2014 (8) TMI 976 - AT - Income Tax

Disallowance of product development expenses - expenditure incurred for the designing charges of packaged drinking water bottle and changing of colour of the cap of the beverages bottles - revenue v/s capital - Held that - The assessee is into manufacturing and sale of fast moving consumer goods products and has various competitors in the market having similar line of products. Keeping with the market trends and pace of consumer preferences the changes in the design of the products and also the quality of the products is an essential part of market strategy to augment sale and profit. Such an expenditure incurred for designing the product cannot be held to be of enduring benefit. Even otherwise also if the advantage of such expenditure is merely for augmenting the assessee s trading/ business operations or to carry on the business more efficiently for profitability leaving the fixed capital untouched the expenditure would generally be on the revenue account even though the advantage may have an enduring benefit for a brief period. Here in this case the assessee has changed the design of the bottle and the colour of the cap as is a regular phenomenon to be carried out between one to two years which cannot be held to be for an enduring benefit or major change in the profit making apparatus. Such expenditures are required for either augmenting the sale or to survive in the market under stiff competition. Therefore such expenditure has to be treated as revenue expenditure and accordingly the disallowance as confirmed by CIT(A) under the head product development expenditure is allowed. - Decided in favour of assesse. Eligibility for deduction under section 80- IB - additional ground raised - Held that - Assessing Officer in the assessment year 2004-05 while passing the order under section 143(3) has allocated the business/depreciation losses to the demerged company. Such an order was also confirmed by the learned Commissioner (Appeals) also however the Tribunal in that year has allowed the assessee s claim carried forward losses which was apportioned due to demerger. This order of the Tribunal is now subject matter of appeal before the hon ble High Court. Learned counsel submitted that if the hon ble High Court reverses the order of the Tribunal then there would be no carried forward of losses hence will result into positive income and then deduction under section 80-IB has to be allowed. Thus such a plea is too prompt however being a legal plea based on statutory provision we direct the Assessing Officer that in case as a result of any order passed by the High Court resulting into setting aside of the Tribunal order or denying the claim of carried forward of losses then the Assessing Officer while computing the positive income of the assessee for this year shall examine the claim of deduction under section 80-IB. - Decided in favour of assessee for statistical purposes. Market research expenses - revenue v/s capital - Held that - Assessee has incurred market research expenditure mainly on the existing products such as Simply Imlee and Frooti to find out the consumer preferences and choice of various age group consumers so as to target the sales of these products accordingly. These expenses are incurred for constant endeavour to carry out market research which is inevitable for fast moving consumer goods industry to remain in competition and are routine expenditure carried out in the ordinary course of business for strengthening the existing brands. Therefore the learned Commissioner (Appeals) has rightly held that such expenses incurred on market research is nothing but revenue expenses - Decided in favour of assesse.

Issues Involved:
1. Disallowance of interest on interest-free advances to a subsidiary company.
2. Disallowance of product development expenses.
3. Eligibility for deduction under section 80-IB.
4. Deletion of addition on account of market research expenses.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest on Interest-Free Advances to a Subsidiary Company:
The assessee's appeal on this ground was dismissed as "not pressed" by the learned senior counsel representing the assessee. Consequently, this issue was not considered further in the judgment.

2. Disallowance of Product Development Expenses:
The assessee-company, engaged in the business of manufacturing and sale of fast-moving consumer goods, had debited product development expenses. The Assessing Officer disallowed these expenses, treating them as capital in nature, but allowed depreciation at 25%. The learned Commissioner (Appeals) partially allowed the expenses, treating some items as revenue and others as capital. The Tribunal held that the expenses for designing packaged drinking water bottles and changing the color of caps were incurred frequently to stay competitive and did not provide an enduring benefit. Hence, these expenses were treated as revenue expenditure, and the disallowance was deleted.

3. Eligibility for Deduction under Section 80-IB:
The assessee raised an additional ground regarding eligibility for deduction under section 80-IB. The Tribunal noted that the claim was not shown in the computation of income due to carried forward losses, but the assessee was otherwise eligible for the deduction. The Tribunal directed the Assessing Officer to examine the claim if the High Court's decision on the carried forward losses resulted in positive income for the assessee. Thus, the additional ground was allowed for statistical purposes.

4. Deletion of Addition on Account of Market Research Expenses:
The Revenue's appeal challenged the deletion of an addition made on account of market research expenses, which the Assessing Officer had treated as capital expenditure. The Tribunal upheld the learned Commissioner (Appeals)'s decision, noting that the expenses were incurred for market research on existing products to understand consumer preferences and were essential for the business. These expenses were routine and did not lead to the creation of new products or brands, thus qualifying as revenue expenditure. Consequently, the Revenue's appeal was dismissed.

Conclusion:
The assessee's appeal was partly allowed, with the disallowance of product development expenses being deleted and the additional ground regarding section 80-IB being allowed for statistical purposes. The Revenue's appeal was dismissed, affirming the deletion of the addition on account of market research expenses.

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