2016 (11) TMI 258 - HC - Income Tax

Addition for guarantee commission struck down due to unreliable comparables; advertising treated as revenue expenditure, allowable

The Commissioner of Income Tax, Mumbai Versus M/s. Asian Paints (India) Ltd.

HC upheld the Tribunal's findings: the addition for guarantee commission was unjustified because external bank comparables were unreliable (missing year ... Addition on account of guarantee commission chargeable to its Associate Enterprises - Held that:- 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. Expenditure on advertisement on television - Held that:- 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. vs. CIT [1980 (5) TMI 1 - SUPREME Court ] 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. Thus 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. Issues:1. Whether the Tribunal was justified in deleting the addition made on account of guarantee commission chargeable to Associate EnterprisesRs.2. Whether the Tribunal was justified in deleting the disallowance made on expenditure for 'Corporate Brand' building, treating it as revenue in natureRs.Analysis:Issue 1: Guarantee Commission Chargeable to Associate Enterprises- The Assessing Officer held that the Respondent charged 0.20% commission on guarantees to its Associate Enterprises, resulting in an upward adjustment of Rs. 2.42 crores.- The Dispute Resolution Panel upheld this adjustment, but the Tribunal disagreed, stating that using external comparables like HSBC and Allahabad Bank was inappropriate due to lack of data specifics.- The Tribunal noted that similar additions in earlier years were deleted by the Tribunal, and Revenue accepted those decisions.- The Counsel for Revenue acknowledged the consistent Tribunal decisions on this issue, leading to the conclusion that no substantial question of law arose.Issue 2: Expenditure on Corporate Brand Building- The Respondent incurred Rs. 29.99 crores on TV advertisements, including Rs. 5.47 crores for corporate advertisements.- The Assessing Officer disallowed the Rs. 5.47 crores, deeming it capital expenditure for building brand value with enduring benefits.- The Tribunal reversed this, considering the expenditure as revenue in nature since it facilitated business, increased sales, and profitability.- The Counsel for Revenue argued that brand-related expenses should be capital due to enduring benefits.- Referring to a previous case, the Court clarified that ongoing business expenses are revenue, distinguishing between maintaining and creating a brand.- The Court cited a test from a Supreme Court case, emphasizing that the nature of advantage obtained commercially guides the capital/revenue classification.- The Tribunal's view that corporate advertisement enhances business, impacting sales and profitability, was considered reasonable based on the facts presented.- Consequently, as no substantial question of law arose, the Court dismissed the appeal without costs.