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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
O R D E R भहावीय स िंह, उऩाध्मक्ष के द्वाया / PER MAHAVIR SINGH, VP: This appeal of assessee is arising out of the order of the Commissioner of Income Tax (Appeals)]-2, Mumbai, [in short CIT(A)], in appeal No. CIT(A)-2/IT/598/2009-10 dated 02.05.2016. The assessment was framed by the Dy. Commissioner of Income Tax (in short ACIT/ ITO/
The only issue in this appeal of assessee is against the order of CIT(A) in holding the payment of ₹ 9.13 crores made to Lakme Exports Ltd. and ₹ 1.820 crores to Lakme Exports Ltd. as capital in nature as against the claim made by the assessee as revenue in nature. For this, assessee has raised the following 6 grounds:-
“1. The Learned CIT(A) erred in Law and on facts in holding that the payment of Rs. 9,13,00,000 made to Lakme Ltd and Rs. 1,82,00,000 made to Lakme Exports Ltd. under agreement dated 27.3.96 are not deductible as revenue expenditure.
2. The Learned CIT(A) erred in holding that the payment made to Lakme Ltd and Lakme Exports Ltd. under the agreement dated 27.3.96 constitute capital expenditure.
He failed to appreciate that the agreement with Lakme Ltd and Lakme Exports Ltd. merely seek to align the marketing operation of the appellant for a period of 10 years.
5. He failed to appreciate that Lakme Ltd and Lakme Exports Ltd. have not given up their source of Income.
6. He also failed to appreciate and ought to have held that by virtue of the agreement with Lakme Ltd. and Lakme Exports Ltd. the appellant has not acquired any capital asset or a right.”
3. The original assessment was framed by DCIT, special Range-31, Mumbai under section 143(3) of the Act vide order dated 15.09.1998 for the relevant assessment year 1996-97. Against this original assessment order, the assessee preferred the appeal before CIT(A) and CIT(A), Mumbai decided the appeal vide order dated 09.07.1999. The assessee preferred an appeal before ITAT against this order. The ITAT in vide order dated 22.08.2006 set aside this issue to the file of the Assessing Officer with certain directions. The Assessing Officer in set aside assessment proceedings passed order giving effect to the ITAT’s order dated Nil passing practically ex-parte order. Against this order of the Assessing Officer, the assessee preferred the appeal before
We noted that the AO did not accepted assessee's submission and disallowed the non compete fee paid as per the above referred agreement to Lakme Ltd. and Lakme Export Ltd. holding the same as capital expenditure. He failed to appreciate that the amount of Rs.10.95 crores paid to Lakme Ltd and Lakme Exports Ltd is not for acquiring any capital asset, it is a payment made whereby Lakme Ltd and Lakme Exports Ltd have agreed to sell the specified products to HLL group/Joint venture company for a period of 10 years instead of marketing and selling these products themselves. The arrangement is in the nature of alignment of marketing activities undertaken with a purpose of increasing the company's profitability. Lakme Ltd and Lakme Exports Ltd have not given up their source of income. Therefore, the amount paid to Lakme Ltd and Lakme Exports Ltd is an expenditure incurred wholly and exclusively for business purposes and is deductible under sec. 37(1) of the Act. The matter went upto Tribunal, the Tribunal after taking cognizance of the facts that the Lakme Ltd. and Lakme Exports Ltd. had not given up right to manufacture of the products and that the assessee has not acquired any capital assets remanded the matter back to AO to take into consideration relevant facts such as whether the arrangement has resulted in reduction into the advertisement and other cost or whether the arrangement has favourably affected the price strategy or sales of the company, to determine if the advantage in the revenue field
“10. There is no dispute about the legal position laid down by the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. (Supra) and Coal Shipment Pvt. Ltd. (supra) relied on by the learned Counsel for the assessee as well as directed on by the Revenue. The basic question is whether advantage obtained by the assessee is in capital field or revenue field. The question can be answered only by referring to the relevant materials on record. The learned Counsel has argued that the arrangement between the parties would reduce the cost of assessee but nothing has been brought on record to substantiate the same. The cost incurred by the assessee prior to and after the agreement has to examined and the onus being on the assessee, it is the duty of the assessee to place such material on record. There is no reference to any material to substantiate the same. Further, it is seen from the terms of the agreement that Lakme Cos. had given up the marketing of restricted
Now before us, the learned Counsel for the assessee Shri Percy Pardiwala stated the facts that the assessee was engaged in the business of manufacturing, marketing and trading of personal products. The marketing for Personal Products which was Company's main business activity, had become very competitive due to the entry of many international manufacturers of personal products either directly or in joint venture with other Indian companies. In order to maintain the volume and grow in such a competitive market, the company had to spend a lot of money on advertisement of its products. Normally such
He explained that during the course of original assessment proceeding, the assessee was called upon to justify the deductibility of these payments. The assessee vide its letter dated 20.8.1998 submitted that; Lakme Ltd and Lakme Exports Ltd have not given up their basic right to manufacture/produce the said products for subsequent sale/marketing. However, they were required to sell such products through a Joint Venture company where both Lakme Ltd. and Hindustan Lever Ltd. had equal stake. In this arrangement, existence of synergies in the marketing operations between Lakme group and HLL group has resulted in ensuring profitability for both the group companies. Further, the said alliance is valid merely for a period of 10 years. The outcome of the above referred agreement was that for a consideration of Rs.30
In the order giving effect proceeding, the DCIT, vide letter dated 4.8.2009 had asked for certain information to be filed in connection with set aside grounds by the Hon'ble ITAT. The assessee requested DCIT to grant adjournment in the matter as the assessee were busy in tax audit and the return of income filing of Hindustan Unilever Limited and its subsidiary companies (including the assessee company). The assessee did not receive any communication after that from the DCIT till December 2009. Further, since the matter is 15 year old, a request was made to allow time and fix the hearing in the month of January 2010. However, the DCIT passed the ex-parte order without giving sufficient
It was contended, on merits, in view of the above given facts that all the facts were before the AO and even during set aside assessment proceedings. He contended that the non compete fee paid to Lakme Ltd. and Lakrne Export Ltd. is fully allowable as revenue expenditure under sec 37(1) of the Act. For this, the assessee pointed out and the relevant points are as under:-
a) Lakme Ltd. and Lakme Exports Ltd, had agreed to market, distribute, sell their products through the assessee and its associates merely for a period of 10 years. b) Lakme Ltd. and Lakme Exports Ltd. had not given up their basic right to manufacture, produce, process the specified articles.
C) Lakme Ltd. and Lakme Exports Ltd. had not given up their source of income. d) The assessee did not acquire any capital assets or a right under the agreement.
The learned Counsel for the assessee further narrated from the facts of the case, that before CIT(A) the complete detail in respect to the directions of Hon’ble ITAT, provided certain clarification and details to substantiate that this arrangement helped the company in reducing cost, promotion expenses and achieve higher profitability. The Assessee drew our attention to written submissions filed, wherein assessee has filed a Calendar Total A & A & P as % Years P Sales 1995 5,934 26% 1996 6,468 33% 1997 5,923 28% 1998 4,362 26% 1999 3,750 21% 2000 2,229 15% HLL Group (HLL, Indexport and LIEL)
Calendar Personal Increase in Years Products sales in % Sales (In Lakhs) 1995 62,493 38% 1996 86,542 30% 1997 112,805 54% 1998 173,257 54% 1999 199,445 15% 2000 205,446 3% 10. From the above tables, the learned Counsel explained that in the year 1995 the advertisement and promotion expenses cost was around 26% of the sales which due to intense competition increased to 33% in 1996. However, post arrangement the advertisement and promotion post have come down gradually to 15% of the sales in the year 1999. This clearly shows that due to intense competition assessee’s profitability was under stress due to higher advertisement and promotion expenses
On the other hand, the learned CIT DR heavily relied on the order of the CIT(A) and stated that the statistics given by the assessee company with regard to advertisement and promotional expenses have not been uniformaly reducing the expenses and also considering the sales increased, which is not study in the calendar years 1995 to 2000.
We have also considered the decision of Hon’ble Supreme Court in the case of Empire Jute Company Ltd. Vs. CIT (1980) 124 ITR 1 (SC), wherein, Hon’ble Supreme Court has observed as under:-
“There may be cases where expenditure, even if incurred for obtaining advantage of “On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the - circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the ,contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated the receipt is revenue: Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss ,of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.”