2016 (12) TMI 1284 - HC - Income Tax

Deduction claimed against the gain in repayment of foreign loans due to fluctuations in Foreign Exchange Rate - Held that - The decision in Woodward (2009 (4) TMI 4 - SUPREME COURT ) was correctly applied. Section 43A of the Income Tax Act, 1961 which applies in such circumstances, inter alia requires the treatment of foreign exchange fluctuation to follow the purpose of the borrowing; yet it also highlights that, the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset. This Court notices that there is no finding by the AO that the cost of the asset had been reduced or increased, as the case may be, on account of foreign exchange fluctuation. In the circumstances, the findings rendered are not only factual but, in our opinion, in conformity with the previous rule in Woodward (supra). The question of law sought to be urged by the revenue is answered against it. Allowance of advertisement and promotion expenses - Held that - Under the Trade Mark Act, especially Section 48, as long as the arrangement existed, the assessee, who was a licensee of the products, was entitled to claim them as business expenditure though in the ultimate analysis they might have enhanced the brand of the overseas owner. No doubt, if the arrangements were terminated, the brand presence of the overseas owner of the articles/IPR would have subsisted. But that would nevertheless subsist in any event on the theory of trans-national reputation of the IPR owner. In the circumstances, disallowing a certain proportion on an entirely artificial and notional basis from the expense otherwise deductible, in our opinion, was not justified. The question of law is answered against the revenue.

Summary

Issues Involved:
1. Deduction claimed against gain in repayment of foreign loans due to fluctuations in Foreign Exchange Rate.
2. Allowance of part of advertisement and promotion expenses for brand building of parent company.
3. Enduring benefit of advertisement and promotion expenditure creating tangible assets and its treatment as capital expenditure.

Analysis:

Issue 1: Deduction claimed against gain in repayment of foreign loans due to fluctuations in Foreign Exchange Rate
The High Court examined the case where the assessee claimed loss on account of foreign exchange fluctuation due to repayment of external commercial loans from its parent company. The Assessing Officer (AO) considered the liability falling into the capital stream, but the CIT(A) and ITAT favored the assessee following the decision in another case. The Court emphasized the purpose of the loan and held that if it was for a fixed asset or working capital, relevant circumstances should be considered. As the assessee failed to provide material, the Court ruled in favor of the revenue, highlighting the application of Section 43A of the Income Tax Act, 1961. The Court found no evidence of the asset cost being affected by foreign exchange fluctuation, thus answering the question of law against the revenue.

Issue 2: Allowance of part of advertisement and promotion expenses for brand building of parent company
Regarding the allocation of brand enhancement expenditure to the overseas owner/collaborator, the AO disallowed 10% of the expenditure, stating it enhanced the brand value of the overseas proprietor. However, the CIT(A) disagreed with this reasoning, and the ITAT confirmed the order without substantial reasoning. The Court observed that the expenses were incurred by the assessee and the arrangement with the brand proprietor allowed the use of specified brands. Despite transfer pricing exercises, the overseas owner did not establish any rival licensee in the area of the assessee's operation. The Court held that as long as the arrangement existed, the assessee could claim the expenses as business expenditure under the Trade Mark Act, Section 48. Disallowing a portion of the deductible expense was deemed unjustified, and the question of law was answered against the revenue. Consequently, the appeal was dismissed.

Issue 3: Enduring benefit of advertisement and promotion expenditure and its treatment as capital expenditure
The Court noted that Question No.3 regarding the enduring benefit of advertisement and promotion expenditure had been concluded in a previous case and did not require consideration. Therefore, the judgment focused on the other two issues raised by the revenue.