Engineering and Development costs incurred for  manufacture and sale of Seats for Passenger cars are Revenue Expenditure :ITAT [Read Order]

The Pune bench of Income Tax Appellate Tribunal (ITAT) has held that engineering and development costs incurred for  manufacture and sale of seats for passenger cars are revenue expenditure.

The assessee Lear Automotive India Private Limited a Joint Venture between Lear Corporation, Mauritius and Tachi-S Company LtdJapan and engaged in the manufacture and sale of Seats for Passenger cars. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee claimed deduction of Rs.3.90 crore towards Engineering and Development costs.

The AO came to hold that the amount paid by the assessee was capital expenditure and hence, not deductible as revenue expenditure

Aggrieved by the order assesee filed an appeal before the Commissioner of Income Tax (Appeal). The CIT (A) dismissed the appeal. Thus, the assessee filed a second appeal before the tribunal.

It was observed by the tribunal that the assessee entered into Engineering Recovery Agreement with Lear Corporation, Japan Ltd. and Tachi-S Co., Ltd. which is also a Japanese entity.

Lear and Tachi-S would: ‘perform the engineering development work for the Products under the terms of this Agreement’.

As per the agreement assessee would be paying USD 8.07 per product towards Engineering Costs incurred by Lear and Tachi-S, which will be shared by Lear at USD 4.12 and Tachi-S at 3.95 USD.

After verifying the agreement clauses the bench determined that the assessee did not have any dominion and control over the intellectual property rights of the technology developed by Lear and Tachi-S, which was simply licensed to it on non-exclusive basis.

Thus, the payment by the assessee did not result in acquiring and owning the Engineering and Development Technology so as to be characterized as an intangible asset capable of capitalization.

The Tribunal found that it is a case of payment in the nature of royalty for the use of such Technology, being an item of revenue nature

After considering the facts the two  member bench of R.S. Syal (Vice President) and Partha Sarathi Chaudhury (Judicial Member) allowed the appeal filed by the assessee and deleted the disallowance made by the assessing officer.

Keyur Patel appeared for the revenue and Dhanesh Bafna appeared for the assessee.

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