TMI Blog1990 (6) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... as the sister concerns of the assessee. One of them is M/s. Pure Drinks (New Delhi) Pvt. Ltd. The relationship of the assessee with the other five bottling companies has been described by the Assessing Officer in a chart reproduced below :-- Assessee Company Name of Company Name of Directors Campa Beverages Co. (P.) Ltd. Harjit Kaur- Mg. | Director (assessee) Charanjit Singh | Daljit Singh | Directors Ajit Singh | Bottling coys. Mohan BottlingCo.Daljit Singh | (P.) Ltd.,LudhianaCharanjit Singh | Directors Ajit Singh | Pure Drinks (P.) Daljit Singh | Ltd.,Patiala. Charanjit Singh | Directors Ajit Singh | Southern Bottlers Ajit Singh | (P.) Ltd.,Patiala. Charanjit Singh | Directors Daljit Singh | Pure Drinks (Cal.) Daljit Singh | (P.) Ltd. Charanjit Singh | Directors Harjit Kaur | PunjabBeverages Daljit Singh | (P.) Ltd.,Patiala. Charanjit Singh | Directors Ajit Singh | 3. During the year under consideration the assessee advertised the soft drinks made from the concentrates manufactured by it by incurring some expenditure directly and by allowing the aforesaid five sister concerns to incur some expenditure themselves and agreeing to reimburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see claims to have reimbursed to the aforesaid 5 bottlers (sister concerns) is as below : Expenses incurred by Bottlers : Rs. (i) Television Screening 1,78,530.00 (ii) Radio --- (iii) Productions 11,652.76 (iv) Press 98,774.01 (v) Hoarding 5,84,642.51 (vi) Cost of Gifts under various schemes --- (vii) Cultural activities other shows --- (viii) Selling Expenses 56,768.93 (ix) Sampling 21,53,787.58 (x) ExportSalePromotion --- (xi) Sale Promotion 1,07,820.21 (xii) Beverages Samples --- ------------------------- 31,91,976.00 ------------------------- Out of the aforesaid expenditure of Rs. 31,91,976 claimed to have been incurred by the assessee through the Bottlers the Assessing Officer vide assessment order dated 6-9-1984 disallowed the expenditure of sampling amounting to Rs. 21,53,788. That addition was confirmed by the Commissioner of Income-tax(A) and the assessee then came to this Tribunal in I.T.A.No. 1733(Del)/85 and the Tribunal vide order dated7-8-1986remitted the matter to the Assessing Officer for a fresh decision in the light of the following observations/directions :-- "We have carefully considered the arguments of the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of that company. After looking into these facts, the Income-tax Officer would come to a definite conclusion about the nature of the expenditure and the allowability or otherwise of the claim." 5. When the matter went back to the Assessing Officer he re-examined the matter. The details of sum of Rs. 21,53,788, vis-a-vis, each bottler as given by the Assessing Officer are as under : "Name of the Bottler Sampling expenses incurred by Bottlers but taken by Campa Beverages (assessee) Rs. Pure Drinks (P.) Ltd. 1,13,590 Pure Drinks (Cal.) Ltd. 14,49,692 Mohan BottlingCo.(P.) Ltd.,Ludhiana2,62,289 PunjabBottling (P.) Ltd. 2,10,981 Southern Bottlers (P.) Ltd. 1,17,236 ------------------ 21,53,788" ------------------ 6. The Assessing Officer asked the assessee to produce evidence regarding the actual incurring of expenses under the head "Sampling" by the bottlers and the checks/control exercised by the assessee with regard to the genuineness of the expenses under the sampling and forming part of the debit notes. It may be clarified here that the expenditure in question was booked in the account books of the assessee on the basis of debit notes issued by the respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite of the aforesaid findings the assessing officer thought that a sum of Rs. 1,68,000 out of the aforesaid expenditure of Rs. 21,53,788 should be allowed. The Assessing Officer thought that 5% of the total sales of the bottling companies should be the reasonable expenditure on sampling and he divided that 5% portion amongst the bottlers and the present assessee in proportion to their respective sales. The actual calculation given by the Assessing Officer is as under :-- "3.6 Therefore, expenses on sampling allowable in the hands of Campa Beverages, is worked out below :-- Name of the concern Sales by theSaleby Campa Bottlers Beverages to bottlers Rs. Rs. 1. Pure Drinks (P.) Ltd. 34,42,702 2,24,750 2. Pure Drinks (Cal.) Ltd. 80,34,963 12,54,912 3. Mohan BottlingCo.(P.) Ltd. 92,39,545 7,47,989 4.PunjabBottling (P.) Ltd. 67,84,707 10,41,255 5. Southern Bottlers (P.) Ltd. 35,15,810 4,99,410 ----------------------- ------------------ 3,10,17,727 37,68,316 ----------------------- ------------------ (b) Sampling expenses taken as reasonable i.e. 5% of the sales by Bottling Cos. i.e. 5% of 310.17 lacs. 15.5 lacs (c) Proportionate share of sampling expenses for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated3-12-1989admitted the aforesaid additional evidence and remitted the matter to the assessing officer to examine such additional evidence and submit his report. The assessing officer, i.e., the Deputy Commissioner of Income-tax (Asst.), Special Range-V, New Delhi has sent a report dated 1-6-1989 doubting the genuineness of the letters by the assessee forwarding the copy of the Resolution to the bottlers in question and their respective replies because, according to him, (i) such letters do not bear any despatch number ; (ii) there is no mark to show that the said letters were actually despatched or handed over ; and (iii) the assessee had not maintained any despatch register for the said period. 10. The appeals were thereafter heard on merits. The learned counsel for the assessee contended that the expenditure in question was a bona fide expenditure as it was incurred in order to push up the sales of cold drinks manufactured by using the assessee's product, i.e., concentrates as the base and any increase in the sale of cold drinks would result in corresponding increase in the sale of concentrate by the assessee. According to him, cold drinks aforesaid under the brand name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reduce their losses and to reduce the income of the assessee is a clear device to transfer the loss of the bottlers to the assessee and has to be rejected on the principles of Mcdowell's case. It was further contended that the Resolution dated2-6-1979adopted by the Board of Directors of the assessee does not create any obligation on the assessee to take over the expenditure and the resolution does not prescribe any procedure for the exercise of any control on such expenditure. It was also pointed out that the entire expenditure has been booked at the end of the year which shows that this is merely an afterthought. It was also pointed out that in assessment year 1980-81 no such expenditure was taken over and that in the case of another sister concern M/s. Pure Drinks (New Delhi) Ltd., such expenditure was not taken over by the assessee. On these arguments the learned counsel for the Revenue attempted to sustain the disallowance. 12. In order to determine whether the reimbursement of the expenditure on free sampling can be validly treated as a genuine business expenditure of the assessee, the first point that needs consideration is whether there was an agreement between the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture, including expenditure on free sampling, was a genuine need arising out of commercial expediency. The Department had in its paper book filed the standard form of agreement that, according to it, were executed between the assessee and the Franchise holders. Such specimen agreement is placed at item No. 21 of the Revenue's paper book and reliance was placed on clause 3(j)(vi), which reads as under :-- "(vi) The Manufacturer, may from its own account, do such advertisement of the Beverage within the Territory as may seem advisable, is being at all times expressly understood and agreed, however, that the Manufacturers shall first submit all such advertising to the Company for its approval so that its beverage Base and/or Syrup may not get a bad name and will use, publish, maintain and/or distribute only such advertising of the product as the Company shall approve and authorise." According to the Revenue under such agreements the burden of advertising was on the Franchise holders. It is to controvert this argument that the assessee has filed the copies of the agreement actually entered into between the assessee and the bottlers, which show that this clause was struck out in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve bottlers who expressed their consent and the parties by their conduct followed what was stipulated by the resolution, inasmuch as the bottlers incurred substantial expenditure on advertising including free sampling and sent debit notes to the assessee, who in its turn gave the bottlers the required adjustment. A copy of the letter dated9-6-1979, which was sent by the assessee to M/s. Punjab Beverages Pvt. Ltd. has been placed at page 17 of the paper book No. II. The letter reads as under :-- "This has reference to the franchise arrangements made by us with you in regard to bottling of Campa range of products from and out of the beverage base supplied by our Company. You will appreciate that with the exit of the erstwhile Coca-Cola Company fromIndia, concerted efforts are needed to promote the sale of our products with the brand name in the style of 'CAMPA'. With this objective in view, we may have to incur higher expenditure at the initial stages on advertisement/publicity through all possible media on mass scale. Thus keeping in view the discussions you had with us, we have decided to make efforts to launch advertisement campaign and to carry out other publicity work and in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been allowed. Had it been the case of the Revenue that there was no resolution of the nature aforesaid and there was no agreement for reimbursement, then the whole expenditure should have been disallowed. The allowance of about 1/3rd of the expenditure is a tacit acceptance of the assessee's contention that in fact there was such an agreement. We, therefore, hold that there was an agreement between the assessee and the bottlers prior to the commencement of the accounting year, under which the assessee agreed to reimburse the bottlers for their advertising expenditure. 13. We have now to see whether the expenditure of the order of Rs. 21,53,788 was incurrred by the bottlers and is, therefore, a genuine business expenditure of the assessee. The expenditure in question is by way of free distribution of the cold drinks by way of samples. That is why it has been named as free sampling and as held by the Tribunal in earlier order dated7-8-1986free sampling is a known method by which consumer articles are popularised. Such a method is particularly suited when one wants to introduce and popularise things like cold drinks, tea, coffee etc. It was for the purpose of allowing the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s like the assessee even advertise goods that are not made by them directly but are made from goods produced by them. For example, we have been seeing the Steel Authority of India propagating through T.V. the use of stainless steel utensils. Such utensils are manufactured by various persons out of stainless steel sheets produced and sold by others. And if the sale of stainless steel goods increases the sale of SAIL products, i.e., stainless steel sheets would automatically increase. Similar is the case of the present assessee. Then various manufacturers allow their dealers to advertise goods in their respective territories. To illustrate the point, we may refer to the film industry in which the film producer authorises the distributor and the distributor in its turn authorises the exhibitor to advertise the film in the respective territory and such expenditure of the distributor is reimbursed by the producer and the expenditure of the exhibitor is reimbursed by the distributor. Therefore, these are ways of advertising and promoting one's business and we do not think why the assessing officer could not understand the reason for which the assessee agreed to reimburse the bottlers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement with Pure Drinks (New Delhi) and its case stood on a totally different footing. 16. It was also contended that the sister concerns were separate legal entities and, therefore, there was no need to take over their expenditure by the assessee company. There is a fallacy in this argument. It is not correct to say that when in order to advertise and popularise the soft drinks in question, the bottlers were advertising the drinks in pursuance of the aforesaid agreement with the assessee the expenditure was of the bottlers only. It was an expenditure that was incurred by the bottlers under the authority of the assessee and was to benefit the assessee equally by pushing up the sales of its own concentrates. If the assessee was not to reimburse the bottlers and wanted to do free sampling itself, then it would have had to purchase the drinks from the bottlers in question and have its own establishment for popularising the drinks through free sampling etc. That would have been more expensive and would amount to carrying on coal toNew Castle. Any rational man would adopt only this method which has been adopted by the assessee. As the bottlers would suffering losses they could not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying that he is contributing more only to save income-tax. The government from time to time announces several schemes and reliefs and simply because a person utilises those schemes to save tax he cannot be condemned as a tax dodger. Therefore, every device is not bad. It is only a colourable device, i.e., a transaction which is not genuine, which is to be condemned and rejected. In this case as shown by us in this order there were cogent circumstances that necessitated an arrangement of the type in question failing which the business interests of the assessee company and its share holders would have been adversely affected. Therefore, if by the arrangement in question, which has been actually acted upon, the assessee has taken over expenditure which it could incur in its own rights as well and thereby reducing the losses of the sister concerns and the taxable income of the assessee, the mere fact that a savings in taxes is achieved by the assessee, the transaction cannot be branded as a colourable device. In our view, this was an arrangement that any rational citizen would make and we uphold it as a genuine arrangement necessitated by business, commercial and financial exigencies. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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