2009 (9) TMI 918 - HC - Income Tax

Expenditure incurred on advertisement and publicity - Business Expenditure or not ? - as per AO trademark Adidas belonged to the assessee s parent company and since the assessee was already paying royalty at the rate of 5 per cent of sales, it was to promote the brand name of the licensor company and on this ground held that it was not allowable u/s 37(1) - Tribunal has reversed the decision of the CIT(A) as confirming the addition - HELD THAT - We find from the order of the ITAT that it has discussed in detail the terms of Technical Assistant Agreement dated 14-2-1997, as per which the assessee was provided the technical know-how and was also allowed to use the brand name Adidas on the products manufactured by the assessee, which are to be sold in India, Nepal and Bhutan. Tribunal observed that merely because the assessee was paying royalty at the rate of 5 per cent to M/s. AIPL would not mean that the assessee could not incur the expenditure on advertisement to popularize the products dealt with by it in Indian market. No doubt, brand name of Adidas is already a well-known brand which belongs to the parent company of the assessee. However, to popularize the said product in India and to promote its sale in the Indian territories, it became essential for the assessee to incur expenditure on advertising to propagate the aforesaid brand name. The benefit thereof had to necessarily accrue to the assessee as well as the main purpose of the advertisement is to augment the sales. The contention of the assessee that it was a commercial practice and commercial expediency has rightly been accepted by the Tribunal. We, therefore, do not find any substantial question of law that arises for our consideration. This appeal is accordingly dismissed.

Summary

Issues:
1. Allowability of advertisement expenditure under section 37(1) of the Income-tax Act for the assessment year 1997-98.

Analysis:
For the assessment year 1997-98, the case involved the question of whether the advertisement expenditure incurred by the assessee, a company incorporated as a joint venture of two companies, was allowable under section 37(1) of the Income-tax Act. The Assessing Officer disallowed the expenditure on the grounds that the trademark 'Adidas' belonged to the assessee's parent company, and the expenditure was not incurred wholly and exclusively for the business of the assessee. However, the Tribunal reversed the decision, stating that the expenditure was for the assessee's business purposes. The Tribunal highlighted that even though the assessee was paying royalty for using the brand name 'Adidas,' it was essential to incur expenditure on advertising to promote the brand in the Indian market. The Tribunal accepted the assessee's argument that the advertisement expenses were incurred for commercial expediency and to augment sales, thus making them eligible for deduction under section 37(1) of the Act.

The Tribunal's detailed analysis of the Technical Assistant Agreement dated 14-2-1997 revealed that the agreement allowed the assessee to use the brand name 'Adidas' on its products sold in specific territories. The Tribunal emphasized that the advertisement expenses were directly related to the business activities of the assessee, which involved manufacturing and selling products under the brand name 'Adidas.' The Tribunal noted that the expenditure was incurred to promote the assessee's business in India and increase sales, which aligned with the commercial strategy of the assessee. The Tribunal rejected the argument that paying royalty for the brand name 'Adidas' was sufficient reason to disallow the advertisement expenses, emphasizing that promoting sales through advertising was a common business practice and fell within the scope of 'wholly and exclusively incurred for the purpose of business' as per section 37(1) of the Act.

In conclusion, the High Court found no substantial question of law to consider in the case and dismissed the appeal. The judgment upheld the Tribunal's decision, affirming that the advertisement and publicity expenses incurred by the assessee were essential for promoting business activities and thus eligible for deduction while computing the assessee's profit from business. The Court highlighted that the expression 'wholly and exclusively' in section 37 of the Act did not mean 'necessarily,' allowing the assessee the discretion to decide on expenditure for facilitating business activities, even if voluntarily incurred for promoting business and earning profit.

This comprehensive analysis of the judgment showcases the intricate legal arguments and considerations involved in determining the allowability of advertisement expenditure under the Income-tax Act for the assessment year 1997-98.