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2015 (8) TMI 328 - ITAT CHENNAI

2015 (8) TMI 328 - ITAT CHENNAI - TMI - Capital or revenue expenditure - Disallowance of expenses by way of professional charges and legal fees paid to Pacific Consultants for the Green Field Project executed in China - CIT(A) deleted the addition - Held that:- We find that the expenditure incurred by the assessee was not for the purpose of exporting goods from India to China. The expenditure incurred by the assessee company to find out the feasibility of proposed new establishment in China. The .....

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hing a new manufacturing unit in China and the expenses incurred for feasibility status of the company given enduring benefit to the company which proposed to be established by the assessee. Therefore, it has to be treated as capital expenditure in the hands of the assessee company proposed to be established by the assessee and not as revenue expenditure in the hands of the assessee. CIT(A), without considering the facts in proper prospective, simply allowed the ground raised by the assessee by .....

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revenue.

Consultancy charges paid to M/s. Chaturvedi & Shah, Chartered Accountants - Held that:- The professional charges paid was relating to the proposed green field project to be established by the assessee company in China, which is not relating to the business and we find that it is not a revenue expenses. The ld. CIT(A) has observed that the expenditure incurred in the course of business. The ld. CIT(A) ignoring the material fact that the expenditure incurred by the assessee is .....

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aim - Held that:- The Assessing Officer has not commented anything about the supplementary agreement. It appears from the order of the ld. CIT(A) that the assessee has also filed a technical report before the ld. CIT(A). Based on that report, he has made certain observations. Such report was also not placed before us for our consideration. Before us, the ld. Counsel for the assessee has not able to explain the R&D activities carried out by the assessee on the machineries utilized by M/s. Super S .....

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o between them and the technical report as stated to have filed before the ld. CIT(A) as to whether the machineries installed by the assessee was actually used for R&D activities by the assessee and decide the issue in accordance with law. - Decided in favour of revenue for statistical purposes.. - ITA No. 1349/Mds/2013 - Dated:- 9-7-2015 - Chandra Poojari, AM And V. Durga Rao, JM,JJ. For the Appellant : Shri Pathlaveth Peerya, CIT For the Respondent : Shri R Vijayaraghavan, Adv. ORDER Per: V Du .....

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see has not seriously object to the submissions of the ld. DR. Accordingly, we condone the delay of six days in filing the appeal and admit the appeal for hearing. 3. The first ground raised in the appeal of the Revenue is with regard to the addition in respect of ₹ 67,24,547/-. 4. Brief facts of the case are that the assessee is a textile machinery manufacturer. In the assessment order, the Assessing Officer has observed that the assessee has incurred expenses amounting to ₹ 67,24,5 .....

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es in India and they are incurred as capital expenditure for forming new subsidiary company in China, the Assessing Officer has observed that this cannot be allowed as revenue expenditure under section 37 of the Income Tax Act and therefore, the Assessing Officer has disallowed the same. 5. The assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) has observed that the subsidiary in China is manufacturing only ring frames. The expenditure was incurred for expanding the exis .....

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f the assessee out of India, the ld. CIT(A) has directed the Assessing Officer to allow the expenditure under section 37(1) of the Act. 6. The Revenue carried the matter in appeal before the Tribunal. 7. The ld. DR has submitted that the expenditure incurred by the assessee is not for assessee's business and it is for establishment of subsidiary. It is altogether a new company and it continues enduring benefit to the assessee. Therefore it is capital expenditure and not revenue expenditure. .....

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(Delhi), CIT v. Euro India Ltd. - 2013-TIOL-780-HC-DEL-IT, CIT v. Priya Village Roadshows Ltd. 332 ITR 594(Delhi) & CIT v. F.C.S. International Marketing P. Ltd. 283 ITR 32 (P&H). 9. We have heard both sides, perused the materials on record and gone through orders of authorities below. The assessee is a manufacturing company i.e., M/s. Lakshmi Machine Works Ltd., Coimbatore. The assessee intends to expand its business by setting up of new manufacturing textile Machinery Company in China .....

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sibility status for forming wholly owned subsidiary company in China and it is capital expenditure to form new subsidiary company, it cannot be allowed under section 37 of the Act. On appeal, the ld. CIT(A) has observed that the expenditure incurred in the ordinary course of the business of the company and also for finding avenues for export of the manufactured machinery of the assessee outside of India and directed the Assessing Officer to allow the expenditure under section 37(1) of the Act. W .....

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project carried out by the assessee ultimately not materialized. It is only a case of the assessee that the expenditure incurred is revenue expenditure. In our opinion, the expenditure incurred by the assessee for the purpose of establishing a new manufacturing unit in China and the expenses incurred for feasibility status of the company given enduring benefit to the company which proposed to be established by the assessee. Therefore, it has to be treated as capital expenditure in the hands of t .....

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s deductible. In the present case, it is not a case of the assessee that the project is abandoned and the only aspect of the assessee is that the assessee wanted to establish a different establishment in a foreign country i.e., China. Therefore, the case law relied on by the ld. Counsel for the assessee has no application. 11. In the case of CIT v. Euro India Ltd. (supra), the Hon'ble Delhi High Court has observed that whether the expenditure or payment made was for facilitating the assessee .....

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But, if a new asset has come into existence which was of enduring benefit, then such expenditure would be of capital nature. In the present, it is not the case of the assessee that the proposed new company has come into existence. It is only case of the assessee that the expenditure is for the purpose of business and has no application to the facts of the present case. 12. In the case of CIT v. Priya Village Roadshows Ltd. (supra), the Hon'ble Delhi High Court has observed that if there is n .....

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a view to bringing an asset or advantage into existence and having enduring benefit. If the project is not materialized, the nature of expenditure would not change to revenue. Further, in the case of McGax-Ravindra Laboratories (India) Ltd. v. CIT (supra), in this case, the assessee company wanted to set up a manufacturing unit in Malaysia and it was a joint venture unit. The Hon'ble Delhi High Court has observed that the expenditure incurred by the assessee for the foreign travel of its emp .....

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the ld. CIT(A) is not correct and he has not considered the facts in right prospective. The ld. CIT(A) proceeded that the assessee company and the subsidiary which the assessee wanted to establish are one and the same. We therefore, reverse the order passed by the ld. CIT(A) on this issue. Accordingly, the ground raised by the Revenue is allowed. 15. In so far as consultancy charges paid to M/s. Chaturvedi & Shah, Chartered Accountants is concerned, the professional charges paid was relating .....

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pose of assessee's own business and the expenditure incurred was relating to the proposed new establishment, which the assessee wanted to establish in China and therefore, it is capital expenditure. Thus, we reverse the order passed the ld. CIT(A) on this issue and this ground of appeal raised by the Revenue is allowed. 16. The next ground of appeal of the Revenue is relating to R&D expenses. In the assessment order, the Assessing Officer has observed that the assessee, during the year h .....

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e lease deed was to be renewed 11 months. The lessee was to purchase raw material and manufacture yarn with its own funds and employees. The lessee Super Sale India Ltd. was to give feedback on the performance of the machineries to the assessee company so that it can be used by R & D department to rectify any short-comings in these machineries. So, the assessee has claimed that these machineries are used in R & D work and should be allowed under section 35(iv) of the Act. The Assessing O .....

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009. The lease is renewed every eleven months. The Super Sales India Ltd. used its own resources for purchase of raw materials, manufacture of yarn and it has own employees and yarn is being marketed by them and income admitted by that company. The assessee company only transferred pilot machinery manufactured by them to the mill premises to be run by Super Sales India so that on the basis of feedback received for this month, any alteration to this machinery can be made by the R&D department .....

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ch and development functioning. 17. On appeal before the ld. CIT(A), the assessee has submitted as under: "The Assessing Officer has not denied the fact that the appellant had the benefit and advantage of scientific research through the closed monitoring by its own staff in charge of research at the Pilot project to study the performance of the machinery. The fact that SSIL had its own employees/or purchase of raw materials and manufacture of yarn and the income / loss from the yarn produce .....

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inging improvement to the machinery by study of the working of the machinery at the Pilot plant. The Assessing Officer has merely denied the deduction u/s 35(iv) because of the fact that the appellant did not invest in raw materials, did not employ its own employees in the process of manufacture of yarn and did not market the yarn and also did not admit income from the activity of manufacture and sale of yarn. It is submitted that they are factors to be considered for purpose of Section 35(iv) a .....

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y by according periodical renewals from time to time. Copies of the report of the staff of R & D department of the appellant company regarding their observations through a study of the performance of the textile machinery under mill conditions at the Pilot project are enclosed. They were highly useful in the extension of the appellant's business and this fact has not been disputed by the Assessing Officer." 18. The ld. CIT(A), after considering the submissions of the assessee, allow .....

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re such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year, and the balance of the expenditure shall be deducted in equal installments for each of the four immediately succeeding previous years. (ia) In a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted fo .....

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penditure incurred in the previous year shall be deducted for that previous year". The appellant is a manufacturer of spinning mill machinery and is a major supplier of the machinery to all major textile mills in India as well as to export markets. In the earlier years, the appellant was paying to another spinning mill M/s Advaith Textiles for allowing them to test their machinery @ ₹ 50 lacs per quarter. The appellant has to upgrade the machinery after getting the feedback from the c .....

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am. As seen from this agreement, LMW after' manufacturing a machine, before commercialization of the same, it required thorough testing and validation in mill condition. The machinery before release into market was being further improved with modification after being operational in mill condition and also input data was used for future machinery development. 5.4 As seen from this agreement, SSIL has agreed for LMW's proposal to make trial run and evaluate the performance of textile machi .....

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lot batches, draw frame models, speed frame models and ring frame models. The machinery was capitalized at the cost incurred by the appellant company for manufacturing of the same. The details of cost of manufacture have also been examined. 5.5 I have also examined various observation reports furnished by the appellant along with the technical details on the validation trial. There were changes made with regard to various machines. For example, in the case of validation of Comber LK 64, which wa .....

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nt raw material types to achieve the maximum efficiency. The machines developed after these tests were commercialized during the various months of the financial year and subsequently in the case of Card LC 333, the commercialization was done in July 2008 where in the subsequent year 2009-10, 261 machines were sold, 2010-11 512 machines were sold and 2011-12 586 machines were sold. In the case of Comber LK-64, the commercialization was done in September, 2008. The quantity of machines sold increa .....

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ch related to a business or class of business include - (a) Any scientific research which may lead to or facilitate an extension of that business or as the case may be, all businesses of that class. (b) Any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be all businesses of that class. 5.6 The company provided in-house facilities for conducting of its scientific research by installing its machinery in i .....

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on Action taken 1. Flyer trough vibration at 1350 rpm New housing with right tolerance under manufacturing. 2. Flyer run out is more Flyer run is correct to less than 0.5 mm by bending the center stem. This is to- be monitored further. R & D to recommend the allowable run out. Spindle speed to be increased from 1000 rpm to 1350 rpm and observed. Similarly in case of other machines also, validation reports at different stages of running the machine and the consolidation reports were filed to .....

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e deduction because the machinery are used third parties for its business activities and it cannot be said to have been used directly by the assessee for doing research and development in prototypes or developing new machinery. On examination of all the information furnished by the appellant, it is clear that when the machinery are used by SSIL for manufacturing yarn, the study of the problems incurred during the actual performance of the machines has helped the appellant to change various param .....

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The ld. DR has submitted that the machines installed by the assessee in a pilot mill were not used for the purpose of R & D. It was used by Super Sales India Limited. On the basis of report submitted by the 3rd party, the assessee carried out research work and therefore, deduction claimed by the assessee cannot be allowed. 21. On the other hand, the ld. Counsel for the assessee has reiterated the submissions which he has made before the ld. CIT(A) and supported the order passed by the ld. C .....

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ected in the pilot mill to that company. As per the lease agreement dated 05.05.2008 [as stated in the assessment order] lease deed was executed and renewed every eleven months and the lessee was to purchase raw materials, manufacture of yarn with its own fund and employees. The lessee M/s. Super Sales India Limited was to give a feed back on the performance of the machineries to the assessee company so that it can be used by the R&D department to rectify any short coming. From that it is ve .....

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d thereby M/s. Super Sales India Limited manufactured yarn, sold the same and income was earned. The main purpose of M/s. Super Sales India Limited is to earn income. In that process, if any shortcoming is found, it has to be reported the assessee, thereby the machineries installed by the assessee has not directly used for the purpose of R&D. The machineries used by the 3rd party cannot be said that the assessee company only carried out R&D activities based on the report submitted by the .....

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