TMI Blog2015 (2) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... price. In the present case, the Transfer Pricing Officer did not make any adjustment and has accepted the transfer pricing between the respondent-assessee and the related enterprises, i.e., the compensation paid or retained by the respondent-assessee in view of the functions performed, risk assumed and asset deployed, etc. Once we hold that one of the functions to be performed by the respondent-assessee was to incur the advertisement and promotion expenditure, then the expenditure incurred for the said purpose should be allowed under section 37(1) of the Act, as incurred wholly and exclusively for purpose of the said assessee. However, adequate compensation/price should be paid for the same by the associated enterprise, with reference to the functions, risk and assets. In case, the respondent-assessee was not being paid adequate consideration or compensated by its associated enterprise, necessary adjustments could have been made by the Transfer Pricing Officer in accordance with the Act. - Decided in favour of assessee. - ITA 1297/2010, ITA 1101/2011, ITA 489/2013 - - - Dated:- 24-11-2014 - MR. SANJIV KHANNA AND MR. V. KAMESWAR RAO, JJ. For the Appellant : Mr. N.P. Sahni, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inc., USA (1 per cent. shares) 3. The respondent-assessee was engaged in the business of distribution, marketing and production of high quality educational and entertainment satellite television programmes for satellite television channels, i.e., Discovery and Animal Planet. Assessment year 2002-03 4.1. In the return of income filed for assessment year 2002-03, the respondent-assessee had declared nil income after setting off brought forward losses of ₹ 4,85,39,897. This return was subsequently revised but again declaring nil income after adjustment of brought forward losses of ₹ 4,82,34,363. 4.2. During the period relevant to the assessment year 2002-03, the respondent-assessee had shown programmes sourcing fee of ₹ 5,20,91,937, facilitation fees of ₹ 1,28,75,927, subscription fees of ₹ 23,46,50,460, agency commission and marketing commission fee of ₹ 3,69,91,065, programming revenue of ₹ 65,00,000 and other income of ₹ 54,75,642. 4.3. The Assessing Officer observed that the assessee had shown the gross advertisement revenue of ₹ 15,12,06,722 but only 15 per cent., i.e., ₹ 2,30,26,266 had been credite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had retained 15 percent of the advertisement revenue as sale commission and the balance 85 per cent. had been repatriated or paid to the associated enterprises abroad, therefore, the advertisement expenses of ₹ 2.37 crores should not be entirely disallowed. This, he observed, would be unreasonable, therefore, the advertisement expenses of ₹ 67.15 lakhs were disallowed. I. T. A. No. 489 of 2013 (assessment year 2004-05) 5.2. For the assessment year 2004-05, the assessee had filed return declaring an income of ₹ 17,87,44,860. In the profit and loss account, the assessee had shown programme sourcing receipt of ₹ 2,54,16,606, sub scription fees of ₹ 39,89,28,282, agency commission of ₹ 7,03,47,271, marketing fee of ₹ 5,86,783 and other income of ₹ 1,00,16,153. The Assessing Officer noticed that the assessee had shown the advertisement sale commission of ₹ 5,32,44,990, which was only 15 per cent. of the gross advertisement receipts. He referred to the assessment order for the assessment years 2002-03 and 2003-04 and held that 85 per cent. of the advertisement receipts had been transferred to the associated enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and the associate enterprises under which the assessee had acted as an advertisement sale representative. As an advertisement sale representative, the assessee was entitled to 15 per cent. of the gross receipts as its income for the services rendered and performed by them. The balance 85 per cent. was transferred to the associated enterprise abroad. 9. The Assessing Officer's enigmatic and equivocal pronouncement that the entire advertisement revenue should have been retained as income is mere an incantation. The programmes were prepared and aired in India by the foreign associate enterprise, which had incurred expenditure or paid for the software and airing them. The finding that the entire or 100 per cent. expenditure on advertisement expenses were incurred for higher and increased advertisement revenue, is fanciful and reflects a spirit of creativity than realism. Unintendedly, the Assessing Officer, as noticed below, impeached and transgressed into the domain of international transaction price fixation, without realising that the Transfer Pricing officer had accepted the price. The Assessing Officer, as noticed below under section 37(1) of the Act, cannot go into t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery ; it may include measures for the preservation of the busi ness and for the protection of its assets and property from expropri ation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre- condition to commence or for carrying on of a business ; it may com prehend many other acts incidental to the carrying on of a business. Thus, any expenditure which is laid out for business which, in the present case, consisted of distribution of channels and earning of subscription revenue, advertisement agency commission, etc., would be wholly and exclusively for the purpose of business. 10.3. Whether an expenditure was wholly and exclusively incurred or laid out for the purpose of business or profession must be determined from the angle and as per the assessee's perspective and choice. It is subjective. What one assessee may want to incur, another may not like to incur the same or similar expenditure. The quantum may also differ and vary. Section 37(1) does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of trade or business of the assessee. In the present case, the finding is that it was laid out for the purpose of the assessee's business and there is evidence to support this finding. In CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC), the Supreme Court followed the earlier judgment in Chandulal Keshavlal (supra) to hold (page 418) : The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meetings on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meetings would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian jockeys . . . Therefore, any expenditure which was incurred for preventing the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protest. Consequently when section 37 was finally enacted into law, the word 'necessarily' came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. 11. As per the findings recorded by the Tribunal and the Commissioner of Income-tax (Appeals), the respondent-assessee was engaged in the business of distribution of television channels and had retained 100 per cent. of the subscription fee. As per the agreement between the respondent-assessee and the associated enterprise, it was the obligation and the duty of the respondent-assessee to advertise and promote the channels. Similarly, the assessee was acting as a selling agent for advertisements to be aired on the channels. It was entitled to retain 15 per cent. of the gross receipts as income and pass on or transfer 85 per cent. of the gross receipts to the foreign enterprises. 12. Thus, one of the functions being performed by the assessee was to advertise and promote the channels and to earn subscription reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, as in the present case, disallowance made by the Assessing Officer treating the advertisement expenditure as non- business expenditure must fail and flounder. However, adequate compensation/price should be paid for the same by the associated enterprise, with reference to the functions, risk and assets. In case, the respondent-assessee was not being paid adequate consideration or compensated by its associated enterprise, necessary adjustments could have been made by the Transfer Pricing Officer in accordance with the Act. It is an accepted position that the Transfer Pricing Officer did not deem it appropriate and proper to make any adjustment in respect of these international transactions. The price received by the assessee for the international transaction was accepted by the Transfer Pricing Officer. 15. In view of the aforesaid discussion, it is held that the advertisement and promotion expenditure was rightly treated, by the Tribunal, as one of the functions which the respondent-assessee was mandated and required to perform for the purpose of his business and would, therefore, be allowable as a business expenditure under section 37(1) of the Act. 16. In view of the af ..... X X X X Extracts X X X X X X X X Extracts X X X X
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