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Income Tax Appellate Tribunal, DELHI BENCH ‘B’, NEW DELHI
ORDER Per Prashant Maharishi, AM:
This appeal is preferred by revenue against order of CIT(A) XIII dated 12 August, 2013 raising following grounds of appeal : “1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 17,99,870/- made out of advertisement expenses.
2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 19,854/- out of club membership expenses.”
02. The brief facts of the case that Assessee Company is engaged in the business of providing technical services of hotels under its brand name “fortune”. It provides operating and marketing services also. For the relevant assessment year it filed its return of income on 27.09.2010 declaring in total income of Rs. 5,16,67,703/- assessment u/s 143(3) was made on 28th September, 2012 on total income of Rs. 5,35,54,780/-. The Assessing Officer disallowed a sum of Rs. 17,99,870/- being 20% of total advertisement expenditure incurred by the assessee of Rs. 1,19,99,128/-.
2 Fortune Park Hotels ltd. Further disallowance of Rs. 19,854/- was also made on account of claim membership fees and Rs. 67,353/- on account of disallowance u/s 14A. Against this assessee preferred appeal before CIT (A) who in turn allowed the appeal on substantive grounds and deleted the addition of advertisement expenditure as well as the club fees expenditure. Against the order of CIT (A), revenue is in appeal before us. Ground no.1 :- 03. Ground no. 1 is against deletion of disallowance of Rs. 17,99,870/- out of advertisement expenditure. During the year assessee has incurred expenditure of Rs. 1,53,44,166/- under the head “advertisement and sales” promotion and out of the above sum an amount of Rs. 1,19,99,128/- was incurred on account of advertisement in print media for strengthening the ‘Fortune Brand’. Ld. Assessing Officer disallowed 20% of the advertisement expenses on account of brand building expenditure and according to AO, same was capital in nature. Therefore he disallowed an amount of Rs. 23,99,826/-. He further held that as brand is an intangible asset allowed depreciation @ 25% on 23,99,826/- amounting to Rs. 5,99,956/- thereby making net addition / disallowance of Rs. 17,99,870/-. On appeal before the CIT(A) the addition of Rs. 17,99,000/- was deleted on the ground that expenditure has not been incurred to acquire any brand and such expenditure has not resulted in creation of any asset for the assessee. He further held that object of the expenditure was better performance and improvement on existing business. He further held that as there is no benefit of enduring nature acquired by the assessee the expenditure incurred on brand building is not capital expenditure. He relied on various decisions of jurisdictional High Court wherein such disallowance is deleted.
Ld. DR relied on the order of the Assessing Officer and stated that the brand is definitely an intangible asset for the assessee from which economic benefit is derived for a long time. The assessee is getting benefit not for 3 Fortune Park Hotels ltd. one year but for several years out of expenditures on brand building incurred by the assessee.
Ld. AR submitted that this issue is covered in favour of the assessee in its own case for Ay 2009-10 in dated 27/09/2013. He submitted that Hon’ble ITAT has considered all the grounds and has deleted the addition. He drew attention to para 8 of the order wherein Hon’ble ITAT has held that expenditure incurred by the assessee are of revenue nature. He submitted that this ground of appeal
is therefore covered in favour of the assessee.
06. We have carefully considered the rival submissions. We have perused the order of co-ordinate bench in case of ITA no. 522/Del./2013 for assessment year 2009-10 in case of the assessee. According to that order, ITAT has considered the identical issue for AY : 2009-10. The parties have also agreed d that there is no change in the facts as well as law with respect to this addition pertaining to the current assessment year. Hon’ble ITAT has dealt with this issue as under :- “8. We have heard the parties and have perused the material on record. The issue is as to whether the incurrence of the expenditure in question has brought any enduring benefit to the assessee company. The assessee Company is in the business of providing operating, marketing and technical services to hotels, through its expertise, under the brand name 'Fortune'. The services provided by the assessee pertained-to technical, consultancy, operating and marketing services for operation of hotels in India. For provision of such services, an agreement is entered into, whereby, the hotel seeking to avail the services of the assessee, agrees to engage the assessee Company to render services including Marketing, Advertisement and Reservation Services and Technical Consultancy and Pre-opening Services. For this, service fee is paid to the assessee company by the hotel. Apropos the expenditure in question, under the relevant agreement, undisputedly, the assessee was required to provide services in connection with marketing, advertisement and publicity of its client hotel in the local and national markets. The Assessing Officer held the expenditure incurred to have been incurred towards brand building and capital in nature. However, it is seen that the assessee had incurred the expenditure in question so as to promote and maintain hotels 4 Fortune Park Hotels ltd. run by it under the 'Fortune' brand owned by the assessee. This was having a direct bearing on the sales/turnover of the hotels being operated by the assessee Company, resulting in more profits to it. Undisputedly, the expenditure was incurred by the assessee Company in the regular course of its business. It was incurred to enhance the brand value of the hotels and to thereby earn higher profits. The expenditure was having a direct nexus with the assessee's business and profitability. This expenditure was, in fact, necessary for promoting the assessee's business interests. It has not been shown that the expenditure was incurred to acquire any brand from any outside party, nor did it result in the creation of any capital asset for the assessee Company. The brand has been in existence for a number of years and the expenditure claimed in the earlier years has consistently been allowed as an allowable revenue expenditure u/s 37(1) of the Act.
9. All these facts and circumstances, it is seen, were duly taken into consideration by the Ld. CIT (A) while holding the expenditure incurred by the assessee to be of a revenue nature rather than a capital one, as erroneously held by the Assessing Officer. It would be appropriate to here reproduce the relevant portion of the CIT (A)'s order:- “It is seen that most of the expenditure has been incurred on print/digital media, to create 'archive designs' and printing cloth caps etc. The expenditure incurred in the print and digital media for publicity of brand 'Fortune' along with the name of particular hotel is not enduring in nature and same has to be kept on repeating every month to attract the public attention. It may be mentioned here that the appellant is facing stiff competition from its rival brands and in order to mark its presence in the market, the appellant has to incur expenditure on advertisement and sales promotion. Therefore, the expenditure incurred on advertisement and publicity is not of the capital nature but the same is of revenue nature. It is contended by the appellant that it has submitted all the bills and vouchers of advertisement expenses along with the copy of ledger account. These details have also been filed before me. It is seen that all the expenses are supported by the bills and vouchers and the same have been incurred on advertisement and publicity of the brand 'Fortune.' Therefore, expenses incurred on advertisement cannot be called of enduring nature. The expenditure was not in a capital nature as no permanent asset has been created by this expenditure. The appellant has to incur expenditure on advertisement and 5 Fortune Park Hotels ltd. publicity to remain in the lime light and to show its presence in the market. The public memory is very short, if the appellant does not spent money on advertisement and publicity, the competitor will take the stage and market shares of the appellant."
10. On the CIT(A)’s observation that all the expenses incurred by the assessee are supported by the bills and vouchers as having been incurred on advertisement and publicity of the brand name, the Ld. DR has objected that the expenditure has not been doubted but, undisputedly, certain amount has certainly been spent for creating a brand name, which itself fetches a definite enduring benefit to the assessee. We do not find ourselves ad idem with the Ld. DR in this regard. The observation of the Ld. CIT (A) is merely buttressing the finding that the expenditure incurred did not fetch any enduring benefit to the assessee, that such expenditure had to be repeated every month to attract public attention in the face of stiff competition from rival brands of the assessee and to keep afloat in the prevailing cut-throat competition.
11. The department has not been able to establish either that the expenditure was incurred to acquire any brand from any outside party, or that it was not incurred in the normal course of the assessee's business, or that it had resulted in the creation of any capital asset for the assessee company, or even that it had fetched any enduring benefit to the assessee company in the capital field.
Also, the case is governed by the rule of consistency, the Department having regularly allowed similar expenditure incurred in earlier years and there is no change in the facts and circumstances in the year under consideration. So, there is no reason to make disallowance this year.
In view of the above, the Ld. CIT (A) is found to have correctly appreciated the nature of the expenditure incurred by the assessee Company to be of a revenue nature. All the case laws cited by the assessee before the Ld. CIT (A) have correctly been taken into Consideration by him.
In 'CIT vs. Agra Beverages Corpn. (P) Ltd.', 11 Taxman.Com 350 (Del), the assessee had incurred expenditure on advertisement and publicity of products of a party in its territory. The Assessing Officer took a view that since the party 6 Fortune Park Hotels ltd. had also gained from the said expenditure, the assessee's claim could not be allowed in full and disallowed 10% of the amount claimed. The Tribunal allowed the entire claim and the Hon'ble jurisdictional High Court upheld the order of the Tribunal, holding that the expenditure was exclusively incurred for the purposes of the assessee's business and to promote the sales of the assessee and if in the said process, the party, or its trade mark also benefited, that would not militate against the assessee so far as regards deduction u/s 37 of the Act.
In 'Adidas India Marketing (P) Ltd. vs. Assessing Officer, Ward 1(2), New Delhi' 10 Taxman.com 18 (Del), the assessee Company was a subsidiary of Adidas. It incurred expenditure on advertisement and promotion of the brand 'Adidas' in India and debited it to the account of the holding company. Before the Assessing Officer, the assessee explained that it had incurred expenditure on brand promotion and had debited the same to the holding Company and that no amount was actually paid by it to the holding Company out of borrowed funds for non-business purposes. The Assessing Officer, however, disallowed interest payment made by the assessee. It was held that the expenditure incurred by the assessee towards advertisement for and on behalf of the holding Company was undoubtedly on grounds of commercial expediency, inasmuch as the assessee undoubtedly would be benefited by making advertisement of the •brand name 'Adidas' to augment and promote sale effected by it in notified territories and that therefore, the Assessing Officer was not justified in disallowing the interest payment made by the assessee. v 16. In 'Salora International vs. ACIT, Range -9, New Delhi', 166 Taxman 54 (Del) (Mag), it was inter alia, held that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more effectively or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future; that advertisement expenditure cannot be of enduring nature in the present day scenario, as there is a lot of competition in the market; and that since under the same set of facts, the department, in earlier years, was constantly allowing the payments as royalty expenditure, there was no justification on its part to change the view at its sweet will, without any change of facts and circumstances during the year under consideration.
In 'CIT vs. Salora International Ltd.' 308 ITR 199 (Del), it was held that where there was a direct nexus between 7 Fortune Park Hotels ltd. the advertisement expenditure and the business of the assessee, the expenditure was a revenue expenditure. 18. All the above decisions are squarely applicable to the present case and they have been correctly appreciated by the Ld. CIT (A). No decision to the contrary has been brought to our notice.
In view of the above discussion, finding no merit in the ground raised by the department, the same is rejected.”
Therefore respectfully following the decision of co-ordinate bench in the case of the assessee for AY 2009-10, We confirm the order of CIT(A) in deleting the disallowance of Rs. 17,99,870/- made out of advertisement expenses. Therefore, ground no. 1 of the appeal of the revenue is dismissed.
Ground no. 2 :-
2nd ground of appeal is against the disallowance of Rs. 19,854/- incurred by the assessee of club expenses. During the course of assessment proceedings assessee submitted that the said expenses are comprising of membership expenses of the employees of the company. However, assessing officer disallowed these expenses as personal expenditure. Against this assessee preferred an appeal before the CIT(A) who in turn deleted the disallowance holding that revenue cannot step into shoes of a businessman to conduct business or incur expenditure in a particular way and therefore following the decision in case of assessee for A.Y. : 2008-09 he deleted the addition against this revenue is in appeal.
9. Before us ld. DR submitted that AO has disallowed the expenditure holding that it is a personal expenditure and therefore disallowance may be upheld. The ld. AR of the appellant submitted that the Hon’ble Supreme Court in CIT vs. United Glass Manufacturing Company ltd. has held that club 8 Fortune Park Hotels ltd. membership fees for employees incurred by the assessee is a business expenditure and is allowable u/s 37 of the Income Tax Act.
We have heard the rival contentions. In view of the decision of Hon'ble Supreme Court in case of CIT vs. United Glass Manufacturing Company ltd, Civil appeal no 30146/2008 dated 13.9.2012 the membership expenses of the club incurred by the assessee are allowable u/s 37(1) of the Act. Therefore we confirm the order of CIT(A) in deleting in the disallowance of Rs. 19,854 on this account. Therefore, ground no. 2 of the appeal is dismissed.
In the result, appeal of the revenue is dismissed. (Order Pronounced in the Court on 21/10/2015)