TaxTMI 
TaxTMI 
2023 (6) TMI 1549
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....ejudice to each other: 1. The Ld. CIT(A) has erred in law and in facts in granting partial relief while disposing of the appeal in the present case. 2. The Ld. CIT(A) has erred in law and in facts in confirming the disallowance of Marketing Expenses of Rs. 2,38,09,495/- treating the same as capital expenditure in nature. 3. The Ld. CIT(A) has erred in law and in facts in confirming the disallowance of Rs. 34,84,956/- treating the same as capital expenditure in nature. 4. The Appellant craves leaves to add, amend, alter, delete all or any of the forgoing grounds of appeal." 4. In this case, the Assessee claimed that it has engaged in dealing in pharmaceutical and allied products and had declared a total loss of Rs. 4,96,55,610/- by filing its return of income on dated 14.10.2017 for the AY under consideration, which was subsequently selected for limited scrutiny under CASS and consequently notices under section 143(2) and 142(1) of the Act, were issued, in response to which, the assessee filed requisite details. 5. The assessee in the Profit & Loss a/c debited an amount of Rs. 2,38,09,495/- as service charges for marketing, whereas the total....
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..../ Sales Persons for marketing along with the Region/ Area of deputation (page no. 24) 2. Sample Bill of Nijji Healthcare Private Limited already provided vide submission dated having letter no 0025/11/M/K/KNB/20 dated 26th November, 2019. 3. Ledger of Nijji Healthcare Private Limited deducting TDS at page no 25-26 From the above you will observe that, the reason for low PBDIT is Sales Return of Expired Stocks and non- satisfactory results of performance by Marketing Agency." 5.4 The assessee in support of its claim/submission also submitted the list of employees engaged at various places, however, as alleged by the AO, not provided any details such as amount of salary paid to the persons, works done by the persons for assessee through Nijji, their PAN Numbers, addresses, etc. to establish identity of these persons. The assessee also not provided appointment letters of persons claimed to be engaged in marketing, in order to substantiate the employment of such sales persons, therefore in order to afford a further opportunity, the AO again asked the assessee to explain the process of work done by Nijji and explain the allowability of marketing expenses. ....
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.... of person dependency and outsource the marketing activity to an experienced team. Further, the company was hesitant to go for marketing on PAN India basis on its own due to its weakness on various cultural geological and economic front. The assessee company does not have sales and marketing staff other than staff of NPL for the said activities nor expenses wrt marketing staff under head salaries. This is reflected in the employee list of assessee company attached on page No 22. The decision was mainly on account of convenience to the operations of the company. huge and vast experience of promoters of NHPL and to focus more on developing strong medicines, engaging into manufacturing expertise, research and development of the Ayurvedic Products. We attach herewith the profile of NHPL on page no 6 to 21. Your goodself will observe and understand that the company's core business is providing services for marketing and sales activities to various companies, especially to Pharma and Consumer Health Companies like Alere (MNC). P&G (Global leader in FMCG / FMHCG), Zydus (for Sugar free product). Meiji (A Japanese organization in FMCG), Kraft Heinz (Complan) ....
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....NHPL for its sales activities. Conclusion The assessee company has appointed Healthcare Put. Ltd (NHPL) for its day-to-day marketing activities for sales of ail the products and the compensation paid by the assessee is "Service charges for Marketing and sales" and not Market Development Expenses. The revenue earned from sales is revenue income and thus as per matching principle in accounting, the corresponding expenses incurred to earn the said income are also revenue in nature, which cannot be capitalized. Further, the payments made to NHPL are of recurring in nature for services provided with very limited period benefits (i.e. for the services provided for a particular month). The benefits received being limited to a particular period and not of enduring nature, it cannot be principally capitalized as per the accounting principles. This can be observed from the table provided above for year on year payments made to NHPL. It is just like a Salary paid by a company to its marketing staff, which is very well allowed as revenue expenditure to the company. Hence the show-cause notice issued for capitalizing of Rs.2,38,09,495 paid to Nijji H....
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....elopment Charges paid by the assessee to Nijji are towards the development of market for its products and therefore such expenses are to be capitalized as the benefit arisen from such expenses is of enduring nature and will last over a period of time longer than one F Y. 5.8 The AO also rejected the claim of the assessee to the effect that in AY 2016-17, such expenses were also claimed and allowed, therefore, the same may be allowed by following the rule of consistency, by holding that principle of res-judicata is not applicable to Income Tax proceedings. 5.9 The AO ultimately disallowed the amount of Rs. 2,38,09,495/- paid by the assessee to Nijji and claimed as revenue expenses. 6 On appeal, the Ld. Commissioner more or less on the same footing/reasoning as of the AO, affirmed the said addition. 7. The assessee also challenged the said addition and claimed that from the website of Nijji, it is clear that it also involved in Geographical expansion. Further Nijji has clearly depicted in its website, contracts sales solutions (CSO/CSS/CSMO) and in the bottom of the page described as under: "This is our core service where we take complete accountability of achiev....
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....ery activity which gives an enduring benefit to the assessee would not get the character of capital in nature. Enduring benefit is not the only criteria to decide the nature and character of expenditure. Thus, necessary test is whether it is for acquisition of any capital asset or for the purpose of carrying on the business derived revenue from it. In order to ascertain whether the expenditure is revenue or capital in nature, one has to look at the expenditure from commercial point of view. For better understanding, the concluding part of the order is reproduced herein below: 7. Now we may advert to the third substantial question of law, which pertains to the claim of the assessee for allowing deduction in respect of expenditure incurred under the head of marketing support fee and transaction support fee. The Tribunal by placing reliance on the order dated August 14, 2014 passed in case of the assessee itself for the assessment years 2006-07 and 2008-09 has held that in the aforesaid years, the Tribunal had taken into account the market support services to be delivered by IBM to the assessee and from a perusal of the article 2 of the agreement, it is evident that IBM wa....
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....curred for geographical expansion, has to be considered as "capital in nature". The judgement in Principle Commissioner of Income Tax & Anr Vs. Lenovo India Pvt (supra) as relied upon by the Assessee pertains to the well established company, whereas the assessee company is a new one. Hence, the judgment referred to above at all, is not applicable to this case and therefore not of much help. 9. Heard the parties and perused the material available on record and given thoughtful consideration to the peculiar facts and circumstances and the rival contentions of the parties. We observe that the AO disallowed the expenses claimed by the assessee as "revenue in nature" mainly on the reasons that profile of the Nijji do not depict as to whether the Nijji is involved in the sale of products. The work profile of Nijji includes all the service related to launch of products, product planning and management, the work force consultancy in branding and strategic solutions except sales of product as claimed by the assessee. In the bills issued by Nijji, it is clearly mentioned that expenses are towards development of market and not towards the sale of product. Further the Market Development Exp....
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....f the Assessee and determine the tax payable therein in accordance with law but not otherwise. Therefore in our considered view, the AO by exercising its powers under the Act, would have summoned M/s Nijji to ascertain the real picture and to determine real status of expenditures in particular facts and circumstances. 9.4 Hence, for the just decision of case and for the ends of justice, we deem it appropriate to remand the instant issue to the file of the AO to determine afresh the nature of expenditure incurred as claimed by the assessee, by considering the Objects/Memorandum of Association/ Profile of Nijji and nature of expenditure incurred/amount received respectively by the Assessee and Nijji and by giving an opportunity to the assessee to produce Niiji or by summoning Nijji directly for establishing its Objects/Memorandum of Association/Profile and the scope/nature of services provided and details of the employees engaged/appointed by Nijji particularly for selling the products of the assessee. Further, also to establish the actual output made by M/s Nijji in the business of the assessee. We clarify that primary onus would be on the assessee. In the result, issue qua ex....