TaxTMI 
TaxTMI 
2008 (6) TMI 300
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.... then filed a Writ Petn. No. 7459 of 2006, before the Bombay High Court, challenging the orders of the Tribunal dt. 5th Oct., 2005 and dt. 7th July, 2006. While allowing the writ petition, in its order dt. 12th Feb., 2007, Coca Cola India (P.) Ltd. v. ITAT & Ors, [2007] 208 CTR (Bom) 269 : [2007] 290 ITR 464 (Bom), the High Court held as under : "29. For all the aforesaid reasons, we set aside the impugned order passed by the Tribunal dt. 5th Oct., 2005, as well as the order passed on a miscellaneous application dt. 7th July, 2006, insofar as it pertains to the claim relating to service charges and marketing expenses and remit the case to the Tribunal for disposal of the appeal in accordance with law. 30. Accordingly, the writ petition succeeds. Rule is made absolute in terms of prayer cl. (a) with no order as to costs." 4. The cl. (a) of the assessee's writ petition, referred to above, reads as under : "(a) this Hon'ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Art. 226 of the Constitution of India calling for the records of the petitioner....
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....s. The return for asst. yr. 1997-98 was filed on 28th Nov., 1997 declaring loss of Rs. 46,74,77,640. A revised return was filed on 19th Dec, 1997 declaring loss of Rs. 46,62,27,370. In the assessment order passed by the AO under s. 143(3) on 31st March, 2000, the AO determined the loss at Rs. 12,52,40,834 after making disallowances/additions aggregating to Rs. 34,09,86.536, which included, inter alia, the impugned two items as under: Particulars (Rs.) Service charges 10,80,04,482 Marketing expenses 17,99,74,343 7. The assessee had claimed Rs. 46,35,12,031 under the head 'Service charges' out of which the AO made a disallowance of Rs. 10,80,04,482, computed in para 7(iii) of his order, as under : S. No. Particulars Amount Amount (i) Expenses pertaining to earlier year (1.1.96 to 31.03.96) 3,37,06,017 Expenses relating to 1.1.96 to 31.12.96 29,71,93,862 (ii) Proportionate expenses for 3 months 7,42,98,465 Total disallowance 10,80,04,482 7.1 The CIT(A) confirmed the above disallowance made by the AO for the reasons summarized in paras ....
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....e the cases have been filed before different Courts by the bottling unit M/s Hindustan Coca Cola Beverages Ltd. and not by the appellant. Merely because the bottlers are customers of the appellant, running their business or getting involved in their quality of product is not for the purposes of business of the appellant company but for purpose of the business of TCCC or the bottler. CCI Inc. provided such services to bottlers and rightly so as per the correspondence and approval from RBI, but these services do not have direct nexus with the business operations of the appellant. The decision of Hon'ble Supreme Court in the cases of Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC) and Indian Aluminum Co. Ltd. v. CIT 1972 CTR (SC) 51 : [1972] 84 ITR 735 (SC) provide relevant legal authority in this regard in the facts and circumstances of the nature of services rendered by CCI Inc. to the appellant and other entities in India. (v) There are expenses embedded in the service charges claimed by the appellant and embedded in the reimbursed cost of appellant to CCI Inc. which are not allowable in nature as per IT law. These include foreign travel expenses of wive....
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.... in other years. The issue is being restored to the file of the AO as already clarified above first to ascertain and determine the actual amount pertaining to the year under appeal and then to adjudicate the question of allowability thereof as per law having regard to the facts and circumstances of the case relevant to the year under consideration and in the light of our discussion made above. The AO shall provide an opportunity of being heard to the assessee. The assessee shall produce and furnish all such relevant and necessary documents, details, particulars, information, books and other evidences which are necessary to support its claim." 8. The assessee had made another claim of Rs. 73,79,03,469, under the head 'Marketing expenses', out of which the AO disallowed Rs. 17,99,74,343, which was computed in paras 6(v) and 6(vi) of his order, as under : S.No. Particulars Amount (a) Difference on account of expenses i.e., excess amount shown by the assessee as against details received from parties 2,12,04,099 (b) Expenses pertaining to earlier years 9,97,41,327 (c) Expenses in respect of which letters were returned back 3,90,28,917 (d). Es....
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....he same out of the expenses claimed in this particular year. The whole of the expenses claimed amounting to Rs. 73,79,03,469 are to be segregated first year-wise, and then the expenses pertaining or related to this year under consideration are to be examined in detail to determine and ascertain whether all the expenses related to the year under consideration has actually been paid out and expended wholly and exclusively for the assessee's business, and whether any part of such expenditure are not allowable in computing the income of the assessee for the reason, that they are capital in nature and/or have been incurred towards building the equity and goodwill of TCCC brand, etc. or has been incurred for the benefit of any third party and for some other reason/s, if any. In these premises, we therefore, restore this issue to the file of the AO to decide the same de novo with a direction that he will determine and ascertain the expenditures pertaining to this year, examine various kinds of expenditure claimed by the assessee and decide the matter of admissibility of the expenditure as per law after giving an adequate and reasonable opportunity of being heard to the assessee, who s....
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....ell as by the Department. 29. Therefore, the alternative prayer made by the assessee in sub-para (c) of para 32 of miscellaneous application stating that a clarification may be given to the effect that marketing expenses do not exceed the disallowance of Rs. 17,99,74,343 and service charges do not exceed disallowance of Rs. 10,80,04,482 is fit to be allowed and we do accordingly." 10. The Bombay High Court, while disposing of the Writ Petn. No. 7459 of 2006, filed by the assessee, set aside the orders passed by the Tribunal dt. 5th Oct., 2005 and dt. 7th July, 2006 and remitted the case back to the Tribunal for disposal of the appeal in accordance with law. The Court observed as under : "26. By the impugned order, the Tribunal has directed the AO to reconsider the entire claim of service charges and marketing expenses by first segregating the prior period expenses and thereafter determine the actual amount pertaining to the year under appeal and adjudicate as to whether the expenses incurred in the year in question have been incurred wholly and exclusively for the purpose of business. It is pertinent to note that in para 50 of its order, the Tribunal has given ....
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.... /grounds 11. The Bombay High Court has directed us to decide the specific issues/ grounds, mentioned in paras 23 and 27 of its order, as under : Service charges (assessee's appeal) (i) whether the services rendered benefited group companies. (ii) whether the expenses were incurred to take care of the TCCC brand image. (iii) whether rendering services to the bottlers could be a ground for making disallowance. (iv) whether disallowance of foreign travel expenses of the wives was justified. Marketing expenses (assessee's appeal) (v) whether disallowance could be made on ad hoc basis. (vi) whether expenditure on films/TV and brand buildings were capital expenditure. (vii) whether Rs. 31,19,919 deserved to be allowed as the payments were made by account payee cheques and it constituted a small fraction of the total expenditure of Rs. 73,79,03,469. Marketing expenses (Department's appeal) (viii) 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). ....
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....the following cases : (i) S.A. Builders Ltd. v. CIT(A) [2006] 206 CTR (SC) 631 : [2007] 288 ITR 1 (SC); (ii) Indian Aluminium Co. Ltd. v. CIT 1972 CTR (SC) 51 : [1972] 84 ITR 735 (SC); (iii) Star India (P.) Ltd. v. Addl. CIT [2006] 104 TTJ (Mumbai)(TM) 1 : [2006] 103 ITD 73 (Mumbai)(TM); (iv) Campa Beverages (P.) Ltd. v. IAC [1990] 34 ITD 241 (Del); (v) Nestle India Ltd. v. Dy. CIT [2007] 111 TTJ (Del) 489; (vi) CIT v. Sabena Detergents (P.) Ltd. [2008] 214 CTR (Mad) 167 : [2007] 164 Taxman 17 (Mad); (vii) Tata Sons Ltd. v. CIT [1950] 18 ITR 460 (Bom); (viii) CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC); (ix) Govind Rubber Ltd. v. Dy. CIT [2004] 90 TTJ (Mumbai) 1068. 15. Shri S.D. Kapila, the learned Departmental Representative, submitted that TCCC, USA was engaged in the business of manufacture, distribution and sale of its products in India by systematically identifying and organizing a network of authorized contract bottlers, that it assured planned supply of concentrates to the bottlers by appointing a contract manufacturer-cum-supplier of concentrates who worked exclusively for it and....
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....xclusively engaged in manufacture and supply of concentrates to TCCC's bottlers, that it is the branch office of CCI Inc., another subsidiary of TCCC, which does the work of assisting (1) the assessee in improving and planning production of concentrates; (2) identifying, assisting and planning the operation of bottlers of TCCC; (3) organizing schemes and material for publicity for marketing for TCCC, that the assessee pays out the entire expenditure, that it is the business expenditure of TCCC. 15.4 The service charges paid by the assessee to CCI Inc. are only partly for expenditure for the purpose of assessee's business, that most of service charges and whole of publicity and marketing expenditure are clearly the business expenditure of TCCC which it does not reimburse to Coca Cola India (P.) Ltd., that incidentally, it is about 60 per cent of gross revenue, that this is inverted logic which is not correct, that the assessee's business is that of contract manufacturer-cum-supplier, that it is TCCC which is engaged in systematic business of contracting concentrates manufacturer (the assessee), supervisor-cum-consultant (CCI Inc.) and network of bottlers, that the ass....
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....s seen that the CIT(A) in para 8.3.1.(v) of his order had placed reliance on the decisions of the Supreme Court in the cases of Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC) and Indian Aluminium Co. Ltd. v. CIT. 18.1 It was pointed out by Shri Dastur, the learned Authorised Representative, that the ratio laid down by the Supreme Court in the case of Travancore Titanium Product Ltd. was modified by a Larger Bench of five Judges of the Supreme Court in the case of Indian Aluminium Co. Ltd. 18.2 In the case of Travancore Titanium Product Ltd., the test adopted by the Supreme Court was that 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business'. 18.3 In the case of Indian Aluminium Co. Ltd., the above test was qualified by stating that if the expenditure laid out by the assessee was 'incidental' to the carrying on of his business, it should be allowed. In other words, the requirement of a 'direct and intimate connection between the expenditure and business' was substituted by 'expenditure being incidental to the carrying on of business'. 18.4 It is seen that th....
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....39;, and in this connection, he drew our attention to the discussion at p. 624 of The Law and Practice of Income-tax (Eighth Edn.) by N.A. Palkhivala, which reads as under : "Purpose of business.-Before the corresponding section in the 1922 Act was amended in 1939, allowance was given in respect of any non-capital expenditure 'incurred solely for the purpose of earning such profits or gains'. Under the present law the expenditure should be laid out 'wholly and exclusively for the purposes of the business'. The two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earning the profits of the business. This is established by the decision of the Supreme Court. Subba Rao, J., speaking for the Supreme Court, observed in CIT v. Malayalam Plantations Ltd., "The expression 'for the purpose of the business' is wider in scope than the expression "for the purpose of earning profits......." The law directs attention to the purpose for which, and not to the motive with which, the expenditure is incurred." 18.7 Both the part....
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.... the AO. (vii) the test is : existence of a 'nexus' between the expenditure and the 'purpose of business'. 19. We now proceed to examine the facts of the present case in the light of the legal position discussed in the above paras. Discussion and conclusion (Service charges) 20. The assessee had claimed Rs. 46,35,12,031 under the head 'Service charges' out of which the AO made a disallowance of Rs. 10,80,04,482, in para 7(iii) of his order, as under : S.No. Particulars Amount Amount (i) Expenses pertaining to earlier year (1.1.96 to 31.3.96) 3,37,06,017 Expenses relating to 1.1.96 to 31.12.96 29,71,93,862 (ii) Proportionate expenses for 3 months 7,42,98,465 Total disallowance 10,80,04,482 21. It is seen that the first/main reason given by the AO for disallowing Rs. 10,80,04,482 was that these expenses related to earlier year and not 'related to this year'. In other words, according to the AO the balance of Rs. 35,55,07,549 related to the accounting year relevant to asst. yr. 1997-98, which he allowed. The other ....
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....case the services rendered by the CCI Inc. to the bottlers were for fostering the business of TCCC in India, and therefore the reimbursement of these expenses by the assessee could not be allowed in view of the decision of the Supreme Court in the case of Chandulal Keshavlal & Co. He drew our attention to the following observations of the apex Court : "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible....." 25.1 In our opinion, the word 'only' appearing in the judgment of the Supreme Court, as reproduced above, is crucial and makes all the difference, in the context of the facts of the present case. The argument of the learned Departmental Representative would have been acceptable if it was demonstrated by the Department that the expenses were incurred by the assessee for services rendered to bottlers, manufacturing a beverage which was not made from the 'concentrate' manufactured by the assessee company. 26....
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....para 8.3.1 of his order, the CIT(A), while justifying a disallowance of 25 per cent of the expenses claimed under the head 'Service charges', inter alia, made a general and vague observation as under : "(v) There are expenses embedded in the service charges claimed by the appellant and embedded in the reimbursed cost of appellant to CCI Inc. which are not allowable in nature as per IT law. These include foreign travel expenses of wives of employees for their pleasure trips, capital expenditure on purchase of software etc." 28.2. The CIT(A) has not given any detail. He merely says, "these include foreign travel expenses of wives of employees for their pleasure trips, capital expenditure on purchases of software etc.". The observation is too general and vague to form a basis for any disallowance. 28.3 In view of the facts and circumstances discussed above, we are of the opinion that 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 h....
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....Rs. 17.99.74.373, computed in Daras 6(v) and 6(vi), as under : S. No. Particulars Amount (a) Difference on account of expenses i.e excess amount shown by the assessee as against details received from parties 2,12,04,099 (b) Expenses pertaining to earlier years 9,97,41,327 (c) Expenses in respect of which letters were returned back 3,90,28,917 (d) Estimated/ad hoc 2,00,00,000 Total 17,99,74,343 33. The AO made the disallowance, mainly on three grounds; one, that there were differences in the amounts claimed by the assessee and the amounts confirmed by the payee-parties; two that there were claims that which were not confirmed by some of the parties by sending replies to the AO; and three, that there were expenses pertaining to earlier years. It is seen that in order to verify the assessee's claim, the AO had written letters to only 56 parties and therefore, in respect of other parties to whom letters had not been written by him an estimated/ad hoc disallowance of Rs. 2,00,00,000 was made. The failure on the part of the assessee to file details has also been mentioned as one of the reasons. 34. The CIT(A) reduc....
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.... 36.4 Shri Kapila, the learned Departmental Representative did not make any particular submission as, to why the CIT(A) went wrong in reducing the addition of Rs. 6,02,33,016 to Rs. 31,19,919. 36.5 Shri Dastur, the learned Authorised Representative, submitted that Rs. 31,19,919 constituted a small fraction (about 0.4 per cent) of the total expenditure of Rs. 73,79,03,469, that all the payments were made by account payee cheques, and that the concept of 'materiality', as applicable to all walks of life, had to be taken into consideration. He, however, admitted that, at this stage, the assessee could not give details. Admittedly, in respect of this amount of Rs. 31,19,919 the cases of difference/no reply could not be explained. It is seen that during the hearing before the Tribunal on the earlier occasion the assessee was agreeable to the confirmation of the disallowance of Rs. 31,19,919. This has been noted by the High Court in para 23 of its order. Therefore, considering the facts and circumstances discussed above we are of the opinion that the order of the CIT(A), confirming the disallowance of Rs. 31,19,919 does not call for any interference. 36.6 The last componen....