TMI Blog2008 (6) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dt. 5th Oct., 2005 (to the extent it deals with the deduction for service charges and marketing expenses) and 7th July, 2006 [Exhs. E and K passed by respondent No. 1 under ss. 254(1) and 254(2) of the Act respectively]. 5. In order to comply with the directions given by the Bombay High Court, the learned Authorised Representative of the assessee Shri S.E. Dastur, and the learned Departmental Representatives, Shri S.D. Kapila and Shri Pradeep Sharma, were heard on 16th Jan., 2008, 17th Jan., 2008, 18th Jan., 2008 and on 28th Jan., 2008. Brief facts 6. The assessee company is a 100 per cent subsidiary of Coca Cola South Asia India Holding, Hongkong, which in turn is a subsidiary of Coca Cola South Asia Holding, Singapore. The ultimate holding company of the assessee is The Coca Cola Company, USA (TCCC for short), engaged in the manufacture of certain 'beverage essence' and 'beverage bases' used in the preparation of non-alcoholic beverages which are sold under the trademarks : Coca Cola , Coke , Fanta and Sprite . TCCC is the registered owner in India of the trademarks Coca Cola , Coke , Fanta and Sprite . 6.1 The assessee company had e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65 Total disallowance 10,80,04,482 7.1 The CIT(A) confirmed the above disallowance made by the AO for the reasons summarized in paras 8.3.1 and 8.4 of his order as under : 8.3.1 As pointed out above, detailed enquiries were required to be made and in the process, statement on oath of Shri K.S. Nair, general manager of the appellant company was also recorded during the appellate proceedings for asst. yr. 1998-99 and a copy of the same is enclosed with the appellate order for asst. yr. 1998-99. Here it would suffice to point out that the minutes of the sales and operation meeting submitted by the appellant in the appellate proceedings for asst. yr. 1998-99 vide submission dt. 9th May, 2003 and the statement on oath as well as discussion with Mr. K.S. Nair during the appellate proceedings for asst. yr. 1998-99 reveal the following specific factors which are relevant for determining the allowability of service charges and the nature of services rendered by CCI Inc. to the appellant company : (i) CCI Inc. has been rendering services not only to the appellant company but also to other group companies and entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant and embedded in the reimbursed cost of appellant to CCI Inc. which are not allowable in nature as per IT law. These include foreign travel expenses of wives of employees for their pleasure trips, capital expenditure on purchase of software, etc. (vi) There are expenses on various services directly provided to the appellant for supply of bases and concentrates of the beverages and various other aspects which have been discussed in detail in the appellate order for asst. yr. 1998-99. 8.4 In the light of these facts on record and after considering all these features, without prejudice to the stand that may be taken in later assessment years (as the facts are slightly different in different assessment years), the disallowance made by the AO out of the service charges which is of the order of less than 25 per cent of the total service charges claimed, is required to be upheld on this account. I am therefore not discussing the issue relating to the previous year expenses which has been discussed by the AO in the opening para of para 7(iv) of the assessment order. The material aspect is that part of the service for which service charges have been paid are not wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee as against details received from parties 2,12,04,099 (b) Expenses pertaining to earlier years 9,97,41,327 (c) Expenses in respect of which letters were returned back 3,90,28,917 (d). Estimated/ad hoc 2,00,00,000 Total 17,99,74,343 8.1 The CIT(A) restricted the above disallowance to. 10 crores, described in para 7.17 of his order, as under : 7.17 In the light of these facts, the disallowance made under the head 'Marketing expenses' by the AO is sustained at Rs. 10 crores in this particular assessment year as the appellant was engaged in the manufacture of beverages in Ahmedabad and Pune as well. The above disallowance sustained at Rs. 10 crores is made up of four components viz. : (i) Rs. 4,42,81,637- because of external enquiries and as admitted by the appellant in view of its inability to give evidence in support of its claim. (ii) Rs. 2 crores Ad hoc disallowance as the appellant has not been able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, restore this issue to the file of the AO to decide the same de novo with a direction that he will determine and ascertain the expenditures pertaining to this year, examine various kinds of expenditure claimed by the assessee and decide the matter of admissibility of the expenditure as per law after giving an adequate and reasonable opportunity of being heard to the assessee, who shall be at liberty to furnish all such details, papers, documents, evidences, etc. in support of its claim. We order accordingly. 9. In its miscellaneous application dt. 3rd Feb., 2006, the assessee, inter alia, submitted in paras 19 and 27, that the Tribunal omitted to decide the ground Nos. 4 and 3 in the assessee's appeal and the ground Nos. 1 and 2 in the Department's appeal, relating to the disallowances out of 'service charges' and 'marketing expenses', raised before it, though the material already on record enabled it to decide the same, and that this constituted a mistake apparent from the record. In para 32 of its aforesaid petition the assessee requested as under : 32. For the aforesaid reasons, the applicant respectfully submits that the Hon'ble Tribunal m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst segregating the prior period expenses and thereafter determine the actual amount pertaining to the year under appeal and adjudicate as to whether the expenses incurred in the year in question have been incurred wholly and exclusively for the purpose of business. It is pertinent to note that in para 50 of its order, the Tribunal has given a categorical finding to the effect that out of the disallowance of service charges of Rs. 10,80,04,482 confirmed by the CIT(A), service charges amounting to Rs. 3,37,06,617 were incurred in the earlier year and that amount is not allowable in the year in question. Having quantified the claims which relate to earlier years, the Tribunal was not justified in remanding the matter to the AO to redetermine the service charges which are relatable to earlier years. 27. Similarly, whether service charges and marketing expenses were incurred wholly and exclusively for the purpose of business was not an issue raised in the appeal. The specific grounds raised in the appeal against the order of the CIT(A) were, whether the services rendered benefited group companies, whether the expenses were incurred to take care of the TCCC brand image, whether rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 73,79,03,469. Marketing expenses (Department's appeal) (viii) whether the disallowance of prior period expenditure should have been Rs. 5,76,75,624 as claimed by the Department, instead of disallowance of Rs. 4,11,61,718 confirmed by CIT(A). (ix) whether the disallowance on account of differences/no reply should have been Rs. 1,89,99,955 as claimed by the Department instead of disallowance of Rs. 31,19,919 confirmed by the CIT(A). 12. We now proceed to decide the aforesaid specific issues/grounds in the following paras. 13. The submissions made by both the parties during the hearing were summarized by the learned Authorised Representative and the learned Departmental Representatives, in written 'notes' filed on 18th/28th Jan., 2008. Arguments (service charges) 14. Shri S.E. Dastur, the learned Authorised Representative reiterated the arguments which were put forward on behalf of the assessee company before the AO, the CIT(A) and the Tribunal. He submitted that the assessee company benefited from the services rendered to it by CCI Inc., that any prudent businessman in the assessee's position would have engaged the services of CCI Inc. to per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk of authorized contract bottlers, that it assured planned supply of concentrates to the bottlers by appointing a contract manufacturer-cum-supplier of concentrates who worked exclusively for it and to whom it sold essence which is the most vital and closely guarded ingredient of the concentrate, that for carrying on these activities including marketing and assisting bottlers in achieving a high degree of efficiency in production, quality and hygiene, TCCC utilized services of CCI Inc., the Indian branch for which payments were wholly made by Coca Cola India (P.) Ltd., the assessee. 15.1. The assessee was an authorized supplier of concentrates under a license from TCCC for manufacturing and supplying concentrates to the 'authorised bottlers' of TCCC under strict instructions and plan of TCCC, which the latter continuously and systematically monitors and supervises, that the assessee is a captive contract manufacturer and supplier of concentrates, that it has limited manpower of about 50-60, which is wholly devoted to manufacture and supply of concentrates as per TCCC's plan and arrangement with bottlers in India. It is the business of TCCC, as is evident from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m-supplier, that it is TCCC which is engaged in systematic business of contracting concentrates manufacturer (the assessee), supervisor-cum-consultant (CCI Inc.) and network of bottlers, that the assessee has no say in the pricing of essence which is a vital raw material for producing concentrates, that the assessee has also no say in fixation of price of concentrates to be sold to bottler and not in the pricing of beverages by the bottlers, that all these prices are fixed by TCCC and these prices are not negotiable, that the assessee has also no control over the bottlers, that it is not an independent seller of goods produced by it. Therefore, it is not a trader of its goods, that hence, the entire expenditure is the business expenditure of TCCC, that the settled law, therefore, is that expenditure on marketing and service charges is allowable in the hands of TCCC even if it incidentally benefits Coca Cola India (P.) Ltd., that the payments made by the assessee are gratuitous and not for the purpose of its business, which is that of captive contract manufacturer-cum- supplier of TCCC. 15.5 He drew our attention and took us through the following three agreements : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Aluminium Co. Ltd., the above test was qualified by stating that if the expenditure laid out by the assessee was 'incidental' to the carrying on of his business, it should be allowed. In other words, the requirement of a 'direct and intimate connection between the expenditure and business' was substituted by 'expenditure being incidental to the carrying on of business'. 18.4 It is seen that the expression 'wholly and exclusively' used in s. 37(1) of the IT Act, 1961 was the subject-matter of discussion by the Supreme Court in the case of Sassoon J. David Co. (P.) Ltd. v. CIT [1979] 10 CTR (SC) 383 : [1979] 118 ITR 261 (SC). In this case, the Court held that the expression wholly and exclusively used in s. 10(2)(xv) of the IT Act, 1922 [s. 37(1) of the IT Act, 1961] does not mean necessarily , that ordinarily it was for the assessee to decide whether any expenditure should be incurred in the course of his or its business, that such expenditure may be incurred 'voluntarily' and without any 'necessity' and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court. Subba Rao, J., speaking for the Supreme Court, observed in CIT v. Malayalam Plantations Ltd., The expression 'for the purpose of the business' is wider in scope than the expression for the purpose of earning profits....... The law directs attention to the purpose for which, and not to the motive with which, the expenditure is incurred. 18.7 Both the parties referred to the recent decision of the Supreme Court, in relation to s. 37(1) of the Act, in the case of S.A. Builders Ltd. v. CIT(A). In this case the Court held as under : 35. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 174 CTR (Del) 188 : [2002] 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Proportionate expenses for 3 months 7,42,98,465 Total disallowance 10,80,04,482 21. It is seen that the first/main reason given by the AO for disallowing Rs. 10,80,04,482 was that these expenses related to earlier year and not 'related to this year'. In other words, according to the AO the balance of Rs. 35,55,07,549 related to the accounting year relevant to asst. yr. 1997-98, which he allowed. The other reason given by the AO, and without prejudice to the aforesaid first reason, was that the. item-wise, date-wise details of payment, and evidence/details of services rendered by CCI Inc. to the assessee, were not furnished; but we find that on this reason/ground the AO made no disallowance. The entire disallowance made by the AO was for the reason that it did 'not relate to this year', as seen from the details given above. 22. CIT(A) does not appear to have gone into the question as to whether part of the expenses claimed related to earlier year. He confirmed the disallowance made by the AO for three specific reasons; one, the services were rendered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our opinion, the word 'only' appearing in the judgment of the Supreme Court, as reproduced above, is crucial and makes all the difference, in the context of the facts of the present case. The argument of the learned Departmental Representative would have been acceptable if it was demonstrated by the Department that the expenses were incurred by the assessee for services rendered to bottlers, manufacturing a beverage which was not made from the 'concentrate' manufactured by the assessee company. 26. In the present case, it is an admitted fact that the bottlers manufacture beverages from 'concentrates' purchased from the assessee company. An increase in the volume of business of the bottlers has a direct effect of increasing the volume of the business of the assessee. It can be nobody's case that the volume of the business of the assessee company and of the bottlers was not intricately linked with each other, and that the services rendered by CCI Inc. to the bottlers did benefit the assessee by helping the bottlers to increase the volume of their business. Therefore, in respect of the expenses relating to the services rendered by CCI Inc. to the bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easure trips, capital expenditure on purchases of software etc. . The observation is too general and vague to form a basis for any disallowance. 28.3 In view of the facts and circumstances discussed above, we are of the opinion that 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. The mandate of the Supreme Court, as noted in the above paras, is very clear. 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). 29. To conclude, 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. The ground No. 4 in the assessee's appeal is partly allowed. Arguments (Marketing expenses) 30. Shri S.E. Dastur, the learned Authorised Representative submitted that the 'advertisement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17,99,74,343 33. The AO made the disallowance, mainly on three grounds; one, that there were differences in the amounts claimed by the assessee and the amounts confirmed by the payee-parties; two that there were claims that which were not confirmed by some of the parties by sending replies to the AO; and three, that there were expenses pertaining to earlier years. It is seen that in order to verify the assessee's claim, the AO had written letters to only 56 parties and therefore, in respect of other parties to whom letters had not been written by him an estimated/ad hoc disallowance of Rs. 2,00,00,000 was made. The failure on the part of the assessee to file details has also been mentioned as one of the reasons. 34. The CIT(A) reduced the above addition of Rs. 17,99,74,343 to Rs. 10,00,00,000 computed as under : Particulars AO CIT(A) Diff. (11 parties) 2,12,04,099 31,19,919 No reply (14 parties) 3,90,28,917 Earlier year (7 parties) 9,97,41,327 4,11,61,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of Rs. 6,02,33,016 to Rs. 31,19,919. 36.5 Shri Dastur, the learned Authorised Representative, submitted that Rs. 31,19,919 constituted a small fraction (about 0.4 per cent) of the total expenditure of Rs. 73,79,03,469, that all the payments were made by account payee cheques, and that the concept of 'materiality', as applicable to all walks of life, had to be taken into consideration. He, however, admitted that, at this stage, the assessee could not give details. Admittedly, in respect of this amount of Rs. 31,19,919 the cases of difference/no reply could not be explained. It is seen that during the hearing before the Tribunal on the earlier occasion the assessee was agreeable to the confirmation of the disallowance of Rs. 31,19,919. This has been noted by the High Court in para 23 of its order. Therefore, considering the facts and circumstances discussed above we are of the opinion that the order of the CIT(A), confirming the disallowance of Rs. 31,19,919 does not call for any interference. 36.6 The last component of Rs. 17,99,74,343 was Rs. 2,00,00,000 added by the AO on estimate/ ad hoc basis which was confirmed by the CIT(A). It is seen that in order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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