1990 (6) TMI 101 - AT - Income Tax

Summary

Issues Involved:

1. Relationship between the assessee and its sister concerns.
2. Nature and purpose of the advertising expenditure.
3. Validity of the reimbursement agreement.
4. Genuineness and necessity of the advertising expenditure.
5. Control and supervision over the expenditure.
6. Application of the McDowell & Co. vs. CTO judgment.
7. Allocation of advertising expenses between the assessee and bottlers.

Detailed Analysis:

1. Relationship between the Assessee and its Sister Concerns:

The assessee is a manufacturer of soft drink concentrates, which it sells to 28 franchise holders (bottlers), six of which are controlled by the same directors and are considered sister concerns. The relationship between the assessee and these bottlers was scrutinized, particularly focusing on the shared management and control.

2. Nature and Purpose of the Advertising Expenditure:

During the relevant assessment year, the assessee incurred advertising expenses directly and through its sister concerns, which were reimbursed. The advertising expenditure was aimed at promoting the soft drinks manufactured from the assessee's concentrates. The resolution adopted by the assessee's Board of Directors on June 2, 1979, authorized such expenditure to be incurred directly or through bottlers, with a cap of Rs. 30 lakhs per area per financial year.

3. Validity of the Reimbursement Agreement:

The Tribunal examined whether there was a genuine agreement between the assessee and the bottlers for the reimbursement of advertising expenses. The evidence included a resolution by the Board of Directors, letters exchanged between the assessee and the bottlers, and the conduct of the parties, which indicated that the agreement was acted upon. The Tribunal noted that the absence of formal bilateral agreements did not invalidate the arrangement, as the resolution and subsequent actions demonstrated a mutual understanding.

4. Genuineness and Necessity of the Advertising Expenditure:

The Tribunal emphasized the commercial necessity of the advertising expenditure to promote the assessee's products, especially after the exit of Coca Cola from India. The expenditure on free sampling was considered a legitimate business strategy to increase sales of the concentrates. The Tribunal found that the expenditure was genuine and incurred out of commercial expediency, rather than as a device for tax avoidance.

5. Control and Supervision over the Expenditure:

The Tribunal addressed concerns about the lack of direct control by the assessee over the advertising expenditure incurred by the bottlers. It was noted that the common directors of the assessee and the bottlers provided an inherent control mechanism. The Tribunal concluded that the control and supervision exercised by the directors of the bottling companies, who were also directors of the assessee, were sufficient.

6. Application of the McDowell & Co. vs. CTO Judgment:

The Tribunal distinguished the present case from the McDowell & Co. vs. CTO judgment, which condemned colorable devices for tax avoidance. The Tribunal held that the arrangement between the assessee and the bottlers was a genuine business transaction, necessitated by commercial and financial exigencies, and not a colorable device to defraud the Revenue.

7. Allocation of Advertising Expenses between the Assessee and Bottlers:

The Tribunal rejected the Revenue's argument that the advertising expenses should be shared between the assessee and the bottlers. It was held that the entire expenditure was incurred by the bottlers on behalf of the assessee under a valid agreement, and thus, it was the assessee's expenditure. The Tribunal found no basis for allocating the expenses between the parties.

Conclusion:

The Tribunal concluded that the advertising expenditure of Rs. 21,53,788 incurred by the assessee through the bottlers was a legitimate business expenditure, wholly and exclusively for the purposes of the assessee's business. The disallowance of the expenditure by the Assessing Officer was deemed improper and was deleted. The appeal was allowed in favor of the assessee.