2008 (6) TMI 300 - AT - Income Tax

Tribunal Grants Partial Relief on Service Charges and Marketing Expenses, Upholds CIT(A) Decisions Against Department's Appeal.

The Tribunal partially allowed the assessee's appeal, reducing the addition of service charges from Rs. 10,80,04,482 to Rs. 3,37,06,017, providing relief ... Allowability of expenses on account of reimbursement of service charges and the nature of services - expenses related to earlier years - related entities or not - Service charges - Marketing expenses - deductible u/s 37(1) or not. Service charges - HELD THAT:- TCCC, USA is a multinational company operating in more than 150 countries through its subsidiaries. The three agreements are part of the 'business model' chosen by TCCC. The subsidiary companies like the CCI Inc. and the assessee are independent entities for the purpose of the IT Act, 1961. In such a situation, an expenditure incurred by one company may sometimes directly and/or indirectly benefit more than one group company. There will be inter se purchases and sales at rates carefully worked out after taking into consideration various factors - in respect of the expenses relating to the services rendered by CCI Inc. to the bottlers, it can be said that the necessary 'nexus' did exist between such expenses and the 'purpose of the business' of the assessee. In respect of the impugned expenses incurred by the assessee under the head 'Service charges', the necessary 'nexus' between these expenses and the 'purpose' of the assessee's business did exist, and therefore, the requirement of s. 37(1) can be said to have been fulfilled. The fact that the bottlers and TCCC-a group company were also benefited by these services is immaterial - Therefore, on the facts of the case, we see no justification for the addition of Rs. 7,42.98,465 (Rs. 10,80,04,482 - 3,37,06,017) - the addition of Rs. 10,80,04,482 is reduced to Rs. 3,37,06,017. In other words, the assessee gets relief of Rs. 7,42,98,465. Marketing expenses - HELD THAT:- The reasons given by the AO for making the ad hoc disallowance/ addition of Rs. 2,00,00,000 have no merit. The CIT(A) too gave no cogent reason to agree with the AO and therefore, there are no justification for the disallowance. It is accordingly deleted - the addition of Rs. 10,00,00,000 sustained by the CIT(A), in respect of 'marketing expenses' is reduced to Rs. 4,42,81,637 (Rs. 4,11,61,718 + Rs. 31,19,919). In other words, the assessee gets relief of Rs. 5,37,18,863 (Rs. 2,00,00,000 + Rs. 3,37,18,863) - the issue is partly allowed. Appeal allowed in part. Issues Involved:1. Service charges: whether the services rendered benefited group companies, whether the expenses were incurred to take care of the TCCC brand image, whether rendering services to the bottlers could be a ground for making disallowance, and whether disallowance of foreign travel expenses of the wives was justified.2. Marketing expenses: whether disallowance could be made on an ad hoc basis, whether expenditure on films/TV and brand buildings were capital expenditure, whether Rs. 31,19,919 deserved to be allowed as the payments were made by account payee cheques, and whether the disallowance of prior period expenditure should have been Rs. 5,76,75,624 as claimed by the Department, instead of disallowance of Rs. 4,11,61,718 confirmed by CIT(A).Detailed Analysis:Service Charges:1. Benefit to Group Companies:The Tribunal found that the services rendered by CCI Inc. to the bottlers did benefit the business of the bottlers and TCCC, a group company, in enhancing its brand image in India. However, it also benefited the assessee company as the services helped the bottlers to increase their business volume, which in turn increased the purchase of concentrates from the assessee. Therefore, the necessary 'nexus' existed between these expenses and the 'purpose of the business' of the assessee.2. TCCC Brand Image:The Tribunal noted that the expenses incurred by the assessee for services rendered by CCI Inc. were also for taking care of the TCCC brand image. However, the benefit to TCCC was indirect and incidental. The primary benefit was to the assessee, as the increased brand image led to higher sales of concentrates.3. Services to Bottlers:The Tribunal concluded that the services rendered by CCI Inc. to the bottlers were for the purpose of the assessee's business, as the bottlers' increased business directly benefited the assessee. The Tribunal emphasized the existence of a 'nexus' between the expenses and the 'purpose of business' of the assessee.4. Foreign Travel Expenses of Wives:The CIT(A) made a vague observation that the service charges included non-allowable expenses such as foreign travel expenses of employees' wives. However, the Tribunal found this observation too general and lacking specific details, and thus, it could not form a basis for any disallowance.Conclusion for Service Charges:The Tribunal reduced the addition of Rs. 10,80,04,482 to Rs. 3,37,06,017, providing relief of Rs. 7,42,98,465 to the assessee. The ground No. 4 in the assessee's appeal was partly allowed.Marketing Expenses:1. Ad Hoc Disallowance:The AO made an estimated/ad hoc disallowance of Rs. 2,00,00,000 due to the failure of the assessee to file details for certain expenses. The Tribunal found that the reasons given by the AO for the ad hoc disallowance had no merit and deleted the disallowance.2. Capital Expenditure:The CIT(A) sustained a balancing figure of Rs. 3,37,18,000 as capital expenditure for production of TV, cinema, radio, and posters development. The Tribunal found the CIT(A)'s reason too general and vague. The disallowance was deleted as it was devoid of merit.3. Rs. 31,19,919 Payments:The CIT(A) reduced the addition of Rs. 6,02,33,016 to Rs. 31,19,919, representing differences between amounts claimed by the assessee and amounts confirmed by payee-parties. The Tribunal upheld the disallowance as the assessee could not provide details to explain the differences.4. Prior Period Expenditure:The CIT(A) restricted the disallowance of Rs. 9,97,41,327 to Rs. 4,11,61,718, which the assessee accepted. The Department's claim of Rs. 5,76,75,624 was not supported by specific submissions, and the Tribunal upheld the CIT(A)'s order.Conclusion for Marketing Expenses:The Tribunal reduced the addition of Rs. 10,00,00,000 sustained by the CIT(A) to Rs. 4,42,81,637, providing relief of Rs. 5,37,18,863 to the assessee. The ground No. 3 in the assessee's appeal was partly allowed, and the ground No. (2) in the Department's appeal was rejected.Decision Summary:- Assessee's Appeal (ITA No. 1257/Pn/2003):- Ground No. 4: Partly allowed.- Ground No. 3: Partly allowed.- Department's Appeal (ITA No. 1269/Pn/2003):- Ground No. 1: Rejected.- Ground No. 2: Rejected.