CIT V. SPICE COMMUNICATIONS LTD

ITA/643/2010

AI Insights

The case involves appeals by the Revenue against Spice Communications Ltd. concerning the treatment of various expenditures for the assessment years 2003-04, 2004-05, and 2005-06. The Revenue challenged the ITAT's decision which favored the assessee, Spice Communications, on three main grounds: the classification of advertisement and sales promotion expenses, software expenses, and payments made under specific service agreements. The ITAT had ruled these expenditures as revenue in nature, which the Revenue contested, arguing they should be treated as capital expenditures. The High Court examined the arguments and the relevant legal provisions, ultimately upholding the ITAT's decisions and dismissing the appeals.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 692649 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 16-05-2012
• Assessment Year: misc
• Other Referred Cases: CIT v. Adidas India Marketing, CIT v. Solora International Limited, CIT v. Agra Beverages Industries Private Limited, CIT v. Mono Motors Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M S SYALI; HUSNAL SYALI
• Assessee Lawyers: SURUCHI AGGARWAL
• Keywords: Advertisement Expenses; Capital expenditure; Management Service Agreement; Revenue expenditure; Software Expenses; Technical service agreement
• Section: 37(1); 260A

Judgement Text

"{. !l ?i. { $-5 to 7 *IN THE HIGH COURT OF DELHI AT NEW DELHI t- ITA Nos. 64312010,64912010 and 680i2010 CIT ..... Appellant fhrough : Ms. Suruchi Aggarwal, Advocate. versus SPICE COMMI.]NICATIONS LTD ..... Respondent Through: Mr. M.S.Syali, Sr. Advocate with Ms.Husnal Syali, Advocatc. COITAM: TION'I3LE MR. JUSTICE SANJIV KIIANNA }ION'BLE MR. JUSTICE R.V.EASWAR ORDER t6.05.2012 1. 'l'hese appeals filed by the Revenue under Section 260A of the Incomc Tax Act, 1961 (hereinafter referred to as 'the Act') in the case of M/s Spice Communications Limited relate to the assessment years 2003-04, 2004-05 and 2005-06. The Revenue is aggrieved of a corlulron orcler dated 9tl' Octob er, 2009 passed by the Income 'fax Appellatc 'I'ribunal (hereinafter referred to as 'I'[AT') on three grounds. (i) 'l'he I1AT has ered in holding that the entire adveftisernent and sales promotion expenses incurred should be treated as rcvenue expenditure. Part thereof, namely, 10% r.vas rightly treated as capital cxpenditure by the Assessing Officer. (ii) The software (r --_1 ITA Nos. 643/2010, 649/2010 and 680/2010 Page 1 of 16 Digitally Signed By:AMULYA Signature Not Verified cxpenses of Rs.22,038/- and Rs.3,13,2961- telating to assessment year 2004-05 and 2005-06, respectively have been wrongly treated as rcvenue expenditure and should have been treated as capital cxpenditure. (iii) Payrnents made to Modicorn Network and Distacom Communication India Ltd. under the 'management service agreement' and 'tcchnical service and operating agreements' respectively, were cntircly capital expenses and the ITAT has erred in holding that only 25Yo was capital expense and the balance 75Yo should be treated as rcvenue expense. 2. On the first issue, the findings recorded by the Tribunal are that the respondenVassessee is in the business of promoting mobile telephonic services since 1997 and that the market was highly competitive and required aggressive marketing. Expenses were incurred to invite customers and promote the cellular rnobile service of thc asscssec. 'I'he advertisement and sales promotion expenses were incunccl for the purpose of carrying on the business and not for creating a capital asset. Accordingly, it has been held that the C[I(A) was justified in holding that the entire expenditure should be treated as revenlle expenditure and the Assessing Officer was not right in treating rc% of the expense as capital expenses incurred towards brand --a ll'A Nos. 643/20tO,649/2Ot0 and 680/2010 Page 2 of 16 \"(- building. A Division Bench of this Court had an occasion to examine the issue of advertisement expenditure in the case of CIT v. Adidas Inclicr Morketing, (2010) 195 Taxman 256, wherein it was held as under:- \"4. We find from the order of the ITAT that the Tribunal has discussed in detail the terrns of Technical Assistant Agreement dated l4-2-I997, as per which the assessee was provided the technical know-how and was also allowed to use the brand name 'Adidas' on the products manufactured by the assessee, which are to be sold in India, Nepal and Bhutan. The Tribunal observed that merely because the assessee was paying royalty at the rate of 5 per cent to IWs. AIPL would not mean that the assessee could not incur the expenditure on advertisement to popularize the products dealt rvith by it in Indian market. No doubt, brand name of 'Adidas' is already a well-known brand which belongs to the parent company of the assessee. However, to popularize the said product in India and to promote its sale in the Indian territories, it becamc essential for the assessee to incur expenditure on advertising to propagate the aforesaid brand narne. The bcnefit thereof had to necessarily accrue to the assessee as well as the main purpose of the advertisemcnt is to augment the sales. The contention of the assessee that it was a commercial practice and commercial expediency has rightly been accepted by the Tribunal. The relevant portion of the judgment of the Tribunal dealing with this aspect is reproduced below : \" 17. xxx 19. In the present case, the ery2enditure has been incurred by the assessee in the carryi.ng on of its business activities of ntanufacturing and selling the product under ITA Nos. 643/2010,649/2010 and 680/2010 -, Page 3 of 16 a the brand nanrc Adidas. The expenses are thus have the direct nexus with the sales or lhe business promotion of the assessee. At this stage, it is also pertinent to mention that nterely because the assessee-company has been paying royalty to IUI/s. Adidas A.G. for the use of the brand nanre Adidas, that by itself cannot be a ground to disallow the assessee's claim on account of advertisentent expenses which nxere made to prornote the assessee's busittess in India and to increase its business and the sales of the products under the brand nanxe Adidas. The assessee was paying royalty for using brand nanrc Adidas to the custonters in various parts of India to nwke them muare about the nature of the products being sold by the assessee at dffirent outlets as per assessee's business strategy. To promote business and conlnxerce by any businessman would certainly come within the expression of ' con'mzercial expediency and no label of any oblique ntotive with a view to reduce tax incidence can be fastened. The activity to promote ones sales by advertising the product which were being sold by him arc certainly to come within the expression \"wholly and exclusively incurced for the pnrpose of business\", which ,s to be considered and looked into having regard to the realities of business front the point of view of a prudent businessman and not from the point of view of a tax collector. 20. In the light of the discussions nmde above and having found that since the assessee had incurred the advertisentent and publicity expense with a view to promote its sale of products under the brand nanxe Adidas which were sold bv the assessee, the ITA Nos. 64312010,649/2010 and 580/2010 -_J Page 4 of 16 { advertisement expenses incurred by the assessee are to be held as incurred to facilitate the assessee's business, and would thus be eligible fo, deduction while contputing the assessee's profit from busi.ness. At this stage, it is also pertinent to note that the expression ' vholly and exclusively\" used in section 37 of the Act v,ould not ntean \"necessqrily\". h is for the assessee to decide whether any expenditure should be incurred to facilitate its bttsiness activities. It is also well-settled that even such expenditure incurred voluntarily and not for any necessity by are incurred for prornoting the business and to earn profit, the assessee can claim deduction under section 37(1) of the Act. This was so obsertted by the Hon'ble Suprente Cottrt in the case of Sasson J. David & Co. (P.) Ltd (supra) We, therefore, reverse the order of the CIT(A) and direct the Assesstng Officer lo allow the assessee's claim of deduction on account of advertisentent and publicity expenses in all the three assessment years.\" 3. fhe aforesaid reasoning and ratio was approved in case of CIT v. Solora Internationol Limited, (2009) 308 ITR 199, wherein a Division Bench of this Court opined: \"3. 'l'he first issue that is sought to be raised in this appeal pertains to advertising expenditure of approximately Rs 3.08 crores. According to the Asscssing Officer, the expenditure were incurred for launching of its products. The Assessing Officer was of the view that such expenditure was of an enduring nature and, therefore, treated one-third as \"capital expenditure\" and only allowed the two-thirds of the said amount as \"expenditure, to the assessee\". fhe t '-a ITA Nos. 643/2010,649/2010 and 680/2010 Page 5 of 15 -e Commissioner of Income-tax (Appeals) allowed the entire amount after treating the expenditure as \"revcnue expenditure\". The findings of the Comrnissioner of Income-tax (Appeals) were confirmed by the Income-tax Appellate Tribunal by virtue of the impugned order. Particularly, the Tribunal held that there was a direct nexus between the advertising expenditure and the business of the assessee and that the assessee had to incur such cxpenditure to meet the competition in the Indian market for selling its products in India. A finding was retutned that unless the assessee made its products known to the market, its business would suffer. Consequently, the Tribunal held the entire cxpenditure on advertising to be of a revenue nature and allowed the same. The Tribunal also noted the decision of the Supreme Court in the case of Empire fate Co. Ltd. v. CIT [1980] l24ITR 1 wherein thc Supreme Court held that there could be cases where the expenditure cven if it was incurred for obtaining of a benefit of an enduring nature may, nevertheless, be on the revenue account and, in such cases, the test of \"enduring benefit\" may break down. 4. We are of the view that the decision of the Tribunal on this aspect of the matter does not call for any interference and, therefore, no substantial question of law arises on this aspect.\" 4. Subsequently, another Divison Bench of this Court, in ITA No. 96612009 titled as CIT v. Agra Beverages Irttlustries Private Limitecl, decided on25.1.2011. held as under: \"6. Learned counsels appearing for the appellant have submitted that the agreement entered into between the assessee and the Pepsi clearly shows that it was Pepsi who was to remain owner of the trademark and arr I r-J ITA Nos. 643/2010, 649/20IO and 680/2010 Page 6 of 16 t obligation was cast upon the assessee not to take any action which would prejudice or harm the trademark or Pepsi's ownership thereof in any way. It is also stated in the said agreement that the use of the trademark by the assessee enures to the benefit of Pepsi. It is also pointed out by the leamed counsels that as per Clause 19 of the agreement, the assessee was to seek prior approval in respect of any advertising and sales promotion which is incured in the trademark and trade name of Pepsi. The learned counsels also argued that the advertisement and publicity which was done by the assessee, nowhere mentions the name of thc assessee and exclusively name of Pepsi appeared therein, i.e. its trademark and trade address etc. were exhibited. From this, it is sought to be argued that by specific agreement in writing the assessee agreed to give advantage to the Pepsi in respect of publicity and advertisement carried out by the assessee for Pepsi\"s product. In these circumstances, argued the leamed counsels, the CIT (A) was justified in apportioning the expenditure and the principles laid down by the Supreme Court in the case of Sassoon (supra) would not be applicable. We are unable to accept the aforesaid submission of the learned counsel for thc appellant. In Ssssoon case (supra), the Supreme Court categorically held that when the expenditure incurred for promoting the business to earn profits merely because from the said expenditure some third pafty has benefited cannot be a reason to disallow the expenditure. Instead of analyzing that judgment in detail, our purpose would be served by referring to a Division Bench judgment of this court in CIT Ys. Dalmia Cement (8.) Ltd.120021254ITR 377, wherein the judgment of Supreme Court in Sassoon ':a ITA Nos. 643/2010,649/2010 and 680/2010 Page 7 of 15 -a case (supra) and some other judgrnents are taken note of, analysed and the principles laid