TaxTMI 
TaxTMI 
TaxTMI 
2011 (6) TMI 326
X X X X Extracts X X X X
X X X X Extracts X X X X
....engaged in the business of distribution and marketing of National Geographical Channel and History Channel. In the process it also rendered post production services. However, w.e.f. 1st July, 2004 the assessee-company entered into 'advertising sales representation agreements' with Fox International Channels as well as NGC Net Work Asia LLC whereby the assessee was appointed as an exclusive independent representative in the territory to solicit television advertising for the channels and to collect and remit advertisement charges. In return the assessee is entitled to commission @ 15% of net billed advertising actually collected by foreign representative or received by assessee on account of advertisements solicited and concluded by the representative during the term of the agreements. Advertisement orders on which representatives shall be eligible to commission shall be those solicited and concluded by representatives in the territory pursuant to section E-1, even though obtained in collaboration with the principal's personal or promotional activities. Case of the learned Counsel is that even prior to 2004 assessee was incurring advertisement expenditure and it was consistently all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssing Officer sought to disallow the expenditure under section 37(1) read with section 40A(2) of the Act, in fact the said expenditure is not covered under section 40A(2) of the Act since payments were made to third parties and not to its principals. He further observed that genuineness of the expenditure is not disputed by the Assessing Officer; the Assessing Officer has not pointed out any instance of expenditure which was not wholly and exclusively incurred for the purpose of business. The main plank of the Assessing Officer's contention was that expenditure incurred by the assessee was excessive and unreasonable and it also benefited principals whereas there cannot be any disallowance merely on the ground that it is excessive or unreasonable, unless the case falls within the ambit of section 40A(2) of the Act. Learned CIT(A) observed that the impugned expenditure is not covered under section 40A(2) of the Act. Further, expenditure having been incurred in the form of payments made to Indian residents it cannot also be treated as an international transaction so as to apply the provisions of section 92 of the Act. Relevant observations of the learned CIT(A) are extracted for immed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isallowed solely on that basis. In this regard, he relied upon the decision of the ITAT, Mumbai Bench in the case of Nestle India Ltd. v. DCIT [ ] 111 TTJ 498. 7. Learned J.M. was however of the view that impugned expenditure would not qualify for deduction because it was not incurred wholly and exclusively for the purpose of business. Terms and conditions of the agreements were taken note of by the learned J.M. to highlight that the assessee was appointed as representative of Fox International Channels and National Geographical Channel Net Work Asia to solicit television advertisements for their respective channels i.e., History Channel and National Geographical Channel. In his opinion, assessee acted only as an agent of two foreign companies, without having any right or authority to take part in the decision as to which advertisement has to be telecasted; assessee was required to forward the proposals to those companies for consideration and for acceptance of the advertisements to be telecasted. The assessee was thus acting as an intermediary for those companies and in return assessee was entitled to get commission @ 15% of net billing on advertisements. All the general ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th the object and motive of the expenditure. In other words, unless the object and motive of the expenditure is wholly for promoting the business of the assessee, expenditure will not qualify for deduction. He again referred to the quantum of expenditure in contrast, with the total income offered to tax, to point out that in the event of expenditure being high in comparison with the income offered to tax a question arises as to whether expenditure was incurred exclusively for the purpose and conduct of business ? 9. Learned Judicial Member referred to the sample copies of the advertisements published in newspaper's to highlight that in none of those advertisements the companies name is not mentioned which implies that advertisements were wholly for the promotion and publicity of the channels and predominantly to promote the business of the foreign companies and not to benefit the assessee-company. Though he admitted that the primary condition to be fulfilled to qualify for deduction under section 37(1) is the purpose i.e., expenditure has to be incurred wholly and exclusively, but in the event of an expenditure incurred for dual purpose, it would not qualify for deduction because ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....own name, learned Judicial Member concluded that the sum of Rs.6.21 crores will not qualify the test of commercial expediency. However, he chose to restore the Order of the Assessing Officer implying thereby that 1/3rd of the expenditure shall qualify for deduction. 12. On a reference under section 255(4) of the IT Act, 1961 the matter was listed for hearing on 1-6-2011. Learned Counsel, appearing on behalf of the assessee, submitted that in order to obtain commission from the principals, assessee has to incur certain expenditure towards advertisement as per the agreements entered into with the principals. He then adverted our attention to Circular No. 742, dated 2nd May, 1996 (regarding Taxation on Foreign Companies) to submit that it is a common practice that foreign telecasting companies ordinarily agree to pay commission at the rate of 15 per cent or so to the advertisement agent which should be treated as fair and reasonable if the taxable income is computed at 10 per cent of the gross receipts. 13. Learned Counsel, appearing on behalf of the assessee, adverted our attention to pages 6 and 16 of the paper book to submit that the income declared by the assessee is within the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arned Judicial Member to differentiate this case to hold that the case falls outside the ambit of section 37(1) of the Act, has no relevance in the instant case. He thus strongly supported the Order passed by the learned Accountant Member. 14. On the other hand, learned D.R. strongly supported the Order passed by the learned Judicial Member. He adverted our attention to page 11 of the paper book to submit that though the assessee-company has been incorporated in the year 2000 and was primarily engaged in the distribution and marketing of the National Geographical Channel and the History Channel, w.e.f. 1st September, 2004 the assessee has agreed to render the services of soliciting television advertisements for the channels which in itself shows that the assessee was engaged in two independent activities i.e., (a) distribution and marketing and (b) as an agent to solicit television and advertisement for the channels. He also adverted our attention to page 18 of the paper book to highlight that agreements are liable to be terminated subject to certain conditions which shows that the expenditure incurred by the assessee may or may not yield any benefit if it is terminated immediatel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o confine himself to the question framed and referred to by the Hon'ble President. In the instant case the Assessing Officer has not disputed the nature of expenditure. The fact that he has allowed 1/3rd of the total expenditure shows that the expenditure was revenue in nature and it was wholly and exclusively for the purpose of business. Unless it is shown that it was a fraudulent transaction it cannot be assumed that expenditure was not exclusively incurred for the purpose of business. So long as there is an intimate connection between the expenditure and the business carried on by the assessee, either of distribution or of soliciting advertisements, merely because a third party also gains some benefit out of such expenditure it cannot be assumed that the expenditure would fall outside the ambit of section 37(1) of the Act. He thus strongly supported the Order passed by the learned Accountant Member. 17. I have carefully considered the rival submissions and perused the record. In my considered opinion the expenditure incurred by the assessee can be said to be wholly and exclusively incurred for the purpose of business. No doubt, there is no straight jacket formula to apply the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supra), and the decisions of the Hon'ble Apex Court in the case of Travancore Titanium Product Ltd. and Panipat Woollen and General Mills Co. Ltd. (supra) the expression "exclusively" has to be understood in a way that due weightage has to be given to the intention of the parties, nature or character of the trade and the objects sought to be achieved. Learned Judicial Member further observed any remote or indirect benefit as a result of the expenditure cannot be said to be incurred wholly and exclusively for the purpose of trade. In the opinion of the learned Judicial Member even if the expenditure is incurred wholly for the purpose of business, if there is a suspicion as to the intention of the parties with regard to the object sought to be achieved, it cannot be considered under section 37(1) of the Act since it has to be assumed that the benefit is remote or indirect, with reference to the expenditure. In my humble opinion the view taken by the learned Judicial Member is based on incorrect appreciation of the principles laid down by the Courts in the aforementioned judgments. In the instant case the assessee incurred the expenditure as per the agreement entered into with t....