue deserves to be dismissed.
11. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The undisputed facts of the present appeal are that the Assessing Officer made the assessment u/s 143(3) on 31.1.2005 and thereafter issued notice u/s 148 on 20.3.2009 on the ground that the assessee has incurred expenditure for Research & Development of ` 66,95,385/- for the purpose of technical assistance fees for the development of SJ Series Engines and that the expenditure has been claimed as revenue expenditure as it falls under the ambit of technical know-how paid of :- 7 -: I.T.A.No. 11/11 AVL List GMBH. The Assessing Officer observed that it is noticed from the agreement entered into by the assessee with AVL List GMBH during the assessment proceedings for the assessment year 2001-02 that the project was aimed at improvement and modernization of existing and water cooled and naturally aspirated 3 cylinder diesel tractor engine. Further, AVL was requested to perform corresponding design calculation and development work aimed at 4 engine versions as per customer request. He also noted that Article 5 of the Agreement makes it clear that the above technical know-how given by AVL should not be shared with the other third party except with AVL's sub-suppliers. From this, he inferred that the technical assistance fee paid for development of prototype diesel engine as per the request of the assessee-company and subsequent to the development of prototype engine, drawings, designs have been supplied to the assessee-company for mass scale production of diesel engines in India with the supervision and consultancy of AVL List GMPH. Therefore, the expenditure incurred was capital expenditure. Since the assessee had not produced the materials fully and truly to the tax authorities, the Assessing Officer had reason to believe that there was escapement of income by way of excess claim of deduction.
:- 8 -: I.T.A.No. 11/1112. On appeal, the CIT(A) has held the re-assessment proceedings to be invalid by following the order of the Tribunal in assessee's own case for assessment year 2001-02.
13. We find from the reasons recorded by the Assessing Officer as quoted by the CIT(A) in his order that similar issue was considered by the Assessing Officer in re-assessment proceedings for assessment year 2001-02. In assessment year 2001-02, the CIT(A) held the re-
assessment proceedings to be invalid which was confirmed in appeal by the Tribunal. We also observe that the Tribunal in assessment year 2001-02, has held as under:
"3. Short facts apropos are that the assessee had filed original return for the impugned assessment year declaring income of Rs. 35,64,40,434/- which was later revised through a revised return to Rs. 35,64,17,704/-. Assessment was completed u/s 143(3) of the Act on 25.3.2004. Thereafter, notice was issued on 28.3.2008 u/s 148 of the Act for reopening the assessment and the reason given was as under:
"It is found that the assessee has made a claim of Rs.2,62,30,965/- as expenditure on "product development expenses". Out of these expenses a sum of Rs.1,82,75,250/- has been paid by this assessee to M/s.AVL towards "Technical assistance fee" for the development of new SJ Series Engine in research development department. As per the agreement with AVL vide article 4 of this agreement it is found that the assessee shall in due course shall have worldwide right to use the end results of the projects entered with M/s. AVL utilizing which it shall produce and sell the new engines. Thus it is found that the assessee has made the above expenditure which is capital in nature and therefore cannot be allowed as revenue expenditure. Thus, the assessee has not disclosed the facts fully and truly before the assessing officer. Hence, the income has escaped the assessment to the extent of Rs.1,82,75,250/- for the-assessment year 2001-02":- 9 -: I.T.A.No. 11/11
4. Though assessee objected to the reopening, Assessing Officer proceeded with the reassessment and completed such reassessment on 11.12.2008. Assessee assailed reopening before ld. CIT(A) in its appeal. Submission of the assessee was that reopening was beyond four years after the end of the relevant Assessment Year and invalid since, it had furnished all particulars before the Assessing Officer during original assessment proceedings. It was pointed out by the assessee that notes on account to its balance sheet as on 31.3.2001 specifically mentioned R & D expenditure of Rs. 4,02,65,172/- as Revenue in nature and Rs. 8,33,520/- as capital in nature. Further, according to the assessee, Assessing Officer had, during original assessment proceedings, vide his letter dated 9.2.2004 required various clarification from assessee in relation to the assessment, which, inter alia, included details in respect of product development expenses being part of its R & D claim. Specific reason was also sought by the Assessing Officer, why such claim should be allowed as Revenue expenditure. According to the assessee, detailed reply was given by it to Assessing Officer on 17.2.2004 and break up also given for total expenditure of Rs. 4,02,65,172/-. This break up included technical assistance fees for development of new S.J. Series Engine as per agreement with one M/s AVL GMBH, Austria. Therefore, as per the assessee, clarifications were given and the Assessing Officer having satisfied himself on the reply given by assessee completed the assessment. Hence, it was argued that reopening was purely on a change of opinion. As per the assessee, there was no new information available with Assessing Officer nor was any information omitted by the assessee to be given to the Assessing Officer. Again, as per assessee, its R & D department was developing basic engineering details for a new engine which was forwarded to Austria for comments of AVL and based on such comments, improvements suggested were carried out. Thereafter, R & D department developed prototype engine and carried out testing again through AVL, Austria. Crux of its submission was that all such details were submitted to the Assessing Officer and therefore, reopening was merely on a change of opinion. Reliance was placed on the decision of the Hon'ble Apex Court in the case of CIT Vs. Kelvinator of India Ltd 320 ITR 561 and CIT Vs. Cholamandalam Investments and Finance Company Ltd of :- 10 -: I.T.A.No. 11/11 Hon'ble Jurisdictional High Court 309 ITR 310. Ld. CIT(A), appreciating the contentions of the assessee held that there was no failure on the part of the assessee to furnish full and complete particulars during the course of original assessment proceedings and hence reopening done was invalid.
5. Now before us, the ld. D.R. strongly supported the order of the Assessing Officer.
6. Per contra, the ld. A.R. submitted that the ld. CIT(A) had rightly relied on the decision of the Hon'ble Apex Court in the case of Kelvinator of India Ltd [supra] and held the reassessment proceedings to be invalid.
7. We have heard the rival submissions and perused the orders. During the course of original assessment proceedings, Assessing Officer had written a letter on 9.2.2004 to the assessee requiring various details. Item 3 of the said letter ran as under:
"Details with respect to product development expenses and a detailed NOTE with regard to the claim of this expenditure as Revenue".
Assessee, in reply to this letter, vide letter dated 17.8.2004 gave such details and such details furnished by assessee read as under:
"As per section 35 (1) of the income tax act, any expenditure laid out or expanded all scientific research related to business is allowed in full in the previous year in which it was incurred. For details of expenditure, please refer Annexure - 3.:- 11 -: I.T.A.No. 11/11
Simpson & Co. Ltd manufactures Diesel Engines which are offered as original equipment for vehicles, tractors, industrial equipments and gensets.
These products have to meet emission regulations which are being enacted by Govt. of India To meet this requirement and also in bringing out new products with lower fuel consumption, oil consumption and improved life, the R&D Dept. is engaged in developing newer models of engines and upgrading the existing products. For achieving this, we carryout modifications on the existing products and test them at our end. We send engines after establishing satisfactory performance at our end to ARAI, (Automobile Research Association of India) to measure the emission constituents. We carry out at ARAI development test to assess the present status of the product, type approval test to meet legislative requirements and conformity of production test ARAI is an approved certifying lab.
To meet the competition and marked requirements, we develop newer products. For this activity, we avail external assistance during design and testing.
Based on the above activities, we now have products meeting Bharat stage II(Euro IT) emission norms for vehicular engines. In the same way, our" tractor engines meet the current Indian regulation Term II. For export of tractors, we have emissionised product meeting US tier II norms. In the genset segment, we have products which meet current CPCB norms. The engines offered for industrial application meets the norms applicable for this segment.
These activities are carried out in a separate setup in our company. We are equipped with necessary testing and design facilities for carrying out this activity. For design, we have Pro E software to create 3D models of our engines and components. 20 drawings are made for manufacturing. In testing, we have facilities to check combustion parameters for optimizing the performance to meet the above said objectives."
Annexure to the above reply, enclosed by assessee gave break- up of the product development expenses in a very detailed manner. Assessee had also given present status of its R & D programme with regard to the development of the Engine and also brought to the attention of the Assessing Officer recognition given by Ministry of Science and Technology on 3.6.2003 for its research & development unit. In the balance sheet attached to the :- 12 -: I.T.A.No. 11/11 returned income, assessee had clearly given break up of the R & D expenses. Thus, without doubt, assessee was asked the details of R & D expenses and it had furnished complete details including the break up. Original assessment was completed only after considering such replies and queries. If that be so, reasons mentioned by Assessing Officer for reopening, reproduced at para three above, can only be considered as a change of opinion. Assessing Officer wants to treat the expenses which he earlier treated as Revenue in nature, after considering the replies given by assessee to be capital in nature without having any fresh material supporting such change of opinion. Hon'ble Apex Court in the case of Kelvinator of India Ltd [supra] had held that even after substitution of section 147 by Taxation Laws [Amendment] Act, 1987 w.e.f 1.4.1989 'reason to believe' was still required and not a 'mere change of opinion'. Further, here, undisputedly, the reopening proceedings were initiated after four years from the end of the relevant Assessment Year and therefore, proviso to section 147 clearly applied. We are of the opinion that there was no failure on the part of the assessee to furnish all particulars for its assessment at the time of original assessment and the reassessment proceedings were initiated without any rhyme or reason. Ld. CIT(A) had, therefore, rightly held such reassessment proceedings to be invalid. We decline to interfere with the order of the ld. CIT(A)."
14. In the present appeal also, we find that the Assessing Officer, during the course of original assessment proceedings, has written a letter on 17.9.2004 to the assessee requiring various details and item 3 of the said letter reads as follows:
"3. Details with respect to product development expenses and a detailed NOTE with regard to the claim of this expenditure as revenue."
15. We also observe that the assessee, in reply to this letter, had written a letter on 28.9.2004 giving the details required by the Assessing Officer and the reply reads as under:
:- 13 -: I.T.A.No. 11/11"As per section 35 (1) of the income tax act, any expenditure laid out or expanded all scientific research related to business is allowed in full in the previous year in which it was incurred. For details of expenditure, please refer Annexure - 3.
Simpson & Co. Ltd manufactures Diesel Engines which are offered as original equipment for vehicles, tractors, industrial equipments and gensets.
These products have to meet emission regulations which are being enacted by Govt. of India To meet this requirement and also in bringing out new products with lower fuel consumption, oil consumption and improved life, the R&D Dept. is engaged in developing newer models of engines and upgrading the existing products.
For achieving this, we carryout modifications on the existing products and test them at our end. We send engines after establishing satisfactory performance at our end to ARAI, (Automobile Research Association of India) to measure the emission constituents. We carry out at ARAI development test to assess the present status of the product, type approval test to meet legislative requirements and conformity of production test ARAI is an approved certifying lab.
To meet the competition and marked requirements, we develop newer products. For this activity, we avail external assistance during design and testing.
Based on the above activities, we now have products meeting Bharat stage II(Euro IT) emission norms for vehicular engines. In the same way, our" tractor engines meet the current Indian regulation Term II. For export of tractors, we have emissionised product meeting US tier II norms. In the genset segment, we have products which meet current CPCB norms. The engines offered for industrial application meets the norms applicable for this segment.
These activities are carried out in a separate setup in our company. We are equipped with necessary testing and design facilities for carrying out this activity. For design, we have Pro E software to create 3D models of our engines and components. 20 drawings are made for manufacturing. In testing, we have facilities to check combustion parameters for optimizing the performance to meet the above said objectives.":- 14 -: I.T.A.No. 11/11
16. Further, we also observe that the break-up of Product Development Expenses of ` 2,06,54,543/- was also given with the letter dated 28.9.2004 by the assessee which is as follows:
"(i) Amount paid to Automobile Research ` 32,59,939 Association of India (ARAI is the certifying agency to confirm that our engine meet the Legislative requirement. Hence, we have to offer engine Development, Type Approval and conformity of production to them) - Testing expenses
(ii) Value of components and spares ` 2,39,274 purchased and also sub-contracting relating to development of material and components used by Engg. & Development Department to be used in diesel Engines
(iii) Value of components and spares ` 2,38,450 consumed by Engg. & Development Department for conducting various tests on Engines and components (Mainly Nozzle holder & FI pump from MICO for EURO-II)
(iv) SJ 3-Prototype Honing expenses - Nagal ` 10,00,000 Spl Pvt. Ltd
(v) AVL Pattern and Fixures - Import of ` 84,66,319 reference Model
(vi) Value of Experimental Engines used by ` 4,55,176 Engg. & Development Department
(vii) Technical assistance fee for the ` 69,95,385 development of new SJ series engine in Research & Development Department as per Agreement with AVL Total ` 2,06,54,543 2,06,54,543"
4,543"
:- 15 -: I.T.A.No. 11/1117. Thus, it is seen that the assessee was asked to furnish the details of Research & Development expenses and the complete details including the break-up were provided by the assessee in the original assessment which was completed after considering the details and the reply of the assessee. Thus, it is seen that the facts and issue involved in the present year of appeal are identical to the facts and issue involved in assessment year 2001-02 wherein the Tribunal has confirmed the order of the CIT(A) holding the re-assessment proceedings as invalid. Respectfully following the same, in the present year of appeal also, we hold the re-assessment proceedings to be invalid and dismiss the grounds of appeal of the Revenue.
18. In the result, the appeal of the Revenue is dismissed.
Order pronounced on Tuesday, the 17th of July, 2012, at Chennai.
Sd/- Sd/-
(CHALLA NAGENDRA PRASAD) (N.S.SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 17th July, 2012
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR