Income Tax Appellate Tribunal - Bangalore
M/S Dhaanya Seeds Pvt. Ltd.,, Bangalore vs Department Of Income Tax on 26 July, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH " B "
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND
SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
I.T.A. No.1523/Bang/2012
(Assessment Year : 2005-06)
Dy. Commissioner of Income Tax, Vs. M/s. Dhaanya Seeds Pvt. Ltd.,
Circle 11(1), Bangalore. Plot No.3, KIADB, 4th Phase,
Bommasandra, Banghalore-560 099
PAN AABCD 7328L
Appellant Respondent.
C.O. No.55/Bang/2013
(In ITA No.1523/Bang/2012)
(Assessment Year 2005-06)
M/s. Dhaanya Seeds Pvt. Ltd., Vs. Dy. Commissioner of Income Tax,
Bangalore. Circle 11(1), Bangalore.
Appellant Respondent
Revenue By : Dr. P. V. Pradeep Kumar.
Assessee / C.O. By : Shri V. Sridhar.
Date of Hearing : 26.7.2013.
Date of Pronouncement : 27.09.2013.
O R D E R
Per Shri Jason P. Boaz, A.M. :
This appeal by revenue is directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dt.17.8.2012 for Asst. Year 2005-06. The assessee has also separately filed Cross Objections (C.O.) in respect of the aforesaid order of the learned CIT(Appeals) - I, Bangalore. Being inter connected, both the appeal and C.O. were heard together and are being disposed off by way of this consolidated order.
2. The facts of the case, in brief, are as under :
2ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
2.1 The assessee, a company engaged in development of seeds as well as in production of seeds filed its return of income for Assessment Year 2005-06 on 30.10.2005 declaring a loss of Rs.2,19,71,140. The return was processed u/s. 143(1) of the Income Tax Act, 1961 ('the Act' in short) and the case was subsequently taken up for scrutiny. The assessment was completed by an order u/s.143(3) of the Act dt.24.12.2007 wherein the loss was determined at Rs.1,08,82,186 by making the following disallowances :
(i) U/s.43B : Rs.6,205.
(ii) U/s.40(a)(ia) : Rs.43,93,515.
(iii) Shortage of raw material : Rs.11,70,705
(iv) Seed Development Cost : Rs.55,18,529.
2.2 Aggrieved with the order of assessment for Assessment Year 2005-06 dt.24.12.2007,the
assessee preferred an appeal before the learned CIT(Appeals) - I, Bangalore. The learned CIT(Appeals) disposed the assessee's appeal by order dt.17.8.2012 allowing the assessee partial relief.
3. Aggrieved by the order of the learned CIT(Appeals) -I, Bangalore dt.17.8.2012 for Assessment Year 2005-06,revenue is in appeal before us raising the following grounds :
" 1. The order of the learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The learned CIT (Appeals) has erred in holding that the reimbursements of Rs.4,78,499 are not liable for tax deduction at source, without appreciating the fact that sections 194C and 194J refer to any sums paid and that Circular No.715 dated 8.8.1995 answers this question in the affirmative at question number 30.
3. The learned CIT (Appeals) has erred in holding the disallowance of Rs.;11,70,705 as unreasonable without appreciating the fact that the company has not substantiated its claim of shortage with any supporting material.
4. The learned CIT (Appeals) has erred in restricting the capitalisatin of seed development cost to Rs.7,59,989 from Rs.55,18,529 holding that the balance was towards production of parent seeds without appreciating that the agreement entered by the company was a contract for development of seeds and therefore the entire expenditure was capital in nature.
3ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored.
6. The appellant craves leave to add, alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal."
4. The assessee has also filed Cross Objections raising the following grounds :
" 1. The learned CIT (Appeals) erred in confirming a sum of Rs.7,89,989 as capital expenditure out of Rs.55,18,529 being the reimbursement of expenses when no asset of enduring nature was acquired by the appellant.
2. Without prejudice to the above ground, the learned CIT (Appeals) erred in not allowing depreciation on a sum of Rs.7,59,989 after holding that the expenditure is of capital in nature.
3. For these and other grounds that maybe urged at the time of hearing the cross objection / appeal may be allowed and justice rendered."ITA No.1523/Bang/2012 - Revenue's appeal for Assessment Year 2005-06.
5. The grounds raised by revenue at S.Nos.1, 5 & 6 being general in nature, no adjudication is called for thereon.
6.0 Disallowance u/s.40(a)(ia) - Reimbursement of Expenses to C&F Agents - Rs.4,78,499.. 6.1.1 In the order of assessment, the Assessing Officer had made disallowances u/s.40(a)(ia) of the Act under various heads aggregating to Rs.43,93,515 for non-deduction of tax on such payments. However, what is before us in the present appeal is the issue of disallowance u/s.40(a)(ia) of the Act in respect of reimbursement of expenses amounting to Rs.4,78,499 made to C&F Agents.
6.1.2 On appeal, the learned CIT(Appeals) observed that these expenses were incurred by C&F Agents on behalf of the assessee; that the claims were made in their bills on actual basis and the amounts were shown separately and supported by necessary evidence. The learned CIT(Appeals) observing that since these payments were made on actual basis and did not contain any element of income, held that these payments were not liable for deduction of tax 4 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 u/s.195 of the Act and in that view of the matter, the action of the Assessing Officer in invoking the provisions of section 40(a)(ia)of the Act was held to be untenable and the disallowance was deleted.
6.2 The learned Departmental Representative contended that the assessee's submissions that the reimbursements are made through separate bills and since do not have any element of income, they do not come within the ambit of tax deducted at source (TDS) u/s.194Cota is not tenable. It is submitted by the learned D.R. that the scheme of TDS provisions apply to the gross sum paid to each C&F Agent, but not the sum paid bill-wise. In this regard, the learned D.R. relied on CBDT Circular No.715 dt.8.8.1995 wherein at Answer to Question No.30 it was clarified that reimbursements cannot be deducted out of the bill amount for the purposes of TDS. In view of this, the learned D.R. contended that TDS has to be made on the gross amount of the bill, if the payment is made on account of a contractual obligation/s.194C of the Act. It was submitted that it is in order to overcome the view of the CBDT as clearly brought out in Answer to Question No.30 of CBDT Circular No.715 dt.8.8.1995, it has become a practice to raise a separate bill in respect of reimbursement of expenses by the person raising bill for such expenses; which is not tenable in law. In this regard, the learned D.R. relied on the following judicial decisions to support the proposition that TDS is applicable on reimbursements even if a separate invoice is raised for the purpose and even if there is no "income" element in such reimbursements :
(i) Transmission Corporation of A.P. Ltd. (1999) 239 ITR 587.
(ii) CIT Vs. Elly Lilly & Co. India Ltd. (2009) 312 ITR 225.
(iii) Van Oord ACZ India (P) Ltd. 112 ITD 79 (2008).5 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
It was submitted that even though the cited cases pertained to section 195 of the Act, the ratio of the judgements applies to the facts of the case on hand. To sum up, the learned DR's arguments on this issue are as under :
(i) The scheme of TDS applies to gross payments, whether paid through one bill or several bills, as long as the payments are made to the same person during the year;
(ii) It is not open to the assessee to examine the taxability of a particular payment at the time of payment;
(iii) The taxability of the particular payment (i.e. whether it has got the character of income or not), is beyond the scope of 40(a)(ia) of the Act.
In view of the above arguments put forth, the learned D.R. prayed for reversal of the order of the learned CIT(Appeals) on this point and allowing revenue's appeal. 6.3.1 Per contra, the learned A.R. supported the order of the learned CIT(Appeals) in deleting the disallowance of Rs.4,78,499 made by the A.O. u/s.40(a)(ia) of the Act. The learned A.R. submitted that it is well settled by several judicial decisions that where the amount reimbursed does not contain any element of income, the question of making TDS thereon does not arise. In support of this proposition, the learned A.R. relied on the decision of the Hon'ble Apex Court in the case of GE India Technology Centre (P) Ltd V CIT (2010) 327 ITR 456 wherein it was held that -
" ..... The expression "Chargeable under the provisions of the Act" in section 195(1) shows that the remittance has got to be a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted."6 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
The learned A.R. also submitted that the decision of the ITAT, Delhi, relied on by the learned D.R. has been over ruled by the Hon'ble Delhi High Court in Van Oord ACZ India Ltd.(2010) 323 ITR 130.
6.3.2 The learned A.R. further submitted that the Answer to Question No.30 of the CBDT Circular No.715 dt.8.8.1995 is applicable only in cases where the gross amount of the bill includes reimbursement of expenses and the same cannot be separately identified in the bill and does not apply in respect of reimbursement of actual expenses. It is submitted that if the bill in question is only in respect of reimbursement of actual expenses, there is no question of deduction of tax at source from such payments. In this regard the learned A.R. relied on the decision of the Delhi Tribunal in the case of ITO V Dr. Willmar Schwabe India P. Ltd. (2005) 95 TTJ 53 wherein it was held that when the bill is for reimbursement of actual expenses there is no need for making TDS on such payment. The learned A.R. drew our attention to the Tribunal's conclusion at para 12 of the said order which is extracted hereunder :
" After considering the rival submissions and perusing the relevant material on record, we find no infirmity in the impugned order of learned CIT (Appeals) on this issue. It is observed that as agreed by and between the assessee company and M/s. Indochem Techno Consultants Ltd., a vehicle was to be provided by the assessee company to the said consultant for attending to its work and thus, the assessee company was to bear the vehicle expenses actually incurred by the said party. Bills for such expenses incurred by the said consultant were separately raised by them on the assessee company in addition to bills for fees payable on account of technical services and since the amount of bills so raised was towards the actual expenses incurred by them, there was no element of any profit involved in the said bills. It was thus a clear case of reimbursement of actual expenses incurred by the assessee and the same, therefore, was not of the nature of payment covered by s. 194J requiring the assessee to deduct tax at source there from. The CBDT circular NO.715, dt.8thAug., 1995, relied upon by the Assessing Officer in support of his case on this issue was applicable only in the cases where bills are raised for the gross amount inclusive of professional fees as well as reimbursement of actual expenses and the same, therefore, was not applicable to the facts of the present case, where bills were raised separately by the consultants for reimbursement of actual expenses 7 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 incurred by them. As such, considering all the facts of the case, we are of the view that the provisions of section 194J were not applicable to the reimbursement of actual expenses and the assessee company was not liable to deduct tax at source from such reimbursement. In that view of the matter, we uphold the impugned order of learned CIT (Appeals) on this issue and dismiss the relevant grounds of the Revenue's appeal."
The learned A.R. ;pleaded that in view of the above submissions, the order of the learned CIT(Appeals) ought to be upheld and revenue's appeal on this issue dismissed. 6.4.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited. In terms of sub-section (2) of Section 4 of the Act, which is the charging section, in respect of income chargeable under sub-section (1), income tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of this Act. From this, it is clear that tax is to be deducted only where the element of income is part of the payment. Since reimbursement of expenses do not constitute trading receipts or have any element of income therein, TDS is not liable to be made from reimbursements. Though section 194C of the Act mentions TDS being made on "any sum" paid to a resident in pursuance of a contract, the term "any sum" cannot be stretched to mean even expenses incurred on behalf of the client and later recovered from them. When a C& F agent incurs expenses like custom duty, port dues, and other sundry charges, he is merely acting as a front man of his client and on his behalf. These expenses do not normally have any nexus with the commission he is supposed to earn for his work. Though the decision of the Hon'ble Apex Court in Transmission Corporation was rendered in relation to TDS to be made on payments to non-residents, the principle could be applied to section 194C of the Act as well. The Hon'ble Court held that any such payment must constitute a trading receipt of the recipient and must bear the character of income either wholly or partially and in either case it would call for 8 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 deduction of tax at source. It is, therefore, important to first establish that the receipt should bear the character of income for making it liable to TDS.
6.4.2 The reliance placed by revenue on CBDT Circular No.715 dt.8.8.1995 to hold these reimbursements liable to TDS is, in our view, misplaced. The Question No.30 in this Circular was whether TDS should be made on the gross amount of the bill including reimbursements or excluding reimbursements. The Answer thereto was that TDS is on any sum paid and hence reimbursements cannot be deducted out of the bill amount for TDS. This does not mean to lay down a proposition that any payment made to a C&F Agent should be subjected to TDS. The Circular does not and cannot dilute the proposition that TDS is liable only on the income element. If the payment includes both an income element and a reimbursement element, then TDS has to be on the total amount. This is the principle enunciated by the Hon'ble Apex Court in the case of Transmission Corporation of A.P. Ltd. (supra). If the payment is only for reimbursement of expenses, then TDS is not liable to be made on such payments. In this regard, we agree with the finding of the learned CIT(Appeals) at para 4.6 of his order which is extracted as under :
" 4.6 As regards the amount of Rs.4,78,499 towards reimbursement of actual expenses, the Assessing Officer relied on the Board's Circular No.715 dated 8.8.1995. I have considered the said circular and also the various decisions relied on by the appellant in this regard. There is no dispute about the nature of expenditure claimed by the appellant. It is towards the reimbursement of expenses incurred by the C&F agents on behalf of the appellant. As explained by the appellant, these expenses were incurred by the C&F agents on behalf of the appellant and claims were made in their bills on actual basis and the amounts were shown separately supported by necessary evidence. Therefore, these payments were made on actual basis and they do not contain any element of income. Hence, such a payment is not liable for deduction of tax under section 195 of the Act. Further the Board's circular is applicable only where there is no indication about the reimbursable amounts in the bills separately. In that case, the gross amount has to be considered for deduction of tax. In view of this factual and legal position, the amount of 9 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 Rs.4,78,499 is not liable for TDS. Hence, it cannot be disallowed under section 40(a)(ia). In view of the above findings, the disallowance of Rs.12,41,217 (Rs.87,807 and the amount of Rs.11,53,410) is sustained as against the amount of Rs.43,93,515 made by the Assessing Officer in the assessment order on various items discussed above."
6.4.3 In the case on hand, as pointed out by the learned CIT(Appeals), the expenses have been incurred by the C&F Agents on behalf of the assessee; the claims were made on actual basis and the amounts were separately shown with proper evidence. The fact that the reimbursement of expenses have been separately billed, in the case on hand, is not disputed. The C&F Agents are appointed to provide the service of carrying out sales for which they are paid service charges on which TDS has been made and not for the purpose of incurring expenses on behalf of the assessee. In this view of the matter, the reimbursement of expenses by C&F Agents cannot be held to be contract / service on which the provisions of section 194C of the Act would come into play and apply. In view of the factual position as laid out above and following the decision of the Hon'ble Delhi High Court in the case of Van Oord ACZ India (P) Ltd. (supra), we hold that there is no need to deduct TDS on reimbursement of expenses to C& F Agents which are separately billed and accordingly uphold the order of the learned CIT(Appeals). Consequently, we dismiss ground No.2 raised by revenue. 7.0 Disallowance due to shortage - Rs.11,70,705 7.1 In the ground at S.No.3, revenue contends that the learned CIT(Appeals)'s order is erroneous in holding the disallowance of Rs.11,70,705 as unreasonable, without appreciating the fact that the assessee had not substantiated its claim of shortage with any supporting material. In written submissions made before us, the learned D.R. has contended that the claim of shortages is uncalled for and the entire claim of shortages amounting to Rs.25,96,379 10 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 made is to be disallowed and alternatively, the part disallowance made by the A.O. to the extent of Rs.11,70,705 needs to be sustained. It is the contention of the learned D.R. that in the seed business, the seed production is generally given for contract farming in which the entire cost of seed production, processing and marketing is debited to the profit and loss account and correspondingly the sale proceeds of the processed and packed seeds are credited to the profit and loss account as 'turnover'. Therefore, there is no need for separately accounting for any loss / shortage. In support of this contention, the learned D.R. submitted a copy of the financial statements of Assessment Year 2008-09 of M/s. Namdhari Seeds, a leading seed company of Bangalore, which show that this entity has not claimed any expenditure on account of shortage therein. The learned D.R. prayed that in view of the above submissions, the Tribunal reverse the order of the learned CIT(Appeals) and direct that the entire expenditure of Rs.25,96,379 claimed on account of shortage be disallowed. Alternatively, the disallowance of Rs.11,70,705 made by the Assessing Officer on account of shortage be sustained.
7.2 Per contra, the learned A.R. supported the decision of the learned CIT(Appeals) on the issue of shortage. The learned A.R. submits that, in the business of seed processing normally 5% to 7% seeds get eliminated due to processing activity and therefore the assessee's claim of shortage of 3.64% was reasonable. The learned A.R. submitted that, as in the case of Namdhari Seeds cited by the learned D.R., in the case of the assessee also there is no separate debit to the profit and loss account in respect of shortage of raw materials. The learned A.R. submitted that the learned CIT(Appeals)'s order / finding on the issue of shortages was based on the assessee's own case for earlier and subsequent years and held the shortages claimed in the period under consideration to be reasonable. In view of this, the learned A.R. prayed that no 11 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 interference is called for in the order of the learned CIT(Appeals) and sought dismissal of this ground raised by revenue.
7.3.1 It is seen form the records that in the course of assessment proceedings, the Assessing Officer found that the assessee claimed an amount of Rs.25,96,379 towards shortage of raw materials incurred in the course of business which amounted to3.64% of the consumption of raw materials during the year under consideration. The Assessing Officer was of the view that the claim was excessive and observing that the assessee had not produced any evidence to substantiate its claim of shortages, the Assessing Officer held that only 2% of consumption of raw materials as shortage was allowable and the balance 1.64% amounting to Rs.11,70,705 was held to be excessive and disallowed.
7.3.2 In appeal, the learned CIT(Appeals) allowed the claim of the assessee and deleted the disallowance made by the Assessing Officer in view of the following observations :-
(i) that the assessee deals in the processing of seeds from the raw stage to packing stage and in the process of removing stones, dust, mud, etc. shortages are bound occur;
(ii) that the assessee is dealing in seeds of various categories and it is difficult to assume that the shortages is uniform for all manufacturers;
(iii) no comparable case has been brought on record to show that the shortage claim of the assessee is excessive; and
(iv) the shortages claimed in the earlier and subsequent years (i.e. A.Ys 2004-05 & 2006-07) were 9.75% and 4.68% and hence the claim of 3.64% in the period under consideration is not unreasonable.12 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
7.4.1 We have heard the rival contentions and perused and carefully considered the material on record. The fresh arguments put forth by the learned D.R. about contract farming and 'evidence' in the form of financial statements of another company is too general and vague to merit any serious consideration at this stage. Firstly, the Assessing Officer has not rendered any finding that the assessee is into contract farming and hence no shortages / wastages occur at all. Further, as observed by the learned CIT(Appeals), the assessee has claimed such shortages in the earlier years which have been allowed. It is trite to state that the accounting practices consistently followed by the assessee cannot be negated by the A.O. without good reason and a finding in this regard. We are, therefore, confining ourselves to the findings given by the A.O. in the order of assessment and that of the learned CIT (Appeals) in his order. 7.3.2 It is seen that the A.O. in the order of assessment has accepted that in this line of business it is normal that shortages occur. The only issue of dispute is whether the claim of the assessee of shortages at 3.64% of consumption of raw material is reasonable or excessive. The Assessing Officer was of the view that the claim of shortages was excessive and hence allowed the same to the extent of 2% of consumption of raw materials. In doing so, we find that, the Assessing Officer did not assign any reasons for making such an adhoc estimate. In the absence of any basis for the Assessing Officer to adopt shortages at 2% in the absence of any industry average, we find that, the learned CIT (Appeals) examined the shortages claimed by the assessee in the period 2004-05 to 2006-07. It is seen that the shortage of Assessment Year 2004-05 was 9.75% and that of Asst. Year 2006-07 was 4.68% which fluctuated and was in excess of the 3.64% shortage of the current year. In this factual view of the matter, we agree with the learned CIT (Appeals) that the shortages at 3.64% in the current year is less than that 13 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 of both the earlier and subsequent year and is therefore reasonable. In view of the above, we find no infirmity in the order of the learned CIT (Appeals) and uphold the same. Consequently, we dismiss Ground No.3 raised by revenue.
8. Seed Development Expenses disallowed - Rs.7,59,989.
8.1 In the ground raised at S.No.4, revenue contends that the learned CIT (Appeals) erred in restricting the disallowance of seed development expenses to Rs.7,59,989 as against Rs.55,18,529 disallowed by the Assessing Officer ; holding that the balance was towards production of parent seeds, and without appreciating that since the agreement entered into by the assessee was a contract for development of seeds the entire expenditure was capital in nature. In the C.O. filed, the Grounds No.1 to 3 raised by the assessee challenge the order of the learned CIT (Appeals) in both confirming the disallowances to the extent of Rs.7,59,989 and also alternatively in not allowing depreciation thereon.
8.2 In the course of assessment proceedings, the Assessing Officer observed that the assessee, who is in the business of developing and multiplying seeds, had entered into a contract for development of seeds with M/s. Metahelix Life Sciences Pvt. Ltd. (Metahelix) vide Agreement dt.15.11.2002 and supplementary Agreement dt.31.1.2003 by which that company provided the assessee with seed technology for manufacture and development of certain seeds and vegetables. Considering that the assessee is a seed manufacturing company which utilises various technologies for development of seeds, the Assessing Officer held that these expenses were capital in nature and disallowed the entire amount of Rs.55,18,529 claimed as seed development cost. Though the Assessing Officer held that depreciation is allowable thereon, it 14 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 appears from a perusal of the order of assessment that no depreciation was allowed while computing the assessee's total income.
8.3 On appeal, the learned CIT (Appeals) on examination of the matter, found that out of the total amount of Rs.55,18,529 only, an amount of Rs.7,59,989 spent towards development of seeds as R&D expenses which has to be considered as capital in nature. The balance of Rs.47,58,542 spent towards production of seeds was held be revenue in nature. In this manner, the learned CIT (Appeals) at para 6.3 and 6.4 of his order restricted the disallowance on account of capital expenditure to Rs.7,59,989 and allowed the balance amount of Rs.47,58,542 as revenue expenditure.
8.4 Before us in this appeal, revenue is in appeal against the order of the learned CIT (Appeals) in restricting the disallowance on account of seed development expenses to Rs.7,59,989. The assessee in its C.O. has challenged the order of the learned CIT (Appeals) in sustaining the aforesaid disallowance of Rs.7,59,989 and also that the learned CIT (Appeals) did not grant depreciation on the same.
8.5 The learned D.R. has filed a paper book elaborately discussing the business process of development of seed technology by the parent company M/s. Metahelix Life Sciences (P) Ltd. from which the assessee has purchased the parent seed in order to buttress the proposition of revenue that there is an enduring benefit for a number of years to the assessee and therefore the expenses ofRs.55,18,529 are capital in nature and ought to be disallowed. In written submissions, the learned D.R. submits as under :
" From the start of the breeding program to the end of the release of new variety / hybrid, it will usually take 4-8 years, sometimes even more time. The R&D leadingto development of new varieties / hybrids is a very expensive activity. The life cycle of a newly released high yielding variety / hybrid is around 6-8 years. That means once 15 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 either a new variety/ hybrid is produced or acquired through contract, its benefit flows to the seed company over a period of time. Every year, the seed company has to just multiply the parent seeds of improved variety / hybrid for commercial exploitation; and this multiplication is generally taken up through contract farming."
8.6.1 The learned Authorised Representative also filed written submissions. The learned A.R. contends that the assessee depends on the parent seed developed and produced by Metahelix for its business operations of production, marketing and sale of hybrid seeds to the farmers. As per the agreement between parties, the actual expenses incurred by Metahelix for development and production of product seeds will be reimbursed by the assessee. As far as the assessee is concerned, the entire expenses reimbursed to Metahelix is towards purchase of parent seeds used by the assessee as raw material to multiply and sell the seeds and therefore is revenue expenditure since there is no enduring benefit to the assessee. 8.6.2 The learned A.R. submits that out of the total expenditure of Rs.55,18,529 expended on seed development, the learned CIT (Appeals) held that to the extent ofRs.47,58,542 reimbursed to Metahelix towards production of parent seed the expenses were revenue in nature, whereas Rs.7,59,988 expended towards development of parent seed was capital in nature. It is submitted by the learned A.R. that the remand report of the A.O. dt.3.8.2012 clarified the position that the entire expenditure was spent for acquiring parent seed, being the assessee's stock-in-trade which is multiplied and sold and by no stretch of imagination can this be held as capital expenditure. In this regard, the learned A.R. placed reliance on the following judicial decisions:
(i) J.K. Industries V UOI (2008) 297 ITR 176 (SC)
(ii) Empire Jute Co. Ltd. V CIT (1980) 124 ITR 1 (SC)
(iii) ITO V Five Star Audio (ITA No.1921/Mds/2012, C.O. No.187/Mds/2012 dt.15.1.2013.16 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
8.7.1 We have heard the rival submissions and perused and carefully considered the material on record. The assessee company is in the business of acquiring, producing, manufacturing and development of various seeds and vegetables. For development of seeds, it is using technologies developed by various companies. In this context, the assessee entered into an Agreement with Metahelix dt.15.11.2002 and supplementary agreement dt.31.1.2003 under which Metahelix will develop parent seeds (both male and female) of superior quality. The assessee processes such parent seeds form Metahelix and supplies it to farmers who grow and develop these seeds. The fully developed seeds are received by the assessee from the farmers after 3 to 6 months, and are about 20 times more than the parent seeds received by the assessee from Metahelix. The assessee, after receiving these seeds from the farmers, processes these seeds in its plant which consists of many operations like cleaning, processing, conditioning, chemical treatment, etc. and then does packing of the same. In this process, the damaged and bad seeds are removed and only top quality seeds are packed. 8.7.2 In the light of the activities involved in the ass business model, the following facts emerge :-
(i) That Metahelix does research and development leading to development of new technologies enabling new strains in varieties of crops;
(ii) The assessee purchases the parent seed from Metahelix, which are the result of the research program of Metahelix;
(iii) These parent seeds are given by the assessee to farmers, whereby it is multiplied many times into hybrid seeds;
(iv) The parent seeds developed by Metahelix lose its life once it is given to farmers for further development.
(v) The parent seeds are material input for the assessee to develop hybrid seeds and multiply them;
(vi) If the development of the parent seeds involve research and development, such activities are carried out by the Metahelix and not by the assessee;17 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013
(vii) If at all any research activity carried out, it is by Metahelix and not by the assessee.
The above facts clearly indicate that the amounts paid by the assessee to Metahelix is towards procurement of parent seeds, a finding made by the learned CIT (Appeals) as well. It is seen that the learned CIT (Appeals) has also given a finding that the assessee is not engaged in research and development. In the light of the above factual matrix, we are in agreement with the learned CIT (Appeals) that seed development cost is not capital but revenue in nature and hence is allowable expenditure.
8.7.3 We, however, find that the learned CIT (Appeals) after rendering a finding that the assessee is not doing any research and development activity, has held that about of the total reimbursement of expenses made by the assessee to Metahelix, an amount of Rs.7,59,989 has been used by Metahelix for development of seeds and therefore disallowed these expenses as capital in nature. We are unable to agree with this finding of the learned CIT (Appeals). It is an uncontroverted fact that the assessee does not carry out any research and development activity. The facts on record establish that the expenses incurred by the assessee were towards purchase of parent seeds. If a part of the amount paid by the assessee have been utilised by Metahelix for development of seeds, the expenses can be capital in nature for Metahelix but not for the assessee. Merely because the expenses paid by the assessee to Metahelix is towards defraying the expenses of development of parent seeds, it does not change the nature of the expenditure by the assessee which is for procurement of parent seeds. As far as the assessee is concerned, the entire expenditure is incurred towards purchase of parent seeds and therefore it is entirely revenue in nature. There is no enduring benefit to the assessee due to the purchase of parent seeds as they lose their existence and form once they are converted 18 ITA No.1523/Bang/2012 & C.O. No.55/Bang/2013 into hybrid seeds. In this view of the matter, we are of the considered opinion that the entire expenditure ofRs.55,18,529 is revenue in nature and are therefore entirely allowable expenditure.
9. In the result, revenue's appeal for Assessment Year 2005-06 is dismissed and the Cross Objections raised by the assessee is allowed.
Order pronounced in the open court on 27th Sept., 2013.
Sd/- Sd/-
(N.V. VASUDEVAN) (JASON P BOAZ)
Judicial Member Accountant Member
*Reddy gp
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, - B Bench.
6. Guard File.
(True copy) By Order
Asst. Registrar, ITAT, Bangalore