9911796707
TMI Blog1990 (6) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... e bottling companies has been described by the Assessing officer in a chart reproduced below: Name of Company . Names of Directors . Campa . Harjit Kaur Mg. Director Beverages . Charanjit Singh ) . Co.(P)Ltd.) . Daljit Singh) Directors (Assessee) Bottling Ajit Singh ) . . Companies: Daljit Singh ) . . Mohan Bottling Charanjit Singh) Directors . Co.(P)Ltd.,Ludhiana Ajit Singh ) . . Pure Drinks (P) Daljit Singh ) . . Ltd.,Patiala Charanjit Singh ) Directors . . Ajit Singh ) . . Southern Bottlers Ajit Singh ) . . (P)Ltd.,Patiala. Charanjit Singh ) Directors . . Dajit Singh ) . . Pure Drinks(Cal) Daljit Singh ) . . (P) Ltd., Charanjit Singh ) Directors . . Harjit Kaur ) . . PunjabBevarages Daljit Singh ) . . (P) Ltd.,Patiala Charanjit Singh ) . . . 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 the same to them. For this purpose the assessee company purports to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levision & 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 scheme -- (vii) Cultural activities & other shows -- (viii) Selling Expenses 59,768.93 (ix) Sampling 21,53,787.85 (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 dt.6th Sept., 1984disallowed the expenditure on sampling amounting to Rs. 21,53,788. That addition was confirmed by the CIT(A) and the assessee then came to this Tribunal in ITA No. 1733(Del)/85 and the Tribunal vide order dt.7th Aug., 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 counsel for the assessee and the Departmental Representative and we have gone through the various details and materials filed in support of the assessee's claim. We are of the view that the disallowance has been made witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Pure Drinks (P) Ltd. 1,13,590 Pure Drinks(Cal.)Ltd. 14,49,692 Mohan BottlingCo.(P)Ltd.,Ludhiana 2,62,289 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 respective bottlers. In response to the query as aforesaid, the assessee produced before the Assessing Officer the load report of theLudhianaplant run by Mohan Bottling Co.(P)Ltd. for the Month of March, 1980. The Assessing Officer has observed in the assessment order that this summary load report contain details of the sampling done at va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 5 per cent 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: (a)Name of the concern Sales by the bottlers Sale by Campa . . Bevarages to bottlers 1. Pure Drinks (P) Ltd. 34,42,702 22,24.750 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 per cent of the sales by bottlingCos. . I.e. 5 per cent of 310.17 lacs. 15.5 lacs (c)Proportionate share of sampling expenses for Campa Beverages 15.5 * 37.68 . (310.17+37.68) . 15.5 * 37.68 . 347.85 . 1.68 lacs." Thus, this time the Assessing Officer reduced the disallowance from Rs. 21,53,788 to Rs. 19,85,788. 8. The assessee again appealed to the CIT(A) who vide order under appeal has by exercising his pore of enhancement restored the disallowance to Rs. 21,53,788. The learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 Campa were introduced somewhere in 1979 after the exit of Coca Cola fromIndia. The concentrate was developed by the assessee in its own laboratories and, therefore, a very massive advertisement campaign had to be launched to popularise the drink. According to him free distribution of the cold drinks amongst the customers and prospective buyers was one of the methods of popularising the drinks and this was resorted to by the assessee through the bottlers who were manufacturing the cold drinks. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted 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 asst. yr. 1980-81 on 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 assessee and the bottlers aforesaid on this point. Let us, therefore, first examine whether there was a business need for such agreement. Admittedly the assessee was producing the concentrates which as such had no consumer value. Such concentrates had to be converted by some bottler into respective drinks and then sold in the market. In other words, the concentrate could not be sold to the consumer of cold drinks. Therefore, the sale of the assessee's concentrate depended on the sale of the cold drinks manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 agreements actually entered into between the assessee and the bottlers which show that this clause was struck out in all the agreements. The result, therefore, is that according to the Franchise agreements entered into between the assessee and the aforesaid bottlers, there was no specific agreement about the obligation to advertise the drinks. The assessee passed the resolution, as reproduced above, on 2nd June, 1979 saying that a mass scale advertising campaign has to be launched and advertisement be made either directly or through some of the bottlers subject to the fact that the expenditure on such advertisement shall not exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to the franchise arrangement 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 order that such a campaign be launched on all India level, your involvement in this process is much appreciated; and we accordingly authorise you to do all sorts of advertisement and publicity. In this behalf, the Board of Directors had passed a resolution which is being sent to you. It is requested accordingly that you shall favour us with your debit notes at the end of the accounting year in order to enable us to reimburse the expenditure which you had incurred on this account. This resolution would also sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incurred 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 ways it has been named as free sampling and as held by the Tribunal in earlier order dt.7th Aug., 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 could drinks, tea, coffee, etc. It was for the purposes of allowing the Revenue a second opportunity for verification of the genuineness of this expenditure that the Tribunal vide its order dt.7th Aug., 1986restored the matter to the Assessing Officer so that he may with reference to the books of accounts and other records of he bottlers cross verify these expenses with the other companies. The assessment order ultimately passed by the Assessing Officer would show that he did not make any such attempt to summon records from the bottlers in question to cross verify the genuinen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease. Similar is the case of the present assessee. Then various manufacturers allow their dealers to advertise goods in the 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. 14. As pointed out earlier, it was contended on behalf of the Revenue that the assessee did not exercise any control over the expenditure and that it is unnatural that the assessee should suffer this heavy expenditure without any actual control. This argument, in our view, has no substance. As we have seen above all the bottlers are what the Revenue authorities call as sister concerns. There are common directors and all of them are private limited companies. That means that in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 were suffering losses they could not continue their business indefinitely in such circumstances. They had to do something to minimise their losses. They could ask the assessee to reduce the prices of the concentrate or they could ask the assessee to meet some of their expenditure on advertising. Thus, out of the two or more alternatives, the assessee adopted this method and agreed to reimburse the bottlers the expenditure on advertising. Therefore, the fact that the bottlers we separate legal entities did not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the type in question failing which the business interests of the assessee company its shareholders 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 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. No rational person can suggest that this group of persons should have continued to suffer through the losses of sister concerns and yet pay higher tax on income earned through the assessee company, while their real income was lower. 19. Lastly, Shri Rajendra the learned counsel for the Revenue contended that since free sampling, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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