TMI Blog2012 (10) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred wholly and exclusively for the purpose of business and is not capital in nature – in favour of assessee. - IT APPEAL NO. 4511 (MUM.) OF 2011 - - - Dated:- 11-5-2012 - G.E. VEERABHADRAPPA, AND AMIT SHUKLA, JJ. Mrs. Aarti Vissamji for the Appellant. Pravin Varma for the Respondent. ORDER Amit Shukla, Judicial Member - This appeal has been preferred by the assessee against order dated 20-1-2010, passed by CIT(A)-16, Mumbai for the quantum of assessment passed under Section 143(3) for the assessment year 2006-2007. 2. The solitary grievance of the assessee herein this appeal is against enhancement and disallowance of Rs. 3,8962,423/- made on account of sales promotion expenses by the CIT(A), treating it to be as capital expenditure as against disallowance of 20% made by the Assessing Officer at Rs. 58,44,364/-. 3. The factual matrix of the case is that the assessee-company is engaged in the business of licensing, manufacturing, distribution and selling of diamonds under the brand "Nakshatra". In the course of scrutiny proceedings, the Assessing Officer noted that the assessee has claimed sales promotion expenses of Rs. 3,89,62,423/-, which was towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and, therefore, these expenses do not accrued to the assessee in the capital filed but only in the revenue field. In support of its contentions, reliance was placed on the following judgments before the CIT(A) :- (i) Empire Jute Co. Ltd. v. CIT [1980] 3 Taxman 69 (SC); (ii) ITAT, Delhi E-Bench in the case of Jt. CIT v. Modi Olivetti Ltd. [2004] 4 SOT 895 and (iii) ITAT Mumbai in the case of Gitanjali Gold Precious Ltd. v. ITO [ITA No. 4232/Mum/2005, dated 22-5-2008] 5. Learned CIT(A) after carefully perusing the agreement dated 8-11-2005 entered into with the assessee, DTC Ltd. and DBC AG and taking note of the various clauses (which has been reproduced from pages 5 to 7 of the appellate order), he reached to the following conclusion which are very relevant :- "2.3.3 From a perusal of the aforesaid agreement it is apparently clear that the entire expenditure incurred by the DTC and DBCAG is for the effective marketing strategy to grow consumer demand for diamond and Jewellery and to identify the consumer demand with the Mark owned by the DTC and DBCAG. The entire expenditure is therefore, for the creation of the Mark i.e. Nakshatra and the Brightest Circle of ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consider the nature of advantage in a commercial sense and it is only where the advantage is in the nature of capital field, the expenditure has to be tr5eated as the capital expenditure. In the instant case I find that the entire expenditure incurred by the appellant is in the capital field i.e. creation of a property and goodwill in the form of brand or mark of DTC. Therefore, I find the entire expenditure claimed by the appellant amounting to Rs. 3,89,62,423/- as an expenditure is in the filed of capital. Accordingly, during the course of appellate proceedings the ld. AR of the appellant was asked as to why the entire expenditure should not be disallowed being capital in nature. The Ld. AR of the appellant has stated that the entire expenditure is in the revenue field and is spent for the promotion of sale of branded Jewellery and it does not accrue any benefits of enduring nature to the appellant. The arguments of the appellant were considered and it is found that there is nothing new in the arguments. They are the same argument which were given by the appellant before the Ld. AO. It is, therefore, held that the A.O. has apparently erred in treating only 20% of such payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not have any right, title or interest in the Mark "Nakshatra" and right to use and the copyrights vests with the DTC only. The goodwill resulting from the use of the "Nakshatra" Mark by the assessee company will give enduring the benefit to DBCAG and DTC. On the contrary there is covenant that the assessee company will not do anything to damage the goodwill or diminish the rights or interests of the DTC or DBCAG. From various other clauses, she submitted that the mark "Nakshatra" is only a brand which has to be used for manufacturing or selling of the products. She further drew our attention to the logo and advertisement campaign of the mark "Nakshatra" to show that this brand does not belong to the assessee company as it carries the signature of DTC. Lastly, she submitted that due to usage of this mark, the sales of company had been increasing manifold year by year. The sum and substance of her argument that from all the angles the expenditure incurred are purely in the nature of sales and promotion which was reimbursed to DTC and was in the nature of revenue expenditure which should be allowed as a whole. In support of her contentions, she relied upon the following case law : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promotion of such products under the mark of "Nakshatra", the enduring benefit belongs to DTC and what the assessee is enjoying is only profit from selling of the premium products under the said mark. The goodwill here in this case is an asset which does not belong to the assessee company but at the same time the assessee is enjoying the fruits of profit from usage of such a goodwill for which it is making payment to the owner of such asset. Thus, the payment made by the assessee does not go to create enduring benefit of an asset belonging to the assessee company but augmenting its sale and resultantly its profit. Therefore, such an expenditure, in our view, is definitely of revenue field. The advantage of using mark "Nakshatra" is mainly facilitating the assessee's business operation and to augment more profitability without generating any capital or fixed capital to the assessee. 9.2 Even for the sake of the argument, it is presumed that using of the mark "Nakshatra" is giving advantage of enduring benefit to the assessee or it is a some kind of license, still it would be on revenue account as there is no creation of an asset tangible or intangible to the assessee. The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as revenue expenditure. Here in this case, payment on account of sales promotion to DTC was not for acquisition of an asset or a right of a permanent character. The payment was for a promotion of a brand from which the assessee company is getting benefit for carrying on its business for earning profit. The usage of the mark "Nakshatra" is enabling the assessee to make more sales but it has not resulted in any kind of addition or augmentation of any profit making asset. It may also happen that the assessee may choose not to use the mark or the owner of the mark decline the right to use of the mark, then in that situation there is no loss to the assessee on capital side. The inference drawn by the CIT(A) from interpretation of clauses of agreement was though right as highlighted in para 5 above, however, the conclusion drawn by him ultimately is erroneous. Thus, the findings of the CIT(A) that even though the expenditure incurred is revenue in nature but the benefit accrues in the capital field is not correct. Thus, we hold that the entire expenditure of Rs. 3,89,62,423/- incurred by the assessee on sales promotion is on revenue account and is an allowable as an expenditure incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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