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TMI Blog2015 (3) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has spent the expenditure on advertisement and sales promotion for brand building purpose. In our view, the assessee was right in law in claiming this expenditure as revenue expenditure. - Decided in favour of assessee. Unaccounted service income - AO noticed that the assessee has been consuming its own products (captive consumption) while providing services to its clients - assessee contented that the consumption of materials would depend upon the types of services offered, i.e, the product mix would depend upon the type of service, thus, captive consumption of materials cannot be at standard proportion of service income receipts - Held that:- there appears to be some merit in the contentions of the assessee. Normally the service receipts are determined on the basis of Fixed costs, variable costs and profit element. The material cost would fall in the category of variable costs. Accordingly, the cost of particular service would normally be determined at Fixed cost + Variable cost + Profit amount. Hence, comparison of the variable cost to the total service receipts, in our view, may not be right method of approaching issue. Further, when the assessee is offering 562 typ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the assessee, it is required to comply with the provisions of sec. 40A(3) of the Act. Otherwise, the assessee is required to show that the payments are covered by the exceptions given in Rule 6DD of IT Rules. Since the assessee has claimed that M/s Marico Ltd has incurred expenses through cheque payments wherever necessary, including the salary payment made to seconded employees, we are of the view this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer for fresh examination. - Decided in favour of revenue for statistical purposes. - I.T.A. No3175/Mum/2013, I.T.A. No3286/Mum/2013 - - - Dated:- 4-3-2015 - S/Shri B.R.Baskaran And Vivek Varma JJ. For the Appellant Ms.Padmaja For the Respondent Shri Nitesh Joshi ORDER Per B.R.BASKARAN, Accountant Member: These cross appeals are directed against the order dated 05-02- 2013 passed by Ld CIT(A)-20, Mumbai and they relate to the assessment year 2009-10. 2. The assessee is in appeal in respect of the following issues:- (a) Whether the expenditure incurred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough its brand ambassador, being a model named Riddhhima Kapoor and hence the Ld CIT(A) held that the assessee has only promoted the brand as its business strategy. He also took the view that the big glow sign board displaying the name of Kaya Skin Clinic cannot be presumed to be having temporary benefits. Accordingly, the Ld CIT(A) held that the assessing officer was right in holding that the publicity is nothing but brand development involving enduring benefit to the assessee. Accordingly he held that the expenditure incurred on brand building is to be considered as Capital Expenditure. 6. Since the Ld CIT(A) held the advertisement expenses have been incurred towards Brand building and the same constitutes Capital expenditure, he also held that the same constitutes intangible asset eligible for depreciation @ 25%. Accordingly he directed the AO to allow depreciation @ 25%. 7. The main submission of the assessee was that it was required to incur advertisement and sales promotion expenses continuously every year. He further submitted that the assessee has been incurring the expenditure on advertisement and sales promotion since its inception, i.e., since the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not brand creation (see sample advertisements at pages 135 to 137 of the paper book) and audio visual clip of an advertisement on the television separately provided on a CD after the hearing on 04.08.2014; (iii) appointment of a brand ambassador for advertising its products and services does not mean that the nature of the expenditure incurred is for creation of brand. Brand ambassador is chosen because of her beauty and skin which co-relates to the assessee s business. (iv) displaying the glow sign board Kaya Skin Clinic outside its outlet does not lead to the conclusion that the Assessee is creating the brand name; (v) advertisement and sales promotion exercise provides a stimulus to the potential customer to buy services and products offered by the Assessee. However, the advertisement may fail to induce the desired behaviour and, hence, it is appropriate to charge the same off as revenue expenditure. (vi) Salt Brand Solutions was appointed for the purposes of expanding the awareness amongst the people of the services being offered by the Assessee. Engaging such services cannot be regarded as creation of brand image. In any event, the services of Salt Brand Solu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3063/Mum/2006) (d) Asian Paints Ltd (2013)(37 CCH 177)(Mum) (e) Fine Jewellery (56 SOT 220)(Mum) 9. On the contrary, the Ld D.R submitted that the brand name is an intangible asset and the said view finds support from AS-26, i.e., the accounting standard issued by the Institute of Chartered Accountants of India. He further submitted that the assessee has advertised only the name Kaya Skin care clinic and not any particular product/service and hence the Ld CIT(A) was justified in upholding the view taken by the AO that the assessee has incurred advertisement expenses towards brand building only. He further submitted that the brand shall have enduring benefit to the assessee. He also submitted that the assessee has engaged a Brand ambassador to market its brand Kaya Skin clinic . He further submitted that the case law relied upon by the assessee are distinguishable and hence the ratio of those decisions is not applicable to the facts of the instant case. 10. We heard the parties and perused the record. Before us, the Ld A.R placed reliance on the decision rendered by Delhi bench of ITAT in the case of Spice Communication (supra). The head notes given for that decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in interfering with the order of the CIT(A) in deleting the disallowance of 10 per cent of expenses towards advertisements and sales promotion incurred by the assessee for smooth functioning and carrying on assessee s business effectively, proficiently and profitability. The order of the CIT(A) is, thus, upheld on this issue. Though the Ld D.R tried to distinguish this decision by submitting that the AO, therein, had taken only 10% of the expenses in the Capital field, yet we are of the view, the ratio of the above said decision squarely applies to the instant case. 11. It is also pertinent to note that the Hon ble jurisdictional Bombay High Court in the case of Geoffrey Manner and Co. Ltd (supra) has laid down the following ratio to determine the nature of advertisement expenses:- 5. In our opinion the correct test to be applied in such a case would be, that if the expenditure is in respect of an ongoing business of the assessee and there is no enduring benefit it can be treated as revenue expenditure. If, however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss operation and not with an object to acquire asset of enduring nature. Therefore, the said expenditure was of revenue nature and the Tribunal has rightly treated the same as of revenue nature.-CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) applied. 13. In all the above said cases, it has been held that the expenditure incurred in order to facilitate the business operation and not with the object of acquiring asset of enduring nature is allowable as revenue expenditure. In the instant case, we have already seen that the assessee has been incurring expenditure and sales promotion since AY 2004-05, meaning thereby, the assessee was required to incur those expenses every year in order to retain its position in the market. There should not be any dispute that the assessee is conducting its business in a competitive environment. Further, there is merit in the submission of Ld A.R that it is difficult to assess the period of benefit derived from advertisement and further it is also difficult to ascertain as to whether any brand name was created. Hence, we are of the view that the Ld CIT(A) was not correct in law in holding that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the consumption of materials and booking of service income, since all the clinics are following detailed standard procedures right from contacting the client till the completion of the treatment. He further submitted that the assessee is generating adequate documentation at each stage and hence there is no scope for suppression of income. He further submitted that the assessee, as a part of its sales promotion scheme, would offer certain free and discounted services scheme. Such types of schemes would also consume beauty products and the same would not result in receipt of service charges. Accordingly, he submitted that the tax authorities are not justified in presuming that the service charges income are directly proportional to the cost of captive consumption of beauty materials. 17. The Ld D.R, on the contrary, submitted that the service income reported by the assessee during the current year was lower in proportion than that disclosed in the immediately preceding year. He submitted that the assessee could not properly explain the said difference and hence the Ld CIT(A) was justified in confirming the addition made in the service income. 18. We have heard the rival con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt. Hence the rejection of books of account and consequent estimate of income under these set of facts, in our view, is not justified. On the contrary, the claim of captive consumption needs to be examined on an overall basis, i.e., by making test checks. 20. The assessee has claimed to have maintained quantity details of various products. Hence, on a test check basis, the said details can be verified and a decision can be taken. Hence, we are of the view that this issue needs to be restored to the file of the AO with the direction to examine the claim of captive consumption. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore this issue to the file of the AO with the direction to examine the claim of captive consumption on a test check basis and take appropriate decision in accordance with the law. 21. The next issue urged by the revenue relates to the eligibility of the assessee to claim depreciation on the pre-operative expenses. During the year under consideration, the assessee had capitalized expenses to the tune of ₹ 2.23 crores and claimed depreciation thereon. The said expenditure consisted of rent, audit fee, salary, professional fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern named M/s Marico Ltd had incurred certain expenses on behalf of the assessee herein. Accordingly, the assessee had accounted for the expenses by crediting the account of M/s Marico Ltd, i.e., through Journal entries. The AO took the view the expenditure incurred through Journal entries does not fall in any of the exemptions provided under Rule 6DD of the IT Rules. He further observed that the assessee has not proved that M/s Marico Ltd had incurred expenses otherwise than the account payee cheques or through demand drafts or RTGS. Accordingly, he disallowed the expenses incurred under the head seconded employees amounting to ₹ 8.44 crores and Other expenses amounting to ₹ 44.98 lakhs, by invoking the provisions of sec. 40A(3) of the Act. The Ld CIT(A) however, directed the AO to delete the disallowance of expenditure u/s 40A(3) of the Act. The revenue is aggrieved by his decision. 24. We heard the parties and perused the record. The total addition made by the assessing officer was ₹ 8.89 crores. According to the assessee, there was totaling error of ₹ 1.08 crores and further a sum of ₹ 2.00 crore was loan transaction. Thus, the remaining exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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