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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DLEHI
Before: SHRI SHAMIM YAHYA & SHRI N.K. CHOUDHRY
This appeal has been preferred by the Assessee against the order dated 30.01.2019, impugned herein, passed by the learned Commissioner of Income-tax (Appeals)- 36, New Delhi (in short “Ld. Commissioner”), u/s. 250(6) of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2014-15.
In the instant case, the Assessee declared its income at total loss of Rs.31,76,93,622/-, by e-filing its return of income on dated 29.11.2014, which was selected for scrutiny and therefore notice dated 28.08.2015 u/s. 143(2), notice u/s. 142(1) dated 26.04.2016 alongwith questionnaire and again notice u/s. 143(2) of the Act dated 03.07.2017 have been issued to the Assessee . In response, the AR of the Assessee attended the proceedings from time to time and filed documents pertaining to its case. .
On perusing the profit and loss account of the Assessee, the Assessing Officer found that the Assessee has claimed advertising expenses of Rs.26,85,34,669/-, therefore, in order to examine, whether the above expenses were revenue in nature in view of the fact that these expenses would essentially lead to establishment and promotion of “Livpure” brand in India, show caused the Assessee to provide the details of the expenses and to explain why these expenses should not be treated as expenditure towards acquisition of intangible assets being “capital expenditure”.
3.1 In response, the Assessee claimed as under:
“The assessee has been issued show cause on proposed addition on account of expenditure incurred on advertisement, marketing, sales promotion by treating the same as capital expenditure. The assessee hereby denies that it has incurred any expenditure which is of capital nature. The expenses incurred by the assessee are of revenue nature. No tangible or intangible asset of enduring nature has been created. The expenditure incurred on advertisements as well as sales promotion schemes is to facilitate the trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more pro fitably. The expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Hon’ble Bombay High Court approved the decision of ITAT Mumbai in case of Fine Jewellery (India) Ltd. Vs ACIT (ITA Appeal No. 3124 of 2011). ITAT Mumbai has remarked as below.
Even from the facts of the case it is seen that the expenditure incurred by the assessee is not creating any enduring benefit of an asset but is rather helping the assessee in augmenting its sales and resultantly its profit. Even if it is presumed that the building of brand image of “Nirvana ” is giving advantage of enduring benefit to the assessee, still it would be on revenue account as there is no creation of a tangible or intangible asset of enduring nature to the assessee. The Hon ’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 , has held that no tests for distinguishing between capital and revenue expenditure is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem, whether it is a capital expenditure or revenue expenditure. Their Lordships have held that even tests of enduring benefit at times gets failed as not each and every advantage of enduring nature can be of capital field. The most celebrated observations of their Lordships on this account are reproduced hereinbelow (head note) :
"There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit, is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. ”
Further such a payment has also to be seen from the context of business necessity or expediency also. If the outgoing expenditure is so intricately related
to carrying on or the conduct of the business that it may be regarded as integral part of the profit-earning process and not for an acquisition of an asset or a right of the permanent character, the possession of which is condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.
Thus, from the facts of the case we do not find that these expenses incurred by the assessee has resulted in any kind of addition or augmentation of any profit- making asset. Thus the view taken by the Assessing Officer is prima facie correct view and, therefore, we do not find any reason to hold that such an order is erroneous or it is prejudicial to the interests of the Revenue. Thus the conclusion drawn by the learned Commissioner of Income-tax in the impugned order is not tenable both in law and on facts and accordingly we cancel the impugned order passed under section 263. In the result, the grounds taken by the assessee are allowed and the appeal of the assessee is also treated as allowed. The assessee has incurred expenditure on exhibitions; hoardings; road show; wall paintings; news paper ads; TV ads; advertisement on Internet, social media, website; mobile ads; dealer meets; distributors meets; technical meets, retainer-ship of PR agencies; ambassador fees; cable ads; promotional material like pens, key rings, caps, t-shirts, calendars, paper weights etc. These all expenses are of revenue nature and cannot be considered as capital expenditure. The detail of such expenses have already been filed as annexure G-51 vide letter dated 12.12.2017. The nature of expenses warrants that these expenses do not create any tangible or intangible assets and cannot be considered as capital expenditure.”
The Assessing Officer after examining the claim of the Assessee, found not acceptable on the following reasons:
4.2. The assessee has basically submitted that the above expenditure is revenue expenditure and not capital expenditure and has cited number of case laws in its support. The reply of the assessee, along with the case laws submitted by it has been considered. The assessee has tried to explain that the nature of these expenses is revenue since this will result in enhanced sales due to enhanced publicity and trade name of the assessee. The submission made by the assessee is considered but there is not much force in the arguments of the assessee on this issue. There is no dispute or doubt that advertising, marketing and business promotion increases the awareness, popularity and the visibility of the “Livpure brand and will lead to better sales and turnover and therefore, increased profit and revenues for the assessee. But this benefit will flow to the assessee in long run and thus give an enduring benefit. It is clear that these expenses are not incurred wholly and exclusively for the business of the assessee. Expenditure is incurred for establishment and promotion of the brand “Livpure”. The trademarks, brands stand for reputation of a Company; they represent the achievements, solidity, innovativeness, the goals and the financial power of the Company. It is important to note that how the return attributable to marketing activities can be identified. A marketing intangible may obtain value as a consequence/advertising and other promotional expenditures, which can be important to maintain the value of the trademark. However, it can be difficult to determine what these expenditures have contributed to the success of a product. For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to the production or revenue, and to what degree. It is also possible that a new trademark or one newly introduced into a particular market may have no value or little value in that market and its value change over the years as it makes an impression on the market (or perhaps loses its impact). A dominant market share may to some extent be attributable to marketing efforts of distributors. The value and any changes will depend to an extent on how effectively the trademark is promoted in the particular market. More fundamentally, in many cases higher returns derived from the sale of trademarked products may be due as much to the unique characteristics of the product or its high quality as to the success of advertising and other promotional expenditures. 4.3 The assessee spends money on advertisement, marketing and business promotion expenses. Therefore, it is the efforts of assessee which has built a formidable marketing network in India. It has an assured Quality Control mechanism in place to ensure strict adherence to its laid down norms on products quality. This in brief itself, indicates the kind of efforts involved in creating Marketing Intangible without which the Company would not have been a market competitor in the segment.
4.4. The expenses incurred by the assessee are of Rs. 26,85,34,669/- (on account of advertisement, marketing and business promotion expenses). However, there is no denial to the fact that these expenses have substantially benefited the “Livpure” brand and have enhanced the image of this brand in the market. Thus, these expenses have given the enduring benefit to the assessee. Thus, these expenses cannot be said to have incurred on “revenue account”.
4.5 This is a fact that the Advertisement, Marketing and Business Promotion Expenses to the tune of Rs. 26,85,34,669/- have been incurred by the assessee and claimed against the taxable income in connection with the advertisement, marketing and business promotion. It cannot be denied that benefit of such huge expenses which is nearly 24% of the total expenditure (Rs. 79.77 Cr) in the initial years for the establishment of its product in the market the advantages would flow to the Company in long run and the Brand-Image would ultimately result in better sales prospects of the assessee Company. Such aggressive advertisement and business promotion in the nature of blitzkrieg creates an enduring advantage to the Company and its main owner, as the image gets imprinted in the minds of the customers which is not very easy to dislodge.
4.6 Details of these expenditure show that the expenditure is incurred on the advertisement and marketing, which are nothing but capital in nature and were incurred to promote their brands and products , the benefit of which is enduring in nature which goes beyond the previous year relevant to assessment year under consideration. There no dispute or doubt that it increases the awareness, popularity and the visibility of the brand in market which will lead to better sales and turnover and therefore, increased profit and revenues for the assessee. Therefore, the benefit of advertisement and marketing are of enduring nature available over a much longer period of time the accounting period relevant for A.Y. under consideration alone. In view of this, expenditure on advertisement and publicity becomes capital in nature as it is leading to the creation of the intangible assets being goodwill, reputation and creditability. It has been held by various courts in their decisions that when expenditure is made with a view to bring into an assets or advantage for the enduring benefit of the business, such expenditure is not revenue but a capital expenditure.”
4.1 The Assessing Officer while relying upon various decisions rendered by Hon’ble Apex Court and High Courts, as mentioned in the assessment order, ultimately disallowed the expenditure to the tune of Rs.26,85,34,669/- by treating the same as “capital in nature”, which was claimed by the Assessee incurred on advertising and publicity as “revenue in nature”.
The Assessee being aggrieved preferred first appeal before the ld. Commissioner and reiterated its claim as claimed before the Assessing Officer. The ld. Commissioner by the impugned order, though affirmed the said addition of Rs. 26,85,34,669/- as “capital expenditure”, however allowed the depreciation on the same, by concluding as under:
“4.2.3.1. The appellant, Livpure Private Limited earlier known as (Luminous Water Technologies Private Limited), is engaged in the business of RO water purifier industry. The expenses incurred by the appellant are of Rs. 26,85,34,699/- (on account of advertisement, marketing and business promotion expenses).
In the instant year, an amount of Rs. 26,85,34,669/- has been incurred which the AR has stated includes general routine expenses on advertisement like advertisement in print media and electronic media, pamphlets & brouchers, display of boards at the shops of the dealers etc. The AR has stated that this also includes expenses incurred on maintenance of website, SMS, exhibition expenses, sales promotion schemes, rent for advertisement space, dealer meet expenses, professional fee, training expenses etc. The AR has stated that the appellant has not incurred any capital expenditure on advertisement expenses and the brand of the appellant is self generated and no capital expenditure has been incurred thereon.
The AO made the addition on account of expenditure incurred cr advertisement, marketing, sales promotion by treating the same as capita expenditure. The AR of the appellant has stated that the expenditure incurred on advertisements as well as sales promotion schemes is to facilitate the trading operations or enabling the management and conduct of the appellant's business to be carried on more efficiently or more profitably.
The AO has observed that the advertising, marketing and business promotion will increase the awareness, popularity and the visibility of the "Livpure" brand but the AO has held that this benefit will flow to the appellant in the long run and thus give an enduring benefit.
Therefore, the AO held that these expenses cannot be said to have incurred on "revenue account".
The AO has commented that the benefit of such huge expenses which is nearly 24% of the total expenditure (Rs. 79.77 Cr) in the initial years for the establishment of its product in the market the advantages would flow to the Company in long run and the Brand-Image would ultimately result in better sales prospects of the appellant Company. The AO held the expenses on this account as Capital Expenditure.
The reasons given by the AO are convincing as it is quite clear that the appellant is incurring expenditure towards building a brand which is of an enduring nature. I find no reasons to interfere with the AO's findings on this issue and I agree that the expenditure cannot be treated as revenue expenses. The submissions filed by the appellant on this issue has been considered and found not to be tenable. The case laws cited are distinguishable in facts.
4.2.3.2. A perusal of the submission reveals that the appellant has made an alternative pleas with is reproduced below :
"Without prejudice to above, it is respectfully submitted that the Ld. AO while treating the expenditure incurred towards advertisement, publicity and sales promotion as capital expense, erred in not providing depreciation on such alleged capital expenditure as per the applicable provisions of the Income Tax Rules, 1962. Accordingly, in light of the above, it is hereby submitted that if the alleged addition is sustained, then it is prayed that the Assessee, being eligible for depreciation, be allowed the same in accordance with the Income Tax Rules as per scheme of Law.
The alternate plea of the appellant has been considered. The A.O. is directed to work out the depreciation on the capital expenditure. Appeal on ground Nos. 2 and 3 are partly allowed.”
The Assessee being aggrieved is in appeal before us. The Assessee in order to substantiate its claim submitted that advertising and publicity expenses are regular expanses and therefore “revenue in nature” and cannot be treated in any sense as “capital in nature”.
On the contrary, the ld. DR vehemently supported the impugned order and claimed that impugned order neither perverse nor suffered from any infirmities.
Heard the parties and perused the material available on record. The Assessee in the instant case claimed total loss of Rs.31,76,93,622/-. Further, in its Profit and Loss Account, the Assessee also claimed advertising and publicity expenses of Rs.26,85,34,669/- as “revenue in nature”, which were disallowed by the Assessing Officer by treating the same as “capital in nature”, on the grounds that the expenditures are incurred for establishment of brand “Livpure”. There is no denial to the fact that these expenses have been incurred to increase the awareness and popularity of the “Livpure” brand and to enhance the profit and revenue for the Assessee in long run. Thus these expenses have given enduring benefit to the Assessee and cannot be said to have incurred on “revenue account” wholly and exclusively for the purposes of Assessee’s business. We observe that there are so many heads of expenses which the Assessee has claimed to have been incurred. The Assessing Officer though gone into the legality/status of the expenditures but without bifurcating different heads of the expenditures treated all the expenditures as “capital in nature” and therefore in our view determination qua nature of different head of expenditures has not been done properly and in real sense. We further observe that the Assessee also did not file proper details/heads of the expenditures incurred and in lump sum claimed the said expenditure as “revenue in nature”. Hence, considering the peculiar facts and circumstances and for just decision of the case, we are inclined to remand the instant case to the file of the Assessing Officer for decision afresh, suffice to say, by affording reasonable opportunity of being heard to the Assessee.
The Assessee is also directed to produce the bifurcated details and documents in relation to the expenses incurred on account of advertising and publicity expenses as claimed. Further, the primary onus would be upon the Assessee to establish the nature of the expenses before the Assessing Officer.
In the result, the appeal filed by the Assessee stands allowed for statistical purposes.
Order pronounced in the open court on 15/02/2023.