9911796707
TMI Blog2009 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 passed by the Income Tax Appellate Tribunal (hereinafter referred to as the „Tribunal") in ITA No. 3234/Del/2005 pertaining to assessment year 2001-02. 2. The assessee-company is aggrieved by the disallowance of a sum of Rs 27,61,882/- on account of accrued marketing expenditure, which is in the nature of, incentive paid by the assessee-company to its franchisee calculated at 2% of the sales made by the franchisee for the period December, 2000 to March, 2001. 2.1 The other issue with which the assessee-company is aggrieved is the disallowance of a sum of Rs 44,44,002/- by the Assessing Officer. The claim of the assessee-company arose on account of the contributions towards advertising, marketing and promotional activities (hereinafter referred to as the "APM activities") made by the assessee-company towards wholly owned subsidiary. 3. In order to deal with aforementioned issues of the appeal the following facts require to be noted: 3.1 The assessee-company which is a private limited company was incorporated on 17.03.1994 under the Companies Act, 1956. The main business of the assessee-company was to develop and manage franchisees for running restaurants. The assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pages 287 to 299 of the paper book. The sum and substance of this tripartite agreement is that the wholly owned step-down subsidiary, that is, YRMPL would open a brand fund account in various banks for the purpose of carrying out "APM activities" in order to further the business operations of KFC and PHILLC restaurants run by the franchisees by establishing and creating co-operative advertising brand funds. The tripartite agreement, as per clause 3.1, mandates that the franchisee shall pay 5% of its revenue for a particular month as an advertising contribution into a bank account of the brand fund established by YRMPL by the 10th day of the following month. Apart from the above, the franchisee was also required to spend an additional 1% of the revenue in the manner directed by the assessee-company and/or YRMPL in writing from time to time on such local store marketing, advertising, promotional and research expenditure proposed by the franchisees and approved in advance by the assessee-company and/or YRMPL during the relevant accounting period. In the event the franchisees was unable to spend the entire amount, the unspent amount was to be paid to YRMPL on a written demand of YRMPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isee in the same proportion as the actual advertising contribution made by each franchisee including franchisee in that accounting period. On the other hand, if there is a deficit in any of the brand funds at the end of an accounting period, the deficit will be carried forward to the next accounting period and be met out of the advertising contribution paid by the franchisees including franchisee for that accounting period. For the avoidance of doubt, it is agreed between the parties that Tricon and/or TRIM shall not be obliged to fund the deficit. 8.5 It is clearly understood and agreed between the parties that the only objective of TRIM is to coordinate the marketing activities of the brand including the mutual benefit of the franchisees including the franchisee. It is envisaged that no profits will be earned and no dividends will be declared by TRIM." 3.7 The assessee-company in order to accelerate the growth of PHILLC brand in India introduced an incentive scheme in April, 2001. Apart from the other terms and conditions of the scheme the assessee-company offered that in the event the franchisees were to commence construction or operation of business on or from three additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following facts: 4.1 The assessee-company had contributed a sum of Rs 1.15 crores to YRMPL. The assessee-company divided the expenses under two heads, namely, advertising and sales promotion, in respect of which it claimed Rs 27,48,394/-, and contribution towards APM Activities under which it claimed Rs 87,86,318/-. 4.2 Since the amount of Rs 27,48,394/- shown under advertising and sales promotion was related to payments made to advertising agencies like O&M and HTA etc. the same was allowed by the Assessing Officer. In so far as the balance sum, that is, the contribution in the sum of Rs 87,86,318/- towards APM Activities was concerned, the Assessing Officer relying upon clause 4.1 of the tripartite agreement, referred to hereinabove, observed that the assessee-company had no obligation to contribute the amounts to YRMPL. His analysis in paragraph VI.7.4 and VI.7.5 would show that even though the YRMPL had received Rs 2.64 crores as contribution it had spent only Rs 2.19 crores and hence had shown the balance Rs 44.44 lacs as unspent monies under the head "current liabilities". Even while the assessee-company claimed as an expense the unspent money shown in the account of YR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der it to its wholly owned subsidiary, that is, YRMPL was purely voluntary. It further observed that there was no demonstrable expediency and nor was the assessee-company able to show how the said contribution had benefited its business. It also noted that the Assessing Officer had found as a matter of fact that out of the total contribution of Rs 2.64 crores received by YRMPL Rs 2.19 crores had been spent which had been allowed to the subsidiary. Thus keeping these facts in mind the Tribunal came to the conclusion that the said excess amount had to be disallowed in view of the assessee"s failure to prove that contribution had been paid by the assessee-company in the course of carrying on its business or for reasons of commercial expediency. 7. Having heard the learned counsel for the parties we are of the view that on both the issues the impugned judgment deserves to be sustained. In the instant case, as is evident, from the facts as stated above the assessee-company has created an intermediary in the form of a wholly owned subsidiary, that is, YRMPL to carry on a "co-operative advertising" on the behalf of its franchisees and franchisees of the assessee-company, based on a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.19 crores leaving a sum of Rs 44,44,002/- as unspent which is shown in its books as current liabilities by YRMPL. In these circumstances the learned counsel submits that there was no reason for the authorities below to disallow out of Rs 87.86 lacs a sum of Rs 44.44 lacs paid as contribution to YRMPL. In order to buttress his submission the learned counsel also cited the judgment of the Supreme Court in the case of CIT vs Dhanrajgirji Raja Narasingirji; (1973) 91 ITR 544 at page 550 as well as the judgment of the Supreme Court in the case of S.A. Builders vs CIT; (2007) 288 ITR 1 at page 14. The learned counsel for the Revenue Ms Prem Lata Bansal, in opposition, relied upon the orders of the authorities below. 8. As is evident from the facts detailed out by the authorities below the assessee-company under the tripartite agreement, in particular, clause 4.1 was under no obligation whatsoever to contribute any money to its wholly owned subsidiary YRMPL. The facts as found also show that whatever was spent by the assessee-company by way of advertisements towards liability to advertisers such as O&M and HTA etc. was allowed. Furthermore, the facts also reveal that the total contrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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