2019 (3) TMI 2088 - AT - Income Tax

Marketing expenses disallowance overturned - incidental benefits to sister concerns don't disqualify legitimate business expenditure

ITAT Mumbai upheld CIT(A)'s deletion of 25% disallowance of marketing and publicity expenses. Revenue argued expenses benefitted foreign sister concern ... Disallowance of 25% of marketing and publicity expenses - allowable business expenditure or not? - these expenses ultimately benefitted the foreign sister concern of the assessee holding the 'STAR' brand - CIT(A) deleted addition - HELD THAT:- Since the CIT(A) has passed the order on the basis of the decision of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2010-11 as well as on the basis of the decision of the Bombay High Court in case of Star India Private Limited [2009 (3) TMI 990 - BOMBAY HIGH COURT] wherein held as admittedly as per AO also the assessee had incurred impugned expenses primarily for the purpose of its business. If these expenses incidentally provided some benefits to some other entity also, then that itself would not make the said expenses as not related to business of the assessee or not having been incurred during the course of or for the purpose expenses is that it should be incurred during the course of and for the purpose of business of the assessee, which is duly passed here, and beyond that nothing more is to be examined. If any expenses is to be examined strictly from this point of view as has been done by the AO, then we are affairs that many more expenses would become disallowable which is neither the intention nor the requirement of the law. Therefore, we found no illegality and infirmity in the order passed by the CIT(A) in question, specifically, in the circumstances, when there is no distinguishable material on record and no law contrary to the law relied by the Ld. Representative of the assessee has been produced before us - Decided against revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:(a) Whether the disallowance of 25% of marketing and publicity expenses incurred by the assessee was justified on the ground that these expenses ultimately benefitted the foreign sister concern holding the 'STAR' brandRs.(b) Whether the Commissioner of Income Tax (Appeals) was justified in deleting the disallowance of 25% of marketing and publicity expenses despite the fact that the brand-building exercise carried out by the assessee also benefitted its foreign sister concern, which did not reimburse any part of these expensesRs.(c) Whether the Assessing Officer's partial disallowance of marketing and publicity expenses was sustainable in law, given the nature of the relationship between the assessee and the foreign entity and the applicable judicial precedentsRs.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Justification of disallowance of 25% of marketing and publicity expensesRelevant legal framework and precedents: The dispute revolves around the interpretation of Section 37(1) of the Income Tax Act, 1961, which allows deduction of expenses incurred wholly and exclusively for the purpose of business. The Assessing Officer (AO) disallowed 25% of marketing and publicity expenses on the basis that these expenses also benefitted the foreign sister concern holding the 'STAR' brand, and since the foreign entity did not reimburse these expenses, the disallowance was warranted.The Tribunal and CIT(A) relied heavily on the decisions of the Hon'ble Bombay High Court in the cases of Star India Private Limited and NGC Network (India) Private Limited, which held that the mere fact that foreign principals or sister concerns benefit from marketing expenses incurred by the Indian entity does not justify denial of deduction under Section 37(1). These cases emphasized that the relationship between the Indian entity and the foreign principal was that of principal and agent, yet the courts ruled in favor of allowing full deduction.Further, the Supreme Court decision in Sasoon J David was cited, which supports the principle that expenses incurred during the course of business and for business purposes are deductible even if they incidentally benefit other related entities.Court's interpretation and reasoning: The CIT(A) and the Tribunal observed that the AO's approach was overly restrictive by attempting a partial disallowance on the basis of incidental benefit to the foreign sister concern. The Tribunal noted that the assessee was itself a broadcaster and incurred marketing and publicity expenses primarily for promoting its own channels. The incidental benefit to the foreign sister concern did not negate the business purpose of the expenditure.The Tribunal emphasized that the test under Section 37(1) is whether the expense was incurred 'during the course of and for the purpose of business' of the assessee. If this test is satisfied, incidental benefits to others do not justify disallowance.Key evidence and findings: The assessee had incurred marketing and publicity expenses amounting to Rs. 15.25 crores, primarily for promoting its regional language television channels. The AO accepted 75% of these expenses as allowable but disallowed 25% on the ground of benefit to the foreign sister concern. The CIT(A) and the Tribunal relied on the assessee's submissions, judicial precedents, and the absence of any contrary material to uphold full deduction.Application of law to facts: Applying the legal principles from the cited precedents, the Tribunal found that the AO's partial disallowance was not sustainable. The marketing expenses were incurred wholly and exclusively for the assessee's business. The incidental benefit to the foreign sister concern did not alter the nature of the expense or its eligibility for deduction.Treatment of competing arguments: The revenue argued that since the foreign sister concern benefitted and did not reimburse these expenses, a part of the expenses should be disallowed. The Tribunal rejected this argument, relying on the binding precedents which held that incidental benefit to related parties does not disqualify the deduction if the expense was incurred for the assessee's business. The revenue's reliance on the AO's order and a Special Bench ruling in an unrelated case was found insufficient to override the consistent judicial trend favoring the assessee.Conclusions: The Tribunal concluded that the CIT(A) was justified in deleting the disallowance of 25% of marketing and publicity expenses. The AO's partial disallowance was set aside, and the full amount of such expenses was allowed as deduction under Section 37(1).Issue (c): Sustainability of Assessing Officer's partial disallowance in light of judicial precedentsRelevant legal framework and precedents: The Tribunal extensively relied on the decisions of the Hon'ble Bombay High Court in CIT v. Star India Pvt. Ltd. and CIT v. NGC Network (India) Pvt. Ltd., which invalidated the AO's action of granting only part of the advertisement and marketing expenditure on the ground of benefit to foreign principals. The Tribunal also referred to the Third Member decision of the Mumbai ITAT and the ruling of the Supreme Court in Sasoon J David.Court's interpretation and reasoning: The Tribunal noted that these precedents have established that the AO's approach of partial disallowance due to incidental benefit to foreign principals is not permissible under the law. The Tribunal underscored that the relationship between the Indian entity and the foreign principal, even if principal-agent in nature, does not justify partial disallowance if expenses are incurred wholly and exclusively for the Indian entity's business.Key evidence and findings: The Tribunal observed that the CIT(A) had relied on the assessee's own earlier case for AY 2010-11 where the issue was decided in favor of the assessee following the same principles. The Tribunal found no distinguishable material or contrary law brought on record by the revenue to challenge these findings.Application of law to facts: The Tribunal applied the binding precedents and the assessee's own earlier favorable ruling to uphold the CIT(A)'s order. It held that the AO's partial disallowance was contrary to settled legal principles and was rightly deleted.Treatment of competing arguments: The revenue's reliance on the AO's order and the Special Bench ruling in a different case was considered but found insufficient to override the consistent judicial pronouncements favoring the assessee. The Tribunal emphasized the absence of any contrary binding precedent or distinguishable fact to justify interference.Conclusions: The Tribunal upheld the CIT(A)'s deletion of the partial disallowance and dismissed the revenue's appeal.3. SIGNIFICANT HOLDINGS'The Hon'ble Bombay High Court in the case of Star India Private Limited as well as in the case of NGC Network (India) Private Limited has dealt with the similar issue and has invalidated AO's action of granting only part of the advertisement and marketing expenditure on the ground that it has also benefited the principals. The Hon'ble High Court relying on the decision of Supreme Court in the case of Sasoon J David has held that the mere fact that the foreign principals are also benefited does not entail right to deny deduction under Section 37(1) of the Act.''Admittedly as per AO also the assessee had incurred impugned expenses primarily for the purpose of its business. If these expenses incidentally provided some benefits to some other entity also, then that itself would not make the said expenses as not related to business of the assessee or not having been incurred during the course of or for the purpose expenses is that it should be incurred during the course of and for the purpose of business of the assessee, which is duly passed here, and beyond that nothing more is to be examined.''In view of the above decision of the Hon'ble ITAT in appellant's own case as also the decisions of the Hon'ble Bombay High Court, the addition of Rs. 3,81,34,639/- made by the Assessing Officer cannot survive and hence, is deleted.'Core principles established:Marketing and publicity expenses incurred wholly and exclusively for the purpose of the assessee's business are deductible under Section 37(1) of the Income Tax Act, even if such expenses incidentally benefit foreign sister concerns or principals.The mere incidental benefit to related foreign entities does not justify partial disallowance of expenses if the expenses are incurred in the course of and for the purpose of the assessee's business.Judicial precedents from the Bombay High Court and the Supreme Court establish that the relationship of principal and agent does not alter the deductibility of expenses incurred by the agent for its own business.Revenue's attempt to disallow expenses on the ground of non-reimbursement by foreign sister concern is not sustainable in the absence of contrary binding precedent or distinguishable facts.Final determinations on each issue:The Tribunal affirmed the CIT(A)'s order deleting the disallowance of 25% of marketing and publicity expenses. The appeal filed by the revenue was dismissed, confirming that the entire marketing and publicity expenses incurred by the assessee for promoting its own business are allowable deductions under Section 37(1) of the Income Tax Act, notwithstanding incidental benefits to foreign sister concerns.