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Facts
The assessee, an Indian subsidiary of a Swedish company engaged in retail clothing, incurred expenditure in foreign currency for marketing and sales promotion. The Assessing Officer disallowed this expenditure, stating it was for brand building for the parent company and lacked a direct nexus to the assessee's business in India.
Held
The Tribunal held that the expenditure incurred in foreign currency for marketing and sales promotion was for the purpose of the assessee's business and was commercially expedient. The Tribunal followed the decision of the jurisdictional High Court and noted that the genuineness of the expenditure was not doubted.
Key Issues
Whether marketing and sales promotion expenditure incurred in foreign currency for aligning Indian stores with global standards is a business expenditure allowable under Section 37 of the Income-tax Act.
Sections Cited
143(3), 37, 30, 36
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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: The appeal in AY 2016-17, arises out of 1. the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as „ld. NFAC‟, in short] in Appeal No. ITBA/NFAC/S/250/2023- 24/1061576187(1) dated 27.02.2024 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 24.12.2019 by the Assessing Officer, DCIT/ ACIT, Circle-11(1), Delhi (hereinafter referred to as „ld. AO‟).
The only issue to be decided in this appeal is as to whether the 2. Learned CITA was justified in deleting the disallowance made in the sum of Rs 1,79,63,152/- by the Learned AO on account of marketing and sales promotion expenditure incurred in foreign currency under section 37 of the Act in the facts and circumstances of the instant case. Page | 1 We have heard the rival submissions and perused the materials 3. available on record. The assessee is an Indian company and is a subsidiary of H&M Hennes and Mauritz GBC AB, Sweden. The assessee is engaged in the business of importing, marketing, warehousing and retail trade of all kinds of ready-to-wear clothing merchandise. The return of income for the Assessment Year 2016-17 was filed by the assessee company on 22-11- 2016 declaring total income of Rs. 5,41,28,630/-. During the year under consideration, the assessee incurred sales promotion and marketing expenditure amounting to Rs. 13,34,31,474/-. Out of the said expenditure, an amount of Rs. 1,79,63,152/- was incurred in foreign currency for the purpose of business operations of the assessee in India. Details of the entire sales promotion and marketing expenditure were sought for by the Learned AO which were duly furnished by the assessee company vide submission dated 10-12-2019. The Learned AO noted that assessee had incurred expenditure of Rs. 1,79,63,152/- in foreign currency towards marketing and sales promotion, however, no sales had been effected in this regard. The Learned AO stated in the Show-Cause Notice as to why the sales and marketing expenditure incurred in foreign currency should not be disallowed as not incurred wholly and exclusively for the purpose of business under Section 37 of the Act. The assessee responded to the Show-Cause Notice by stating that it had effected sales of Rs.142,44,09,343/-. The assessee submitted that it is in the business of selling clothing and merchandise and incurs sales promotion and marketing expenditure for the purpose of its business. The Learned AO, however, did not heed to the contentions of the assessee and noted that no sales have been made by the assessee outside the Indian taxable jurisdiction and proceeded to disallow the expenditure incurred on sales promotion and marketing incurred in foreign currency in the sum of Rs. 1,79,63,152/- holding that such expenditure has no direct nexus to the business of the assessee company in India. He also alleged that such expenditure to the foreign parties was nothing but a brand building exercise for the benefit of the assessee's parent company i.e. H&M GBC, Sweden.
The assessee submitted that the parent company has global 4. contractual arrangement with third parties for providing marketing and sales promotion supplies and services to H&M group entities. In pursuance of such agreements, marketing and sales promotion supplies and services are availed by a local entity from these group verified vendors for the purpose of their business. The expenditure incurred in foreign currency by the assessee was paid to those foreign vendors in foreign currency for marketing and sales promotion supplies and services availed by the assessee of its retail business in India. It was submitted that expenditure incurred by the assessee was towards purchase of indoor interior window visual materials, in-store screens and music systems, print of indoor campaign materials, display information, purchase of mannequins for the stores, campaign bags, signs, etc. for stores of the assessee located across India. The motive behind having such group verified vendors for marketing and sales promotion expenditure can be appreciated from the fact that the H&M group stores anywhere in the world have the same look and feel. The expenditure incurred by the assessee is towards aligning the physical interiors / exteriors of the Indian stores with the global H&M standard and stores located across the world. Accordingly, it was pleaded that there was a commercial expediency on the part of the assessee company to incur this expenditure and the said expenditure is a direct business need wholly and exclusively incurred for the purpose of the assessee and not as a brand- building exercise of H&M, GBC, Sweden.
We find that the details of marketing and sales promotion 5. expenditure incurred by the assessee are enclosed in Pages 32 to 66 of the Paper Book. On perusal of the said details, we find that none of the expenditure per se are neither capital in nature nor personal in nature. The purpose of incurring the said expenditure had been duly explained by the assessee which has been reproduced supra. These expenditures are not falling within the ambit of provisions of section 30 to 36 of the Act. Hence we have no hesitation to hold that the provisions of section 37 of the Act have been duly fulfilled by the assessee as none of the negative conditions prescribed therein applies to the facts of the instant case. We hold that the assessee had duly established the business nexus of incurrence of marketing and sales promotion expenditure for the sum of Rs 1,79,63,152/- in the instant case. We find that the issue in dispute is covered in favour of the assessee by the decision of the Hon‟ble Jurisdictional High Court in the case of CIT vs Modi Revlon P Ltd reported in 210 taxman 161 (Del) wherein it was held that:-
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.
We find that the genuineness of marketing and sales promotion 6. expenditure is not doubted by the Learned AO in the instant case before us. We find that the Learned CITA had deleted the disallowance by observing as under:- Page | 4 “8.3 I have gone through the facts of the case and submission made by the appellant company. The appellant during the year incurred expenses of Rs. 13,34,31,474/- towards sales promotion expenses out of that Rs.1,79,63,152/- was incurred in foreign currency. The AO noted that the sales were not made outside India and also failed to prove direct nexus of the expenditure incurred in foreign currency and sales made by it in India. Thus, the AO inferred that the said payment were nothing but a brand building exercise for the benefit of the parent entity. Therefore, the expenses incurred at Rs.1,79,63,152/- under the head sales promotion expenses was disallowed u/s 37 of the Act and added to the total income of the appellant company. 8.4 On the contrary to the AO, the appellant submitted that the parent company (i.e. H&M GBC) of the appellant has global contractual arrangement with third parties for providing marketing and sales promotion supplies and services to H&M group entities. In pursuance of such agreements, marketing and sales promotion supplies and services are availed by a local entity from these group verified vendors for the purpose their business. Further, the appellant submitted that the expenditure incurred in foreign currency by the Appellant was paid to these foreign vendors in foreign currency for marketing and sales promotion supplies and services availed by the Appellant of its retail business in India. The appellant also submitted that the motive behind having such group verified vendors for marketing and sales promotion expenditure can be appreciated from the fact that the H&M group stores anywhere in the world have the same look and feel. Thus, the expenditure incurred by the Appellant is towards aligning the physical interiors/exteriors of the Indian stores with the global H&M standard and stores located across world. Accordingly, the expenditure incurred by the Appellant bears direct nexus to sales in India. 8.5 Section 37(1) of the Act deals with the expenditure not described in section 30 to 36 of the Act and not being in the nature of capital expenditure or personal expenses of the assessee and wholly and exclusively for the purpose of business. The phrase “wholly and exclusively” and “for the purpose of business” was defined by the courts in various judgments. Some of the observations of Hon‟ble Courts are as under: a. Additional Commissioner of Income-tax vs. Rajasthan Spg. & Wvg. Mills Ltd. [2004] 137 Taxman 367 (Rajasthan) It is well-settled that expression 'wholly and exclusively' does not denote 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business. Such expenses can be incurred voluntarily and without necessity. If it is incurred for promoting the business and to earn the profits, the assessee can claim deduction. [Para 11] b. Sree Meenakshi Mills Ltd. vs Commissioner of Income-tax [1963] 49 ITR 156 (Madras) The words "wholly and exclusively" pointedly signify that the expenditure should be completely devoted to the business. It need not be essential, necessary, or compelling; it may be optional and purely voluntary. But it must be commercially expedient and should have the aim of the continuance and furtherance of the business and an eventual augmentation or stabilisation of profits. c. Mysore Kirloskar Ltd. vs Commissioner of Income-tax [1987] 30 Taxman 467 (Karnataka) The word 'wholly' refers to the quantum of expenditure and the world 'exclusively' refers to the motive, object or purpose of the expenditure. d. Commissioner of Income-tax vs Williamson Tea (Assam) Ltd. “The true test for an expenditure, laid out wholly and exclusively for the purpose of business, is that it is incurred by the assessee as incidental to its trade for the purpose of keeping its trade going on and that the expenditure must be incurred by the assessee as a trader and not in any other capacity. The word 'wholly' refers to the quantum of expenditure and the word 'exclusively' refers to the motive, objective and purpose of the expenditure. The expression 'wholly and exclusively', appearing in section 37, does not mean necessarily. It is important to note, in this regard, that the word, 'necessarily', found place in the Income-tax Bill, 1961, but it was dropped at the legislative anvil. [Para 16]” e. S.R.M.T Ltd vs. DCIT [2005] 97 TTJ (Visakhapatnam –Trib.) 580 The scope of the term „for the purpose of business‟ is surely wider than the term „for the purpose of earning profit‟. f. Krishna Sahakari Sakhar Karkhana Ltd. vs. Commissioner of Income-tax [2000] 112 TAXMAN 246 (BOM.) It is well-settled by the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, that the expression „for the purpose of the business‟ is wider in scope than the expression „for the purpose of earning profits‟. Its range is wide, it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, 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 the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. The only limitation is that the purpose should be the purpose of the business, that is to say, the expenditure incurred should be for the carrying on of business and the assessee should incur it in his capacity as a person carrying on the business. It cannot include sums spent for purposes unconnected with the business. 8.6 As noted above, the appellant incurred expenses of Rs.1,79,63,152/- towards marketing and sales and promotion in foreign currency towards purchase of indoor interior and other accessories particularly developed/designed for providing marketing and sale promotion and services to H&M Group entities for the same looks and ambiance across world. Therefore, there is direct nexus between expenses incurred towards this head and appellant’s business. In the light of above decisions and considering the facts and circumstances of the case, the AO is not justified in disallowing Rs.1,79,63,152/- without appreciating the fact that the expenses incurred towards marketing and sales and promotion in foreign currency were incidental to business and commercial expediency. Consequently, this ground of appeal is allowed.”
In view of the aforesaid observations and respectfully following the 7. judicial precedents relied upon hereinabove, we do not find any infirmity in the order of the Learned CITA deleting the disallowance. Accordingly, the grounds raised by the revenue are dismissed.
In the result, the appeal of the revenue is dismissed. 8.
Order pronounced in the open court on 04/06/2025.