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2015 (3) TMI 569 - ITAT MUMBAI

2015 (3) TMI 569 - ITAT MUMBAI - TMI - Advertisement and Sales Promotion - capital v/s revenue expenditure - submission of the assessee was that it was required to incur advertisement and sales promotion expenses continuously every year - CIT(A) held the expenditure incurred for brand building purpose - Held that:- he expenditure incurred in order to facilitate the business operation and not with the object of acquiring asset of enduring nature is allowable as revenue expenditure. In the instant .....

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o difficult to ascertain as to whether any “brand name” was created. Hence, we are of the view that the Ld CIT(A) was not correct in law in holding that the assessee has spent the expenditure on advertisement and sales promotion for brand building purpose. In our view, the assessee was right in law in claiming this expenditure as revenue expenditure. - Decided in favour of assessee.

Unaccounted service income - AO noticed that the assessee has been consuming its own products (captive .....

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ment. The material cost would fall in the category of variable costs. Accordingly, the cost of particular service would normally be determined at Fixed cost + Variable cost + Profit amount. Hence, comparison of the variable cost to the total service receipts, in our view, may not be right method of approaching issue. Further, when the assessee is offering 562 types of services and since there is a possibility that one unit of product shall be used to many clients, it would also be difficult to e .....

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taken. Hence, we are of the view that this issue needs to be restored to the file of the AO with the direction to examine the claim of captive consumption. - Decided in favour of assessee for statistical purposes.

Eligibility to claim depreciation on the pre-operative expenses - CIT(A) allowed depreciation - Held that:- AO has wrongly disallowed depreciation without any valid reasons when it is establish that there is some expenditure which are preoperative expenses then same are to b .....

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Disallowance made u/s 40A(3) - AO noticed that the assessee’s sister concern named M/s Marico Ltd had incurred certain expenses on behalf of the assessee herein thus expenditure incurred through Journal entries does not fall in any of the exemptions provided under Rule 6DD of the IT Rules - CIT(A) directed the AO to delete the disallowance - Held that:- According to Ld CIT(A), the salary was given to the employees by direct credit to their bank accounts. However, the Ld CIT(A) did no .....

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the assessee has claimed that M/s Marico Ltd has incurred expenses through cheque payments wherever necessary, including the salary payment made to seconded employees, we are of the view this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer for fresh examination. - Decided in favour of revenue for statistical purposes. - I.T.A. No3175/Mum/2013, I.T.A. No32 .....

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e? (b) Whether the unaccounted service income of ₹ 18.81 crores made by the AO was rightly upheld by Ld CIT(A)? 3. The revenue is in appeal in respect of the following issues:- (a) Whether the Ld CIT(A) is justified in allowing depreciation on Advertisement and Sales Promotion Expenses treating the same as acquisition of intangible rights, instead of treating it as Deferred revenue expenditure . (b) Whether the Ld CIT(A) was justified in allowing depreciation on pre-operative expenses clai .....

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r the head Advertising & Sales Promotion to the tune of ₹ 17.10 crores. The AO took the view that the assessee has incurred this expenditure only to build its own brand, which will give enduring benefit to the assessee. Accordingly the AO took the view that the expenditure incurred by the assessee should be treated as deferred revenue expenditure . Accordingly, the AO allowed 20% of the expenditure and, however, disallowed the balance amount i.e., ₹ 13.68 crores as Capital expend .....

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and name is being advertised and not the latent feature of services. Accordingly he held that the assessing officer has rightly pointed out the fact that, basically, the assessee promotes the brand name instead of services and products. It was seen that the assessee has been promoting its brand name through its brand ambassador, being a model named Riddhhima Kapoor and hence the Ld CIT(A) held that the assessee has only promoted the brand as its business strategy. He also took the view that the .....

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the same constitutes Capital expenditure, he also held that the same constitutes intangible asset eligible for depreciation @ 25%. Accordingly he directed the AO to allow depreciation @ 25%. 7. The main submission of the assessee was that it was required to incur advertisement and sales promotion expenses continuously every year. He further submitted that the assessee has been incurring the expenditure on advertisement and sales promotion since its inception, i.e., since the assessment year 200 .....

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he Income tax Act, as held by the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd Vs. CIT reported in 225 ITR 802(SC). He further submitted that the tax authorities are not correct in presuming that the advertisement expenses incurred by the assessee has resulted in brand building, since the result of advertisement could not be measured in a scientific manner. He further submitted that there is uncertainty over the period for which the said advertisement program .....

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7 of the Paper Book and sample invoices at pages 123 to 134 shows that the advertisements are focused towards promotion of the services relating to skin treatment and weight management provided by the Assessee. Further, no enduring benefit is derived from such advertisements as such expenditure has to be incurred on a regular basis year after year. (b) The expenditure on advertisement and sales promotion is not for the purposes of creation of any brand name as: (i) the Assessee's brand has a .....

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ertisement on the television separately provided on a CD after the hearing on 04.08.2014; (iii) appointment of a brand ambassador for advertising its products and services does not mean that the nature of the expenditure incurred is for creation of brand. Brand ambassador is chosen because of her beauty and skin which co-relates to the assessee s business. (iv) displaying the glow sign board Kaya Skin Clinic outside its outlet does not lead to the conclusion that the Assessee is creating the bra .....

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tion of brand image. In any event, the services of Salt Brand Solutions were engaged in May, 2011 and have no relevance to the year under consideration. (c) Assuming without admitting that benefit resulting from the advertisement and sales promotion expenses endures over a period beyond one year, the Assessee submits that the period of such benef i t cannot be as cer tained. Therefore, deduc t ion for expenditure cannot be spread over a number of years. It is an admitted position that expenditur .....

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35 ITR 29 (Del.), Hindustan Commercial Bank Ltd., In re 21 ITR 353 (All.) and DCIT v. Core Healthcare Ltd. 308 ITR 263 (Guj.). In any event, such expenditure cannot be deferred as the period for which the benefit may flow is not ascertainable. It is also possible that the advertisement may fail to have the desired result. (d) Assuming without admitting that the expenditure on advertisement and sales promotion is for the purposes of creation of brand name the Assessee submits that in view of the .....

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sales promotion is to be regarded as capital in nature, then, the Assessee submits that, the CIT(A) has rightly treated it as a depreciable asset and allowed depreciation on the same. 8. During the course of hearing, the Ld A.R also placed reliance on the following case law:- (a) ITO Vs. Spice Communication (35 SOT 78)(Delhi) (b) CIT Vs. Geoffrey Manner and Co. Ltd (315 ITR 134)(Bom) (c) Warner Lamber India (ITA No.954 & 3063/Mum/2006) (d) Asian Paints Ltd (2013)(37 CCH 177)(Mum) (e) Fine J .....

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es towards brand building only. He further submitted that the brand shall have enduring benefit to the assessee. He also submitted that the assessee has engaged a Brand ambassador to market its brand Kaya Skin clinic . He further submitted that the case law relied upon by the assessee are distinguishable and hence the ratio of those decisions is not applicable to the facts of the instant case. 10. We heard the parties and perused the record. Before us, the Ld A.R placed reliance on the decision .....

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as being relatable to brand building-Assessee has not acquired any brand from any outside party-No justification for the addition Held : It is not in dispute that the assessee is in the business of providing cellular mobile services under its own self-generated brand "Spice" since 1997. The assessee s business of providing cellular mobile services is undoubtedly a highly competitive business, and assessee has to provide services in a competitive environment. This is also not in dispute .....

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the assessee has not acquired any brand from any outside party. The expenditure on advertisement and sales promotion constituted expenditure incurred on press advertisement, hoardings, neon signs, brochures, etc. The press advertisements could not be considered as capital asset acquired by the assessee. Similarly, putting hoardings and neon signs could not also be considered on capital field. These expenditures do not lead to create any capital asset to the assessee. Even there is no benefit of .....

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ification in interfering with the order of the CIT(A) in deleting the disallowance of 10 per cent of expenses towards advertisements and sales promotion incurred by the assessee for smooth functioning and carrying on assessee s business effectively, proficiently and profitability. The order of the CIT(A) is, thus, upheld on this issue. Though the Ld D.R tried to distinguish this decision by submitting that the AO, therein, had taken only 10% of the expenses in the Capital field, yet we are of th .....

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ated as revenue expenditure. If, however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be marketed. Considering the above, in our opinion the judgment in Patel International Film Ltd. (supra) is clearly distinguishable. The CIT(A) and the Tribunal on the facts of this case were clearly within their jurisdiction in holding that the expenditure was by way of revenue expenditure as it was in .....

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the case of Geoffrey Manner & Co. Ltd (supra). For the sake of convenience, the head notes given by the ITR in the case of Liberty group marketing division are extracted below:- Business expenditure-Capital or revenue expenditure- Advertisement expenditure on glow sign boards-Expenditure incurred by the assessee on glow sign boards does not bring into existence an asset or advantage for the enduring benefit of the business-Glow sign board is not an asset of permanent nature but requires fre .....

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with the effect of weather. Therefore, it requires frequent replacement. The Tribunal has also recorded a finding that the assessee has to incur expenditure on glow sign boards regularly in almost each year. This fact itself shows that the advantage accrued from the use of the glow sign boards is not of enduring nature. Thus, the expenditure by the assessee on these glow sign boards did not bring into existence any asset or advantage for the enduring benefit of the business. The assessee has sp .....

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and not with the object of acquiring asset of enduring nature is allowable as revenue expenditure. In the instant case, we have already seen that the assessee has been incurring expenditure and sales promotion since AY 2004-05, meaning thereby, the assessee was required to incur those expenses every year in order to retain its position in the market. There should not be any dispute that the assessee is conducting its business in a competitive environment. Further, there is merit in the submissio .....

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of Ld CIT(A) on this issue and direct the AO to allow the entire amount spent on advertisement and sales promotion as revenue expenditure. 14. Since we have upheld the view of the assessee, the examination of the questions as to whether the same constitutes deferred revenue expenditure or Capital asset, being intangible asset eligible for depreciation do not arise. 15. The next urged by the assessee relates to the assessment of unaccounted service income of ₹ 18.81 crores. The AO noticed t .....

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mes of the captive consumption at ₹ 119.86 crores. The assessee had declared the service charges income at ₹ 101.05 crores. Hence the AO treated the difference amount of ₹ 18.81 crores as unaccounted income of the assessee. The Ld CIT(A) also confirmed the said addition. 16. The Ld A.R submitted that the assessee is providing 562 different types of services using different types of its products. He further submitted that the assessee is manufacturing 48 types of products and th .....

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uty care products consumed and the services rendered by the assessee. He also submitted that the assessee is having adequate internal controls and checks in place on the consumption of materials and booking of service income, since all the clinics are following detailed standard procedures right from contacting the client till the completion of the treatment. He further submitted that the assessee is generating adequate documentation at each stage and hence there is no scope for suppression of i .....

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d that the service income reported by the assessee during the current year was lower in proportion than that disclosed in the immediately preceding year. He submitted that the assessee could not properly explain the said difference and hence the Ld CIT(A) was justified in confirming the addition made in the service income. 18. We have heard the rival contentions and perused the record. The main contention of the assessee is that the consumption of materials would depend upon the types of service .....

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ned or authenticated by any of the clients and hence those vouchers were self serving invoices. It appears that the assessee has claimed that it is having quantitative details for captive consumption. However, the Ld CIT(A) has observed as under in this regard:- Further I find no force in the argument that there is quantitative details of captive consumption because there is no details on record which can be one to one correlated. When there is complete failure on the part of the assessee to cor .....

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t there appears to be some merit in the contentions of the assessee. Normally the service receipts are determined on the basis of Fixed costs, variable costs and profit element. The material cost would fall in the category of variable costs. Accordingly, the cost of particular service would normally be determined at Fixed cost + Variable cost + Profit amount. Hence, comparison of the variable cost to the total service receipts, in our view, may not be right method of approaching issue. Further, .....

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cks. 20. The assessee has claimed to have maintained quantity details of various products. Hence, on a test check basis, the said details can be verified and a decision can be taken. Hence, we are of the view that this issue needs to be restored to the file of the AO with the direction to examine the claim of captive consumption. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore this issue to the file of the AO with the direction to examine the claim of captive consumpti .....

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nses neither form part of assets nor they can, per se, be considered to be fixed asset. Accordingly he disallowed the depreciation claimed by the assessee. The Ld CIT(A), however, allowed the depreciation. Hence, the revenue is aggrieved by his decision. 22. We heard the parties on this issue and perused the record. The Ld CIT(A) has allowed the claim of the assessee with the following observations:- 6.3 I have considered the finding of the AO and rival submission of the appellant carefully. I f .....

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attributable to the cost of bringing the assets to its working condition for its use. The reliance placed in the cases of Challapalli Sugars Ltd. v. CIT 98 ITR 167(SC). Gujarat High Court in Arvind Mills Ltd. v. CIT 112 ITR 64(Guj) Bombay High Court in CIT v. Polychem ltd. 98 ITR 574 (Bom), CIT V/s Nirlon Synthetic Fibres & Chemicals Ltd 137 ITR 1 (Bom) and CIT V/s J.M.A. Industries Ltd 129 ITR 373( Delhi) supports the contention of the appellant. If such expenditure is not to be capitalize .....

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lowed the decision of Hon ble Supreme Court rendered in the case of Challapalli Sugars Ltd (supra). Accordingly, we do not find any infirmity in the decision of Ld CIT(A) on this issue. 23. The next issue urged by the revenue relates to the disallowance made u/s 40A(3) of the Act. The AO noticed that the assessee s sister concern named M/s Marico Ltd had incurred certain expenses on behalf of the assessee herein. Accordingly, the assessee had accounted for the expenses by crediting the account o .....

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