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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
Spencer’s Retail Ltd. -vs.- D.C.I.T., Circle-5, Kolkata Kolkata [PAN : AABCG 3443 R] (Respondent) (Appellant) For the Appellant : Shri D.S.Damle, FCA For the Respondent : Shri Anand Kumar Singh, JCIT Date of Hearing : 13.02.2017. Date of Pronouncement : 01.03.2017. ORDER
Per N.V.Vasudevan, JM
This is an appeal by the Assessee against the order dated 29.10.2013 of CIT(A)- VI, Kolkata relating to AY 2008-09.
Grounds No.1 raised by the assessee read as follows :- “1. The Commissioner of Income Tax (Appeals) erred in upholding the action of the Assessing Officer in disallowing advertisement and selling expenses holding the same to be capital in nature on the facts and in the circumstances of the case. “
The Assessee is a company engaged in the business of retail trading of food items and non-food items, retail selling of books and music CDs etc. The assessee was earlier knows as “Great Wholesale Club Ltd.”. There was a company by name Spencer and Company Ltd. (SCL) which was carrying on business of retail trading under specific brand name “SPENCER’S” at various locations in India. SCL’s brand had its business and popularity only in South India. The assessee wanted to use the brand name spencers for its retailing business in respect of various products through its supermarkets at various locations in India. SCL and the assessee entered into an agreement dated
2 M/s. Spencer’s Retail Limited A.Yr.2008-09 15.09.2005 whereby SCL permitting use of ‘Spencers ‘ trade mark of SCL by the assessee on a licence basis. Article 7 of the agreement which is relevant for a decision in the present appeal, provides as follows :- “ ARTICLE 7 Brand Building
7.01 The Licensor agrees with the Licensee that its Brand name Spencer's is popular only in select few places in South India.
7.02 The Licensee will be utilizing the Spencer's Brand name for rolling out Retail Stores through its Supermarkets/Hypermarkets at various locations in India and needs to spend considerable amount of money on advertising and publicity to popularize Spencer's Brand name.
7.03 The Licensor shall benefit from such advertisement and publicity expenditure likely to be incurred by the Licensee on pan India basis.
7.04 The Licensor therefore agrees to co-share the advertisement and publicity expenses likely to be incurred by the Licensee over a period of 5 years from 1/4/2006 for an amount not exceeding Rs. 50 (fifty )Crores in totality.
7.05 The Licensor hereby gives an option to the Licensee to purchase the said Spencer's Brand at the end of the 5 years from the Agreement date based on valuation to be carried out by a reputed Firm of Chartered Accountants appointed mutually. The Licensor and Licensee shall mutually agree on the sale consideration based on such report of Chartered Accountants Firm. However, the Licensor alone at its sole discretion may decide not to sell the Spencer Brand name to the Licensee and the Licensee agrees to be bound by such decision of the Licensor”
As can be seen from the aforesaid clause in the Agreement for use of brand name of SCL, the Assessee was given a right to use SCL’s brand name “SPENCER’S” and agreed to spend considerable amount of money on advertising and publicity to popularize SCL’s brand. SCL agreed to share advertisement expenses as those expenses will go to increase it’s brand value for 5 years from 1.4.2006. The Assessee had a right to purchase the brand name from SCL on the expiry of 5 years on the basis of valuation.
3 M/s. Spencer’s Retail Limited A.Yr.2008-09 5. In pursuance of the said agreement the assessee incurred certain expenses. The total expenditure debited in assessee’s profit and loss account under the head “Advertisement and publicity” was a sum of Rs.32,11,12,444/-. The assessee got reimbursement of advertisement expenditure relating to brand enhancement of SCL of a sum of Rs.29,42,50,444/- as per clause 7.04 of the license agreement referred to above. The Assessee claimed as deduction the remaining sum of Rs.2,68,62,000/-. Out of the aforesaid advertisement expenditure a sum of Rs.61,25,000/- was towards advertisement and selling expenditure of music division in the business of music retailing known as Music World. There is no dispute that this expenditure had to be allowed as deduction and was allowed as deduction by the AO. Now the dispute between the revenue and the assessee was with regard to allowing deduction of the remaining advertisement expenditure which was claimed as deduction by the assessee in the profit and loss account. The plea of the assessee was that though huge expenditure was incurred for brand building of SCL’s “SPENCER’S” brand, some of the expenses out of the aforesaid brand building expenditure related to the communication of various promotion offers/price offers in the store /catchment area for selling the merchandise of the assessee and did not help in creating the value for spencer brand and therefore they were claimed as usual advertisement and promotion expenses by the assessee as deduction and as a revenue expenditure. To the extent the assessee recovered charges from Spencers by way of reimbursement of advertisement expenditure from SCL, those expenses could be said to be brand building expenditure which benefitted only SCL and therefore the same was claimed as deduction by the assessee. The undisputed fact was that SCL had treated the expenditure incurred by the assessee which was reimbursed to the assessee as towards its brand building cost was claimed as a capital expenditure and depreciation on the intangible asset was claimed by SCL. The AO was of the view that the nature of the expenditure cannot be different in the hands of the assessee and he held that the expenditure was a capital expenditure and cannot be allowed as deduction. The following were the observations of the AO in this regard :- 3
4 M/s. Spencer’s Retail Limited A.Yr.2008-09 “An analysis of facts and submissions given by the assessee it is seen that this amount of expenditure towards the brand is claimed to have been incurred for the brand which is claimed to have been developed by the Company Spencer and Co. It is to be noted that the said company Spencer and Co. had treated the brand as an intangible asset and has also claimed depreciation on the same. The issue to be noted is that the assessee company, Spencer's Retail Ltd. has been a party to the agreement for building a brand which has been claimed as an asset by the company i.e. Spencer and Co. It is seen that the parties of the same agreement are treating the same expenditure differently i.e. Spencer & Co. treating it as capital expenditure and Spencer's Retail treating as revenue expenditure thereby taking stands favourable to them. The expenditure had been incurred by Spencer's Retail Ltd., out of which Rs. 29,42,50,444/- has been debited in Spencer and Co. and which is also been claimed as capital expenditure by Spencer & Co. and the balance of Rs. 2,68,62,000/- is claimed as revenue expenditure in Spencer's Retail Ltd. This company is also said to use the brand hence in view of the above said amount of expenditure is to the tune of Rs. 2,13,90,251/- other than expenditure incurred for music division is treated as capital expenditure.”
Before CIT(A) the assessee submitted that similar expenditures incurred in A.Y. 2006-07 was allowed by the AO and the details of the expenditures claimed in this year were given by the assessee as follows :- “Details of Advertisement expenses incurred by SRL and reimbursement claimed from SCL Sl.No. Financial Total of advertisement & Reimbursement Net charge to Year selling expenses incurred of the P&L during the year advertisement Account for expenditure advertisement relating to & Selling brand expenses (net enhancement of recoveries) claimed from SCL 1 2006-07 1474.75 991.79 482.96 2 2007-08 3211.12 2942.50 268.62 It was pointed out that the net debit under the head Advertisement & Selling expenditure (net of recoveries) was the expenditure incurred by the Assessee in relation to advertisement & promotion of private label apparel, brands i.e. Assessee’s own
5 M/s. Spencer’s Retail Limited A.Yr.2008-09 brands and for various promotion offers/price offers in the store/catchment area for selling the merchandise in the normal course of business of the Assessee and did not in way directly help in creating value for the brand of SCL. The same was charged as revenue expenses in the Profit and Loss Account of the Assessee. The broad nature of these expenses incurred by the Assessee for its own retailing business was given as under : Print Media Leaflet printing In store advertisement Loyalty Programs Samples Sales Promotion
The CIT(A) however confirmed the order of AO for a total different reasons namely that the assessee did not furnish any evidence to prove that the expenditure which it had claimed as deduction was for building company’s own brand. His observations in this regard were as follows :-
“I have gone through the various clauses from 7.01 to 7.05 of the trade mark licensing agreement. On perusal of the same, it is inferred that the entire money spent for the advertisement and publicity is only to popularize the Spencers brand name which is owned by the SCL. No evidence was furnished to prove that balance expenditure was incurred for private apparel brands i.e company’s own brands. Since the AR of the assessee did not give the basis for allocation of the expenditure and also did not furnish any evidence on the extent of benefit accrues to the assessee company, the entire expenditure incurred by the assessee is treated as capital expenditure incurred for purpose of enhancing brand value', spencer" which is owned by SCL. Hence the disallowance made by the AO is confirmed. Therefore, the grounds of appeals 2 & 3 raised are dismissed.”
8. Aggrieved by the order of CIT(A) the assessee has preferred the present appeal before the Tribunal.
6 M/s. Spencer’s Retail Limited A.Yr.2008-09 9. The ld. Counsel for the assessee submitted that the reason given by the AO for disallowing the expenditure namely the treatment by SCL of the part of the expenditure as capital expenditure cannot be sustained. In this regard it was submitted by him that SCL was the owner of the brand “Spencers” and therefore expenditure incurred towards brand building was capitalised in their books of account. It was submitted that as far as the assessee is concerned it was only a licencee entitled to use the brand “spencers” and that too in a later assessment year. It was submitted by him that the AO had not disputed the fact that the expenses claimed by the assessee to the extent of Rs.2,68,62,000/- as expenses for communication of various promotion offers in the various outsets of the assessee for selling the merchandise and that it had not helped directly in brand building of the brand “Spencers” . It was submitted by him that CIT(A)on the assumption that the expenditure to the extent claimed by the assessee towards company’s own brand concluded that no evidence was furnished by the assessee to substantiate its claim. The ld. Counsel placed reliance on the following judicial pronouncements in support of its claim that advertisement expenditure incurred to maintain corporate image to increase sale of products was to be allowed revenue expenditure. In this regard he drew our attention to the decision of the Hon’ble Bombay High Court in the case of CIT vs Asian Paints (India) Ltd (2016) 75 Taxmann.com 152 (Bombay). Attention was also drawn to the decision of the Hon’ble Delhi High Court in the case of CIT vs Spice Distribution Ltd. (2015) 54 Taxmann.com 325(Delhi) wherein it was held that expenditure incurred to make public informed, aware and remain in limelight was allowable as a revenue expenditure. Reliance was also placed on the decision of ITAT Mumbai Bench in the case of Brightest Circle Jewellery (P)Ltd vs ACIT (2012)24 taxmann.com 130 (Mumbai). In the aforesaid case a Swiss diamond manufacturer was the owner of mark ‘Nakshatra’ He licensed the said mark to one company which in turn had sub-licenced the same to the assessee. The licencee from the owner of the trade mark incurred advertisement expenditure which was reimbursed by the assessee(sub-licencee). The revenue took the stand that the reimbursement of advertisement expenditure for 6
7 M/s. Spencer’s Retail Limited A.Yr.2008-09 promoting brand name ‘Nakshatra’ as capital expenditure. The Tribunal however held that the expenditure was revenue in nature and was to be allowed as deduction. It was held in this case that the expenses even if considered the promoting brand name ‘Nakshatra’ was capital only in so far as the owner of the brand ‘Nakshatra’ is concerned and the benefit that the assessee derives by advertisement expenditure for using the brand was only revenue expenditure.
The ld. Counsel for the assessee also fled before us a chart showing as to how the revenue, in all the assessments completed u/s 143(3) of the Act, for various assessment years except the present A.Y.2008-09, has allowed similar expenditure as a deduction. It was submitted by him that applying the rule of consistency also the expenditure in question had to be allowed as a deduction and as a revenue expenditure. The chart giving the details of similar payment to CESC (successor in interest of SCL) by the assessee which was allowed as deduction in the assessment of the Assessee is given as Annexure to this order. The ld.DR placed reliance on the order of CIT(A).
We have given a very careful consideration to the rival submissions. The case of the AO was that the expenses on “Advertisement and Publicity” to the extent reimbursed by SCL was treated by SCL as capital expenditure in their books of accounts. The expenditure to the extent claimed by the assessee should also be considered of the same nature and therefore the expenditure had to be regarded as a capital expenditure. In fact the assessee before the AO had submitted that expenditure claimed by it as deduction, directly benefited the assessee and had not created any brand value for SCL and to that extent alone the assessee claimed deduction of the expenditure as revenue expenditure. The AO had not disputed this claim of the assessee and proceeded only on the basis that the nature of the expenditure had to be capital because of the treatment by SCL of the same expenditure in its books of account. This approach of the AO in our view is not proper. As rightly contended by the ld. Counsel for the 7
8 M/s. Spencer’s Retail Limited A.Yr.2008-09 assessee, the treatment of the expenses by SCL was not conclusive in the matter. Admittedly the sum capitalized by SCL in its books of account had been reimbursed to the assessee and to this extent the parties agreed that the expenditure created brand enhancement of brand SPENCER’S of SCL. The expenditure to the extent claimed by the assessee as a deduction, was never the subject matter of treatment in the books of accounts by SCL. Moreover, the treatment of the very same expenses by one of parties to a transaction in it’s books of account cannot bind the other party. The AO has to take an independent view keeping in mind the nature of expenditure incurred by the assessee and its relevance in the line of business carried on by the assessee. In the present case we are satisfied that the expenditure to the extent claimed by the assessee had helped its sale and not creating any brand value for SCL and only such expenditure was claimed as deduction by the assessee.
As far as the conclusion of CIT(A) that because the Assessee failed to give basis of classification of expenditure that were reimbursed by SCL to the Assessee, the entire expenditure had to be regarded as not expended to improve sales of the Assessee but the brand of SCL, We are of the view that it was not the case of the AO that the expenditure was towards Advertisement and Publicity and that such expenses did benefit the Assessee in its sales and did not promote the brand of SCL. The only reason given by the AO was that the treatment of the expenses in the books of SCL and the Assessee cannot be different and since SCL treated similar expenses as capital expenditure, the expenditure claimed by the Assessee should also be regarded as capital expenditure. The case of the CIT(A) that the expenditure claimed by the Assessee did not promote the sales of the Assessee. This conclusion of the CIT(A) is not correct because the nature of expenses incurred by the Assessee was given (though it was a general description) and not disputed by the AO. The conclusion of the CIT(A) in this regard is not based on any material. Even otherwise, the question whether expenditure promoted the brand of SCL or was incurred to promote the sales of the Assessee becomes 8 9 M/s. Spencer’s Retail Limited A.Yr.2008-09 academic. The decision of the Hon’ble Mumbai Bench of ITAT in the case of Brightest Circle Jewellery (P)Ltd., (supra) clearly supports the plea of the assessee that the expenditure incurred by a person who is not the owner of the trade mark but which is used by an assessee had to be regarded only as a revenue expenditure. We are therefore satisfied that the claim of the assessee for deduction as revenue expenditure deserves to be accepted.
Apart from the above we also notice that the revenue at no point of time in either A.Y.2007-08 or A.Y. 2009-10 to 2015-16 disallowed the claim of the assessee for deduction of similar item of expenditure as given in the chart given as annexure to this order. Thus based on the rule of consistency the claim of the assessee ought to have been allowed by the revenue. For the reasons given above we direct that the deduction claimed by the assessee should be allowed as revenue expenditure. We hold and direct accordingly.
Ground No.2 raised by the assessee reads as follows :-
“2. The Commissioner of Income Tax (Appeals) erred in upholding the action of the Assessing Officer in making disallowance under section 14A read with Rule 8D on the facts and in the circumstances of the case. “
The issue raised in ground no.2 is with regard to disallowance of expenses incurred in earning exempt income. The AO disallowed a sum of Rs.4,53,251/- u/s 14A r.w.8D(2)(ii) and (iii) of the Rules. The plea of the assessee before CIT(A) was that there was no exempt income during the previous year and therefore there can be no disallowance u/s 14A of the Act. The CIT(A) rejected the claim of the assessee and in doing so placed reliance on the decision of the Special Bench of ITAT in the case of Cheminvest Ltd. Vs CIT 121 ITD 318 (Delhi) (SB) wherein it was held that the disallowance u/s 14A of the Act can be made even in the year where there is no exempt income earned or received by the assessee.
Before us the ld. Counsel for the assessee submitted that the decision of the Special Bench on which the CIT(A) placed reliance has since been reversed by the 9 10 M/s. Spencer’s Retail Limited A.Yr.2008-09 Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi). It was brought to our notice that the Hon’ble ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra). In the light of the admitted factual position that the assessee had not earned or received any dividend income during the previous year, we are of the view that there can be no disallowance u/s 14A of the Act. Accordingly the addition made u/s 14A of the Act is directed to be deleted.
In the result the appeal of the assessee is allowed. Order pronounced in the Court on 01.03.2017.