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Facts
The assessee claimed expenses for sales promotion, primarily for foreign travel incentives to dealers based on sales targets. The Assessing Officer disallowed these expenses, citing lack of substantiation regarding target achievement and entitlement. The assessee also claimed allocation of common expenses which was disallowed by the AO due to lack of attestation and prior claim history.
Held
The CIT(A) deleted the addition, holding that the sales promotion expenses were genuine business expenses incurred for commercial expediency. The Tribunal upheld the CIT(A)'s order, finding that the revenue could not rebut the facts and that similar disallowances related to dealers' schemes were upheld in the case of the assessee's holding company. The Tribunal also concurred with the CIT(A) regarding the common expenses, noting that the arrangement was certified and aimed at reducing operational costs.
Key Issues
Whether foreign travel expenses incurred as sales promotion incentives to dealers, based on sales targets, are admissible business expenditure. Whether allocation of common expenses by a subsidiary company from its holding company, on a cost basis, is admissible.
Sections Cited
143(3), 37
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “G”, DELHI
Before: SH.CHALLA NAGENDRA PRASAD & SH.BRAJESH KUMAR SINGH
Date of hearing: 30/07/2025 Date of Pronouncement: /10/2025 ORDER PER BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER:
This captioned appeal filed by the Revenue, pertaining to Assessment Years 2017-18, is directed against order dated 16.07.2024 passed by the Ld. Commissioner of Income Tax(Appeals)/National Faceless Appeal Centre (in short “NFAC”), Delhi, which in turn arises out of order dated 17.12.2019 passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act').
In this case the AO disallowed a sum of Rs.2,21,60,104/- under head ‘sales promotion expenses’. The assessee had claimed the said expenses by explaining that it was incurred towards its customers who had performed targeted turnover and the same amounted to business promotion to improve the business as well as collection from customers. In this regard, the asesee also furnished the list of the eligible dealers/ customers and the related passengers travelling on behalf of the said dealers/ customers alongwith the bills of the travel agent M/s. Dewan Travels Pvt. Ltd. who had booked the said tickets. However, the same was not accepted by the AO and the main reason for the disallowance given by the AO in para-3.6 of his order which is reproduced as under :- 3.6 The list merely mentions the names of the passengers. However, it is not substantiated by the assessee how the individuals mentioned in the list above have exceeded the sales turnover target set by the assessee.
The assessee has not provided any copy of agreement or any correspondence with the above mentioned companies which states that they would be entitled to foreign travel in case of achievement of certain target.
The assessee has not explained or clarified how was it possible for the assessee to ascertain who was eligible for foreign travel and who was not.
The assessee has not furnished any Board's resolution allowing this expenditure for the above mentioned parties.
A perusal of the list in the table above shows that more than one person of a singleconcern has gone on foreign travel. The assessee has not ascertained how was it decided how many persons from a particular concern would be allowed the benefit of foreign travel.
The assessee has also not explained how the entire scheme works. Whether the incentive is to be given as a certain percentage of sales turnover or some other criterion has been used.
Since the list of the passengers was made available at the close of the assessment proceedings, the AO could not carry out further enquiry on the person as per the list who allegedly travelled abroad- whether they actually went on foreign travel under the business promotion scheme of the assessee or not.
The invoice of Dewan Travels Pvt Ltd Delhi merely mentions the consolidated amount raised on the assessee on some international ravel package. It does not mention for which country, the names of the passengers and other such details which could have enabled this office to co-relate whether the expense incurred in actually on the passengers mentioned in the list.
Aggrieved with the said order the assessee filed an appeal before the CIT(A).
Before the CIT(A) it was submitted by the assessee that the assessee was a subsidiary company of M/s. APL Apollo Tubes Ltd. and the company was engaged in the business of production ERW steel tubes, Galvanised Pipes, sheets and Block pipes etc and the assessee had its manufacturing Unit at Bangalore Karnataka. The assessee explained the dealer’s scheme before the Ld. CIT(A) which has been noted by the CIT(A) in para-6.6 of his order which is reproduced as under :-
6.6 The Appellant has announced the Dealer Tour Scheme for its dealer for Australia tour for the sales target of FY 2016-17-with a threshold purchase limit of 600 tons of GP Pipes. Under the "Dealer Tour Scheme" dealer was entitled for one ticket for every purchase of 600 tons of GP pipe. On purchase of more than 2500 tons of GP pipe, the dealer was entitled for two more additional tickets. For purchases less than 600 tons of GP Pipes, no ticket is given.
4.1 Further, the explanation/ details with respect to the observations/ deficiencies pointed by the AO in para in 3.6. of his order as reproduced earlier in this order were furnished by the assessee in Annexure-6 to Annexure-19 before the Ld. CIT(A). Further, it was submitted inter-alia by the assessee before the Ld. CIT(A) that the Holding Company created a Brochure by the name of Austrian Trip 2016-17, GP Pipes Purchase Reward detailing the terms and conditions of availing the reward of fully paid foreign trip. It was further submitted that the scheme, per Brochure was also sponsored by the assessee and copy of the Brochure was placed as Annexure-9 before the Ld. CIT(A). Further, it was submitted that assessee company had adopted the same scheme and had passed a resolution in the Board Meeting held on 30-05-2016 and the copy of the Board Resolution was placed as Annexure-10 before the Ld. CIT(A)0. It was submitted that as per scheme, for every 600 tons of purchases of GP pipe the dealer was entitled for one ticket per 600 ton and for purchases more than 2500 ton, additional two tickets and the entitlement of dealers was explained by an example below:
Dealer purchases 599 tons of GP pipe during FY 2016- 17-Not Ticket
Dealer purchases 1600 tons of GP pipe during FY 2016-17- Two tickets (one ticket for every 600 tons of purchases) Dealer purchases 3100 tons of GP Pipe during FY 2016-17 Seven tickets (five tickets for every 600 tons and two ticket for more than 2500 ton).
4.2 It was further submitted that the entitled dealers were to decide who will travel on the availed tickets without any interference by the Appellant.
4.3. The Ld. CIT(A) after examining the facts and submissions made by the assessee before him held that the expenses of sales promotions amounting to Rs.2,21,60,104/- were genuine business expenses and in absence of any concrete evidence by the AO it was held by him that it seems it were incurred solely for business purpose and incurred for commercial expediency for assessee’s business and also incurred to reward its customers and dealers to motivate them to further work for augment of the resources of the assessee.
4.4. In view of these facts the Ld. CIT(A) deleted the said addition.
Aggrieved with said the order the Revenue is in appeal before us on the following ground of appeal :-
1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition on account of disallowance of payment made towards foreign travel expenses amounting to Rs.2,21,60,104/- under section 37 of the Act, 1961 without appreciating the facts of the case”.
6. The Sr. DR supported the order of the AO whereas the Sr. AR reiterated its submissions made before the Ld. CIT(A) and supported the order of the Ld. CIT(A). Further, the Ld. AR also relied upon the order dated 30.07.2021 of the coordinate Bench of the Tribunal in the case of its holding company i.e. ACIT Circle-3(1), New Delhi Vs. APL Apollo Tubes Ltd. vide for A.Y. 2013-14, wherein on similar facts disallowance of Rs.4,13,42,756/- under the head “Brand Image expenses” was deleted. The relevant ground no.1 of the said appeal and the findings of the Tribunal in para-5 to 8 of the said order are reproduced as under :-
1. “On the facts and in the circumstances of the case, the Ld. CIT(A) has erre in restricting the addition to Rs.20,48,705/- as against Rs. 4,13,42,756/- made by the AO on account of the “Brand Image” expenses.”
The assessee company is engaged in the business of manufacturing of steel tubes having distributors throughout India. During the year, the assessee achieved a sales of Rs. 1753.17 crore as compared to Rs. 1165.8 crore in the A.Υ. 2012-13. To achieve the target, the assessee floated different schemes to incentivize the dealers. As per the scheme, any dealer achieving sales target of 150 metric tonne, will be entitled for 1 air ticket to and fro to Malaysia and if achieves a sales target of 500 metric tonne of steel tubes, such dealer would be entitled for one ticket to Paris. In case, a dealer achieves target of 750 metric tonne such dealer is entitled for one ticket to Australia and two tickets in case of 1500 M.T. of the steel tubes. As per the scheme, three groups consisting of 272 persons, 251 persons and 157 persons were taken to Malaysia and 20 persons who have been taken to Australia. The assessee has incurred an expenditure of Rs.6,54,32,452/-.
The Id. CIT (A) examined the bills raised by the assessee of Dewan Travels Pvt. Ltd. which are as under:
Sl. Date Amount No. 1. 17.09.2011 Rs. 20,48,705/- 2. 04.04.2012 Rs.2,53,17,202/- 3. 26.05.2012 Rs.1,46,54,700/- 4. 19.07.2012 Rs. 2,34,11,845/-
7. The Id. CIT (A) found that the bill dated 17.09.2011 for an amount of Rs.20,48,705/- pertain to the assessment year
2012-13, hence, disallowed the expenditure to that extent and allowed the remaining expenditure being the amount spent during the year. The disallowance of Rs.20,48,705/ has not been contested by the assessee, The Id. CIT (A) has also verified the list of dealers and their persons who were taken for the foreign junkets in support of the claim of the expenditure while deleting the addition.
Since, the facts could not be rebutted by any cogent material by the revenue before us, we hereby decline to interfere with the order of the Id. CIT (A).
We have heard both the parties and perused the material on record. In this case the AO has not doubted the genuineness of the expenditure. The Ld. CIT(A) after examining the facts and evidence before it and after perusing the scheme under which the said foreign travel expenses were incurred deleted the said addition by holding that the same was incurred for business purpose and for commercial expediency. Further, we also note that the similar deletion of disallowance of foreign travel expenses under the dealers scheme was upheld by the coordinate Bench of the Tribunal in the case of its holding company ACIT Circle – 3 (1) vs. APL Apollo Tubes Ltd. (supra).
7.1 The above findings of facts by the Ld. CIT(A) could not be rebutted by any cogent material by the revenue before us. Moreover, on similar facts the co-ordinate Bench upheld the similar deletion of foreign expenses as under the dealers’ scheme made by the Ld. CIT(A) in the case of the holding company of the assessee. Therefore, considering these facts, we hereby decline to interfere with the order of the Ld. CIT(A). We, therefore, uphold the order of the Ld. CIT(A) and dismiss the Ground No.1 of the revenue.
8. Further in this case an amount of Rs.2,53,43,451./- was disallowed by the AO which was incurred by the assessee towards ‘allocation of common expenses’. As per the details in para no. 42 on page No.9 of the assessment order an amount of Rs.2,53,43,455/- was allocated to the assessee on account of operational expenses, salary cost employees, salary cost of other employees, Gratuity expenses and Leave encashment expenses. It was explained by assessee that this fact was also noted in note No -28 to the financials of the assessee company. However, the AO did not accept the same and stated that the said allocation was not attested either by any auditor or any Chartered Accountant. The AO also questioned the fact that it was not clear as to why the assessee had started claiming the said expenses from the present financial year and observed that it had not claimed such expenses in any of the earlier year. The AO also noted that a perusal of the allocation shows that main expenses was towards employees cost but the assessee had not furnished the list of the employees who had worked for more than one group concerns because of which their expenses was among all the concerns to whom he / she had rendered services. The AO also noted that the assessee had not furnished Form -16 of all such employees in absence of such details it was not possible for her to ascertain whether the allocation of employee cost was made correctly or not. Similar observation was also made by the AO with respect to allocation of operational expense as according to the AO the basis for allocation of the said expenses among various concerns was not provided. Accordingly, the AO disallowed the sum of Rs.2,53,43,451/- and added to same to the total income of the assessee.
Aggrieved with the said order of the AO the assessee filed an appeal before CIT(A).
Before the CIT(A) the assessee inter-alia submitted that the Learned Assessing Officer erred in adding the common expenses allocation pertaining to the subsidiary assessee company based on principles of sharing materiality and as per the generally accepted accounting principles with business prudence to recognize such expenses connected to the respective entity without having any motives involved for loading expenses on each other. It was further submitted that the Assessing officer had also not appreciated that the sharing was with respect to the cost incurred on actual basis and was subjected to Service Tax and the assessee company had followed all such taxes involved in recognition of such sharing of common expenses and it was not a mere booking for expense, but it was a reimbursement and a claim to the extent of respective group Companies. It was further submitted that on the facts and circumstances of the additions in the hands of the Assessee Company being a Subsidiary Company, the Assessing Officer erred in not appreciating that such addition was not a transfer of income from the Holding Company to avoid taxes, but such sharing of common expenses and transferring by the holding Company on cost basis which was a business prudence, which otherwise results in higher income disclosure to the extent and discharging income taxes in the hands of the holding Company. It was further submitted that such an addition again in the hands of the subsidiary Assessee Company amounts to double collection of Taxes for the same amount of expenses incurred, which was totally against the law and is one sided.
The Ld. CIT(A) took note of the fact that the assessee was a subsidiary company of its holding company and to minimize the operational cost, common services were used to across the company of the holding company which helped the assessee to save a lot of cost and doing away with the need to appoint separate team of professionals.
11.1 The Ld. CIT(A) further noted that such an arrangement was also certified by the Chartered Accountant of the assessee. The Ld. CIT(A) took note of the submission made by the assessee submitted before him that to reduce the operational cost and to increase the profitability, the assessee company had since merged with holding company vide order dated 14.10.2022 of NCLT and further such allocation of common expenses as salary has been allowed at business expenses during the assessment proceedings u/s. 143 (3) of the Act for A.Y. 2020-21 in the case of the assessee company.
11.2. In view of these facts, the ld.CIT(A) deleted the said disallowance of Rs.2,53,43,451/-.
Aggrieved with the said order the Department is in appeal before us on the following ground :
2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting addition on account of disallowance of common allocation expenses of Rs.2,53,43,451/- under section 37 of the Act, 1961 without appreciating the facts.
The Ld. Sr. DR supported the order of the AO whereas Sr. AR supported the findings of the CIT(A).
We have heard both the parties and perused the material available on record. On the perusal of the order of the Ld. CIT(A) we observe that the Ld. CIT(A) has verified full facts regarding allocation of the common expenses which could not be rebutted by any cogent material by the revenue before us. We, therefore, uphold the order of the Ld. CIT(A) and dismiss the ground No.2 of the Revenue.
15 In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 27.10.2025.