Relief to Honda : ITAT Deletes Disallowance on Signage Expenses and Sale Tools Expenses [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) deleted the disallowances on signage expenses and sale tools expenses on the basis of decision of Tribunal in previous Assessment Year (AY).

The assessee Honda Motorcycle and Scooter India Pvt. Ltd is a subsidiary of Honda Motor Co. Ltd. Japan. Honda group is engaged in the business of manufacture and sale of motorcycles and scooters. Honda is one of the world leaders in manufacture and distribution of automobiles, motorcycle and power products and has substantial expertise, technical know-how, brand equity, a worldwide marketing network in the above field.

During the assessment proceeding the Assessing Officer (AO) disallowed Rs.54,57,713 of signage expenses as capital in nature  and also ordered disallowance of sales tools expenses.

These sales tools/fixtures are placed at dealer's outlets and are manufactured by third party in accordance with the specifications provided by the assessee. The sales tool subsidy expense represents 50% of the price charged by the third party manufacturer to manufacture such specified sales tool/fixtures which is borne directly by the assessee in accordance with the Agreement entered between Applicant and the third party manufacturer.

The Assessing Officer (AO) has disregarded this expense and held it to be of capital in nature as the same is not supported by the Agreement.

Aggrieved by the order the asssessee filed an appeal before the Commissioner of Income Tax Appeals [CIT(A)], which upheld the decision of AO. Further aggrieved the assessee filed an appeal before the Tribunal .

The Authorised Representative (AR) of the assessee regarding the disallowance of signage expenses, submitted that the assessee had purchased glow sign board/ signals, which were displayed at the location of the dealers of the assessee. The sole purpose of incurring these expenses is to increase the sales at the stores etc. and thus is solely for the purpose of business and allowable as revenue in nature.

At the same time, these are not giving any enduring benefit to the assessee, given the dynamic and competitive nature of the business. The Assessing Officer disallowed the claim of the assessee in a cryptic manner, observing that the explanation given by the assessee is not satisfactory and following the DRP directions held the expense to be capital in nature and allowed depreciation @15%.

The  AR further submitted that this issue is covered in favour of the assessee in assessee's own case for AY 2012-13 to 2016- 17. In this regard, he referred to the decision of ITAT in assessee’s own case for AY 2016-17 & 2015-16.

Regarding the disallowance on sales tool expenses, the AR submitted that it is significant to bring to the attention of the ITAT that this is a contractual obligation and has been expended wholly and exclusively for the purpose of business of the assessee. AO/DRP disallowed the said expense holding not to be a contractual liability. It is a contractual liability and even otherwise allowable expenditure.

The Bench comprising of Shamim Yahya, Accountant Member and Challa Nagendra Prasad, Judicial Member , with regards to the disallowance of signage expenses observed that this issue is squarely covered in favour of the assessee in assessee’s own case for AY 2015-16 & 2016-17.

“The expenditure was incurred on signage for display of the name of the assessee at the dealer's premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure, We find support from the ratio laid down by the Hon'ble Delhi High Court in CIT vs Honda Siel Power Products Ltd.(supra). Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not/the entire expenditure.”

Following the aforesaid order of the coordinate Bench, the Tribunal deleted the disallowance.

On the disallowance on sales tool expenses the Bench perused the material on record and also the decisions of the coordinate Bench of the Tribunal in assessee’s own case. The coordinate Bench of the Tribunal in AY 2016-25 on this issue has held in favour of the assessee and the relevant portion of the said order is reproduced as under :-

“we also hold that sales tool expenditure are revenue expenditure in nature and therefore the disallowance made by the learned assessing officer of Rs.1,92,90,061/- is directed to be deleted. Accordingly, ground number 8 of the appeal is allowed.”

Thus the Tribunal deleted the disallowance made by the AO.

Hence the appeal of the assessee on this ground was allowed.

To Read the full text of the Order CLICK HERE

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