2015 (2) TMI 363 - HC - Income Tax

Disallowance of Advertisement expenditure - Held that - One of the functions being performed by the assessee was to advertise and promote the channels and to earn subscription revenue. Another function was to secure/procure advertisements. The assessee earned 15 per cent. commission for the last mentioned function. The assessee was earning revenue in view of the said functions being performed. Expenditure incurred on advertisement was clearly relatable and laid out for the purpose of business of the respondent-assessee and was not extraneous or unconnected with the same. Consequently, it could not have been disallowed as was done by the Assessing Officer on the ground that it was not laid out or incurred wholly or exclusively for the purpose of business. - Decided in favour of assessee. Transfer pricing adjustment - income earned, i.e., price paid for the service rendered, goods sold, etc - Held that - The Transfer Pricing Officer is required to select appropriate method specified in section 92C of the Act and determine/compute the arm's length price. In the present case, the Transfer Pricing Officer did not make any adjustment and has accepted the transfer pricing between the respondent-assessee and the related enterprises, i.e., the compensation paid or retained by the respondent-assessee in view of the functions performed, risk assumed and asset deployed, etc. Once we hold that one of the functions to be performed by the respondent-assessee was to incur the advertisement and promotion expenditure, then the expenditure incurred for the said purpose should be allowed under section 37(1) of the Act, as incurred wholly and exclusively for purpose of the said assessee. However, adequate compensation/price should be paid for the same by the associated enterprise, with reference to the functions, risk and assets. In case, the respondent-assessee was not being paid adequate consideration or compensated by its associated enterprise, necessary adjustments could have been made by the Transfer Pricing Officer in accordance with the Act. - Decided in favour of assessee.

Issues Involved:

1. Disallowance of advertisement expenses by the Assessing Officer (AO) for the assessment years 2002-03, 2003-04, and 2004-05.
2. Whether the Income-tax Appellate Tribunal (ITAT) was correct in affirming the deletion of these disallowances by the Commissioner of Income-tax (Appeals) (CIT(A)).
3. Whether the ITAT's order was perverse for not properly considering the facts and relying on its own order for the previous assessment year.

Issue-wise Detailed Analysis:

1. Disallowance of Advertisement Expenses:

The AO disallowed advertisement expenses for the assessment years 2002-03, 2003-04, and 2004-05 on the grounds that these expenses were not necessary for the assessee's business. The AO observed that the assessee retained only 15% of the advertisement revenue as commission and repatriated the remaining 85% to its foreign associated enterprises. The AO held that the entire advertisement expenditure was unjustified as it was not relatable to the subscription revenue, which was the major source of income. For the assessment year 2002-03, the AO disallowed Rs. 2,61,54,952, for 2003-04, Rs. 67.15 lakhs, and for 2004-05, Rs. 1,24,18,732.

2. Tribunal's Affirmation of CIT(A) Deletion:

The ITAT affirmed the CIT(A)'s order, which deleted the disallowance of advertisement expenses. The appellate authorities found that the advertisement expenditure was incurred in terms of the license agreement, which required the assessee to publicize and increase the viewership of the channels, thereby increasing the subscription revenue. The ITAT held that the advertisement expenses were related to and had a direct nexus with the license agreement for distributorship and subscription fee collection. The ITAT also noted that the Transfer Pricing Officer had accepted the price and did not make any adjustments, indicating that the expenses were reasonable and for the purpose of the assessee's business.

3. Perverse Order Allegation:

The Revenue contended that the ITAT's order was perverse as it did not properly consider the facts and relied on its own order for the previous assessment year. However, the Tribunal and the CIT(A) had recorded comprehensive findings that the advertisement expenditure was incurred wholly and exclusively for the purpose of the assessee's business. The Tribunal's findings were based on the agreement between the assessee and the associated enterprise, which mandated the assessee to advertise and promote the channels to earn subscription revenue. The Tribunal found that the AO's assertion that the entire advertisement revenue should have been retained as income was unfounded and that the AO had wrongly disallowed the expenditure.

Legal Position and Conclusion:

Under section 37(1) of the Income-tax Act, any expenditure incurred wholly and exclusively for the purpose of business is allowable as a deduction. The Tribunal and the CIT(A) found that the advertisement expenses were incurred for the assessee's business of distributing television channels and earning subscription revenue. The expenditure was not capital or personal in nature, and it was incurred to promote the channels and increase viewership, thereby increasing subscription revenue. The Tribunal held that the AO could not question the reasonableness of the expenditure and that the Transfer Pricing Officer had accepted the price paid for the services rendered.

The High Court concluded that the advertisement and promotion expenditure was rightly treated as a business expenditure under section 37(1) of the Act. Consequently, the disallowance made by the AO was not justified. The appeals were disposed of in favor of the respondent-assessee, with no order as to costs.

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