Advertising & Sales Promotion Spend to Dealers Not ‘Fringe Benefit’: ITAT deletes ₹1.08 Cr FBT Addition [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT) has held that expenditure incurred on advertising, publicity and sales promotion towards dealers, distributors and other third parties does not constitute a “fringe benefit” under Income-tax Act, 1961.

The bench noted that there is no material that the benefits pass to the employees for invoking the Fringe Benefit Tax (FBT).

“FBT is not intended to tax every business expenditure, but only those expenditures which, in substance and reality, represent a benefit to employees” said the tribunal.

As per the assessee, Apar Lubricant Ltd. (now merged with Apar Industries Ltd.) who are engaged in the business of marketing lubricants and allied products, had spent ₹1.41 crore towards advertising, publicity and sales promotion expenses.

These included performance-based incentives to dealers and distributors, distribution of promotional articles such as key chains, torches, T-shirts and bags, payments to advertising agencies, exhibition stall charges and sales commissions.

During the original assessment proceedings, complete details and documentary evidence were furnished.

It was specifically explained that the expenditure was incurred towards third parties and not employees. Therefore did not result in any fringe benefit.

However, the reassessment proceedings were initiated on the grounds that a portion of these expenses was liable to FBT under Section 115WB(2)(D).

The Assessing Officer treated 20% of the advertising and sales promotion expenditure as taxable fringe benefits and made an addition of ₹1.08 crore, on the ground that promotional articles were distributed.

And, according to the Revenue, adequate evidence was not furnished to rule out employee benefit.

Before the bench of Amit Shukla (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member), the assessee contended that the foundation of FBT rests on the concept of a “consideration for employment.”

It was argued that Section 115WB(1) defines fringe benefits as benefits provided by an employer to employees, and that the deeming provision under Section 115WB(2) cannot be applied mechanically without establishing a benefit, direct or indirect, to employees.

It was further submitted that the impugned expenditure was incurred towards independent third parties such as dealers, distributors, customers and advertising vendors, none of whom were employees of the assessee.

Further, the bench noted the ruling of Delhi High Court in T&T Motors Ltd. has explained that “where accessories or promotional items are supplied to customers as part of a sales package and the customer has paid the sale consideration, such expenditure cannot be treated as sales promotion or publicity liable to FBT.”

Following the above ruling, the appellate tribunal deleted the addition made by the assessing officer stating it as unsustainable.