The Delhi High Court has held that Advertising, Marketing and Promotion expenditures incurred are revenue expenditures.
Mr Ruchir Bhatia, Senior Standing Counsel appeared for Revenue and Mr Sumit Mangal, Mr Mayank Aggarwal &Ms Radhika Sharma appeared for the respondent-assessee.
Moet Hennessy (i) Pvt. Ltd, the Respondent -assessee, filed its Return of Income (‘ROI’) on 30th November 2011 which was processed under Section 143(1) of the Income Tax Act, 1961, (the ‘Act). The Assessing Officer (‘AO’) observed that the Assessee Company had entered into international transactions with its Associated Enterprises (‘AEs’) and consequently, made a reference to the Transfer Pricing Officer (‘TPO’) for determining the Arms’s Length Price (‘ALP’) of the international transactions under Section 92CA(3) of the Act.
The TPO in its order observed that the Assessee incurred huge Advertising, Marketing and Promotion (‘AMP’) expendituresto expand the reach of the AE’s brand in India, which is the legal owner of the brand. The TPO thus concluded that the Assessee has created marketing intangibles in favour of the AE.
The TPO determined the ALP of international transaction of promotion of the brand name, by using the Bright Line Test (‘BLT’), and adjusted Rs. 7,10,04,420/- on account of AMP expenditure incurred by the Assessee. Under the aforesaid, the AO passed its draft assessment order under Section 144C of the Act.
The Assessee filed its objection before the Dispute Resolution Panel (‘DRP’). The DRP allowed the Assessee’s objection, by deleting the ALP adjustment made by the TPO by applying the BLT method. The DRP on a separate reasoning disallowed AMP expenditure for several Rs. 6,64,24,161/- under Section 37(1) of the Act, holding that the Assessee had undertaken promotional activities in violation of the bar on advertising and promotion of liquor in India, as per the provisions of the Cable Television Network Rule, 1994 and code of Advertising Standards Council of India (‘ASCI’).
The ITAT held that AO is not empowered to make a fresh determination under Section 144C. The DRP/AO has taken a general view, and there is no finding of facts, that the provisions of Cable Television Network Rule, 1994 or ASCI have indeed been violated by the Assessee concerning the advertisement and promotion.
The Court comprising Justice Manmohan and Justice Manmeet Pritam Singh Arora observed that ITAT held that the said expenses are revenue in nature having been incurred for commercial expediency and deleted the disallowance of AMP expenses of Rs. 6,64,24,161/-, made in light of Explanation 1 to Section 37(1) of the Act.
It was observed that the Revenue itself has treated the AMP expenditure incurred by the Assessee in the previous assessment years as a revenue expenditure. The ITAT while adjudicating the appeals of the Assessee for AY 2009-10 and 2010-11 has held that the AMP expenditure incurred by the Assessee was like bonafide business expenditure in furtherance of its legitimate business interests. The appeal was dismissed.
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