2014 (9) TMI 1203 - HC - Income Tax

Allowability of marketing expenses - nature of the arrangement between the assessee company and the brand owners whereby the assessee was saddled with such marketing expenses - HELD THAT - Appeal is, therefore, admitted on the following substantial questions of law. 1. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in allowing the assessee's claim of marketing expenses for the period from 01-12-1997 to 31-8-1998 incurred by the assessee of ₹ 29,22,88,006/- disallowed by the assessing officer under section 37(1) of the Income Tax Act, 1961, the expenditures being not wholly and exclusively for the purpose of business of the assessee ? 2. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in not appreciating the true nature of the arrangement between the assessee company and the brand owners whereby the assessee was saddled with such marketing expenses which are in fact and for all intent liability of the foreign company owning the brands and the trademarks ?

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal, Pune dated 31st March, 2010.
2. Interpretation of marketing expenses and their allowance as deductions.
3. Determination of expenses as capital in nature for producing films for advertisement purposes.
4. Reconsideration of the findings on marketing expenses and the nature of expenditure for business promotion.

Analysis:
1. The appeal challenges the order of the Income Tax Appellate Tribunal, Pune dated 31st March, 2010. The senior counsels for both parties presented arguments regarding the questions of law formulated by the revenue. Question Nos. 8 & 9 were restored to the Tribunal's file by a previous order of the Division Bench of the Court. The appellant contended that the appeal does not raise any substantial question of law apart from the issues related to marketing expenses. The Tribunal's findings on marketing expenses were discussed, and it was argued that they were based on facts specific to the case and not legally erroneous.

2. The Tribunal's decision regarding marketing expenses was analyzed. The Tribunal allowed a deduction of specific expenses as rebates and discounts, not as advertisement or marketing expenses. This finding was upheld as consistent with the evidence on record, leading to the dismissal of the appeal on this issue. Regarding the enhancement made by the Commissioner of Income Tax (Appeals) to certain expenditures considered capital in nature, the Tribunal's reliance on a previous judgment was noted. The Tribunal's finding on the nature of these expenditures for film production was deemed factual and not legally flawed, resulting in the dismissal of this aspect of the appeal.

3. The Court extensively discussed the questions related to marketing expenses and their allowance as deductions. The appellant argued that these expenses were incurred to promote business and should be considered as business expenditures. The Court reviewed the affidavit filed by the assessee opposing the appeal and found no reason to deviate from a previous order related to the same assessee. The Court admitted the appeal on substantial questions of law related to the correctness of allowing the claim of marketing expenses disallowed by the assessing officer under the Income Tax Act, 1961, and the true nature of the arrangement between the assessee company and brand owners.

4. The Court admitted the appeal on specific substantial questions of law related to marketing expenses and the nature of liabilities between the assessee company and brand owners. The respondent waived service, and the Court directed the Registrar to summon the original record for inspection. The appeal was scheduled to be heard along with another related Income Tax Appeal.

This detailed analysis of the judgment highlights the issues involved, the arguments presented by both parties, and the Court's reasoning leading to the admission of the appeal on substantial questions of law related to marketing expenses and capital expenditures.