Business expenses for brand ambassadors, advertisements, and service centers allowed as revenue deductions under Section 37

ITAT Delhi upheld CIT(A)'s decision allowing deductions for brand ambassador expenses, advertisement and sales promotion expenses, and service center expenses under section 37 of the Income Tax Act. The tribunal rejected the AO's classification of these expenditures as capital in nature, finding them to be revenue expenses incurred wholly and exclusively for business purposes. The expenses were held to augment sales and profits without creating enduring benefits or intangible assets, making them allowable deductions.

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Issues Involved:
1. Disallowance of Brand Ambassador Expenses.
2. Disallowance of Advertisement and Sales Promotion Expenses.
3. Disallowance of Service Centre Expenses.

Summary:

1. Disallowance of Brand Ambassador Expenses:
The Revenue challenged the deletion of the addition of Rs. 3,21,27,950/- made by the Assessing Officer (AO) on account of disallowance of Brand Ambassador Expenses. The AO had argued that the expenses were capital in nature, incurred for brand building, and thus should be considered as deferred revenue expenditure. The CIT(A) disagreed, stating that the expenses were for promoting products, not merely the brand, and did not create any enduring benefit. The CIT(A) cited the Supreme Court case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, which held that the test of enduring benefit is not always conclusive. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were of a revenue nature and allowable u/s 37 of the Income Tax Act, 1961.

2. Disallowance of Advertisement and Sales Promotion Expenses:
The Revenue also contested the deletion of Rs. 6,69,29,143/- disallowed by the AO, who argued that the expenses on neon sign boards and hoardings gave enduring benefits and should be capitalized. The CIT(A) ruled in favor of the assessee, stating that the expenses were for maintaining the corporate image and facilitating business operations, not for creating a corporate image. The Tribunal concurred with the CIT(A), referencing the Delhi High Court case of CIT vs. Pepsico India Holdings (P.) Ltd. [2012] 21 taxmann.com 165 (Del), which allowed similar expenses as revenue expenditure u/s 37(1).

3. Disallowance of Service Centre Expenses:
The AO disallowed Rs. 1,15,40,748/- on account of Service Centre Expenses, considering the provision for warranty as contingent. The CIT(A) deleted this disallowance, noting that warranty is an integral part of the sales price and the provision was based on past experience. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court case of Rotork Controls India (P.) Ltd. vs. CIT [2009] 314 ITR 62 (SC), which allows deduction for warranty provisions u/s 37.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletions of all three disallowances. The order was pronounced in the open court on 23rd January, 2024.

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