DCIT, New Delhi V. M/s Miele India Pvt. Ltd., New Delhi

ITA 724/DEL/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8267 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 10-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Depreciation; Transfer pricing; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 92C; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL , DELHI BENCH F , NEW DELHI BEFORE S H RI N. K. BILLAIYA , ACCOUNTANT MEMBER , AND SHRI K. N. CHARY , JUDICIAL MEMBER ITA NO. 724 /DEL/201 6 [ ASSESSMENT YEAR: 20 1 0 - 1 1 ] THE D .C. I . T . VS. CIRCLE 16 ( 2 ) NEW DELHI M/S MIELE INDIA PVT LTD GROUND FLOOR, 1 TO 5, COPIA CORPORATE SUITES, PLOT NO. 9 JASOLA, NEW DELHI PAN NO. AA FCM 3435 R (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SURENDER PAL, SR. DR RESPONDENT BY : SHRI PIYUSH KAUSHIK, ADV DATE OF HEARING: 0 4 / 0 4 /2 0 1 9 DATE OF PRONOUNCEMENT: 11 / 0 4 /201 9 ORDER PER N. K. BILLAIYA, A CCOUNTANT M EMBER : TH IS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) 19 , NEW DELHI DATED 03 . 1 1 .20 1 5 PERTAINING TO A.Y 20 1 0 - 1 1 . 2 2. GROUND NO. 1 RELATES TO THE DELETION OF ADDITION OF RS. 3,50,51,978/ - ON ACCOUNT OF PRE - OPERATIVE EXPENSE S MADE BY THE ASSESSING OFFICER. GROUND NO. 2 RELATES TO THE DELETION OF ADDITION OF RS. 66,39,950/ - TREATED BY THE ASSESSING OFFICER AS EXPENDITURE ON ADVERTISEMENT, THE ASSESSEE IS BUILDING A BRAND IMAGE OF THE PARENT COMPANY AND HENCE CAPITAL IN NATURE . 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN TRADING OF HIGH - END KITCHEN APPLIANCES, COOLING AND COFFEE MACHINES AND LAUNDRY AND FLOOR CARE APPLIANCES. THE RETURN FOR THE YEAR UNDER CONSIDERATION WAS E - FILED ON 27.09.201 0 DECLARING LOSS OF RS. 7.83 CRORES. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT AND , ACCORDINGLY, STATUTORY NOTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. 4. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED T HAT THE ASSESSEE HAS NOT COMME NCED BUSINESS DURING THE FIRST 7 MONTHS OF THE YEAR UNDER CONSIDERATION. ACCORDINGLY, THE ASSESSING OFFICER ASKED THE ASSESSEE TO REPLY AS TO WHY ALL THE EXPENSES FOR THE FIRST 7 MONTHS SHOULD NOT BE TREATED AS 3 PREOPERATIVE E XPENSES, WHICH NEED TO BE AMORTIZED OVER A PERIOD OF FIVE YEARS. 5. THE ASSESSEE FILED REPLY CONTENDING THAT SALES HAD COMMENCED IN F.Y. 2008 - 09 AND HIGH VALUE PURCHASE ORDER OF EURO 52,853 WAS PLACED IN THE MONTH OF MARCH 2009. THE KEY MANAGERIAL EMPLO YEES HAD JOINED THE ASSESSEE COMPANY IN F.Y. 2008 - 09. INFRASTRUCTURE AND ADMINISTRATION WAS SET UP FOR SMOOTH FUNCTIONING IN ASSESSMENT YEAR 2008 - 09. IT WAS STRONGLY CONTENDED THAT SINCE THE BUSINESS HA D BEEN SET UP IN THE EARLIER ASSESSMENT YEAR, THEREF ORE, NO ADVERSE INFERENCE SHOULD BE DRAWN AND THE EXPENSES INCURRED AND CLAIMED BY THE ASSESSEE ARE NOT PRE - OPERATIVE EXPENSES. 6. THE CONTENTION OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE ASSESSING OFFICER , WHO COMPLETED ASSESSMENT BY DISALLOWING E XPENDITURE OF THE FIRST 7 MONTHS AS PRE - OPERATIVE EXPENSES. 7. PROCEEDING FURTHER, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE IS INCURRING HIGH ADVERTISEMENT AND SALE EXPENDITURE WITHOUT ACTUAL COMMENCEMENT OF BUSINESS, THEREBY BUILDING A BRAND IMAGE O F ITS PRINCIPAL. ACCORDING TO THE ASSESSING OFFICER, SUCH EXPENDITURE SHOULD 4 BE CAPITALIZED AS INTANGIBLE ASSET AND DEPRECIATION SHOULD BE CLAIMED ON SUCH EXPENDITURE. THE ASSESSING OFFICER CONCLUDED BY HOLDING THAT THE EXPENDITURE IS FOR FUTURE AND OF E NDURING NATURE. ACCORDINGLY, HE DISALLOWED THE EXPENDITURE AMOUNTING TO RS. 66,39,950/ - . 8. THE ASSESSEE STRON GLY AGITATED THE MATTER BEFORE THE LD. CIT(A). 9. AFTER CONSIDERING THE FACTS AND SUBMISSIONS, THE LD. CIT(A) CALLED FOR REMAND REPORT FROM THE ASSESSING OFFICER. THE ASSESSING OFFICER, IN HIS REMAND REPORT, CONCEDED THAT THE COMPANY HAS COMMENCED ITS BUSINESS OPERATIONS DURING F.Y. 2009 - 10 AND THE FIRST TWO PURCHASE ORDERS FROM MS NAVIN ELECTROTECH PVT LTD AND M/S DHAWAL INTERNATIONAL ELECTRONIC PVT LTD HAVE BEEN RECEIVED DURING THE PREVIOUS YEAR 2008 - 09. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE REMAND REPORT, THE LD. CIT(A) DELETED THE ADDITION ON ACCOUNT OF PRE - OPERATIVE EXPENSES. 10. ON THE ISSUE OF DISALLOWANCE OF ADMINISTRATI VE EXPENSES, THE LD. CIT(A) HELD AS UNDER: 5 I HAVE GONE THROUGH T HE ARGUMENTS OF THE APPELLANT AND OBSERVATIONS OF THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS OBSERVED THAT BY INCURRING EXPENDITURE, THE ASSESSING OFFICER IS BUILDING A BRAND IMAGE OF THE PARENT COMPANY. IF THAT WAS THE CASE, THEN THE TRANSFER PRICING OFFICER SHOULD HAVE MADE AN ADJUSTMENT IN RESPECT OF THE SAME. HOWEVER, THE TPO HAS GIVEN A CLEAR ORDER ON THE BASIS OF FACTS & CIRCUMSTANCES. MOREOVER, THE APPELLANT HAS SHOWN THAT INCUR RING OF EXPENSES TO THE TUNE OF NEARLY RS. 72,24,922/ - IS NOT ISOLATED OR EXTRAORDINARY. IN FACT, DURING THE SUCCEEDING YEARS, SIMILARLY HIGH EXPENSES HAVE BEEN INCURRED. ADVERTISEMENT EXPENSES HOWSOEVER HIGH MAY BE, HAVE BEEN HELD TO BE OF REVENUE NATURE SIMPLY BECAUSE THEY DO NOT HAVE LASTING VALUE. A. DELHI HIGH COURT IN THE CASE OF CIT V CITIFINANCIAL CONSUMER FINANCE LIMITED (ITA NO. 1820/2010,1974/2010, 01/2011, 05/2011 HELD AS FOLLOWS: 13. APPLYING THE AFORESAID PRINCIPLE TO THE FACTS OF THIS CASE, I T CLEARLY EMERGES THAT THE EXPENDITURE ON PUBLICITY AND ADVERTISEMENT IS TO BE TREATED AS REVENUE IN NATURE ALLOWABLE FULLY IN THE YEAR IN WHICH IT WAS INCURRED. CONCEDEDLY, THERE IS NO ADVANTAGE WHICH HAS ACCRUED TO THE ASSESSEE IN THE CAPITAL FIELD. THIS EXPENDITURE WAS INCURRED TO FACILITATE THE ASSESSEES TRADING OPERATIONS. NO FIXED CAPITAL WAS CREATED BY THIS EXPENDITURE. WE MAY ALSO ADD HERE THAT IN THE INCOME - 6 TAX LAWS, THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE. ONCE THE ASSESSEE CLAIMS TH E DEDUCTION FOR WHOLE AMOUNT OF SUCH EXPENDITURE, EVEN IN THE YEAR IN WHICH IT IS INCURRED, AND THE EXPENDITURE FULFILS THE TEST LAID DOWN UNDER SECTION 37 OF THE ACT, IT HAS TO BE ALLOWED. ONLY IN EXCEPTIONAL CASES, THE NATURE MENTIONED IN MADRAS INDUSTRI AL CORPORATION (SUPRA), THE EXPENDITURE CAN BE ALLOWED TO BE SPREAD OVER THAT TOO WHEN THE ASSESSEE CHOOSES TO DO SO. ( THE DECISION HAS BEEN SUBSEQUENTLY AFFIRMED BY SUPREME COURT.) CONSIDERING THE FACTS & CIRCUMSTANCES OF THE CASE & VARIOUS JUDICIAL PRON OUNCEMENTS IN THE MATTER, THE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED . 11. IN SO FAR AS GROUND NO. 1 IS CONCERNED, THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF THE ASSESSING OFFICER AND THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW . IT WOULD BE PERTINENT TO UNDERSTAND THE CHRONOLOGICAL EVENTS FROM THE DATE OF INCORPORATION AND THE SAME IS AS UNDER: 7 PARTICULARS AY 2008 - 09 AY 2009 - 10 AY 2010 - 11 DATE OF INCORPORATION 27 SEPT.. 07 DATE OF ALLOTMENT OF PAN 15 JAN., 08 DATE OF ALLOTMENT OF TAN 21 JAN., 08 IMPORTER EXPORTER CODE(IEC) 7 NOV., 08 LEASE DEED EXECUTE D WITH REGUS BUSINESS CENTRE 16 JUNE, 08 DATE OF JOINING OF MD 2 JUNE, 08 LEASE DEED EXECUTED FOR PREMISES AT COMMERCIAL PLOT, JASOLA 16 DEC., 08 RECEIPT OF SHARE APPLICATION FROM IMANTO AG JULY 2008 RESOLUTION FOR OPENING OF BANK ACCOUNT 2 AU GUST,0 8 AGREEMENT FOR OUTSOURCED EMPLOYEES (INCLUDING DRIVERS, ADVISORS POSITIONED AT DEALERS SITES AND CHEF) 22 SEPT.,08 DATE OF HIRING OF 6 SENIOR EMPLOYEES MIDDLE OF THE YEAR DATE OF FIRST LOCAL PURCHASE 27 NOV., 08 SALES / 4 DEC., 08 & 26 M ARCH 09 DATE OF CUSTOMER ORDERS RECEIVED FROM DAWAR INTERNATIONAL ELECTRONICS PVT LTD 2 JAN., 09 & 22 JAN.,09 DATE OF VARIOUS PURCHASE ORDERS RAISED ON MIELE & CIE KG 18 MARCH 2009 18 MAY, 09 & 14 JULY 09 DATE OF AGREEMENT WITH R&P MANAGEMENT COMMUN ICATIONS PVT. LTD 1 AUG, 09 DATE OF INVOICE RAISED BY MIELE & CIE KG PURSUANT TO PURCHASE ORDER DATED 18 MARCH 2009 5 AUG,09 DATE OF IMPORT OF PRODUCTS FOR DEMONSTRATION PURPOSES FROM MIELE & CIE KG 19 AUG,09 DATE OF RECEIPT OF CONSIGNMENT FROM MI ELE & CIE KG AGAINST INVOICE DATED 5 AUGUST 2009 22 SEPT., 09 DISTRIBUTION OF PRODUCT CATALOGUES / INFORMATION BROCHURES FOR SOLICITING CUSTOMER ORDERS THROUGHOUT THE YEAR 8 DATE OF LAUNCH OF EXPERIENCE CENTRE FOR DISSEMINATION AND ADVERTISEMENT, PUBLI CITY AND MARKETING OF PRODUCTS TO POTENTIAL CUSTOMERS (WRONGLY TREATED AS COMMENCEMENT OF BUSINESS BY THE ID. AO IN THE ASSESSMENT ORDER) 29 OCT.,09 DATE OF INVOICE RAISED ON DAWAR INTERNATIONAL ELECTRONICS PVT LTD 28 NOV.,09,& 24 DEC.,09 & ' 30 DEC., 09 13. IF THE AFORE STATED CH RONOLOGY OF EVENTS IS CONSIDERED IN THE LIGHT OF THE REMAND REPORT OF THE ASSESSING OFFICER, THERE REMAINS NO DOUBT THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS IN EARLIER ASSESSMENT YEAR. THEREFORE, EXPENSES CONSIDERED AS PRE - OPERATIVE EXPENSES BY THE ASSESSING OFFICER HAVE TO BE TREATED AS LEGITIMATE BUSINESS EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. THE FINDINGS OF THE LD. CIT(A) CANNOT BE FAULTED WITH. GROUND NO. 1 ACCORDING DISMISSED. 14, IN SO FAR AS EXPENDITU RE ON A DVERTISEMENT IS CONCERNED, THE LD. DR VEHEMENTLY STATED THAT THE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE FOR BRAND BUILDING OF ITS PRINCIPAL AND THE ASSESSING OFFICER HAS RIGHTLY TREATED THE SAME AS CAPITAL EXPENDITURE SINCE THE BENEFITS DERIVED BY THE ASSESSEE ARE OF ENDURING IN NATURE. THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE FINDINGS OF THE LD. CIT(A) AND STATED THAT 9 BY NO STRETCH OF IMAGINATION ADVERTISEMENT EXPENSES CAN BE CONSIDERED AS TANGIBLE ASSET. 15. WE HAVE HEARD THE RIVAL SUBM ISSIONS AND HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW QUA THE ISSUE. IT WOULD BE PERTINENT TO MENTION HERE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE CASE WAS REFERRED TO THE TPO AND THE TPO FRAMED ORDER U/S 92C A(3) OF THE ACT ON 09.01.2014 AND NO ADVERSE INFERENCE WAS DRAWN IN RESPECT OF I.T. NOTIFICATION BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT THE TPO WAS SATISFIED WITH T HE AMP EXPENSES INCURRED BY THE ASSESSEE AND DID NOT MAKE AN Y ADVERSE COMMENT IN SO FAR AS THE ISSUE OF BRAND BUILDING IS CONCERNED. 16. IN OUR CONSIDERED OPINION, PUBLIC MEMORY IS VERY SHORT AND, THEREFORE, THE COMPANIES HAVE TO INCUR ADVERTISEMENT EXPENDITURE YEAR AFTER YEAR TO KEEP PRODUCTS FRESH IN THE MINDS OF THE PUBLIC. IN OUR CONSIDERED OPINION, SUCH EXPENDITURE CANNOT PARTAKE THE CHARACTER OF GIVING ANY ENDURING BENEFIT. IN OUR CONSIDERED OPINION, THE ASSESSING OFFICER HAS GROSSLY ERRED IN TREATING SUCH EXPENDITURE AS INTANGIBLE 10 ASSET AND ON FACTS OF TH E CASE, THE FINDINGS OF THE LD. CIT(A) NEEDS NO INTERFERENCE. GROUND NO. 2 STANDS DISMISSED. 17 . IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO. 724 / DEL/201 6 IS DISMISSED. ORDER PRONOU NCED IN THE OPEN COURT ON 11 .0 4 .2019. SD/ - SD/ - ( K.N. CHARY ) ( N. K. BILLAIYA ) JUDICIAL MEMBER A CCOUNTANT M EMBER D ATE D : 11 T H APRIL, 20 1 9 VL COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(APPEALS) 5 . DR, ITAT ASSISTANT REGIS TRAR I TAT , NEW DELHI 11 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE O N WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER