2014 (10) TMI 365 - HC - Income Tax

Transfer Pricing Adjustments - Advertisement and publicity expenses disallowed - Non disclosure in form 3CEB Whether the expenses incurred on advertisement and publicity incurred wholly for the benefit of the assessee or it benefited the principal who was an associated enterprise Held that - The contention of the revenue cannot be accepted because there was no proper disclosure of the benefit before the Transfer Pricing Officer cannot now be a reason to entertain the questions and the order of Transfer Pricing Officer is final - the assessee is an agent of foreign principal and would naturally benefit from advertising carried on by agent in India - the assessee has not suppressed any information - It has offered to tax its income from both business, namely, distribution business as well as advertisement and promotion business AO has proceeded to grant 33.33% of the total advertising expenses as allowable deduction there was no justification for such restriction of the same - the Transfer Pricing Officer had followed a possible view which cannot now be faulted. Relying upon Sassoon J. David And Co. Pvt. Limited Versus Commissioner of Income-Tax, Bombay 1979 (5) TMI 3 - SUPREME Court - it cannot be said that the expenditure was not wholly or exclusively for benefit of the assessee - The mere fact that foreign principals also benefited does not entail right to deny deduction u/s 37(1) - all the amounts earned by the assessee were brought to tax, especially in view of the fact that the payment of expenses were made to Indian residents and there payments were not required to be included in form 3CEB since Section 92 which governs the effect of form 3CEB covers only international transactions assessee s income from subscription fee is variable and through commission received on the advertising sales is 15% of the value of Ad-sales - there is a direct nexus between advertising expenditure and revenue albiet the fact that there may be a lean period before revenue picks up notwithstanding high amount spent on such publicity - the foreign enterprises must compensate the Indian agent for the benefit it receives or it may receive from the advertisement and promotion of its channels by agent in India - The agent in India earns commission from ad sales and distribution revenue, both of which have sufficiently compensated the assessee Decided against revenue.

Summary

Issues Involved:
1. Justification of ITAT in confirming the deletion of disallowance of Rs. 4,14,20,843/- out of advertisement and publicity expenses.
2. Consideration of transfer pricing provisions and the benefit to foreign principals.
3. Treatment of advertisement and publicity expenses as deferred revenue expenditure.

Issue-wise Detailed Analysis:

1. Justification of ITAT in Confirming the Deletion of Disallowance:
The primary issue was whether the ITAT was justified in confirming the CIT(A)'s order, which deleted the disallowance of Rs. 4,14,20,843/- made by the Assessing Officer (AO) out of advertisement and publicity expenses. The AO had restricted the allowable deduction to 33.33% of the total amount, arguing that the expenses benefited not only the assessee but also the foreign principals (NGC Asia and FOX). The CIT(A) allowed the entire expenditure under section 37(1), and the ITAT confirmed this view. The court agreed with the ITAT, stating that the expenses were necessary for promoting the channels, which in turn increased viewership and advertising revenue, thereby benefiting the assessee directly.

2. Consideration of Transfer Pricing Provisions and Benefit to Foreign Principals:
The revenue argued that the assessee did not disclose in Form 3CEB that the foreign principals benefited from the advertising expenses, which could have led the Transfer Pricing Officer (TPO) to take a different view. The court noted that the TPO had accepted the arm's length price declared by the assessee, and this order was final. The court found no suppression of information by the assessee and held that the benefits to the foreign principals were not ascertainable or taxable. The court also referenced the Supreme Court decision in Sassoon J. David, emphasizing that the mere benefit to foreign principals does not preclude the deduction under section 37(1).

3. Treatment of Advertisement and Publicity Expenses as Deferred Revenue Expenditure:
The revenue's alternative claim was that the advertisement and publicity expenses should be treated as deferred revenue expenditure, given that the benefits of such expenses spread over future years. The court rejected this claim, stating that the expenses were incurred wholly and exclusively for the business purposes of the assessee. The court highlighted that the expenses were necessary for generating higher viewership and advertising revenue, which justified their immediate deduction under section 37(1).

Conclusion:
The court dismissed the appeal, upholding the ITAT's decision to allow the full deduction of the advertisement and publicity expenses. The court found no merit in the revenue's arguments regarding non-disclosure in Form 3CEB, the benefit to foreign principals, and the treatment of expenses as deferred revenue expenditure. The questions of law were answered in favor of the assessee and against the revenue, with no order as to costs.