The Income Tax Appellate Tribunal (ITAT), Delhi Bench in relief to the Huawei Telecommunications (India) deleted the 30% disallowance of the advertisement expenses made by AO.
The Appellant, Huawei Telecommunications (India) Company Pvt. Ltd. challenged the disallowance of 30% made by the AO in respect of the advertisement expenditure towards public relation service, promotion activities, commercial advertisement, sponsorship, print media, media monitoring, and analysis, etc. by treating the same as capital expenditure to the tune of Rs.2.84 Crores and Rs.90.74 Lakhs in Assessment Years 2012-13 & 2013-14 respectively.
The taxpayer challenged the disallowance of advertisement expenses on the grounds inter alia that AO has no jurisdiction to examine commercial expediency.
It was urged that expenses are not in the nature of capital expenditure; disallowance on ad hoc basis is not sustainable.
However, DRP proceeded to confirm the disallowance made by the AO on the ground that the taxpayer operates in a segment where there are only 3-4 players at the global level and that there are only 3-4 customers in the Indian market and that the case of the taxpayer is that of a limited supplier and limited buyers.
The activity of the taxpayer after the sale of equipment i.e. installation & commissioning, post-commissioning maintenance services, upgradation etc. is monopolistic which can only be done by the taxpayer requiring any kind of advertisement/promotion, etc. Since equipment belongs to the brand of AEs but, at the same time, it can also not be presumed that all these expenses are only for the benefit of the business of the taxpayer.
The coram consisting of R.K.Panda and Kuldip Singh said that disallowance of 30% of the advertisement expenses by the AO and confirming the same by the DRP is not sustainable for the reasons inter alia that commercial expediency of any expenditure incurred by the taxpayer has to be examined with businessman standpoint and not with the perspective of the tax authority.
The Tribunal while allowing the appeal held that advertisement expenses are revenue in nature; that merely because of the fact that advertisement expenditure incurred by the taxpayer has benefited the third party, the same cannot be disallowed and that disallowance of any expenditure on an ad hoc basis is not permissible in law, hence ordered to be deleted.
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