PARLE AGRO P.LTD,MUMBAI vs. ACIT CEN CIR 25, MUMBAI

(अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: Shri Vijay Kumar Soni-DR Assessee by: Shri Firoze Andhyarujina-AR सुनवाई क� तारीख / Date of Hearing: 29.06.2016 घोषणा क� तारीख / Date of Pronouncement: 29.06.2016 आयकर आयकर अिधिनयम अिधिनयम,1961 क� क� धारा धारा 254(1)केकेकेके अ�तग�त अ�तग�त आदेश आदेश आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act)

लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dtd.26.02,2013 of the CIT(A)-26,Mumbai the assessee and the Assessing Officer(AO)have filed cross-appeals for the year under consideration.Assessee- company engaged in the business of manufacturing of Non-Alcoholic Beverage Base (NABB), fruit juice-based drinks,drinking water etc.,filed its return of income on 30/09/2009 declaring total income of Rs. 9.18 Crores. The assessee filed a revised return on 09/02/2011 declaring income of 11.74 Crores.The AO completed the assessment u/s. 143 (3) of the Act,on 17/10/2011,determining the income of the assessee at Rs. 14.09 Crores.

ITA/3688/Mum/2013:

2.The solitary ground of appeal,raised by the AO,is about is deleting the disallowance of Rs.25. 41lakhs.During the assessment proceedings,the AO directed the assessee to explain the justification of Product Development Expenses(PDE) and to furnish details about the purpose for which the expenditure was incurred.The assessee was asked to furnish details of 3343 &3688M/13-Parle Agro the products for which it had incurred the expenses,the results of the expenditure incurred.In its reply,the assessee informed that development of new product was part of business activity,that it would not survive without developing new products, that it had to improve the existing products. As per the AO,the assessee did not file exact details in response to the queries raised by him especially the purpose for which the expenditure was incurred. Accordingly,a sum of Rs. 25,41,246/- was disallowed as revenue expenditure and was treated as capital expenditure.The AO allowed depreciation @ 25% i.e. of Rs.6.35 lakhs.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that the PDE were incurred to study the combination of ingredient of different product and to study the possible new ideas of the product,that the expenses were incurred only to study the product and concentrate in the library, that such an exercise would not give any enduring benefit to the assessee,that the expenditure in question was incurred in the ordinary course of business, that it was incurring the said expenditure every year in order to study the product ingredients, that the expenses incurred by it had to be allowed as revenue expenses, that the assessee was purchasing different raw material in a small quantity for carrying on experiments for existing products as well as for new products,that for storing such items cold storage charges were also incurred,that it would try to make improvement in the existing products by way of studying ingredient of different raw material, that the assessee was operating in the fast moving consumer goods industry, that it had lot of competition in the market, that the product development study would help it to understand the rival products and features of their products by studying their ingredient, that the product cost development included cost of material consumed for developing new product packing,that the expenses incurred to solve problems/complaints relating to existing products and to study the effect of competitors products. After considering the order of the AO and the submission of the assessee, the FAA held that PDE were incurred for purchase of various ingredients of the product like pulp, soda, apple juice, concentrate etc., for hiring the cold storage to preserve the pulp and concentrate, that the concentrate pulp and other products were purchased to study the same in the laboratory, that these were routine studies/experiments to address the issue relating to taste, appearance, ingredients of rival competitors, that being in the FMCG sector PDE were necessary, that 2

3343 &3688M/13-Parle Agro there could not be any benefit of enduring nature from such expenses, that it required quick thinking and acting to combat same or similar products from a competitor, that the expenditure could not be treated capital expenditure, that same was allowable as per the provisions of section 37 (1) of the Act. 4.During the course of hearing before us,the Departmental Representative (DR) contended that assessee had not filed details about the expenditure, that AO had allowed depreciation after capitalising the expenditure.The Authorised Representative(AR) supported the order of the FAA. He further stated that the identical issue was decided in favour of the assessee by the Tribunal, while deciding the appeals for the earlier AY.s.

5.We have heard the rival submissions and perused the material before us.we find that while deciding the appeal for AY.2007-08 (38 ITR-Trib-203),the Tribunal had decided the issue in favour of the assessee as under: “The assessee claimed deduction of market research expenses. The Assessing Officer held that the assessee could not explain the nature of expenditure and therefore, it was to be treated as capital expenditure and disallowed. The Commissioner (Appeals) confirmed this…….that the expenditure regularly incurred for sustaining the market and to push up the sales was not in the capital field but was essential and incurred in the ordinary course of business for promoting existing brands.The expenditure was to be allowed.” Respectfully,following the above order of the Tribunal,we decide effective ground of appeal against the AO.

ITA/3343/Mum/2013:

6.First ground of appeal deals with upholding the action of the AO for allocating various expenses debited to the advertisement and sales promotion to the extent of Rs. 2.46 Crores for calculating profit of Silvassa unit that was eligible for deduction u/s. 80. IB of the Act. During the assessment proceedings, the AO found that the assessee was selling NABB to various franchises as per the agreement entered with them, that they would manufacture finished products and sell it in the market, that the assessee would undertakes in-house manufacturing and sale of fruit juices at its various factories.After going through the details of all the expenses allocated by the assessee towards the sale of NABB,the AO asked it to explain as to why the advertisement expenses like POP material special event advertisement,

3343 &3688M/13-Parle Agro giveaway advertisement, trade fair participation fees, display, Holdings, banners, glow signs etc. should not be allocated towards the NABB units.He further asked the assessee to produce the basis for allocation of expenses to NABB unit Silvassa which were eligible for deduction u/s. 80 IB of the Act.In its response,dated 19/09/2011, the assessee stated that the allocation of expenses were made on the basis of sale of assessee-company and its franchisee, that accordingly ratio was arrived at 68: 32 respectively, that it was claiming Cenvat Credit for service tax levied to advertisement expenses and for claiming the same ratio of sales were worked out, that it was carrying on business in different category of products, that the advertisement expenses which were having direct nexus with Frooty and Appy were considered for allocation purpose,that the NABB were used to produce those two products,that all the expenses mentioned above were not having direct nexus with the sale of NABB, that some of them were not related to advertisement expenses as those were related to publicity and sales, that the allocation made by the chartered accountant, while issuing form 10CCB,should be accepted for allowing deduction u/s.80IB. After considering the submission of the assessee,the AO held that the explanation submitted by it was not acceptable, that all the expenses mentioned above were very much related to the advertisement cost of fruit-based products.Therefore,following expenses were considered for allocation purposes in the ratio of 68: 32 and accordingly 32% of the expenses were allocated to NABB unit of Silvassa: (table at page number 4 of the AO’s order).

Nature of Advertisement Expenses Amount (Rs.) POP Material 4,53,92,345 Advertisement Exp. –Special Events 31,45,928 Trade/Fare Participation fees 1,11,056 Display 12,03,670 Display (Ratil) 69,20,481 Display (Modern Trade) 8,87,325 Display (Institutions) 12,04,927 Hoardings 3,80,630 Banners 71,87,984

3343 &3688M/13-Parle Agro

Glow Signs 10,800 Promotional Give always 34,66,181 Advertisements Others 70,15,810 Total 7,69,27,137 Allocated to Eligible unit of Silvasa 2,46,16,684 32% Accordingly,profit shown in Form number 10CCB was reduced by Rs. 2.46 Crores. The AO reworked the deduction u/s. 80 IB is follow:

Profit of eligible unit - Rs. 16.57 Crores Less-expenses allocated to eligible units – Rs.2.46 Crores -------------------------------- Rs. 14.11 Crores ----------------------------------- Deduction u/s. 80 IB at the rate of 30% of above Rs.4.23 Crores.

7.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA. Before him, it was contended that it had claimed deduction u/s. 80 IB in respect of profit of its Silvassa unit,that while preparing P&L a/c.of the unit for calculating profit from sale of NABB the advertisement expenses having direct nexus with NABB were considered,that the AO had allocated 32% of the advertisement expenses that were booked under various heads,that the above expenses were booked under the head advertisement expenses,that same were not directly connected with the sale of NABB,that the assessee was also in the business of manufacturing and selling other range of products, that the said expenditure could not be allocated to NABB sale segment, that NABB were used to produce Frooty and Appy,that expenses were directly related to those to products were considered to arrive at profit of Silvassa unit,that the advertisement related expenses which were not having direct nexus with NABB were wrongly allocated by the AO. After considering the submission of the assessee and the assessment order, the FAA held that advertisement expenditure would generally benefit the company as a whole,that expenditure incurred by the assessee was to be considered for allocation to its Silvassa unit also, that the 3343 &3688M/13-Parle Agro argument advanced by the assessee that only advertisement having direct nexus with NABB had to be considered, that it would not be practically feasible to make such a bifurcations, that the AO had rightly considered the advertisement/promotion expenses for allocation.Finally,he upheld the order of the AO.

8.Before us,the AR argued that there was no justification for rejecting the allocation made by the assessee,that the AO had not disturbed the ratio of expenditure i.e.68:32 submitted by it,that it had rightly bifurcated the advertisement expenditure with regard to NABB products and other products, that the expenditure incurred by it under various heads had no connection with the sale of NABB products. He relied upon the cases of Blue Star Ltd. (ITA/ 3363/Mum/05 AY.2001-02 and ITA/3582/Mum/2007,AY.2003-04,dated23/09/2008 and 19/ 06/ 2009).The DR supported the order of the FAA.

9.We have considered the rival submissions and have perused the material before us. We find that while preparing the P&L account of the Silvassa unit for calculating the profit from sale of NABB the assessee had considered only those expenses that had direct nexus with the NABB products,that the AO did not agree with the submissions of the assessee and re- calculated the advertisement expenditure, that he allocated and amount of Rs. 2.46 Crores under the head advertisement and sales promotion for calculating the profit of Silvassa unit, that the assessee was manufacturing packed drinking water,Pet performs & caps, confectionery also. In our opinion,the AO had wrongly held that advertisement requirements of all the products would be same.In the present world of business and trade the assessees have to adopt different strategies for promoting their products.Therefore,the formula ‘one size fits all’ has to be avoided as far as possible.The assessee was incurring expenditure to promote the sale of NABB products and for that it would require a different kind of advertisement strategy as compared to the strategy of selling confectionery.Therefore,in our opinion the method adopted by the assessee for allocating the expenditure was more justifiable than the method adopted by the AO and confirmed by the FAA.So,we hold that there was no justification to recalculate the advertisement expenditure with regard sale of NABB products namely Frooty and Appy.

3343 &3688M/13-Parle Agro We find that while deciding the appeal is in the case of Blue Star (supra), the Tribunal has dealt with the similar issue. In that case the AO had calculated and allocated the corporate expenses while computing deduction u/s.80 IB of the Act, that in the return of income the assessee had claimed deduction u/s. 80 IB at Rs. 18.76 Crores, that the deduction was claimed in respect of assessee’s industrial unit situated at Dadra (Silvassa),that the AO allowed the deduction of Rs. 15.17 Crores only, that the variation in deduction was mainly due to reduction of amount of duty drawback from net sales of the Dadra unit and allocation of corporate expenses including the advertisement expenses,that the assessee had,while computing the deduction u/s. 80 IB,allocated 50% of advertisement expenses in the ratio of turnover of Dadra unit to total turnover of the company, that general advertisement expenses incurred by the assessee for building its corporate brand were not allocated,that the AO allocated total 100% expenses,including the advertisement expenses,in the ratio of turnover of the Silvassa unit to total turnover of the company,that the FAA upheld order of the AO. Allowing the appeal of the assessee, the Tribunal held as under: “We have heard the learned representatives of the parties and have perused the material placed on record.After considering the facts of the case,we notice that the assessee company on its own has allocated 50% corporate expenses, including advertisement expenses,of Head Office in the ratio of Turnover of Dadra unit to total Turnover of the assessee company.The allocation made by the assessee company is duly certified by a technical person,Chartered Accountant.The revenue has failed to point out any cogent reason and material for a different allocation of expenditure in addition to the allocation made by the assessee. Since there is no cogent material on evidence available on record, we are of the considered view that the allocation in respect of Head Office corporate expenses and advertisement expenses made by the assessee are required to be accepted. The Assessing Officer is directed to accept the allocation of the expenses as per the allocation of the expenses made by the assessee……..” Considering the peculiar facts and circumstances of the case under consideration and respectfully following above decision of the Tribunal, delivered in the case of Blue Star (supra),we decide the first ground of appeal in favour of the assessee. 10.Second ground of appeal is about direction given by the FAA to the AO to treat the reusable artwork expenses as capital expenditure. 11.During the course of hearing before us, it was brought over notice that identical issue had arisen in the earlier AY.s.,that the Tribunal, while deciding the appeals for the AY.s.1998-99, 2007-08 and 2008-09 had decided the issue in favour of the assessee. We would like to reproduce had not software decision of the Tribunal for the AY. 1998

99. (25 ITR-TRIB-551) and same reads as under:

3343 &3688M/13-Parle Agro

“The assessee claimed deduction of artwork charges as constituting revenue expenditure. The Assessing Officer held that the artwork was prepared in the form of card paper which was reused. Though the artwork was in the form of card paper, it could be converted into bromide. In that case, it would have a longer life with enduring advantage. He accordingly held that the expenditure was capital in nature. The Commissioner (Appeals) confirmed this….that considering the average life span of such artwork, which was only less than six months, it could not be inferred that any capital apparatus had come into existence which could be the source of income generation for the assessee. The “artworks” was not capital expenditure.” Respectfully,following the above order,we decide the second ground of appeal in favour of the assessee.

12.Last ground of appeal is about disallowance of foreign travel expenditure of Rs. 14.21 lakhs. During the assessment proceedings, the AO directed the assessee to furnish the details of foreign travel expenditure of Directors.He further directed the assessee to submit the justification for foreign travel and to furnish the purpose for which the Directors had undertaken the foreign travel and the benefits derived by the company out of the foreign travel expenditure. The assessee explained the foreign travel expenditure had been incurred for the purpose of business and was allowable as detectable expenditure u/s. 37(1) of the Act.The AO held that assessee had not quantified the exact purpose of each foreign travel and the benefit derived by it from the expenditure.Accordingly,entire expenditure,amounting Rs.14,21, 224/- was disallowed.

13.In the appellate proceedings the FAA held that assessee had not furnished details to justify that the foreign travel undertaken was incidental to the business carried on by the assessee, that it had not proved that the Directors had travelled to set prospective business opportunities.

14.Before us,the AR stated that identical issue was decided in favour of the assessee by the travel in the earlier year i.e.AY.2008-09.The DR left the issue to the discretion of the Bench. We find that the Tribunal has dealt the issue as under: “…. The assessee’s explanation with the details of foreign travel could not be doubted. The business and commercial expediency had to be seen from the point of view of a businessman and if proper explanation with supporting evidence had been given, disallowance could not be made on some flimsy ground. The Commissioner (Appeals) confirmed the expenses mainly on the ground that travel expenses for more than Rs.one lakhs. An expenditure less than Rs.

3343 &3688M/13-Parle Agro one lakh had been deleted by him holding it to be for business purpose and other for non- business purpose without pointing out any personal uses. Thus, the finding of the Commissioner (Appeals) based on such the dichotomy was not sustainable.” We find the departmental authorities have not doubted genuineness of the incurring of expenditure.They have not brought anything to prove that the expenditure had element of personal use. It is the prerogative of an assessee to incur or not to incur an expenditure and to decide its business needs.Therefore,reversing the order of the FAA and following order of the Tribunal for the earlier AY.,we decide the third ground of appeal in favour of the assessee.