DCIT, CIRCLE-16(1), NEW DELHI vs. MAGIC BRICKS REALITY SERVICES LTD, DELHI

आदेश / O R D E R PER C. N. PRASAD, J. M. :

“Assessee Company was incorporated on 19/08/2013. No business was conducted by the company during the period since incorporation till February, 2015. In the month of February 2015 running business of a property portal in the name of MagicBricks.com was acquired through slump sale from its holding company as part of the restructure of business. The holding company is hosting various websites such as indiatimes.com, simplymarry.com, timesjob.com,:toi,in,et.in etc. The real estate listing portal magicbrick.com was also hosted by the holding company however, with a view to give focused attention to this business and to meet the challenge of competition from the rival real estate listing portal such as 99acres.com and housing.com etc. and to get the further visibility and presence of the web 2 portal hosted by the assessee company in the name of magicbrick.com an advertisement campaign was planned across all media format, as a result of which in a very short spanMagicBricks.com became India’s No 1 Property portal and has been adjudged as the most preferred property site in India, by independent surveys. The portal provides a platform for property buyers and sellers to locate properties of interest and source information on the real estate space in a transparent and unambiguous manner. With a view to be everytwhere at once and in order to maintain the confidence of existing as well as to attract new customers and real estate projects across the depth and breadth of India and to create magic brick as a credible and robust brand in this area, the advertisement and the brand promotion expenses were incurred during the year amounting to Rs.20.76 crores. Party wise and media wise details of the same has already been furnished.

Assessee is in the business of rendering services through the use of website. Website by itself is not a product or service that assessee is selling or marketing. It is selling various services through or on this website such as advertisement banner, various classified advertisement about the sale of renting of individual properties or projects. With a view to achieve and grow its revenue targets, assessee has to resort to advertisement to disseminate the information about such services rendered by the assessee through the use of its website. Since doing business through online portal is relatively a new concept in business in India, assessee needs to advertise and undertake country wide advertisement campaign to continuously remind the customer and be present first in various searches conducted by the customer online is the pre-requisite of attracting business through the online portal. Contrary to the traditional sale of product, sale of services, in this format of business through web portal requires a 360 degree reach and knock to a customer which was a business compulsion for the assessee company to undertake the media campaigns to disseminate the information about its services. These expenses are revenue in nature as no enduring benefit is derived by the assessee and assessee has not just incurred the expenses on advertisement in the 3 subsequent year but in fact had the business compulsion to incur much more amount in the subsequent year i.e. 85.40 cores in FY 2015-16 and 50.08 in FY 2016-17, it can thus be seen had there been any enduring benefit out of the sum incurred during FY 2014-15 there should not have been any need to incur any further amount in the subsequent years, which is not the case. Further that no asset got created out of this expenses incurred by the assessee.

The assessee company has continued the advertisement and promotion campaign in the next year as well. A tabulation of the similar expenses in the next two years is given below:

P a r t i c u l a r s A Y 1 5 - 1 6 A Y 1 6 -1 7 A Y 1 7 - 1 8 T o t a l T u r n o v e r 9 . 0 3 1 2 5 . 6 0 1 4 4 . 1 3 T o t a l E x p e n s e 3 1 . 3 3 2 0 3 . 5 3 1 8 0 . 3 6 A d v e r t i s e m e n t E x p 2 0 . 7 6 8 5 . 4 0 5 0 . 0 8 A d v t . P e r ce n t a g e o f 6 6 % 4 2 % 2 8 % T o t a l E x p .

(i) CIT Vs. Discovery Communication India 56 taxmann.com 134 (Del); (ii) CIT Vs. Spice Distribution Ltd. 54 taxmann.com 325 (Delhi HC); (iii) CIT Vs. Pepsico India Holdings (P.) Ltd. 21 taxmann.com 165 (Delhi HC); (iv) DCIT Vs. Hitz FM Radio India Ltd. 82 taxmann.com 327 (Delhi–Trib.); (v) DCIT Vs. Vodafone Mobile Services Ltd. 83 taxmann.com 7 (Delhi–Trib.)

Sr Particulars AY 2015-16 AY 2016-17 AY 2017-18 AY 2018-19 AY 2019-20 No i) 20.76 85.40 50.08 43.01 61.51 Advertisement expenses ii) Total turnover 9.03 125.60 144.13 152.49 209.39 iii) Total expenses 31.33 203.53 180.36 197.89 221.13 iv) Loss (45.40) (11.74) (22.30) (77.92) (35.60)

“4.1.2 I have considered the assessment order and the submissions of the appellant. Considering the fact that there is huge competition in the said business, it was entirely necessary on the part of the appellant company to incur expenditure on 10 promoting the brand to be able to not only retain customers, but also to attract more customers and expand its outreach.

4.1.3 The issue is whether these expenses could be said to provide an enduring benefit to the appellant or whether these expenses create an intangible asset. The concept of enduring benefit has been discussed by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT [(1980) 124 ITR 1(SC)]. The court held that expenditure, even if incurred for obtaining a benefit for an indefinite future, may still be on revenue account and the test of enduring benefit may not work in all situations. According to the Supreme Court, what is material to consider in such situation is the nature of the advantage in the commercial sense and if the advantage is in the capital field, the same would be disallowable. If, however, the capital remains untouched and the expense only enables carrying out the business operations more efficiently and profitably, then despite the fact that there would be an advantage spread out over several years, the expense would be revenue in nature. When the above test is applied in the appellant's case, it can be seen that extensive advertising is required to be made. For this, expenses are required to be made and have been made, with a view to facilitate the business operations and also to expand the same.

4.1.5 As discussed above, the presumption drawn by the AO regarding the building of a brand image has also not been approved by the courts where it has been held that in a competitive environment, it would be difficult to assess the period of benefit derived from such advertisement and to ascertain whether any 'brand name' was created. Reliance is also placed on the decisions of the Punjab and Haryana High Court in the case of Liberty Group Marketing Division (315 ITR 125) and the Bombay High Court in the case of Geoffrey Manner and Co. Ltd. (315 ITR 134). The judgment of Delhi High Court in CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi) recognized that brand promotion exercises undertaken through media campaigns, schemes, programmes etc are essential for propagation of the brand. Similar view has been taken by the Jurisdictional High Court in the case of Modi Revlon Pvt.ltd. (210 Taxman 161) wherein disallowance @50% of advertising expenses had been made by the AO. The Court held that so long as the expenditure was inextricably linked to business purposes, the expenditure was in the revenue field. The relevant portion of the High Court order is extracted as under: 11

“23. In the present case, the AO was conscious of the fact that brand promotion expenses are a necessary ingredient in marketing strategies. Therefore, he allowed about 50 per cent of those expenses. However, the reasoning for disallowance of the rest, i.e. that the assessee could claim only a proportion of such expenses, since advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld. This Court does not see any fallacy in the Tribunal's approach or reasoning, on this aspect. One is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognised, and allowed. The revenue's arguments on this point too are insubstantial.”

4.1.6 Keeping in view the facts of the case and the judicial precedents narrated above, the conclusion is that the benefit resulting from the advertisement, publicity and sales promotion is wholly necessitated for business purposes and its advantage, though enduring in the long term, cannot be termed as being in the capital field. It is also noted that though it has been held that a benefit of enduring nature has been created by the advertising, the AO has not categorized the category of benefit created and at the same time held that the benefit created is not depreciable. The disallowance made by the AO is thus directed to be deleted. Grounds of appeal Nos. 1, 2 and 2.1 are allowed.”

19. We also further notice that almost identical issue came up for consideration before the co-ordinate bench of the Tribunal in the case of Addl. CIT Vs. M/s. Jasper Infotech Pvt. Ltd. In dated 10.11.2021 wherein the co-ordinate bench considered whether the CIT (Appeals) is right in deleting the disallowance of 50% of expenses incurred on advertisement, publicity and business promotion incurred on brand building of e-commerce portal ‘Snapdeal’ considering the same as revenue expenditure and not capital expenditure. The co-ordinate bench of the Tribunal considering various decisions of the jurisdictional High Court held that the expenditure incurred by the assessee are purely in nature and cannot be considered as capital expenditure. While holding so, the Tribunal observed as under:-

“9. We also find that the ld. CIT (Appeals) considered in allowing the claim of the assessee on 4 decisions of the Hon’ble High Courts. Further the Id. CIT (Appeals) followed the decision of the Hon’ble jurisdictional High Court in the case of Modi Revlon Pvt. Ltd. 210 Taxman 161 [2012] 26 taxmann.com 133 (Delhi). There was nothing in the Income-tax Act; nor was there any material on record suggestive of Page | 6 the fact that the assessee could not claim these expenses as revenue expenditure. The fact remained that as assessee is operating in online marketing business as aggregator which is a highly competent consumer market the assessee had to stay ahead of its competition and thus engage itself in brand promotional activities and has necessarily to incur these expenses. The ld. AO having accepted the fact that the assessee could spend amounts for these activities to the extent of 50 % as revenue expenditure the Id AO could not have held that 50 % of such expenses are capital in nature, in absence of any contrary evidence. In view of this, we do not find any infirmity in the order of the Id. CIT (Appeals) in deleting the above disallowance. Further before us no evidence was placed on record to show that assessee has created any intangible asset an d even after the details of expenses are placed before the Id. Assessing Officer, he held that ad-hoc percentage of certain expenditure are capital expenditure without pointing out that which nature of expenditure has resulted into creating an intangible asset. Accordingly, we find that the expenditure incurred by the assessee are purely revenue in nature and cannot be considered as capital expenditure. The Id. Assessing Officer also did not bring on record any evidence to prove his findings. In view of this, all the grounds raised in appeal by the ld. Assessing Officer are dismissed.”

“14. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it is incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee’s trading operations. No fixed capital was created by this expenditure. We may also add here that in the income-tax law, there is no concept of deferred revenue expenditure. Once the assessee claims the deduction for the whole amount of such expenditure, even in the year in which it is incurred, and the expenditure fulfils the test laid down under section 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Investment Corporation Ltd. (1997) 225 ITR 802 (SC), the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so.”

“4. The Tribunal has rightly noticed and referred to the decision of the Delhi High Court in CIT Vs. Pepsico India Cold Drink Ltd. (2012) 207 Taxman 5/21 taxmann.com 165 wherein, the judgment of the Supreme Court in Madras Industrial Investment Corpn. Vs. CIT (1997) 225 ITR 802/91 Taxman 340 (SC) was examined and it was observed that the assessee is entitled to claim deferred revenue expenditure but the Assessing Officer cannot treat the revenue expenditure as deferred revenue expenditure The reason is that the Act itself does not have any concept of deferred revenue expenditure. Even otherwise, there are a number of decisions that the advertisement expenditure normally is and 14 be treated as revenue in nature because advertisements do not have long lasting effect and once the advertisements stop, the effect thereof on the general public and customer diminishes and vanished soon thereafter. Advertisements do not leave a long lasting and permanent effect in the sense that the or service has to be repeatedly advertised. Even otherwise advertisement expense is a day to day expense incurred for running the business and improving sales. It is noticeable that every year, the respondent-assessee has been incurring substantial expenditure on advertisements. The Assessing Officer, in the assessment order, had deferred to the fact that similar additions were also made in the Assessment Year 2008-09. Keeping in view the nature and character of the respondent-assessee's business, every year expenditure has to be incurred to make and keep public informed, aware and remain in limelight. This requires continuous and repeated publicity and advertisements to remain in public eye, to do business by attracting customers. It is an expenditure of trading nature. The aforesaid aspect has been highlighted by the Delhi High Court in CIT Vs. Salora International Ltd. (2009) 308 ITR 199 (Delhi) and CIT Vs. Casio India Ltd. (2011) 355 ITR 196/(2012) 20 taxmann.com 449 (Delhi).”

by the Revenue is rejected. 23. In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on : 29/08/2022.