Case Law Details
Petnet Radio Pharmaceutial Solutions P. Ltd. Vs ACIT (ITAT Delhi)
Disallowance of 25% Repair & Maintenance Expenses: This ground is related to the ad-hoc disallowance of 25% of Repairs and Maintenance expenses amounting to Rs.29,65,966/-. These expenses are routine, regular revenue expenses incurred wholly and exclusively for the purpose of business of the assessee company to ensure that the operations of the company are carried out smoothly. During the relevant AY, the assessee company has incurred repair & maintenance expenditure amounting to Rs 1,18,63,864/-. The major part of this expenditure relates to the amount spent on account of breaking-down of Cyclotron machine (used for production of FDG) for a period of around 2 weeks, which required the assessee company to incur extensive repair & maintenance expenditure so to resume its normal operational activities. A major part of the above expense is paid to Siemens Limited, India; Petnet Inc.; Electro Mech of India and Siemens Petnet Korea Co. Ltd. for purchasing spare parts / accessories and availing services for repairing or maintenance of Cyclotron machine.
However, while passing the assessment order, the AO concluded that the aforesaid legal expenses have not been wholly and exclusively incurred for the business and based on non-compliance of notice issued, to the parties under section 133(6) doubt about the genuineness of the expense and accordingly made an ad-hoc disallowance of Rs. 27,09,764/(30% of the total repair & maintenance) u/s 37 of the Act. The ld. CIT(A) confirmed the addition affirming the order of the Assessing Officer and held that the repair & maintenance expenditure constitute 49% of the total expenses. We find that major parts of the expenses are paid to Siemens Ltd., Petnet Inc., Electro Mech for purchasing of spare parts and accessories. The AO made ad-hoc disallowance of 25% of legal expenses owing to non-compliance by M/s Electro Mech of India to the notices issued u/s 133(6) and the ld. CIT(A) confirmed for the same reason. We find that if the expenses are proved to be un-genuine on verification, the AO ought to have disallowed the entire expenditure. Accepting 75% of expenditure as allowable and the remaining 25% disallowable on ad-hoc basis cannot be considered as a reasonably rational order.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of ld. CIT(A)-38, New Delhi dated 14.02.2019.
2. The assessee company has been set up to primarily manufacture and distribute radiopharmaceuticals to hospitals, clinics and research facilities which are engaged in Positron Emission Tomography (PET) imaging. The assessee company has commenced its PET radiopharmaceutical drug manufacturing facility in September 2012.
Disallowance of Training Charges:
3. During the relevant A.Y., training expenditure has been incurred by the Company on account of training services obtained from Siemen Petnet Korea (SPK) in order to enable the Company to operate and run the “Cyclotron Machine” in a more efficient and effective manner and to repair/maintain the same in-house without outside help.
4. It was argued that the subject training expenses, can by no stretch of imagination, be treated as a capital expenditure, as such expenses do not result in any economic benefit of enduring nature to the company, neither there is an increase in the production capacity the cyclotron machine nor is there an increase in the useful life of the cyclotron machine. It was argued that the aforesaid trainings expense is a revenue expenditure as the same has been incurred for efficient and more profitable working of the business and not for addition or augmentation of profit making apparatus.
5. Whether a sum of money expended is of a capital, or revenue nature, what has to be view only the commercial expediency of the expense, but also the direct and immediate benefit the business of the company. When expenditure is incurred with a view to bring into existence an asset with an enduring benefit, only then such an expenditure can be treated to be in the nature of a capital expense. The Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT (124 ITR 1) held that the expenditure incurred would be capital in nature if it has resulted into any kind of advantage in the capital field but if the advantage consists merely in facilitating the assessee’s business or enable the management to conduct the assessee’s business more efficiently or profitably, the expenditure would be revenue in nature. The Hon’ble Supreme Court also held that if the expenditure was incurred for operation and work of existing profit making apparatus, it would be revenue in nature, but in case expenditure was on addition or augmentation of profit making apparatus the nature of the expenditure would be capital.
6. We hold that in the instant case, since the subject training expenses do not bring into existence any capital asset nor results in any new source of income but merely enable the Company to manage and conduct the production operations in a more efficient effective manner, thus, the said expenses are on account of revenue and cannot be treated as capital expenditure.
Disallowance of 25% Legal & Professional Expenses:
7. During the relevant A.Y., the assessee company has incurred legal & professional expenses amounting to Rs.1,45,56,076/-. Details for the same along with supporting documents such as invoice and agreement are provided .They are,
(a) Service cost/employee cost charged by Siemens Ltd., India for rendering services to the Assessee Company
(b) Technical Assistance/Knowledge Transfer Charges of Rs.34,93,920/- to Petnet Solution Inc., to enable the Assessee Company foster its sale of product. As per the Knowledge Transfer Agreement executed by the Assessee Company with Petnet Solutions, Inc., services in the following phases are rendered to the Assessee Company.
(c) Phase 1: Identification of Customers and Market;
(d) Phase 2: Knowledge Dissemination in respect: to contracts, products and pricing of such products;
(e) Phase 3: Execution: Introducing value addition to product and meeting customer expectations;
(f) Phase 4: Informing about the culture through teamwork and communication;
(g) Phase 5: Introduction of New Products and Continued Education; and
(h) Phase 6; Knowledge adoption and Application.
SAP (System Applications and Products in Data Processing) implementation charges of Rs.29,94,994/- to Petnet Solution Pte. Ltd. Singapore.
8. However, while passing the Assessment Order, the AO concluded that the aforesaid legal & professional expenses have not been Incurred wholly and exclusively for the business and made an ad-hoc disallowance of Rs.36,39,019/- (25% of the total legal & professional charges) u/s 37 of the Act. The AO made ad-hoc disallowance of 25% of legal expenses owing to non-compliance by three parties to the notices issued u/s 133(6) and the ld. CIT(A) confirmed for the same reason. We find that if the expenses are proved to be un-genuine on verification, the AO ought to have disallowed the entire expenditure. Accepting 75% of expenditure as allowable and the remaining 25% disallowable on ad-hoc basis cannot be considered as a reasonably rational order. The appeal of the assessee on this ground is allowed.
Disallowance of 25% Repair & Maintenance Expenses:
9. This ground is related to the ad-hoc disallowance of 25% of Repairs and Maintenance expenses amounting to Rs.29,65,966/-. These expenses are routine, regular revenue expenses incurred wholly and exclusively for the purpose of business of the assessee company to ensure that the operations of the company are carried out smoothly. During the relevant AY, the assessee company has incurred repair & maintenance expenditure amounting to Rs 1,18,63,864/-. The major part of this expenditure relates to the amount spent on account of breaking-down of Cyclotron machine (used for production of FDG) for a period of around 2 weeks, which required the assessee company to incur extensive repair & maintenance expenditure so to resume its normal operational activities. A major part of the above expense is paid to Siemens Limited, India; Petnet Inc.; Electro Mech of India and Siemens Petnet Korea Co. Ltd. for purchasing spare parts / accessories and availing services for repairing or maintenance of Cyclotron machine.
10. However, while passing the assessment order, the AO concluded that the aforesaid legal expenses have not been wholly and exclusively incurred for the business and based on non-compliance of notice issued, to the parties under section 133(6) doubt about the genuineness of the expense and accordingly made an ad-hoc disallowance of Rs. 27,09,764/(30% of the total repair & maintenance) u/s 37 of the Act. The ld. CIT(A) confirmed the addition affirming the order of the Assessing Officer and held that the repair & maintenance expenditure constitute 49% of the total expenses. We find that major parts of the expenses are paid to Siemens Ltd., Petnet Inc., Electro Mech for purchasing of spare parts and accessories. The AO made ad-hoc disallowance of 25% of legal expenses owing to non-compliance by M/s Electro Mech of India to the notices issued u/s 133(6) and the ld. CIT(A) confirmed for the same reason. We find that if the expenses are proved to be un-genuine on verification, the AO ought to have disallowed the entire expenditure. Accepting 75% of expenditure as allowable and the remaining 25% disallowable on ad-hoc basis cannot be considered as a reasonably rational order. The appeal of the assessee on this ground is allowed.
11. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 11/10/2022.
