2024 (6) TMI 516 - AT - Income Tax

Disallowance of Brand Ambassador Expenses - AO had disallowed 75% of the expenditure incurred on brand ambassadors, considering it as capital expenditure towards intangible assets, i.e., brand building - HELD THAT - CIT(A) has recorded finding of fact, with which we agree that the expenditure incurred is not creating any enduring benefit of an asset but is rather helping the assessee in augmenting its sales and resultantly its profit. This finding of fact could not be controverted by the Ld. CIT(DR) by bringing on record any adverse material. We are of the view that the impugned expenditure is of revenue nature, incurred wholly and exclusively for the purpose of assessee business and is allowable deduction u/s 37 of the Act. We therefore decline to interfere with the order of the Ld. CIT(A) on the point and rejecte ground No. 1 of the Revenue. Disallowance on account of Advertisement and Sales Promotion expenses - HELD THAT - As we are not inclined to agree with the view of the Ld. AO that the impugned expenditure will give enduring benefits to the assessee and hence is not of revenue character. We endorse the finding of the Ld. CIT(A) that the expenditure on account of corporate advertisement is to essentially maintain the corporate image and not create a corporate image. These were incurred for enhancing sales, earning profit and facilitating operation of the assessee s business. This is amply demonstrated by the enormous increase in sales during the year as compared to the preceding year. In Pepsico India Holdings (P.) Ltd. 2012 (6) TMI 256 - DELHI HIGH COURT held that the expenditure incurred on neon signs and a glow signs qualifies for deduction u/s 37(1) of the Act. No contrary decision has been brought to our notice. We therefore concur with the findings of the Ld. CIT(A) and consequently reject ground No. 2 of the Revenue. Disallowance on account of Service Centre expenses - case of the assessee has been that warranty is an integral part of the sales price of the value of product - HELD THAT - As provision for warranty is made in the year in which the goods are sold on the basis of past experience. The moment there is a sale, automatically an obligation of warranty arises. This is a normal industry practice. There is no denial from the Revenue s side of the assessee s plea. The Ld. CIT(A) has relied on the decision of ITAT Delhi in M/s Rohde and Schwarz (P) Ltd. 2019 (11) TMI 586 - ITAT DELHI in which Rotork Controls India (P.) Ltd. 2009 (5) TMI 16 - SUPREME COURT has been cited and followed wherein it is held that provision for warranty is entitled to deduction u/s 37 of the Act. We therefore, have no reason whatsoever to differ with the findings of the Ld. CIT(A). Accordingly, ground No. 3 of the Revenue is also rejected.

Summary

Issues Involved:
1. Disallowance of Brand Ambassador Expenses.
2. Disallowance of Advertisement and Sales Promotion Expenses.
3. Disallowance of Service Centre Expenses.

Summary:

1. Disallowance of Brand Ambassador Expenses:
The Revenue challenged the deletion of the addition of Rs. 3,21,27,950/- made by the Assessing Officer (AO) on account of disallowance of Brand Ambassador Expenses. The AO had argued that the expenses were capital in nature, incurred for brand building, and thus should be considered as deferred revenue expenditure. The CIT(A) disagreed, stating that the expenses were for promoting products, not merely the brand, and did not create any enduring benefit. The CIT(A) cited the Supreme Court case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, which held that the test of enduring benefit is not always conclusive. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were of a revenue nature and allowable u/s 37 of the Income Tax Act, 1961.

2. Disallowance of Advertisement and Sales Promotion Expenses:
The Revenue also contested the deletion of Rs. 6,69,29,143/- disallowed by the AO, who argued that the expenses on neon sign boards and hoardings gave enduring benefits and should be capitalized. The CIT(A) ruled in favor of the assessee, stating that the expenses were for maintaining the corporate image and facilitating business operations, not for creating a corporate image. The Tribunal concurred with the CIT(A), referencing the Delhi High Court case of CIT vs. Pepsico India Holdings (P.) Ltd. [2012] 21 taxmann.com 165 (Del), which allowed similar expenses as revenue expenditure u/s 37(1).

3. Disallowance of Service Centre Expenses:
The AO disallowed Rs. 1,15,40,748/- on account of Service Centre Expenses, considering the provision for warranty as contingent. The CIT(A) deleted this disallowance, noting that warranty is an integral part of the sales price and the provision was based on past experience. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court case of Rotork Controls India (P.) Ltd. vs. CIT [2009] 314 ITR 62 (SC), which allows deduction for warranty provisions u/s 37.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletions of all three disallowances. The order was pronounced in the open court on 23rd January, 2024.