AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2024 (6) TMI 516
X X X X Extracts X X X X
X X X X Extracts X X X X
....ether the Ld. CIT(A) has erred in law and on the facts and in the circumstances of the case, in deleting the addition of Rs. 1,15,40, 748/- made by the Assessing Officer on account of disallowance of Service Centre Expenses? 4. The appellant craves to be allowed to add any fresh ground of appeal and/or delete or amend any of the grounds of appeal." 3. The facts in brief are that the assessee company is engaged in the business of trading of mobiles, smart phones, storage devices etc., imported from the China based company SKY Region Trading Ltd. The assessee company was incorporated in immediately preceding year. For A.Y. 2015-16, it e-filed its return on 29.09.2015 declaring loss of Rs. 1,04,28,42,566/-. The case was selected for complete scrutiny through CASS. Statutory notice(s) were issued/ served upon the assessee. In response thereto, details along with supporting evidence were submitted during assessment proceedings which were examined by the Ld. Assessing Officer (AO) on test check basis. 3.1 The Ld. AO found that the assessee had debited provision of warranty of Rs. 1,15,40,748/- to P & L account. He disallowed the same u/s 37(1) of the Income Tax Act, 1961 (the "Act"....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tising its product in consideration of Rs. 3,40,00,000/- and Rs. 1,35,00,000/- plus service tax respectively that comes to Rs. 5,33,71,000/- for a term of one year. 4.3. The total agreement value of Rs. 5,33,71,000/- was recognized in books on the basis of period of agreement following the accrual method of account. In preceding assessment year, assessee debited Rs. 1,05,33,756/- on accounts of Brand Ambassador expenses. During the year under consideration, Assessee has debited Rs. 4,28,37,266/- on account of brand ambassador expenses under the head of Profit & loss a/c "Advertisement and sales promotion expense". 4.4. During the course of assessment proceedings, the appellant had given a detailed note on reasonability of expenses vide letter dated 19.12.2017, copy of product endorsement agreements with brand ambassadors vide reply dated 12.12.2017 and copy of ledger vide letter dated 06.12.2017. 4.5. During the year under consideration, artists promoted products and their features some of the products name are OPPO Mobile- FIND 7, FI, F1S, NI, NI Mini, JOY, YOYO. NEC) 3 and F1S Diwali edition Artists promoted OPPO Mobiles products through Launch event appearance, prints s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....apital field that the expenditure would be disallowable on an application of this test If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit, is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case" 4.10. Further, such a payment has also to be seen from the context of business necessity or expediency also. If the outgoing expenditure is so intricately related to carrying on or the conduct of the business that it may be regarded as integral part of the profit-earning process and not for an acquisition of an asset or a right of the permanent character, the possession of which is condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure 4.11. Thus, from the facts of the case, it is not that thes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....td., [1980] 177 ITR 377(SC). The Apex court held that: "There is also no single definite criterion which by itself, is determinative whether a particular outlay is capital or revenue. The once for all payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit might break down In CIT v. Associated Cement Co. Ltd. JT 282 (2) 287 this Court said: As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 TERI (SC) that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test." 5.8. In CIT....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the case of Empire Jute Co. Ltd. 124 ITR (SC) wherein the Supreme Court held that there could be cases where the expenditure even if it was incurred for obtaining of a benefit of an enduring nature may, nevertheless, be on the revenue account and, in such cases, the test of "enduring benefit" may break down. Derision of the Tribunal did not call for any interference and, therefore, no substantial question of law arose." 5.10. CIT Vs Pepsico India Holding (P) Ltd. (2012) 21 taxmann.com 165 Delhi (Del High Court) "Section 37(1) of the Income-tax Act, 1961-Busness expenditure Allowability of assessed incurred certain expenditure on advertising and marketing of its products and chimed it as business expenditure - Assessing Officer disallowed expenditure incurred on glow signs and neon signs holding that same was of capital nature Whether since expenditure in question was in fact in furtherance of business of assessee and, thus, had direct nexus with its business, and by putting neon signs and glow signs, no assets of permanent nature was created, it was on allowable business expenditure Held, yes. 5.11. Further, the test of enduring benefit applied by the AO was considered....
X X X X Extracts X X X X
X X X X Extracts X X X X
....which is approx. 1.96% of the total sales of mobile phones against expenditure of Rs 31,81,839 for the period ended 31.03.2014 which was 6.63% of the total sales of mobile phones. The expenditure is reduced from 6.63% to 1.96% only because of increase in volumes. 8.5. The appellant company has created a provision of warranty and charged it to profit and loss account as assessee provided standard warranty in which mobile would be repaired or replaced free of charge, when some defect/non- working of product is claimed by the customers of company. The provision is in the nature of claims made by the ASP (Authorised Service Providers) who provide the services to the customers. 8.6. It was submitted that this provision was made by the assessee on account of warranty claims likely to arise on the sales effected by the appellant and to cover up that expenditure. The provision for warranty was based on the basis of past event and on the reasonable estimation. The company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. 8.7 In subsequent assessment year, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pires In view of the above facts and judicial position, disallowance of Rs. 1,15,40,748/- on account of service centre expenses is deleted This ground of appeal is ruled in favour of the appellant." 5. The Revenue is dissatisfied and is in appeal before the Tribunal. All the three grounds relate thereto. 6. The Ld. CIT(DR) supported the disallowance made by the Ld. AO. He highlighted the reasons assigned by the Ld. AO for making the impugned disallowances. 7. The Ld. AR submitted that the Ld. AO has incorrectly considered the expenses incurred on brand ambassador as capital in nature giving enduring benefits and that the ambassadors promoted the 'Brand' instead of the 'Products'. He invited our attention to para 2.1 of Product Endorsement Agreement (copy at pages 31 to 55 of the Paper Book) and meaning of the expression 'Product', 'Endorsement' and 'Services' in para 1.2, 1.6 and 1.7 thereof to explain that the Artists promoted products and features of mobile phone such as high resolution camera, sensor functioning, unique style etc. and no enduring benefits arose to the assessee. In fact, the expenditure is integral part of the profit earning process and is being incurred on a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncurring the expenditure was explained to the Ld. AO with the assistance of Product Endorsement Agreement and recital therein. We have also perused the Product Endorsement Agreement available at pages 30 to 55 of the Paper Book along with the copy of sample invoices placed at page 56 of the Paper Book. On perusal thereof, the Ld. CIT(A) has recorded finding of fact, with which we agree that the expenditure incurred is not creating any enduring benefit of an asset but is rather helping the assessee in augmenting its sales and resultantly its profit. This finding of fact could not be controverted by the Ld. CIT(DR) by bringing on record any adverse material. We are of the view that the impugned expenditure is of revenue nature, incurred wholly and exclusively for the purpose of assessee business and is allowable deduction u/s 37 of the Act. We therefore decline to interfere with the order of the Ld. CIT(A) on the point and rejecte ground No. 1 of the Revenue. 9. As regards, the disallowance of Rs. 6,69,29,143/- on account of Advertisement and Sales Promotion expenses made by the Ld. AO, we are not inclined to agree with the view of the Ld. AO that the impugned expenditure will give ....