2021 (5) TMI 549 - AT - Income Tax

Nature of expenditure - non compete fee paid - Revenue or capital expenditure - HELD THAT - Assessee entering into strategic alliance was able to control the marketing activities in a manner clearly beneficial to the assessee and hence, according to us the expenses incurred are in the nature of Revenue. We allow the claim of the assessee and this appeal of the assessee is allowed.

Summary

Issues Involved:
1. Whether the payment of ?9.13 crores to Lakme Ltd. and ?1.82 crores to Lakme Exports Ltd. is capital or revenue expenditure.
2. Whether the assessee acquired any capital asset or right under the agreement with Lakme Ltd. and Lakme Exports Ltd.
3. Whether the expenditure incurred by the assessee is deductible under section 37(1) of the Income-tax Act, 1961.

Issue 1: Nature of Expenditure
The primary issue is whether the payments to Lakme Ltd. and Lakme Exports Ltd. should be classified as capital or revenue expenditure. The CIT(A) held these payments as capital in nature, while the assessee contended they were revenue expenditures. The Tribunal examined the facts, noting that the payments were made for aligning marketing operations for ten years without acquiring any capital assets. The Tribunal emphasized that the arrangement was intended to increase profitability by reducing competition and marketing costs, thus qualifying as revenue expenditure under section 37(1) of the Act.

Issue 2: Acquisition of Capital Asset or Right
The Tribunal observed that Lakme Ltd. and Lakme Exports Ltd. did not relinquish their right to manufacture or produce the specified products. The payments were made for the strategic alignment of marketing activities, not for acquiring any capital asset or right. The Tribunal referenced the Supreme Court's decision in Empire Jute Co. Ltd., which states that expenditure facilitating trading operations or enabling more efficient business conduct without affecting the fixed capital is revenue in nature.

Issue 3: Deductibility under Section 37(1)
The Tribunal considered whether the payments were deductible under section 37(1) of the Act. The assessee argued that the payments were made to reduce competition and marketing costs, thus enhancing profitability. The Tribunal examined the reduction in advertisement and promotion expenses post-agreement and the increase in sales, concluding that the payments were made wholly and exclusively for business purposes. The Tribunal allowed the claim, citing the Supreme Court's ruling in Kettlewell Bullen & Co. Ltd., which differentiates between revenue and capital receipts based on the impact on the trading structure and source of income.

Conclusion:
The Tribunal concluded that the payments made to Lakme Ltd. and Lakme Exports Ltd. were revenue expenditures, deductible under section 37(1) of the Income-tax Act, 1961. The appeal of the assessee was allowed, and the order of the CIT(A) was set aside. The decision emphasized that the strategic alliance aimed to reduce competition and marketing costs, thereby facilitating more efficient and profitable business operations.