9911796707
TMI Blog2008 (6) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Bombay High Court, challenging the orders of the Tribunal dt. 5th Oct., 2005 and dt. 7th July, 2006. While allowing the writ petition, in its order dt. 12th Feb., 2007, Coca Cola India (P.) Ltd. v. ITAT & Ors, [2007] 208 CTR (Bom) 269 : [2007] 290 ITR 464 (Bom), the High Court held as under : "29. For all the aforesaid reasons, we set aside the impugned order passed by the Tribunal dt. 5th Oct., 2005, as well as the order passed on a miscellaneous application dt. 7th July, 2006, insofar as it pertains to the claim relating to service charges and marketing expenses and remit the case to the Tribunal for disposal of the appeal in accordance with law. 30. Accordingly, the writ petition succeeds. Rule is made absolute in terms of prayer cl. (a) with no order as to costs." 4. The cl. (a) of the assessee's writ petition, referred to above, reads as under : "(a) this Hon'ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Art. 226 of the Constitution of India calling for the records of the petitioner's case and after examining the legality and validity thereof quash an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 46,74,77,640. A revised return was filed on 19th Dec, 1997 declaring loss of Rs. 46,62,27,370. In the assessment order passed by the AO under s. 143(3) on 31st March, 2000, the AO determined the loss at Rs. 12,52,40,834 after making disallowances/additions aggregating to Rs. 34,09,86.536, which included, inter alia, the impugned two items as under: Particulars (Rs.) Service charges 10,80,04,482 Marketing expenses 17,99,74,343 7. The assessee had claimed Rs. 46,35,12,031 under the head 'Service charges' out of which the AO made a disallowance of Rs. 10,80,04,482, computed in para 7(iii) of his order, as under : S. No. Particulars Amount Amount (i) Expenses pertaining to earlier year (1.1.96 to 31.03.96) 3,37,06,017 Expenses relating to 1.1.96 to 31.12.96 29,71,93,862 (ii) Proportionate expenses for 3 months 7,42,98,465 Total disallowance 10,80,04,482 7.1 The CIT(A) confirmed the above disallowance made by the AO for the reasons summarized in paras 8.3.1 and 8.4 of his order as under : "8.3.1 As pointed out above, detailed enquiries were required to be made and in the process, statement on oath of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant, running their business or getting involved in their quality of product is not for the purposes of business of the appellant company but for purpose of the business of TCCC or the bottler. CCI Inc. provided such services to bottlers and rightly so as per the correspondence and approval from RBI, but these services do not have direct nexus with the business operations of the appellant. The decision of Hon'ble Supreme Court in the cases of Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC) and Indian Aluminum Co. Ltd. v. CIT 1972 CTR (SC) 51 : [1972] 84 ITR 735 (SC) provide relevant legal authority in this regard in the facts and circumstances of the nature of services rendered by CCI Inc. to the appellant and other entities in India. (v) There are expenses embedded in the service charges claimed by the appellant and embedded in the reimbursed cost of appellant to CCI Inc. which are not allowable in nature as per IT law. These include foreign travel expenses of wives of employees for their pleasure trips, capital expenditure on purchase of software, etc. (vi) There are expenses on various services directly provided to the appellant for supply of bases and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f allowability thereof as per law having regard to the facts and circumstances of the case relevant to the year under consideration and in the light of our discussion made above. The AO shall provide an opportunity of being heard to the assessee. The assessee shall produce and furnish all such relevant and necessary documents, details, particulars, information, books and other evidences which are necessary to support its claim." 8. The assessee had made another claim of Rs. 73,79,03,469, under the head 'Marketing expenses', out of which the AO disallowed Rs. 17,99,74,343, which was computed in paras 6(v) and 6(vi) of his order, as under : S.No. Particulars Amount (a) Difference on account of expenses i.e., excess amount shown by the assessee as against details received from parties 2,12,04,099 (b) Expenses pertaining to earlier years 9,97,41,327 (c) Expenses in respect of which letters were returned back 3,90,28,917 (d). Estimated/ad hoc 2,00,00,000 Total 17,99,74,343 8.1 The CIT(A) restricted the above disallowance to. 10 crores, described in para 7.17 of his order, as under : "7.17 In the light of these facts, the disallowance made under the head ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenses related to the year under consideration has actually been paid out and expended wholly and exclusively for the assessee's business, and whether any part of such expenditure are not allowable in computing the income of the assessee for the reason, that they are capital in nature and/or have been incurred towards building the equity and goodwill of TCCC brand, etc. or has been incurred for the benefit of any third party and for some other reason/s, if any. In these premises, we therefore, restore this issue to the file of the AO to decide the same de novo with a direction that he will determine and ascertain the expenditures pertaining to this year, examine various kinds of expenditure claimed by the assessee and decide the matter of admissibility of the expenditure as per law after giving an adequate and reasonable opportunity of being heard to the assessee, who shall be at liberty to furnish all such details, papers, documents, evidences, etc. in support of its claim. We order accordingly." 9. In its miscellaneous application dt. 3rd Feb., 2006, the assessee, inter alia, submitted in paras 19 and 27, that the Tribunal omitted to decide the ground Nos. 4 and 3 in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed and we do accordingly." 10. The Bombay High Court, while disposing of the Writ Petn. No. 7459 of 2006, filed by the assessee, set aside the orders passed by the Tribunal dt. 5th Oct., 2005 and dt. 7th July, 2006 and remitted the case back to the Tribunal for disposal of the appeal in accordance with law. The Court observed as under : "26. By the impugned order, the Tribunal has directed the AO to reconsider the entire claim of service charges and marketing expenses by first segregating the prior period expenses and thereafter determine the actual amount pertaining to the year under appeal and adjudicate as to whether the expenses incurred in the year in question have been incurred wholly and exclusively for the purpose of business. It is pertinent to note that in para 50 of its order, the Tribunal has given a categorical finding to the effect that out of the disallowance of service charges of Rs. 10,80,04,482 confirmed by the CIT(A), service charges amounting to Rs. 3,37,06,617 were incurred in the earlier year and that amount is not allowable in the year in question. Having quantified the claims which relate to earlier years, the Tribunal was not justified in rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground for making disallowance. (iv) whether disallowance of foreign travel expenses of the wives was justified. Marketing expenses (assessee's appeal) (v) whether disallowance could be made on ad hoc basis. (vi) whether expenditure on films/TV and brand buildings were capital expenditure. (vii) whether Rs. 31,19,919 deserved to be allowed as the payments were made by account payee cheques and it constituted a small fraction of the total expenditure of Rs. 73,79,03,469. Marketing expenses (Department's appeal) (viii) whether the disallowance of prior period expenditure should have been Rs. 5,76,75,624 as claimed by the Department, instead of disallowance of Rs. 4,11,61,718 confirmed by CIT(A). (ix) whether the disallowance on account of differences/no reply should have been Rs. 1,89,99,955 as claimed by the Department instead of disallowance of Rs. 31,19,919 confirmed by the CIT(A). 12. We now proceed to decide the aforesaid specific issues/grounds in the following paras. 13. The submissions made by both the parties during the hearing were summarized by the learned Authorised Representative and the learned Departmental Representatives, in written 'note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2007] 164 Taxman 17 (Mad); (vii) Tata Sons Ltd. v. CIT [1950] 18 ITR 460 (Bom); (viii) CIT v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC); (ix) Govind Rubber Ltd. v. Dy. CIT [2004] 90 TTJ (Mumbai) 1068. 15. Shri S.D. Kapila, the learned Departmental Representative, submitted that TCCC, USA was engaged in the business of manufacture, distribution and sale of its products in India by systematically identifying and organizing a network of authorized contract bottlers, that it assured planned supply of concentrates to the bottlers by appointing a contract manufacturer-cum-supplier of concentrates who worked exclusively for it and to whom it sold essence which is the most vital and closely guarded ingredient of the concentrate, that for carrying on these activities including marketing and assisting bottlers in achieving a high degree of efficiency in production, quality and hygiene, TCCC utilized services of CCI Inc., the Indian branch for which payments were wholly made by Coca Cola India (P.) Ltd., the assessee. 15.1. The assessee was an "authorized supplier" of concentrates under a license from TCCC for manufacturing and supplying concentrates to the 'authorised bott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . are only partly for expenditure for the purpose of assessee's business, that most of service charges and whole of publicity and marketing expenditure are clearly the business expenditure of TCCC which it does not reimburse to Coca Cola India (P.) Ltd., that incidentally, it is about 60 per cent of gross revenue, that this is inverted logic which is not correct, that the assessee's business is that of contract manufacturer-cum-supplier, that it is TCCC which is engaged in systematic business of contracting concentrates manufacturer (the assessee), supervisor-cum-consultant (CCI Inc.) and network of bottlers, that the assessee has no say in the pricing of essence which is a vital raw material for producing concentrates, that the assessee has also no say in fixation of price of concentrates to be sold to bottler and not in the pricing of beverages by the bottlers, that all these prices are fixed by TCCC and these prices are not negotiable, that the assessee has also no control over the bottlers, that it is not an independent seller of goods produced by it. Therefore, it is not a trader of its goods, that hence, the entire expenditure is the business expenditure of TCCC, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmissible deduction, there must be a direct and intimate connection between the expenditure and the business'. 18.3 In the case of Indian Aluminium Co. Ltd., the above test was qualified by stating that if the expenditure laid out by the assessee was 'incidental' to the carrying on of his business, it should be allowed. In other words, the requirement of a 'direct and intimate connection between the expenditure and business' was substituted by 'expenditure being incidental to the carrying on of business'. 18.4 It is seen that the expression 'wholly and exclusively' used in s. 37(1) of the IT Act, 1961 was the subject-matter of discussion by the Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 10 CTR (SC) 383 : [1979] 118 ITR 261 (SC). In this case, the Court held that the expression "wholly and exclusively" used in s. 10(2)(xv) of the IT Act, 1922 [s. 37(1) of the IT Act, 1961] does not mean "necessarily", that ordinarily it was for the assessee to decide whether any expenditure should be incurred in the course of his or its business, that such expenditure may be incurred 'voluntarily' and without any 'nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business although it may not be incurred for the purpose of earning the profits of the business. This is established by the decision of the Supreme Court. Subba Rao, J., speaking for the Supreme Court, observed in CIT v. Malayalam Plantations Ltd., "The expression 'for the purpose of the business' is wider in scope than the expression "for the purpose of earning profits......." The law directs attention to the purpose for which, and not to the motive with which, the expenditure is incurred." 18.7 Both the parties referred to the recent decision of the Supreme Court, in relation to s. 37(1) of the Act, in the case of S.A. Builders Ltd. v. CIT(A). In this case the Court held as under : "35. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 174 CTR (Del) 188 : [2002] 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,42,98,465 Total disallowance 10,80,04,482 21. It is seen that the first/main reason given by the AO for disallowing Rs. 10,80,04,482 was that these expenses related to earlier year and not 'related to this year'. In other words, according to the AO the balance of Rs. 35,55,07,549 related to the accounting year relevant to asst. yr. 1997-98, which he allowed. The other reason given by the AO, and without prejudice to the aforesaid first reason, was that the. item-wise, date-wise details of payment, and evidence/details of services rendered by CCI Inc. to the assessee, were not furnished; but we find that on this reason/ground the AO made no disallowance. The entire disallowance made by the AO was for the reason that it did 'not relate to this year', as seen from the details given above. 22. CIT(A) does not appear to have gone into the question as to whether part of the expenses claimed related to earlier year. He confirmed the disallowance made by the AO for three specific reasons; one, the services were rendered by CCI Inc. not only to the assessee but also to other group companies in India; two, the expenses were incurred to take c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the difference, in the context of the facts of the present case. The argument of the learned Departmental Representative would have been acceptable if it was demonstrated by the Department that the expenses were incurred by the assessee for services rendered to bottlers, manufacturing a beverage which was not made from the 'concentrate' manufactured by the assessee company. 26. In the present case, it is an admitted fact that the bottlers manufacture beverages from 'concentrates' purchased from the assessee company. An increase in the volume of business of the bottlers has a direct effect of increasing the volume of the business of the assessee. It can be nobody's case that the volume of the business of the assessee company and of the bottlers was not intricately linked with each other, and that the services rendered by CCI Inc. to the bottlers did benefit the assessee by helping the bottlers to increase the volume of their business. Therefore, in respect of the expenses relating to the services rendered by CCI Inc. to the bottlers, it can be said that the necessary 'nexus' did exist between such expenses and the 'purpose of the business' o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 28.3 In view of the facts and circumstances discussed above, we are of the opinion that in respect of the impugned expenses incurred by the assessee under the head 'Service charges', the necessary 'nexus' between these expenses and the 'purpose' of the assessee's business did exist, and therefore, the requirement of s. 37(1) can be said to have been fulfilled. The fact that the bottlers and TCCC-a group company were also benefited by these services is immaterial. The mandate of the Supreme Court, as noted in the above paras, is very clear. Therefore, on the facts of the case, we see no justification for the addition of Rs. 7,42.98,465 (Rs. 10,80,04,482 - 3,37,06,017). 29. To conclude, the addition of Rs. 10,80,04,482 is reduced to Rs. 3,37,06,017. In other words, the assessee gets relief of Rs. 7,42,98,465. The ground No. 4 in the assessee's appeal is partly allowed. Arguments (Marketing expenses) 30. Shri S.E. Dastur, the learned Authorised Representative submitted that the 'advertisement expenditure' incurred by the assessee did benefit it, that the assessee, as a prudent businessman proceeded on the basis" that the 'advertisement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters to only 56 parties and therefore, in respect of other parties to whom letters had not been written by him an estimated/ad hoc disallowance of Rs. 2,00,00,000 was made. The failure on the part of the assessee to file details has also been mentioned as one of the reasons. 34. The CIT(A) reduced the above addition of Rs. 17,99,74,343 to Rs. 10,00,00,000 computed as under : Particulars AO CIT(A) Diff. (11 parties) 2,12,04,099 31,19,919 No reply (14 parties) 3,90,28,917 Earlier year (7 parties) 9,97,41,327 4,11,61,718 Ad hoc 2,00,00,000 2,00,00,000 Capital expenditure - 3,37,18,863 (Balancing figure) 17,99,74,343 10,00,00,000 35. The order of CIT(A) was challenged by the assessee as well as by the Department. The specific issues/grounds, raised in these cross-appeals, in relation to 'marketing expenses', have been summarized above. 36. It is seen, from the details given above, that the major component forming part of Rs. 17,99,74,343 disallowed by the AO, was Rs. 9,97,41,327 representing expenses pertaining to earlier years. The CIT(A) examined the matter in detail and restricted the addition of Rs. 9,97,41,327 to Rs. 4,11,61,718 as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its order. Therefore, considering the facts and circumstances discussed above we are of the opinion that the order of the CIT(A), confirming the disallowance of Rs. 31,19,919 does not call for any interference. 36.6 The last component of Rs. 17,99,74,343 was Rs. 2,00,00,000 added by the AO on estimate/ ad hoc basis which was confirmed by the CIT(A). It is seen that in order to verify the assessee's claim, the AO had written letters to only 56 parties and therefore, in respect of other parties to whom letters had not been written by the AO an estimated/ ad hoc disallowance of Rs. 2,00,00,000 was made by the AO. The failure on the part of the assessee to file details has also been mentioned as one of the reasons. It was pointed out by the learned Authorised Representative that the assessee had furnished details before the AO in respect of the entire expenses of Rs. 73,79,03,468 vide letter dt. 27th Aug., 1999 as under : Division Annexure Amount Blending Division Annexure 1 6,97,13,690 Beverage Division Annexure 2 1,51,938 Bottling Division Annexure 3 4,00,37,839 Total 73,79,03,468 36.7 He stated that the Annexs. (2) and (3) appear to have escaped the not ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
