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

ITA 917/DEL/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5482 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 09-12-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 24-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RENUKA JAIN GUPTA
• Assessee Lawyers: H P AGGARWAL; SURBHI AGGARWAL
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts; Commercial expediency; Revenue expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI S.V. MEHROTRA ITA NO. 917/DEL/2012 ASSTT. YR: 2006-07 DCIT CIRCLE 7(1), VS. M/S SCHOLASTIC INDIA PVT. LTD., NEW DELHI. 3F, M-6, UPPAL DISTRICT CENTRE, JASOLA, NEW DELHI-110024. PAN : AACCS 2858 R ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SMT. RENUKA JAIN GUPTA SR. DR RESPONDENT BY : SH. H.P. AGGARWAL ADV. & MS. SURBHI AGGARWAL ADV. O R D E R PER R.P. TOLANI, J.M: : THIS IS REVENUES APPEAL AGAINST THE ORDER OF CIT (A)-XX, NEW DELHI DATED 21-12-2011RELATING TO A.Y. 2006-07. FOL LOWING EFFECTIVE GROUNDS ARE RAISED: THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF TH E CASE IN DELETING THE ADDITION OF RS. 10,19,121/- MADE BY TH E AO ON ACCOUNT OF DISALLOWANCE OF TRANSFER PRICING. THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE ADDITION OF RS. 13,79,421/- MADE BY TH E AO ON ACCOUNT OF DISALLOWANCE OF ADVERTISING AND PUBLICIT Y EXPENSES. 2. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER. 2 3. APROPOS THE REVENUES GROUND ABOUT T.P. ADJUSTME NT, LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT THE ASSESSEE IS A HUNDRE D PERCENT SUBSIDIARY OF SCHOLASTIC INC., A US BASED MULTINATIONAL COMPANY, PRIMARILY ENGAGED IN PUBLISHING OF BOOKS. THE ASSESSEE, IN INDIA, IS A P UBLISHER AND DISTRIBUTOR OF BOOKS MAINLY CATERING TO THE MARKET OF SCHOOL GOIN G CHILDREN. THE ASSESSEE FOLLOWED TNMM METHOD TO DETERMINE THE ALP WITH ITS AE TRANSACTIONS AND IN ITS RETURN ITSELF OFFERED TO TAX AN AMOUNT OF RS . 3,31,652/- CALCULATED AT 4.88% QUA THE BULK SALE OF BOOKS TO AES. THE ASSESS EE FILED A TABULATED CHART FOR JUSTIFICATION OF THIS WORKING IN WHICH TH E NET PROFIT MARGIN AFTER ADJUSTMENT FROM A.ES CAME TO RS. 23.58% AND TO THE NON A.ES 28.46%. THE DIFFERENCE OF 4.88% AS MENTIONED ABOVE WAS THUS OFF ERED TO TAX AS T.P. ADJUSTMENT. ASSESSING OFFICER, HOWEVER, DID NOT ACC EPT THE ASSESSEES CONTENTIONS AND MADE AN ADJUSTMENT OF RS. 10,91,121 /- OVER AND ABOVE THE OFFER WHICH WAS CHALLENGED BY THE ASSESSEE IN APPEA L. 3.1. IN FIRST APPEAL, THE CIT(A) DELETED THE ADDITI ON BY FOLLOWING OBSERVATIONS: 3.5. DURING THE COURSE OF THE HEARING, THE APPELLA NT HAS ALSO PRODUCED A COPY OF THE AGREEMENTS BETWEEN THE APPELLANT AND PRAKASH BOOKS INDIA PVT. LTD., WH ICH IS AN UNRELATED ENTITY TO PROVE THAT VOLUME DISCOUN TS OR BULK DISCOUNTS ARE OFFERED TO DISTRIBUTORS OR BULK BUYERS. IN THIS PARTICULAR CASE, THE APPELLANT OFFE RS 45% DISCOUNT ON THE SELLING PRICE OF THE BOOKS. 3 IT IS A COMMON KNOWLEDGE SINCE IT IS A COMMON PRACT ICE IN THE BOOK PUBLICATION THAT VOLUME DISCOUNTS ARE G IVEN. THE VOLUME DISCOUNTS CLEARS THE INVENTORY APART FRO M INCREASING THE TURNOVER. THE POINTS RAISED BY THE ASSESSEE IN TERMS OF BED DEBTS RISKS AND CREDITORS ARE ALSO VALID BECAUSE OF THE RELATIONSHIP BETWEEN THE AE AND THE APPELLANT. THE APPELLANT HIMSELF HAD OFFERED FOR TAXATION, AFT ER MAKING A FAIR ADJUSTMENT AROUND 11.88%, ON ACCOUNT OF ALL THIS FACTORS. THESE ADJUSTMENTS WERE BASICALLY ON ACCOUNT OF BULK SALE OF BOOKS TO THE RELATED PARTY. DISCOUNT ON BULK SALE IS A FACT OF COMMERCIAL REALI TY WHICH CANNOT BE BRUSHED ASIDE. AS THE DISCOUNT S ARE VERIFIABLE AND QUANTIFIABLE WITHOUT ANY DOUBT THE ADJUSTMENTS BASED ON SUCH RELIABLE FACTS ARE CERTAI NLY REASONABLY ACCURATE ADJUSTMENTS AS ENVISAGED BY RUL E 10B(3)(II). EVEN THOUGH THE APPELLANT HAS SEGREGATE D THESE INVESTMENTS IN TERMS OF CREDIT RISK, BIG VOLU ME SALES AND SAVING ON ACCOUNT OF INVENTORY OBSOLESCEN CE, THESE ADJUSTMENTS ARE PART AND PARCEL OF 'VOLUME DISCOUNT' IN THE COMMON PARLANCE. THE VOLUME DISCOU NT IS GIVEN BASICALLY TO CLEAR OFF THE STOCK (SAVING O N ACCOUNT OF INVENTORY OBSOLESCENCE), TO REALIZE THE MONEY AT ONE GO (AVOID CREDIT RISK), HIGHER TURNOVER (BIG VOLUME SALE). THEREFORE, THE AO WAS NOT CORRECT IN DISALLOWING THE CLAIM OR VOLUME DISCOUNT AS AN ADJUSTMENT TO NORMALIZE THE DIFFERENCE BETWEEN A HU GE VOLUMINOUS SALE TO THE AE AS COMPARED TO A SMALL SA LE TO UNRELATED PARTIES. AS IT IS CLEAR FROM THE DOCUM ENTS FILED BEFORE ME THAT THE APPELLANT GIVES VOLUME DIS COUNTS AT RATE OF 45/C) EVEN AT THE LOCAL MARKET GOES TO JUSTIFY THE CLAIM OF 11.88% AS A VOLUME DISCOUNT IN INTERNATIONAL TRANSACTION. THE ADJUSTMENT PROPOSED BY THE ASSESSEE IS REASONABLY ACCURATE AND ALSO CORRESPONDS TO COMMERCIAL REALITY. THEREFORE, THE ADDITION MADE ON THIS ACCOUNT SHOULD BE DELETED. TH E AO IS DIRECTED TO DELETE THE ADDITION. THIS GROUND OF APPEAL IS ALLOWED. 4 3.2. LD. COUNSEL PLEADS THAT OFFERING OF VOLUMINOUS DISCOUNT IS A WELL KNOWN MARKET PRACTICE IN BOOK PUBLICATION AS SUCH B ULK SALES IS A WELL RECOGNIZED COMMERCIAL EXPEDIENCY INASMUCH AS THEY I NCREASE TURN OVER, REDUCE THE RISK OF OBSOLETION AND FURTHER REDUCE TH E BAD DEBT RISK IF THE TRANSACTIONS ARE WITH A.ES. THE ASSESSEE MADE A FAI R OFFER OF ADJUSTMENT OF T.P. PROFITS AS ENVISAGED BY RULE 10B(3)(II). CIT(A ) RIGHTLY HELD THAT ASSESSING OFFICER WAS NOT JUSTIFIED IN REFUSING TO ACCEPT THE EFFECT ON ADJUSTMENTS ATTRIBUTABLE TO VOLUMINOUS DISCOUNT AN D BAD DEBTS AND RISK. THESE WERE COMMERCIAL REALTIES WHICH HAVE BEEN APPR ECIATED BY CIT(A). HIS ORDER IS RELIED ON. 3.3. APROPOS GROUND NO. 2, LD. COUNSEL CONTENDS THA T THE ASSESSEE INCURRED AN AMOUNT OF RS. 91,96,144/- AS EXPENSES ON ADVERTI SEMENT AND PUBLICITY. THE ASSESSING OFFICER MADE AN AD HOC ADDITION OF 1 5% OF THE EXPENDITURE, TREATING THE SAME TO BE ATTRIBUTABLE TO BUILD UP TH E BRAND NAME WITHOUT CITING ANY COGENT REASON. ASSESSEE RELIED ON HONBLE SUPRE ME COURT JUDGMENT IN THE CASE OF EMPIRE JUTE CO. 124 ITR 4 THAT THE ADV ERTISEMENT IS QUA THE PROFIT GENERATING APPARATUS AND VARIOUS OTHER JUDGM ENTS. ASSESSING OFFICER, HOWEVER, DISALLOWED THE EXPENDITURE. 3.4. IN FIRST APPEAL THE LD. CIT(A) DELETED THE ADD ITION BY FOLLOWING OBSERVATIONS: 5 THE LAW HAS SETTLED ON THE ISSUE OF ADVERTISEMENT AND PUBLICITY EXPENSES. THERE ARE VARIOUS JUDGMENTS INCLUDING THA T OF CORE HEALTH LTD. (SUPRA) OF THE GUJARAT HIGH COURT. THE VERY FACT THAT THE APPELLANT IS INCURRING THE ADVERTISEMENT E XPENSES EVERY YEAR SHOWS THAT THE IMPACT OF THE ADVERTISEME NT IS LOST SOON AFTER SUCH ADVERTISEMENT ARE UNDERTAKEN. THERE FORE, THERE IS NO JUSTIFICATION FOR DISALLOWING SUCH EXPENSES A S BEING ENDURING IN NATURE. FURTHER, THE AO HAS NOT GIVEN A NY JUSTIFICATION TO TREAT SOME PART OF THE EXPENSES, O N AN AD HOC BASIS AS GIVING ENDURING BENEFIT AND TO HOLD THAT I T GOES TO BUILD THE BRAND. THEREFORE, THE AO IS DIRECTED TO DELETE THE ADDITION MADE IN THIS REGARD. 3.5. LD. COUNSEL CONTENDS THAT IN BOOK PUBLICATION BUSINESS HUGE AMOUNT ON PUBLICITY AND ADVERTISEMENT IS TO BE INCURRED TO PROMOTE VARIOUS TITLES, THE CONTENTS OF BOOKS ARE TO BE ADVERTISED AND SENT TO VARIOUS SCHOOLS, CURRICULUM BOARDS AND AFFILIATION BODIES. THUS TH E OVERALL ADVERTISEMENT IS FOR THE PURPOSE OF PROMOTION OF ASSESSEES INCOME G ENERATING APPARATUS AND THUS THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE MILLS (SUPRA) IS SQUARELY APPLICABLE TO ASSESSEES CASE ON THIS COUNT. 3.6. LD. COUNSEL FURTHER CONTENDS THAT IN THE RECEN T JUDGMENT IN THE CAE OF CIT VS. CITI FINANCIAL CONSUMER FINANCE LTD. (ITA N O. 1820/2010, 1974/2010, 01/2011, 05/2011 DATED 30-3-2011), THE H ONBLE DELHI HIGH COURT RELYING ON CATENA OF JUDGMENTS HELD AS UNDER: APPLYING THE AFORESAID PRINCIPLE TO THE FACTS OF T HIS CASE, IT CLEARLY EMERGES THAT THE EXPENDITURE ON PUBLICITY A ND ADVERTISEMENT IS TO BE TREATED AS REVENUE IN NATURE ALLOWABLE FULLY IN THE YEAR IN WHICH IT WAS INCURRED. CONCEDE DLY THERE IS 6 NO ADVANTAGE WHICH HAS ACCRUED TO THE ASSESSEE IN T HE CAPITAL FIELD. THE EXPENDITURE WAS INCURRED TO FACILITATE T HE ASSESSEES TRADING OPERATIONS. NO FIXED CAPITAL WAS CREATED BY THIS EXPENDITURE. WE MAY ALSO ADD HERE THAT IN THE INCOM E-TAX LAWS, THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE . ONCE THE ASSESSEE CLAIMS THE DEDUCTION FOR WHOLE AMOUNT OF S UCH EXPENDITURE, EVEN IN THE YEAR IN WHICH IT IS INCURR ED, AND THE EXPENDITURE FULFILLS THE TEST LAID DOWN UNDER SECTI ON 37 OF THE ACT, IT HAS TO BE ALLOWED. ONLY IN EXCEPTIONAL CASE S, THE NATURE MENTIONED IN MADRAS INDUSTRIAL CORPORATION (SUPRA), THE EXPENDITURE CAN BE ALLOWED TO BE SPREAD OVER, THAT TOO, WHEN THE ASSESSEE CHOOSES TO DO SO. 4. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. APROPOS T.P. ADJUSTMENTS, THERE IS MERIT IN THE ARGUMENT OF LD. COUNSEL FOR THE ASSESSEE THAT BULK DISCOUNT AND RED UCE BAD DEBT LIABILITY RISK WITH AES IS WELL KNOWN FACTOR AND IS TO BE CONSIDER ED WHILE MAKING T.P. ADJUSTMENTS. IN VIEW THEREOF CIT(A) HAS RIGHTLY APP RECIATED THE ISSUE AND HELD THAT THE SUO MOTU OFFER OF ADJUSTMENT BY ASSES SEE AT 4.88% AS NET PROFIT MARGIN ADJUSTMENT WAS REASONABLE. THE CIT(A)S ORDE R BEING BASED ON SOUND REASONING AND PROPER APPRECIATION OF FACTS, N EEDS NO INTERFERENCE, WHICH IS UPHELD. THIS GROUND OF THE REVENUE IS DISM ISSED. 4.1. APROPOS ADVERTISEMENT ALSO ASSESSING OFFICER HAS NOT GIVEN ANY RATIONAL BASIS OR COGENT REASONS TO COME TO A CONCL USION THAT 15% AD HOC OF THE TOTAL EXPENDITURE ON PUBLICITY & ADVERTISEMENT WAS ATTRIBUTABLE TO BRAND BUILDING. LD. CIT(A) HAS RIGHTLY HELD THAT THE EXPE NDITURE HAS BEEN INCURRED 7 ON PROFIT GENERATING APPARATUS OF THE ASSESSEE. RES PECTFULLY FOLLOWING HONBLE SUPREME COURT JUDGMENT IN THE CASE OF EMPOR IUM JUTE CO. LTD. AND CITI FINANCE (SUPRA) WE UPHOLD HIS ORDER. THIS GROU ND OF THE REVENUE IS DISMISSED. 5. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30-01-2014. SD/- SD/- ( S.V. MEHROTRA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: _30-01-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR