Facts of the case
The Assessee incurred expenditure on advertisement on television aggregating to Rs.29.99 crores. This expenditure related to advertisements published on television relating not only to individual products manufactured by it but also towards corporate advertisement to the extent of Rs.5.47 crores.
The Assessing Officer disallowed the expenditure claimed towards corporate advertisement amounting to Rs.5.47 crores on the ground that the same is on capital account as corporate advertisement helps in building the company’s brand value.The benefit of such build up of brand value would endure over a period of years and therefore fall in the capital field.
Held
Apex Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 o hold that it is not a conclusive test in all cases so that such expenditure is always on capital account. The Court observed that what is to be examined is the nature of advantage obtained in the commercial sense by incurring the expenditure. If the expenditure consists of merely facilitating the assessee to carry on business more profitably leaving the fixed capital untouched, it would be on revenue account. The entire expenditure, the Court observed, has to be looked at from a businessman’s point of view. In the present facts, the expenditure on account of corporate advertisement is to essentially maintain the corporate image and not create a corporate image. Further, the impugned order holds on facts that the corporate advertisement expenditure facilitates the business having a direct impact on sales and profitability of the Respondent-Assessee.
In the above circumstances, the view taken by the impugned order that corporate advertisement enhances the business of the Assessee resulting in increased sales of its product in Revenue field, is a possible view, on the present facts. Consequently, the question as raised does not give rise to any substantial question of law. Thus, not entertained.
HIGH COURT OF BOMBAY
Commissioner of Income-tax, Mumbai
v.
Asian Paints (India) Ltd.
IT APPEAL NO.775 OF 2014
OCTOBER 24, 2016
A.R. Malhotra, Ms. Padma Divakar and N.A. Kazi for the Appellant. Percy Pardiwala, Sr. Counsel and Madhur Agrawal for the Respondent.
ORDER
1. This appeal under Section 260-A of the Income Tax Act, 1961 (“the Act”) challenges the order dated 29 October 2013 passed by the Income Tax Appellate Tribunal (“Tribunal”).
2. The impugned order relates to Assessment Year 2006-07.
3. The Revenue has urged the following questions of law for our consideration :
| (A) | “Whether on the facts and in the circumstances of the case and in law the Tribunal is justified in deleting the addition made by the Assessing Officer on account of guarantee commission chargeable to its Associate Enterprises? | |
| (B) | Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the disallowance made by the Assessing Officer on expenditure on ‘Corporate Brand’ building, treating such expenditure as revenue in nature?” |
4. Re. Question No.(A) :
| (a) | The Respondent-Assessee had given guarantees to various banks on loans advanced to its Associate Enterprises (A.E.). For the purpose of giving this guarantee, the Respondent-Assessee charged 0.20% of the guarantee amount as its commission from its A.E. The Assessing Officer held that such a transaction would be an International Transaction under Section 92B of the Act. On examination, the Assessing Officer held that HSBC charges at the rate of 0.15% to 3% P.A. while Allahabad Bank also charges at the rate of 3% P.A. as commission. Therefore, the Assessing Officer arrived at the Arms Length Price (ALP) of commission for giving of guarantee to Banks on loan advanced to its A.E. would be 3% of the amount of guarantee. Thus, making an upward adjustment on account of commission to Rs.2.42 crores in its draft Assessment order. | |
| (b) | The application of the Respondent-Assessee to the Dispute Resolution Panel (DRP) was not successful. This is so as ALP of the commission received to give the guarantee as determined by the Assessing Officer at Rs.2.42 crores was upheld. This resulted in a final order of the Assessing Officer in terms of its draft Assessment order. | |
| (c) | On appeal, the Tribunal by the impugned order held that the external comparable of HSBC Bank and Allahabad Bank to determine 3% as the ALP of the commission is not appropriate. This for the reason that the financial year to which the data obtained from HSBC Bank and Allahabad Bank are not indicated. Moreover, the circumstances in which the guarantee was given coupled with the terms and conditions of charging 3% commission by the two Banks not known. Besides, internal comparable available at almost the same rate of commission was not even examined. The impugned order further records that identical issue which arose for consideration before the Tribunal in the earlier Assessment Years and similar addition made by the Assessing Officer on account of commission was deleted. These orders of the Tribunal were accepted by the Revenue as no question of law on this issue was raised by the Revenue alluding to the fact that no appeal to the High Court was filed by the Revenue on this issue. | |
| (d) | Mr. Malhotra, learned Counsel appearing for the Revenue, very fairly states that the order of the Tribunal for the issue raised herein also arose for the earlier Assessment Years and the decision on this aspect had been accepted. | |
| (e) | Therefore, the question raised herein does not give rise to any substantial question of law. Thus, not entertained. |
5. Re. Question No.(B) :
| (a) | The Respondent-Assessee incurred expenditure on advertisement on television aggregating to Rs.29.99 crores. This expenditure related to advertisements published on television relating not only to individual products manufactured by it but also towards corporate advertisement to the extent of Rs.5.47 crores. | |
| (b) | The Assessing Officer disallowed the expenditure claimed towards corporate advertisement amounting to Rs.5.47 crores on the ground that the same is on capital account as corporate advertisement helps in building the company’s brand value. The benefit of such build up of brand value would endure over a period of years and therefore fall in the capital field. This view was taken by the Assessing Officer in his final order after his draft Assessment order taking an identical view was upheld by the D.R.P. | |
| (c) | On appeal to the Tribunal, the impugned order allowed the Respondent Assessee’s appeal by inter alia holding that the expenditure is revenue in nature, even if the same is incurred for promotion of a corporate brand, as it facilitates the business of the Assessee and results in increased sales and profitability. The impugned order further holds that the enduring benefit, if any, on account of brand building would not be in the capital field. | |
| (d) | Mr. Malhotra, learned Counsel for the Revenue, urges that an expenditure incurred to create/improve a brand would be on capital account. This is in view of the enduring benefit available to the Respondent-Assessee in relation to its brand. It is particularly submitted that amounts received on sale of brand is on capital account and not taxed as Revenue receipts. As also, amount paid to purchase a brand is regarded on capital account. Therefore, the expenditure incurred on brand advertisement cannot be allowed as Revenue expenditure. | |
| (e) | We find that an identical issue had arisen before this Court in case of CIT v. Jeoffrey Manners & Co. Ltd. [2009] 315 ITR 134 (Bom.), wherein the Court was considering a question whether the expenses incurred by the Respondent-Assessee therein for making advertisement films is to be treated as a capital or revenue expenditure. This Court opined that the correct test to be applied in respect of expenditure incurred for making advertisement films was that when the same was incurred in respect of an ongoing business of the Assessee, it is Revenue. On the other hand, when the expenditure is incurred in respect of a brand which is to be used in a business which is yet to be commenced, it is capital expenditure. In this case also, the expenditure on corporate advertisement films is in respect of ongoing business. The expenditure for advertisement of a brand or corporate name of an existing ongoing business is in the nature of maintaining the brand and/or corporate image and it is not for creation of a brand. Further, the test of enduring benefit urged by the Revenue was considered by the Apex Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 to hold that it is not a conclusive test in all cases so that such expenditure is always on capital account. The Court observed that what is to be examined is the nature of advantage obtained in the commercial sense by incurring the expenditure. If the expenditure consists of merely facilitating the assessee to carry on business more profitably leaving the fixed capital untouched, it would be on revenue account. The entire expenditure, the Court observed, has to be looked at from a businessman’s point of view. In the present facts, the expenditure on account of corporate advertisement is to essentially maintain the corporate image and not create a corporate image. Further, the impugned order holds on facts that the corporate advertisement expenditure facilitates the business having a direct impact on sales and profitability of the Respondent-Assessee. | |
| (f) | In the above circumstances, the view taken by the impugned order that corporate advertisement enhances the business of the Assessee resulting in increased sales of its product in Revenue field, is a possible view, on the present facts. Consequently, the question as raised does not give rise to any substantial question of law. Thus, not entertained. |
6. Therefore, the appeal is dismissed. No order as to costs.