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2008 (6) TMI 300 - AT - Income TaxAllowability of expenses on account of reimbursement of service charges and the nature of services - expenses related to earlier years - related entities or not - Service charges - Marketing expenses - deductible u/s 37(1) or not. Service charges - HELD THAT:- TCCC, USA is a multinational company operating in more than 150 countries through its subsidiaries. The three agreements are part of the 'business model' chosen by TCCC. The subsidiary companies like the CCI Inc. and the assessee are independent entities for the purpose of the IT Act, 1961. In such a situation, an expenditure incurred by one company may sometimes directly and/or indirectly benefit more than one group company. There will be inter se purchases and sales at rates carefully worked out after taking into consideration various factors - in respect of the expenses relating to the services rendered by CCI Inc. to the bottlers, it can be said that the necessary 'nexus' did exist between such expenses and the 'purpose of the business' of the assessee. 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 have been fulfilled. The fact that the bottlers and TCCC-a group company were also benefited by these services is immaterial - Therefore, on the facts of the case, we see no justification for the addition of Rs. 7,42.98,465 (Rs. 10,80,04,482 - 3,37,06,017) - the addition of Rs. 10,80,04,482 is reduced to Rs. 3,37,06,017. In other words, the assessee gets relief of Rs. 7,42,98,465. Marketing expenses - HELD THAT:- The reasons given by the AO for making the ad hoc disallowance/ addition of Rs. 2,00,00,000 have no merit. The CIT(A) too gave no cogent reason to agree with the AO and therefore, there are no justification for the disallowance. It is accordingly deleted - the addition of Rs. 10,00,00,000 sustained by the CIT(A), in respect of 'marketing expenses' is reduced to Rs. 4,42,81,637 (Rs. 4,11,61,718 + Rs. 31,19,919). In other words, the assessee gets relief of Rs. 5,37,18,863 (Rs. 2,00,00,000 + Rs. 3,37,18,863) - the issue is partly allowed. Appeal allowed in part.
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