The Sandesh Limited, Ahmedabad V. The ACIT., Circle-8, Ahmedabad

ITA 2799/AHD/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0902 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 17-08-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 29-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIBHA BHALLA
• Keywords: Gift; Depreciation; Business expenditure
• Section: 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRSAD, JUDICIAL MEMBER) ITA. NO: 2799/AHD/2013 (ASSESSMENT YEAR: 2007-08) THE SANDESH LTD. C/O. MUKESH M. PATEL & CO. 3- 4, VITHALBHAI BHAVAN, NR. S.P. COLONY RLY. CROSSING, AHMEDABAD-13 V/S ACIT, CIRCLE-8, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAACT5730D APPELLANT BY: SHRI MUKESH M. PATEL WITH SHRI JIGAR M. PATEL, AR RESPONDENT BY: MS. VIBHA BHALLA, CIT/DR ( )/ ORDER DATE OF HEARING : 17-08-2016 DATE OF PRONOUNCEMENT : 22 -08-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)-XIV, AHMEDABAD DATED 03.09.2013 PERTAINING T O A.Y. 2007-08. ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 2 2. THE IMPUGNED APPEAL IS BARRED BY LIMITATION BY 27 D AYS. THE DELAY IS CONDONED. 3. THE GRIEVANCE OF THE ASSESSEE RELATES TO THE LEVY O F FRINGE BENEFITS TAX (FBT) AS PER THE FOLLOWING CHART:- SR. NO. NATURE OF EXPENDITURE AMOUNT % LIABLE TO FBT VALUE OF TAXABLE FRINGE BENEFITS 1 TRAVELLING EXPENSES 2,39,978 5% 11,999 2 ENTERTAINMENT/HOSPITALITY EXPENSES 7,92,123 20% 1,58,425 3 PRESENTATION EXPENSES (GIFTS) 42,932 + 12,05,455 50% 6,24,193 4 SALES PROMOTION EXPENSES 11,57,10,912 20% 2,31,4 3,182 TOTAL RS. 2,39,36,799 4. HAVING HEARD THE RIVAL CONTENTIONS, WE HAVE CAREFUL LY PERUSED THE ORDERS OF THE AUTHORITIES BELOW. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY FILED ITS ORIGINAL RETURN OF FRINGE BENEFIT DECLARING FRINGE BENEFIT AT RS. 23,77,215/-. THE FB T RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND ACCORDINGLY ST ATUTORY NOTICE U/S. 115WE(2) WAS ISSUED AND SERVED UPON THE ASSESSEE. 5. ON PERUSING THE RETURN OF FBT, THE A.O. NOTICED THA T THE ASSESSEE HAS NOT PAID FBT UNDER VARIOUS HEADS OF EXPENDITURE. IT WAS EXPLAINED THAT A WRIT PETITION WAS FILED BY THE GUJARAT CHAMBER OF COMMERCE AND INDUSTRIES AND OTHERS BEFORE THE HONBLE HIGH COURT OF GUJARAT CHALLENGING THE LEVY OF FBT. HOWEVER, OUT OF ABUNDA NT PRECAUTION, THE ASSESSEE HAS DEPOSITED FBT IN A SEPARATE ACCOUNT; T HE SAME HAVE BEEN EXPLAINED BY WAY OF A NOTE IN THE AUDITED STAT EMENT OF ACCOUNTS. ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 3 6. THE A.O. WAS OF THE FIRM BELIEF THAT SINCE THE LEVY OF FBT HAS NOT BEEN DECLARED ULTRA VIRUS, THEREFORE, THE ASSESSEE IS LI ABLE TO PAY FBT. THE A.O. ACCORDINGLY COMPUTED THE FBT ON THE FOLLOWING EXPENDITURES:- (I) TRAVELLING EXPENSES R S. 239978/- (II) ENTERTAINMENT/HOSPITALITY EXPENSES RS. 792123 /- (III) PRESENTATION EXPENSES (GIFTS) RS. 1248387 (IV) SALES PROMOTIONS EXPENSES RS. 11,57 ,10,912/- 7. ACCORDINGLY, THE ADDITIONAL FBT COMPUTED BY THE A.O . WAS AT RS. 2,39,36,799/-. 8. AGGRIEVED BY THIS ASSESSMENT, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A). BEFORE THE FIRST APPELLATE AUTHORIT Y, IT WAS STRONGLY CONTENDED THAT THE LEVY OF FBT IS ONLY ON THOSE EXP ENDITURES WHERE EMPLOYER-EMPLOYEE RELATIONSHIP EXISTS. IT WAS BROUG HT TO THE NOTICE OF THE LD. CIT(A) THAT SINCE THE EXPENDITURES CONSIDER ED BY THE A.O. FOR THE LEVY OF FBT DO NOT ESTABLISH ANY EMPLOYER-EMPLO YEE RELATIONSHIP ARE THEREFORE, OUTSIDE THE PURVIEW OF SECTION 115WE (2) OF THE ACT. 9. THE CONTENTIONS/SUBMISSIONS OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE LD. CIT(A) WHO CONCURRED WITH THE VIEW OF THE A.O. THAT PROVISIONS OF SECTION 115WE(2) SQUARELY APPLY ON TH E IMPUGNED EXPENDITURES AND, THEREFORE, THE LEVY OF FBT IS JUS TIFIED. THE APPEAL WAS DISMISSED. 10. BEFORE PROCEEDING FURTHER, LET US FIRST UNDERSTAND THE PROVISIONS OF SECTION115WB(2) WHICH READS AS UNDER:- (2) THE FRINGE BENEFITS SHALL BE DEEMED TO HAVE BE EN PROVIDED BY THE EMPLOYER TO HIS EMPLOYEES, IF THE EMPLOYER HAS, IN THE COURSE OF HI S BUSINESS OR PROFESSION (INCLUDING ANY ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 4 ACTIVITY WHETHER OR NOT SUCH ACTIVITY IS CARRIED ON WITH THE OBJECT OF DERIVING INCOME, PROFITS OR GAINS) INCURRED ANY EXPENSE ON, OR MADE ANY PAYMENT FOR THE FOLLOWING PURPOSES, NAMELY:- (A) ENTERTAINMENT: (B) PROVISION OF HOSPITALITY OF EVERY KIND BY THE EMPLO YER TO ANY PERSONS , WHETHER BY WAY OF PROVISION OF FOOD OR BEVERAGES OR IN ANY OTHER M ANNER WHATSOEVER AND WHETHER OR NOT SUCH PROVISION IS MADE BY REASON OF ANY EXPRESS OR IMPLIED CONTRACT OR CUSTOM OR USAGE OF TRADE BUT DOES NOT INCLUDE--- (I) ANY EXPENDITURE ON, OR PAYMENT FOR FOOD OR BEVERAGE S PROVIDED BY THE EMPLOYER TO HIS EMPLOYEES IN OFFICE OR FACTORY: (II) ANY EXPENDITURE ON OR PAYMENT THROUGH PAID VOUCHERS WHICH ARE NOT TRANSFERABLE AND USABLE ONLY AT EATING JOINTS OR OUTLETS; THE FOLLOWING SUB-CLAUSE (III) SHALL BE INSERTED AF TER SUB-CLAUSE (II) OF CLAUSE (B) OF SUB- SECTION (2) OF SECTION 115WB BY THE FINANCE ACT, 20 08, W.E.F. 1-4-2009 : (III) ANY EXPENDITURE ON OR PAYMENT THROUGH NON-TRANSFERA BLE PRE-PAID ELECTRONIC MEAL CARD USABLE ONLY AT EATING JOINTS OR OUTLETS AND WHICH F ULFILS SUCH OTHER CONDITIONS AS MAY BE PRESCRIBED: (C) CONFERENCE (OTHER THAN FEE FOR PARTICIPATION BY THE EMPLOYEES IN ANY CONFERENCE). EXPLANATION- FOR THE PURPOSES OF THIS CLAUSE, ANY E XPENDITURE ON CONVEYANCE, TOUR AND TRAVEL (INCLUDING FOREIGN TRAVEL), ON HOTEL, OR BOA RDING AND LODGING IN CONNECTION WITH ANY CONFERENCE SHALL BE DEEMED TO BE EXPENDITURE IN CURRED FOR THE PURPOSES OF CONFERENCE; (D) SALES PROMOTION INCLUDING PUBLICITY : PROVIDED THAT ANY EXPENDITURE ON ADVERTISEMENT . (I) BEING THE EXPENDITURE (INCLUDING RENTAL) ON ADVERT ISEMENT OF ANY FORM IN ANY PRINT (INCLUDING JOURNALS, CATALOGUES OR PRICE LIST S) OR ELECTRONIC MEDIA OR TRANSPORT SYSTEM; (II) BEING THE EXPENDITURE ON THE HOLDING OF, OR THE PARTICIPATION IN. ANY PRESS CONFERENCE OR BUSINESS CONVENTION, FAIR OR EXHIBITI ON; (III) BEING THE EXPENDITURE ON SPONSORSHIP OF ANY SPORTS EVENT OR ANY OTHER EVENT ORGANIZED BY ANY GOVERNMENT AGENCY OR TRADE ASSOCIA TION OR BODY: (IV) BEING THE EXPENDITURE ON THE PUBLICATION IN ANY PR INT OR ELECTRONIC MEDIA OF ANY NOTICE REQUIRED TO BE PUBLISHED BY OR UNDER ANY LAW OR BY AN ORDER OF A COURT OR TRIBUNAL; ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 5 (V) BEING THE EXPENDITURE ON ADVERTISEMENT BY WAY OF S IGNS, ART WORK, PAINTING, BANNERS, AWNINGS, DIRECT MAIL, ELECTRIC SPECTACULAR S, KIOSKS, HOARDINGS, BILL BOARDS. (VI) BEING THE EXPENDITURE BY WAY OF PAYMENT TO ANY ADV ERTISEMENT AGENCY FOR THE PURPOSES OF CLAUSES (I) TO (V) ABOVE; (VII) BEING THE EXPENDITURE ON DISTRIBUTION OF SAMPLES EI THER FREE OF COST OR AT CONCESSIONAL RATE; AND (VIII) BEING THE EXPENDITURE BY WAY OF PAYMENT TO ANY PERS ON OR REPUTE FOR PROMOTING THE SALE OF GOODS OR SERVICES OF THE BUSINESS OF TH E EMPLOYER, SHALL NOT BE CONSIDERED AS EXPENDITURE ON SAL ES PROMOTION INCLUDING PUBLICITY; (E) EMPLOYEES WELFARE. EXPLANATION- FOR THE PURPOSES OF THIS CLAUSE, ANY E XPENDITURE INCURRED OR PAYMENT MADE TO FULFILL ANY STATUTORY OBLIGATION OR MITIGATE OCC UPATIONAL HAZARDS OR PROVIDE FIRST AID FACILITIES IN THE HOSPITAL OR DISPENSARY RUN BY THE EMPLOYER SHALL NOT BE CONSIDERED AS EXPENDITURE FOR EMPLOYEES WELFARE; THE FOLLOWING EXPLANATION SHALL BE SUBSTITUTED FOR THE EXISTING EXPLANATION TO CLAUSE (E) OF SUB-SECTION (2) OF SECTION 115WB BY THE FINA NCE ACT, 2008, W.E.F. 1-4-2009: EXPLANATION- FOR THE PURPOSES OF THIS CLAUSE ANY EX PENDITURE INCURRED OR PAYMENT MADE TO- (I) FULFIIL ANY STATUTORY OBLIGATION ; OR (II) MITIGATE OCCUPATIONAL HAZARDS; OR (III) PROVIDE FIRST AID FACILITIES IN THE HOSPITAL OR DIS PENSARY RUN BY THE EMPLOYER; OR (IV) PROVIDE CRCHE FACILITY FOR THE CHILDREN OF THE EMP LOYEE; OR (V) SPONSOR A SPORTSMAN, BEING AN EMPLOYEE; OR (VI) ORGANIZE SPORTS EVENTS FOR EMPLOYEES SHALL NOT BE CONSIDERED AS EXPENDITURE FOR EMPLOYEE S WELFARE: (F) CONVEYANCE (G) USE OF HOTEL, BOARDING AND LODGING FACILITIES; (H) REPAIR, RUNNING (INCLUDING FUEL), MAINTENANCE OF MO TOR CARS AND THE AMOUNT OF DEPRECIATION THEREON; (I) REPAIR, RUNNING (INCLUDING FUEL) AND MAINTENANCE OF AIRCRAFTS AND THE AMOUNT OF DEPRECIATION THEREON; (J) USE OF TELEPHONE (INCLUDING MOBILE PHONE) OTHER THA N EXPENDITURE ON LEASED TELEPHONE LINES; ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 6 (K) MAINTENANCE OF ANY ACCOMMODATION IN THE NATURE OF G UEST HOUSE OTHER THAN ACCOMMODATION USE FOR TRAINING PURPOSES; (L) FESTIVAL CELEBRATIONS: (M) USE OF HEALTH CLUB AND SIMILAR FACILITIES: (N) USE OF ANY OTHER CLUB FACILITIES (O) GIFTS; AND (P) SCHOLARSHIPS; (Q) TOUR AND TRAVEL (INCLUDING FOREIGN TRAVEL). 11. RATIONALE FOR INTRODUCTION OF FBT IS THAT IT IS DIF FICULT TO ISOLATE THE PERSONAL ELEMENT IF THE BENEFITS ARE COLLECTI VELY ENJOYED BY THE EMPLOYEES WHICH MEANS THAT THE PROVISIONS OF FBT WI LL BE APPLICABLE ONLY IN RESPECT OF THOSE EXPENSES WHICH CONTAIN OR AT LEAST ARE LIKELY TO CONTAIN AN ELEMENT OF PERSONAL BENEFIT TO EMPLOYEES . 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF LOWER AUTHORITIES AND ALSO THE CIRCULAR R ELIED UPON BY THE ASSESSEE. AFTER GOING THROUGH THE ENTIRE SCHEME OF BRINGING FBT INTO STATUTE BOOK, WE FIND THAT THE TAX BASE FOR THE PUR POSE OF FBT IS THE VALUE OF FRINGE BENEFITS PROVIDED OR DEEMED TO HAVE BEEN PROVIDED BY AN EMPLOYER TO HIS EMPLOYEES DURING THE PREVIOUS YEAR. THE DETERMINATION OF THE TAX BASE COMPRISES THREE E LEMENTS: A) THE SCOPE OF THE TERM 'FRINGE BENEFITS PROVIDED , B)THE SCOPE OF THE TERM 'FRINGE BENEFITS DEEMED TO HAVE BEEN PROVIDED AND C) THE BASIS OF VALUATION OF THE ABOVE. 13. BEING AN ALTOGETHER NEW CONCEPT INTRODUCED IN THE S TATUTE BOOK, A NUMBER OF ISSUES WERE RAISED BY THE TRADE AND IND USTRY AT DIFFERENT ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 7 FORUMS AFTER THE PRESENTATION OF THE FINANCIAL BILL 2005 AND ALSO AFTER ITS ENACTMENT. THE CBDT DECIDED TO CLARIFY THE ISSU ES RAISED ON SUCH FORUM IN QUESTION AND ANSWER: Q. NO. 2 WHETHER EMPLOYER-EMPLOYEE RELATIONSHIP IS A PRE-REQUISITE FOR THE LEVY OF FBT? ANS. YES Q. NO. 60 WHETHER 'SALES PROMOTION' INCLUDES SALES DISCOUNT OR REBATES TO WHOLESALERS OR CUSTOMERS OR BONUS POINTS GIVEN T O CREDIT CARD CUSTOMERS AND, IF SO, WHETHER FBT IS PAYABLE THEREO N? ANS. SALES DISCOUNT OR REBATES ALLOWED TO WHOLESALE DEALERS OR CUSTOMERS FROM THE LISTED RETAIL PRICE MERELY REPRE SENT LESSER REALIZATION OF THE SALE PRICE ITSELF. THE BONUS POI NTS GIVEN TO CREDIT CARD CUSTOMERS ARE ALSO IN THE NATURE OF DEFERRED SALE D ISCOUNT. THEREFORE, DISCOUNTS OR REBATES OR BONUS POINTS ALLOWED TO CUS TOMERS OR WHOLESALE DEALERS ARE IN THE NATURE OF SELLING EXPE NSES AND OUTSIDE THE SCOPE OF THE PROVISIONS OF CLAUSE (D) OF SUB-SECTIO N (2) OF SECTION 115WB OF THE IT. ACT. ACCORDINGLY, SUCH DISCOUNTS O R REBATES ARE NOT LIABLE TO FBT. Q. NO. 61 WHETHER EXPENDITURE ON INCENTIVES GIVEN T O DISTRIBUTORS FOR MEETING QUANTITY TARGETS (INCLUDING FREE GOODS FOR ACHIEVING CERTAIN SALES TARGET LIKE, 100 FREE TELEVISIONS FOR ACHIEVI NG A TARGET SALE OF 10,000 TELEVISIONS AND CASH INCENTIVES ADJUSTABLE A GAINST FUTURE SUPPLIES) IS LIABLE TO FBT? ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 8 ANS. INCENTIVES GIVEN TO DISTRIBUTORS FOR MEETING SALES TARGETS (INCLUDING FREE GOODS GIVEN AS INCENTIVE TO DISTRIB UTORS FOR ACHIEVING CERTAIN SALES AND CASH INCENTIVES ADJUSTABLE AGAINS T FUTURE SUPPLIES) ARE IN THE NATURE OF PERFORMANCE-BASED COMMISSION. SUCH PERFORMANCE-BASED COMMISSION IS IN THE NATURE OF OR DINARY SELLING COST. THEREFORE, EXPENDITURE INCURRED FOR THE PURPO SE OF PROVIDING INCENTIVES GIVEN TO DISTRIBUTORS FOR MEETING SALES TARGETS (INCLUDING FREE GOODS FOR ACHIEVING CERTAIN SALES TARGET AND C ASH INCENTIVES ADJUSTABLE AGAINST FUTURE SUPPLIES) DO NOT FALL WIT HIN THE SCOPE OF CLAUSE (D) OF SUB-SECTION (2) OF SEC. 115 WB AND, T HEREFORE, NOT LIABLE TO FBT. 14. NOW LET US SEE WHETHER THE EXPLANATIONS OF THE ASSE SSEE FIT INTO THE ANSWERS GIVEN BY THE CBDT ON THE QUESTIONS PERT AINING TO THE FACTS OF THE CASE:- NATURE OF EXPENDITURE AMOUNT (RS) SUBMISSION IN BRI EF EXPLAINING THAT THE RELEVANT EXPENDITURE NOT INCURRED FOR THE EMPLOYEES OF THE APPELLANT COMPANY, THE SAME WAS NOT LIABLE TO FBT A TRAVELLING EXPENSES 2,39,978 *THE APPELLANT HAS INCURRED TOTAL EXPENDITURE OF RS.31,29,335 UNDER THE HEAD TRAVELLING EXPENSES. *OUT OF THE SAME, AN AMOUNT OF RS.2,39,978 WAS INCURRED FOR AND ON BEHALF OF PROFESSIONALS OR BUSINESS ASSOCIATES OF THE APPELLANT, IN CONNECTION WITH ITS BUSINESS AND NOT FOR THE EMPLOYEES OF THE APPELLANT COMPANY. *OUT OF THE SAID RS.2,39,978, EXPENSES OF RS. 72,568 WERE INCURRED FOR CANDIDATES WHO CAME FOR INTERVIEWS HELD DURING THE YEAR FOR VARIOUS EMPLOYMENTS IN SANDESH *AN AMOUNT OF RS. 65,414 WAS INCURRED FOR ENGINEERS WHO CAME FOR OVERHAULING OF MACHINES. *AN AMOUNT OF RS. 33,492 WAS SPENT ON TRAVELLING EXPENSES OF THE EVENT MANAGEMENT CONSULTANT. *THE BALANCE AMOUNT OF RS.68,504 WAS SPENT ON TRAVELLING EXPENSES OF AUDITORS AND ADVOCATES ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 9 B. ENTERTAINMENT/ HOSPITALITY EXPENSES. 7,92,123 *THE ENTERTAINMENT / HOSPITALITY EXPENSES WERE INCURRED BY THE APPELLANT COMPANY ON ITS GUESTS AND NOT FOR ITS EMPLOYEES. *THE APPELLANT HAS TO APPOINT VARIOUS SELLING AGENTS ACROSS VILLAGES, TALUKAS AND DISTRICTS THROUGHOUT GUJARAT, WHO SELL THE NEWSPAPERS TO END READERS. SIMILARLY ADVERTISEMENTS ARE ALSO COLLECTED THROUGH ADVERTISING AGENTS. *THESE SELLING AND ADVERTISING AGENTS OFTEN VISIT AHMEDABAD AND DURING THE YEAR THE APPELLANT HAS SPENT RS. 7,92,123 ON TEA, SNACKS AND LUNCHES SERVED TO THEM, WHICH HAS BEEN DEBITED UNDER THE HEAD ENTERTAINMENT / HOSPITALITY EXPENSES. C.PRESENTATION EXPENSES 12,48,387 *OUT OF RS. 12,48,387 PRESENTATION EXPENSES INCURRED FOR OTHER THAN EMPLOYEES ARE RS.42,932. *THE BALANCE OF RS. 12,05,455 REPRESENTS TRANSPORT & DISTRIBUTION CHARGES IN THE NATURE OF BUSINESS EXPENDITURE, WHICH HAVE BEEN ERRONEOUSLY CLASSIFIED AS PRESENTATION EXPENSES IN THE ASSESSMENT ORDER. THE CORRECT CLASSIFICATION IS EVIDENT FROM THE TAX AUDIT REPORT SHOWING COMPUTATION OF THE VALUE OF FRINGE BENEFITS, RELEVANT PAGE OF THE SAME BEING ATTACHED HEREWITH. D. SALES PROMOTION EXPENSES 11,57,10,912 * EARLIER THERE WERE ONLY TWO MAJOR GUJARATI NEWS PAPERS 'SANDESH' AND 'GUJARAT SAMACHAR'. DIVYA BHASKAR, CAME TO BE LAUNCHED AROUND THIS TIME AND TO GET ITS FOOTHOLD IN GUJARAT, IT AGGRESSIVELY STARTED OFFERING VARIOUS SCHEMES TO ITS SUBSCRIBERS, UNDER WHICH FREE GIFTS WERE GIVEN ON MONTHLY BASIS. * AS A COMPE TITOR, THE APPELLANT WAS UNDER BUSINESS COMPULSION TO OFFER SIMILAR GIFT SCHEMES TO RETAIN ITS SUBSCRIBERS AND READERS. * MOREOVER, IN SAURASHTRA & KUTCH, THERE IS A GENERAL PRACTICE OF SUBSCRIBING TO NEWS PAPERS ON AN ANNUAL BASIS, INSTEAD OF DAILY PURCHASES. IT IS A PRACTICE TO HOLD LUCKY DRAWS AT THE CLOSE OF SUBSCRIPTION SCHEME, WHEN PRIZES ARE GIVEN TO VARIOUS SUBSCRIBERS. *THE APPELLANT HAS DURING THE FINANCIAL YEAR INCURRED AN EXPENDITURE OF RS. 11,57,10,912 FOR DISTRIBUTION OF GIFTS AND PRIZES AS REFERRED TO HEREINABOVE, WHICH ARE IN THE NATURE OF SALES PROMOTION, WHICH NOT RESULTING IN ANY BENEFIT TO THE EMPLOYEES OF THE APPELLANT, IS CLEARLY NOT LIABLE TO FBT. TOTAL 11,79,91,400 ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 10 15. AFTER CAREFULLY CONSIDERING THE DETAILS FILED BY TH E ASSESSEE AND THE EXPLANATIONS GIVEN BY THE CBDT IN ITS CIRCULAR, WE HAVE NO HESITATION TO HOLD THAT ALL THESE EXPENSES HEREINAB OVE ARE OUTSIDE THE PURVIEW OF FBT. 16. OUR VIEW IS ALSO FORTIFIED BY THE DECISION OF THE C O-ORDINATE BENCH IN THE CASE OF CADILA HEALTHCARE IN ITA NO. 1 79/AHD/2011 WHEREIN THE CO-ORDINATE BENCH HAS CONSIDERED THE DE CISION OF T.V. TODAY NETWORK LTD. VS. DCIT 38 TAXMANN.COM 409 WHER EIN THE CO- ORDINATE BENCH HAS HELD AS UNDER:- '6. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF B OTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. FRINGE BENEFITS TAX WAS LEVIED FOR THE FIRST TIME BY THE FINANCE ACT, 2005 BY INTRODUCING CHAPTERXII-H, I.E. , SECTIONS 115W TO 115WL TO THE INCOME-TAX ACT, 1961. SECTION 115WB(2)(D) UNDER WHI CH THE DEPARTMENT HAS COVERED THE PAYMENT OF CHANNEL-PLACEMENT CHARGES RE ADS AS UNDER: '115WB. (2) THE FRINGE BENEFITS SHALL BE DEEMED TO HAVE BEEN PROVIDED BY THE EMPLOYER TO HIS EMPLOYEES, IF THE EMPLOYER HAS, IN THE COURSE OF HIS BUSINESS OR PROFESSION (INCLUDING ANY ACTIVITY WHETHER OR NOT S UCH ACTIVITY IS CARRIED ON WITH THE OBJECT OF DERIVING INCOME, PROFITS OR GAINS) INCURR ED ANY EXPENSE ON, OR MADE ANY PAYMENT FOR, THE FOLLOWING PURPOSES, NAMELY (D) SALES PROMOTION INCLUDING PUBLICITY : PROVIDED THAT ANY EXPENDITURE ON ADVERTISEMENT, (I) BEING THE EXPENDITURE (INCLUDING RENTAL) ON ADV ERTISEMENT OF ANY FORM IN ANY PRINT (INCLUDING JOURNALS, CATALOGUES OR PRICE LISTS) OR ELECTRONIC MEDIA OR TRANSPORT SYSTEM; (II) BEING THE EXPENDITURE ON THE HOLDING OF, OR TH E PARTICIPATION IN, ANY PRESS CONFERENCE OR BUSINESS CONVENTION, FAIR OR EXHIBITI ON; (II)BEING THE EXPENDITURE ON SPONSORSHIP OF ANY SPO RTS EVENT OR ANY OTHER EVENT ORGANISED BY ANY GOVERNMENT AGENCY OR TRADE ASSOCIA TION OR BODY ; ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 11 (IV)BEING THE EXPENDITURE ON THE PUBLICATION IN ANY PRINT OR ELECTRONIC MEDIA OF ANY NOTICE REQUIRED TO BE PUBLISHED BY OR UNDER ANY LAW OR BY AN ORDER OF A COURT OR TRIBUNAL; (V)BEING THE EXPENDITURE ON ADVERTISEMENT BY WAY OF SIGNS, ART WORK, PAINTING, BANNERS, AWNINGS, DIRECT MAIL, ELECTRIC SPECTACULAR S, KIOSKS, HOARDINGS, BILL BOARDS (DISPLAY OF PRODUCTS) OR BY WAY OF SUCH OTHER MEDIU M OF ADVERTISEMENT; (VI)BEING THE EXPENDITURE BY WAY OF PAYMENT TO ANY ADVERTISING AGENCY FOR THE PURPOSES OF CLAUSES (I) TO (V) ABOVE; (VII)BEING THE EXPENDITURE ON DISTRIBUTION OF SAMPL ES EITHER FREE OF COST OR AT CONCESSIONAL RATE; AND (VIII)BEING THE EXPENDITURE BY WAY OF PAYMENT TO AN Y PERSON OF REPUTE FOR PROMOTING THE SALE OF GOODS OR SERVICES OF THE BUSI NESS OF THE EMPLOYER, SHALL NOT BE CONSIDERED AS EXPENDITURE ON SALES PROMOTI ON INCLUDING PUBLICITY; 7. FROM THE ABOVE, IT IS EVIDENT THAT SECTION 115WB(2) IS A DEEMING PROVISION WHICH PROVIDES THAT THE FRINGE BENEFITS SHALL BE DEEMED T O HAVE BEEN PROVIDED BY THE EMPLOYER TO HIS EMPLOYEE IF THE EMPLOYER HAS INCURR ED THE EXPENSES PROVIDED IN VARIOUS CLAUSES OF THE ABOVE SUB-SECTION. CLAUSE (D ) OF THE ABOVE SUBSECTION COVERS SALES PROMOTION INCLUDING PUBLICITY. THE PROVISO TO THE ABOVE CLAUSE EXCLUDES VARIOUS TYPES OF EXPENDITURE ON ADVERTISEMENT FROM THE PURV IEW OF CLAUSE (D). THE ASSESSEE HAS ARGUED THAT NEITHER THERE IS AN EMPLOYER EMPLOY EE RELATIONSHIP NOR THE EXPENDITURE IS IN THE NATURE OF SALES PROMOTION AND PUBLICITY. IN CONTRAST, THE LEARNED COMMISSIONER OF INCOME-TAX- DEPARTMENTAL REPRESENTA TIVE HAS STATED THAT IF THE EXPENDITURE AS PROVIDED IN ANY OF THE CLAUSES OF SE CTION 115WB(2) IS INCURRED BY THE ASSESSEE, THE FRINGE BENEFITS TAX WOULD BE CHARGEAB LE, WHETHER OR NOT THERE IS AN EMPLOYER- EMPLOYEE RELATIONSHIP. IN THIS REGARD, WE FIND THAT THE CENTRAL BOARD OF DIRECT TAXES HAS ISSUED CIRCULAR NO. 8, DATED AUGUS T 29, 2005 WHICH IS PUBLISHED IN [2005] 277ITR (ST.) 20. IN PARAGRAPH 2 OF THE CIRCU LAR, OBJECTIVE FOR INTRODUCTION OF FRINGE BENEFITS TAX IS EXPLAINED WHICH READS AS UND ER: 2. OBJECTIVE 2. 1 THE TAXATION OF PERQUISITES OR FRINGE BENEFITS IS JUSTIFIED BOTH ON GROUNDS OF EQUITY AND ECONOMIC EFFICIENCY. WHEN FRINGE BENEFIT S ARE UNDERTAXED, IT VIOLATES BOTH ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 12 HORIZONTAL AND VERTICAL EQUITY. A TAXPAYER RECEIVIN G HIS ENTIRE INCOME IN CASH BEARS A HIGHER TAX BURDEN IN COMPARISON TO ANOTHER TAXPAYER WHO RECEIVES HIS INCOME PARTLY IN CASH AND PARTLY IN KIND, THEREBY VIOLATING HORIZ ONTAL EQUITY. FURTHER, FRINGE BENEFITS ARE GENERALLY PROVIDED TO SENIOR EXECUTIVE S IN THE ORGANISATION. THEREFORE, UNDER- TAXATION OF FRINGE BENEFITS VIOLATES VERTICA L EQUITY. IT ALSO DISCRIMINATES BETWEEN COMPANIES WHICH CAN PROVIDE FRINGE BENEFITS AND THOSE WHICH CANNOT, THEREBY ADVERSELY AFFECTING MARKET STRUCTURE. HOWEV ER, THE TAXATION OF FRINGE BENEFITS RAISES SOME PROBLEMS PRIMARILY BECAUSE (A) ALL BENEFITS CANNOT BE INDIVIDUALLY ATTRIBUTED TO EMPLOYEES, PARTICULARLY IN CASES WHERE THE BENEFIT IS COLLECTIVELY ENJOYED ; (B) OF THE PRESENT WIDESPREAD PRACTICE OF PROVIDING PERQUISITES, WHEREIN MANY PERQUISITES ARE DISGUISED AS REIMBURSEMENTS OR OTHE R MISCELLANEOUS EXPENSES SO AS TO ENABLE THE EMPLOYEES TO ESCAPE/ REDUCE THEIR TAX LI ABILITY ; AND : (C) OF THE DIFFICULTY IN THE VALUATION OF THE BENEF ITS. 2.2 IN INDIA, PRIOR TO THE ASSESSMENT YEAR 1998-99, SOME PERQUISITES/FRINGE BENEFITS WERE INCLUDED IN SALARY IN TERMS OF SECTION 17 AND ACCORDINGLY TAXED UNDER SECTION 15 OF THE INCOME-TAX ACT IN THE HANDS OF THE EMPLOYEE AND A LARGE NUMBER OF FRINGE BENEFITS WERE TAXED BY THE EMPLOYER- BASED DISALLOW ANCE METHOD WHERE THE QUANTUM OF THE DISALLOWANCE WAS ESTIMATED ON A PRESUMPTIVE BASIS. IN PRACTICE, TAXATION OF FRINGE BENEFITS BY THE EMPLOYER- BASED DISALLOWANCE METHOD RESULTED IN LARGE-SCALE LITIGATION ON ACCOUNT OF AMBIGUITY IN DEFINING THE TAX BASE. THEREFORE, THE TAXATION OF FRINGE BENEFITS BY THE EMPLOYER- BASED DISALLOWANCE METHOD WAS WITHDRAWN BY THE FINANCE ACT, 1997. HOWEVER, THE WITHDRAWAL OF THE P ROVISIONS RELATING TO TAXATION OF FRINGE BENEFITS BY THE EMPLOYER-BASED DISALLOWANCE METHOD RESULTED IN SIGNIFICANT EROSION OF THE TAX BASE. THE FINANCE ACT, 2005 HAS INTRODUCED A NEW LEVY, NAMELY, THE FRINGE BENEFITS TAX AS A SURROGATE TAX ON EMPLO YERS, WITH THE OBJECTIVE OF RESOLVING THE PROBLEMS ENUMERATED IN PARA. 2.1 ABOVE, EXPANDI NG THE TAX BASE AND MAINTAINING EQUITY BETWEEN EMPLOYERS. 8. AT PAGE 25 PARAGRAPH 11, FREQUENTLY ASKED QUESTI ONS ARE GIVEN. QUESTION NO. 2 THEREOF AND REPLY IS AS UNDER : '2. WHETHER EMPLOYER-EMPLOYEE RELATIONSHIP IS A PRE REQUISITE FOR THE LEVY OF FRINGE BENEFIT TAX? ANSWER: YES. ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 13 9. THUS, IN THE CIRCULAR ISSUED BY THE CENTRAL BOAR D OF DIRECT TAXES EXPLAINING THE NEWLY INTRODUCED PROVISIONS OF FRINGE BENEFITS TAX, THE CENTRAL BOARD OF DIRECT TAXES ITSELF HAS CLARIFIED THAT EMPLOYER-EMPLOYEE RELATIO NSHIP IS A PREREQUISITE FOR LEVY OF FRINGE BENEFITS TAX. THE HON 'BLE APEX COURT HAS CO NSIDERED THE ABOVE CIRCULAR IN THE CASE OF R & B FALCON (A) (P.) LTD. (SUPRA) AND HELD AS UNDER (HEADNOTE): 'THE INTERPRETATION OF THE CENTRAL BOARD OF DIRECT TAXES IN ITS CIRCULARS BEING IN THE REALM OF EXECUTIVE CONSTRUCTI ON, SHOULD PRIMARILY BE HELD TO BE BINDING, SAVE AND EXCEPT WHERE IT VIOLATES AN Y PROVISIONS OF LAW OR IS CONTRARY TO ANY JUDGMENT RENDERED BY THE COURTS. TH E REASON FOR GIVING EFFECT TO SUCH EXECUTIVE CONSTRUCTION IS NOT ONLY THE SAME AS CONTEMPORANEOUS WHICH WOULD COME WITHIN THE PURVIEW OF THE MAXIM TE MPORANIA CASTE PESTO, EVEN IN A CERTAIN SITUATION A REPRESENTATION MADE B Y AN AUTHORITY LIKE THE MINISTER PRESENTING THE BILL BEFORE PARLIAMENT MAY ALSO BE FOUND BOUND THEREBY. WHERE A REPRESENTATION IS MADE BY THE MAKE R OF LEGISLATION AT THE TIME OF INTRODUCTION OF THE BILL OR CONSTRUCTION TH EREUPON IS PUT BY THE EXECUTIVE ON ITS COMING INTO FORCE THE SAME CARRIES GREAT WEIGHT.' 10. THAT THE HON'BLE JURISDICTIONAL HIGH COURT HAS ALSO EXPRESSED A SIMILAR VIEW IN THE CASE OF T&T MOTORS LTD. (SUPRA) AND HELD AS UND ER (HEADNOTE): 'A CAREFUL READING OF CLAUSES (I), (II), (IV), (V), (VI) AND (VIII) OF SECTION 115WB(2)(D) ELUCIDATES THAT THE LEGISLATURE HAS EXC LUDED FROM FRINGE BENEFITS EXPENDITURE IN THE FORM OF PAYMENTS TO THI RD PERSONS BECAUSE THIS IS NOT A FRINGE BENEFITS WHICH IS ENJOYED BY THE 'EMPL OYEE/ RECIPIENT' BUT IT IS AN EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS AN D IN THE HANDS OF THE RECIPIENT THE EXPENDITURE IS TAXABLE AS INCOME EARN ED.' 11. THAT IN THE CASE UNDER APPEAL BEFORE US, ADMITT EDLY, THE EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR CHANNEL PLACEMENT WHICH IS MADE TO THE THIRD PERSONS AND THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN THE ASSES SEE AND THE RECIPIENT. THEREFORE, THE CIRCULAR OF THE CENTRAL BOARD OF DIR ECT TAXES AS WELL AS THE DECISION OF THE HON 'BLE APEX COURT IN THE CASE OF R & B FAL CON (A) (P.) LTD. (SUPRA) WOULD BE SQUARELY APPLICABLE. MOREOVER, THE HON'BLE JURISDIC TIONAL HIGH COURT IN THE CASE OF T ITA NO. 2799 /AHD/2013 . A.Y. 2007- 08 14 & T MOTORS LTD. (SUPRA) HAS STATED THAT IN RESPECT OF PAYMENT TO THIRD PERSONS, FRINGE BENEFITS TAX IS NOT APPLICABLE BECAUSE NO FRINGE BE NEFIT IS ENJOYED BY THE EMPLOYEE/RECIPIENT. THE RATIO OF THE ABOVE DECISION OF THE HON'BLE JUR ISDICTIONAL HIGH COURT -WOULD ALSO BE SQUARELY APPLICABLE TO TH E FACTS OF THE ASSESSEE'S CASE BECAUSE PAYMENT HAD BEEN MADE FOR CHANNEL PLACEMENT . BY SUCH PAYMENT, NO FRINGE BENEFITS IS ENJOYED BY THE EMPLOYEE/RECIPIEN T. THE PAYMENT IS IN THE NATURE OF EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS BY THE ASSESSEE AND IN THE HANDS OF THE RECIPIENT, THE EXPENDITURE IS TAXABLE AS INCOME. MOREOVER, THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT IN THE NATURE OF EXPENDITURE FOR SALES PROMOTION. THE ASSESSEE HAS INCURRED THE EXPENDITUR E FOR BROADCASTING OF ITS CHANNELS ON THE DESIRED BANDS. THEREFORE, THE EXPEN DITURE IS FOR THE BROADCASTING OF ITS CHANNELS AND NOT FOR SALES PROMOTION OR PUBL ICITY.' 17. CONSIDERING THE FACTS OF THE CASE, IN THE LIGHT OF THE RELEVANT PART OF THE CBDT CIRCULAR (SUPRA) AND ALSO FOLLOWING THE DECISION OF THE CO- ORDINATE BENCH (SUPRA), WE SET ASIDE THE FINDINGS O F THE LD. CIT(A) AND DIRECT THE A.O. TO DELETE THE FBT OF RS. 2,39,36,79 9/-. 18. APPEAL FILED BY THE ASSESSEE IS ACCORDINGLY ALLOWED . ORDER PRONOUNCED IN OPEN COURT ON 22 - 08- 20 16. SD/- SD/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD.