Income Tax Appellate Tribunal - Chandigarh
Glaxo Smithkline Consumer Healthcare ... vs Assessee on 17 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'A', CHANDIGARH
BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.931 /Chd/2009
(Assessment Year: 2006-07)
M/s Glaxo Smithkline Consumer Vs. The A.C.I.T.
Healthcare Ltd., Patiala Road. Range IV
Nabha. Chandigarh.
PAN: AACCS0144E
ITA No.256 /Chd/2011
(Assessment Year: 2007-08)
M/s Glaxo Smithkline Consumer Vs. The Addl.C.I.T.
Healthcare Ltd., Patiala Road. Range IV
Nabha. Chandigarh.
PAN: AACCS0144E
ITA No.83 /Chd/2012
(Assessment Year: 2008-09)
M/s Glaxo Smithkline Consumer Vs. The Addl.C.I.T.
Healthcare Ltd., Nabha. Range IV
DLF Plaza Tower Chandigarh.
DLF City Phase-1,
Gurgaon.
PAN: AACCS0144E
(Appellant) (Respondent)
Appellant by : Shri Rohit Jain
Respondent by : Shri N.K.Saini, DR
Date of hearing : 17.05.2012
Date of Pronouncement : 19.07.2012
O R D E R
PER SUSHMA CHOWLA, J.M, :
These three appeals filed by the assessee are against the separate orders of the Commissioner of Income-tax(Appeals), chandigarh dated 1 0 . 7 . 2 0 0 9 , 3 0 . 9 . 2 0 1 0 a n d 3 0 . 1 1 . 2 0 0 9 r e l a t i n g t o a s s e s s m e n t ye a r s 2 0 0 6 - 07, 2007-08 and 2008-09 against the order passed u/s 115WE(3) of the Income Tax Act, 1961 (in short 'the Act').
2
2. All the three appeals relating to the same assessee on same issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
3. The assessee in ITA No.931/Chd/2011 has raised the following grounds of appeal:
1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of assessing officer in assessing the taxable value of fringe benefits at Rs. 16,16,64,428 against returned value of fringe benefits of Rs.9,97,91,424.
2. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on freebies like badminton rackets, biscuits, etc., amounting to Rs.24,11,16,498 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of 'sales promotion and publicity' under the provisions of section 115WB(2)(D) of the Income Tax Act, 1961 ('the Act').
3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on samples of company's products given free to the customers amounting to Rs.5,97,20,311 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of 'sales promotion and publicity' under the provisions of section 115WB(2)(D) of the Act.
4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on celebrity endorsement for advertisement amounting to Rs.85,28,219 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of 'sales promotion and publicity' under the provisions of section 115WB(2)(D) of the Act.
5. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the levy of interest under section 234D and in withdrawing interest granted under section 244 A of the Act.
4. The assessee in ITA No.256/Chd/2011 has raised the following grounds of appeal:
1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in 3 confirming the action of assessing officer in assessing the taxable value of fringe benefits at Rs. 15,27,59,108 against returned value of fringe benefits of Rs.9,15,81,054.
2. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on freebies like badminton rackets, biscuits, etc., amounting to Rs.28,44,30,865 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of "sales promotion and publicity' under the provisions of section 115WB(2)(D) of the Income Tax Act, 1961 ('the Act').
3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on samples of company's products given free to the customers amounting to Rs.2,14,59,405 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of" sales promotion and publicity' under the provisions of section 115WB(2)(D) of the Act.
4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the levy of interest under section 234D and in withdrawing interest granted under section 244 A of the Act."
5. The assessee in ITA No.83/Chd/2012 has raised the following grounds of appeal:
1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of assessing officer in assessing the taxable value of fringe benefits at Rs. 13,84,27,204 against returned value of fringe benefits of Rs. 7,89,72,761.
2. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on freebies like badminton rackets, biscuits, etc., amounting to Rs. 29,71,52,606 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of 'sales promotion and publicity' under the provisions of section 115WB(2)(D) of the Income Tax Act, 1961 ('the Act').
3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in treating the expenditure incurred on samples of company's products given free to the customers amounting to Rs. 1,19,610 as liable to fringe benefit tax alleging the same to have been incurred for the purpose of "sales promotion and publicity' under the provisions of section 115WB(2)(D)of th e Act."4
6. All the three appeals relating to the same assessee on same issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
7. The issue raised in the present appeal is in relation to the tax value of fringe benefit computed under the provisions of Chapter XII-H of the Income Tax Act.
8. The facts in the captioned appeals are similar. However, reference i s m a d e t o t h e f a c t s i n a s s e s s m e n t ye a r 2 0 0 6 - 0 7 t o a d j u d i c a t e t h e i s s u e .
9. The brief facts of the case are that the assessee is engaged in the manufacture and sale of healthcare and food products. D u r i n g t h e ye a r under consideration the assessee had filed return of fringe benefits on 29.11.2006 declaring total value of fringe benefits at Rs.9,97,91,424/-.
During the course of assessment proceedings the Assessing Officer noted that in column-6 of Schedule-XVII, the assessee had treated the expenditure on sale promotion amounting to Rs.5,54,68,148/- as fringe benefits under section 115WB(2)(D) and had shown the value of fringe benefits at Rs.1,10,93,630/-. The Assessing Officer on the perusal of the Profit & Loss Account noted that the assessee had not treated the expenditure on freebies expenditure and cost of samples of companies own products given free to customer on purchase of its products and expenditure on celebrity endorsement as fringe benefits 115WB(2)(D) of the Act. The explanation of the assessee why the said items are not to be treated as fringe benefits is reproduced under para 2.1 at pages 3 to 6 of the assessment order. The Assessing Officer in respect of expenditure on freebies observed that clause(D) of section 115WB(2) of the Act provided for levy of tax on fringe benefits in respect of expenditure incurred on sale promotion including publicity and only exceptions were detailed in the Act itself. The Assessing Officer referred to the meaning of sales promotion and also Circular No.8/2005 dated 29.8.2005 under which it has been clearly stated that any expenditure on free offers, 5 p r o d u c t s s u c h a s f r e e b i e s t o t r a d e s o r c o n s u m e r s ( e x c l u d i n g e m p l o ye e s ) was for the purpose of sale promotion and publicity and accordingly liable to Fringe Benefit Tax (FBT). A c c o r d i n g l y, t h e e x p e n d i t u r e o f Rs.24.11 crores incurred on freebies was deemed fringe benefits under t h e p r o v i s i o n s o f s e c t i o n 1 1 5 W B ( 2 ) ( D ) o f t h e A c t . S i m i l a r l y, t h e c o s t o f samples of company's products given to the customers upon purchase of c o m p a n y' s o w n p r o d u c t s a m o u n t i n g t o R s . 5 . 9 7 c r o r e s w a s h e l d t o b e expenses on sales promotion and publicity and, therefore, liable to FBT. The Assessing Officer further held the expenditure on celebrity endorsement amounting Rs.85,28,129/- as not falling within the exception and to be treated as deemed fringe benefits under the provisions of section 115WB(2)(D) of the Act. The Assessing Officer computed the value of fringe benefits at Rs.16,16,64,428/-.
10. T h e C I T ( A p p e a l s ) r e l yi n g o n t h e C i r c u l a r N o . 8 o f 2 0 0 5 , F A Q No.66 held the same to be applicable to the facts of the case. The CIT (Appeals) observed that the expenditure if increases the consumer base then it would come within the meaning of sale promotion. Reliance was placed on the ratio laid down by the Chandigarh Bench of the Tribunal in the case of Glaxo Smithkline Consumer Healthcare [112 TTJ 94 (Chd) wherein while deciding the issue whether the product development expenditure were capital in nature or revenue in nature, it was held that promotion and trade marketing expenses incurred on existing products of the assessee and including cost of presentation items, gifts, etc. given to the customers on the sale of products, was expenditure on advertisement material and were revenue in nature. The product development expenses were also held to be revenue in nature by the Tribunal. The CIT (Appeals) further placed reliance on another decision of the Chandigarh Bench of the Tribunal in Meera & Compan y [15 ITD 227 (Chd) and also t h e j u d g e m e n t o f H o n ' b l e M a d r a s H i g h C o u r t i n P r i n t S ys t e m P r o d u c t [243 ITR 8 (Mad)] wherein it was held that the consumer gifts offered to the customers were to invite their attention to the products, for 6 increasing the sales of the products and were sales promotion expenses, which were not directly related to any single sale. The CIT (Appeals) further held that the reliance of the Assessing Officer on the Circular for taxing the expenditure income on freebies liable to FBT was rightly applied. Similar findings were given b y the CIT (Appeals) in respect of celebrity endorsement and order of the Assessing Officer was thus upheld b y the CIT (Appeals).
11. The assessee is in appeal against the order of the CIT (Appeals). The learned A.R. for the assessee pointed out that section 115WA was the charging section and the term fringe benefits was defined under section 115WB. It was further pointed out that under section 115WB(1) t a x w a s o n t h e b e n e f i t p r o v i d e d b y t h e e m p l o ye r t o t h e e m p l o ye e s a n d under section 115WB(2) tax was on various items defined under the said s u b - s e c t i o n , g i v i n g b e n e f i t s t o t h e e m p l o ye e s . The learned A.R. for the a s s e s s e e p o i n t e d o u t t h a t d e e m i n g f i c t i o n c r e a t e d c o u l d n o t g o b e yo n d the charging section. The next submission of the learned A.R. for the assessee was that memorandum explaining the Finance Bill which had introduced Chapter of fringe benefits reported in 273 ITR (St) 60 at page 196 pointed out that what the Legislature wanted to tax was where there c o l l e c t i v e b e n e f i t s o f t h e e m p l o ye e s a n d i t c o u l d n o t b e e x t e n d e d t o t h e whole of the expenditure. The learned A.R. for the assessee further submitted that because of the fact that particular percentage was fringe benefits, the whole of the expenditure could not be considered for fringe benefits. Reliance was placed on the decision of Delhi High Court in the case of T & T Motors Ltd. [341 ITR 332 (Del)] and on the decision of Mumbai Bench of the Tribunal in the case of DCIT Vs. Kotak Mahindra Old Mutual Life Insurance Ltd. [134 ITD 288 (Mum)]. The learned A.R. for the assessee further pointed out that the discount by way of freebies was given for purchasing products of t h e c o m p a n y, w h i c h was sales discount and in the absence of any purchase, no concession or discount was given by the assessee. Such expenditure could not be held 7 t o be sale promotion as the sale promotion expenses had to be expended irrespective of the customers purchasing the goods. In respect of the other freebies given, the plea of the learned A.R. for the assessee was t h a t t h e s a m e w e r e n o n e - c o m p a n y p r o d u c t s a n d n o n e o f t h e e m p l o ye e s were given the said products. It was stressed by the learned A.R. for the assessee that the said freebies were sales discount given by the assessee company and were not sale promotion expenses, which had to be incurred before the sales. In respect of the celebrity endorsement it was pointed out that by way of insertion w.e.f. 1.4.2007, the payment to celebrity was excluded from the purview of sale promotion under section 115WB(D)(7). The learned A.R. for the assessee placed reliance on the decision of Delhi Bench of the Tribunal in the case of Glaxo Smithkline A s i a P v t . L t d . V s . D C I T r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 6 - 0 7 i n I T A No.1357/Del/2010, order dated 25.11.2011, in this regard.
12. The learned D.R. for the Revenue placed reliance on the observations of the Assessing Officer and the CIT (Appeals) and pointed out that the expenditure incurred by the assessee was sale promotion expenses and consequently included in the value fringe benefits. Further reliance was placed on the observation of the CIT (Appeals) at page 4 in paras 6 to 8 wherein the claim of the assessee in respect of product development expenses was that the same was in the nature of revenue expenses.
13. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the computation of fringe benefits. Under section 115WA of the Act it has been provided that in addition to the income tax charged under the Act, additional income tax by way of FBT in respect of fringe benefits provided or d e e m e d t o h a v e b e e n p r o v i d e d b y a n e m p l o ye r t o h i s e m p l o ye e s , d u r i n g t h e p r e v i o u s ye a r , i s t o b e c h a r g e d @ 3 0 % o n t h e v a l u e o f s u c h f r i n g e benefits. It has been further provided under section 115WA(2) of the 8 A c t t h a t n o t w i t h s t a n d i n g w h e r e n o i n c o m e t a x i s p a ya b l e b y a n e m p l o ye r on his total income computed under the Act, the tax on fringe benefits s h a l l b e p a ya b l e b y s u c h e m p l o ye r .
14. Fringe benefits is defined under section 115WB of the Act. Sub- section (1) to section 115WB of the Act relates to the consideration p r o v i d e d b y t h e e m p l o ye r t o i t s e m p l o ye e s f o r e m p l o y m e n t a s p r o v i d e d in clauses (a) to (d) under the said sub-section. Under sub-section 2 to section 115WB are deeming provisions under which the fringe benefits s h a l l b e d e e m e d t o h a v e b e e n p r o v i d e d b y a n e m p l o ye r t o h i s e m p l o ye e s . Sub-section (2) to section 115WB entails the provisions of the benefits b y a n e m p l o ye r t o h i s e m p l o ye e s , i f t h e e m p l o ye r h a d i n t h e c o u r s e o f c a r r yi n g o n h i s b u s i n e s s i n c u r r e d a n y e x p e n d i t u r e o r m a d e a n y p a ym e n t for the underline purpose as provided in clauses (A) to (Q) under the said sub-section. The said sub-section prior to its amendment by the Financial Act 2006 w.e.f. 1.4.2007 read as under:
(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 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:--
Xxxxxxxx (D) sales promotion including publicity:
Provided that any expenditure on advertisement,--
(i) being the expenditure (including rental) on advertisement 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 te participation in, any press conference or business convention, fair or exhibition;
(iii) being the expenditure on sponsorship of any sports event or any other event organised by any Government agency or trade association or body;
(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 spectaculars, 9 kiosks, hoardings, bill boards [, display of products] or by way of such other medium of advertisement;
(vi) being the expenditure by way of payment to any advertising agency for the purposes of clauses (i) to (v) above;
shall not be considered as expenditure on 'sales promotion' including publicity;
..........................................
15. The issue arising in the present appeal before us is in relation to the expenditure incurred by the assessee on freebies including like badminton racket, etc., amounting to Rs.24,11,16,498/- were fringe benefits incurred by the assessee for the purposes sale promotion and p u b l i c i t y. T h e s e c o n d i s s u e a r i s i n g i n t h e p r e s e n t a p p e a l i s i n r e l a t i o n t o t h e e x p e n d i t u r e i n c u r r e d o n s a m p l e s o f c o m p a n y' s p r o d u c t s g i v e n f r e e t o the customers amounting to Rs.5,97,20,311/- being incurred for the p u r p o s e s s a l e p r o m o t i o n a n d p u b l i c i t y. The third issue arising in the appeal is in respect of expenditure incurred on celebrity endorsement for advertisement amounting to Rs.85,28,219/- also having incurred for the purposes sale promotion and publicity. Both the Assessing Officer and CIT (Appeals) are of the view that the above said items of expenditure were liable to FBT being incurred for the purposes sale promotion and publicity under the provisions of section 115WB(2)(D) of the Act.
16. The first aspect of the issue to be considered is the meaning of e x p r e s s i o n ' s a l e p r o m o t i o n a n d p u b l i c i t y' f a l l i n g w i t h i n t h e s c o p e o f t h e deemed fringe benefits. Admittedly the expression 'sale promotion' is nowhere defined or explained under the Act. The maining of the term promotion and sale promotion as provided in various dictionaries reads as under:
- The Oxford English Dictionary defines the term "promotion" to mean "activity that supports or encourages; the publicizing of a product or celebrity."
- Advanced Law Lexicon, 3rd Edition, 2005 defines 'sales promotion' as "Marketing activities that stimulate consumer purchasing and dealer effectiveness through a combination of personal selling, advertising and all supplementary selling activities. (Advertising law)" 10
- The meaning of the word "promote" has been given in Webster's New World Dictionary, 2nd edition, as under:
"I. To raise or advance to a higher position or rank (promoted to a foremanship). 2. To help bring about or further the growth or establishment of (to promote the general welfare), 3. To further the popularity, sales, etc., by publishing and advertising (to promote a product), 4. (slang) to clear (something) by devious or cunning means, 5. To move forward a grade in school."
17. The Courts had interpreted the meaning of expression sale promotion as used in section 37(3B) of the Act under which certain disallowances were to be made on account of expenditure on sale promotion. While interpreting the expression 'sale promotion' the Courts have also distinquished between the expression 'sale promotion' and selling expenses. We make reference to various judgments on the issue hereunder:
i) CIT Vs. The Statesman Ltd.
[198 ITR 582 (Cal)]
"The expression 'sales promotion' used in section 37(3B), though one of wide amplitude is not defined. It has, therefore, to be understood in its meaning in the setting in which it occurs. 'Sales promotion' necessarily involves an element of advertisement and publicity. A manufacturer of a product may intend to further the popularity or sales by publishing and advertising or by several other modes, but the cost incurred to sell the product will not come within the purview of the 'sales promotion'
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Where the statute imposes restriction on advertisement, publicity and sales promotion, the expression 'sales promotion' cannot include the selling expenses incurred in the ordinary course of the business. "
ii) CIT Vs. Indo Asian Switchgears (P) Ltd.
[257 ITR 645 (P &H)] "However, a discount allowed by an assessee to an agent is not an expense in connection with the publicity or advertisement, etc. It is an amount forgone by the assessee in favour of the dealer for effecting the actual sale. It is not like the fashion show conducted by a garment manufacturer, but a commission allowed to a dealer. Trade discount cannot be treated as a wasteful expenditure incurred by an assessee in connection with sales promotion. It is not a gift as given on a festival or a free sample as distributed by a pharmaceutical company to the doctors 11 but an actual commission allowed or paid to a dealer. It does not fall within the mischief of section 37(3A)."
ii) Usha International Ltd. Vs. ACIT
1995) 53 TTJ (Del) 408]
"9. Ground No. 5 talks of treating discount given to dealers on sale of diesel engines as in the nature of sales promotion. Since it is not disputed that these are discounts allowed to dealers that too on sale of diesel engines only, they could not partake the character of sales promotion. We, accordingly, delete its inclusion for section 37(3A) of the Act.
10. In ground No. 6, the claim is in regard to various types of discounts allowed to dealers and customers and selling commission paid to employees treated by the authority as in the nature of sales promotion. For the reasons mentioned in ground No. 5, we delete inclusion of these items for disallowance under section 37(3A) of the Act."
18. Coming to the provisions of section 115WB(2) of the Act we find that the said deeming provisions have been introduced where certain e x p e n d i t u r e h a s b e e n i n c u r r e d b y t h e e m p l o ye r i n t h e c o u r s e o f h i s c a r r yi n g o f t h e b u s i n e s s a n d t h e s a m e w o u l d b e d e e m e d t o h a v e b e e n p r o v i d e d b y t h e e m p l o ye r t o h i s e m p l o ye e . Sub-section (1) to section 115WB of the Act which defines fringe benefits for the purposes of C h a p t e r - X I I - H i . e . a n y c o n s i d e r a t i o n f o r e m p l o ym e n t p r o v i d e d b y t h e e m p l o ye r t o h i s e m p l o ye e , w o u l d g o v e r n t h e d e e m i n g p r o v i s i o n s l a i d down in sub-section (2) to section 115WB of the Act. Any expenditure incurred by an assessee which is not in the consideration of the e m p l o ym e n t p r o v i d e d b y t h e e m p l o ye r t o h i s e m p l o ye e , w o u l d n o t b e considered as fringe benefits within the meaning of section 115WB of the Act. We find support from the ratio laid down by the Mumbai Bench of the Tribunal in DCIT Vs. Kotak Mahindra Old Mutual Life Insurance Ltd. (2012) 134 ITD 388 (Mumbai) wherein it has been held as under:
"10. Sub-section (2) of section 115WB is a deeming provision where certain expenditures incurred by the employee, fringe benefit are deemed to have been provided by the employer to his employee. In our opinion, sub-section (1) of section 115WB which defines "fringe benefit" under Chapter-XII-H, control sub-section (2) and any expenditure incurred by an employer in the course of his business or profession, which is not a consideration for employment, cannot be considered as "fringe benefit".
Thus, the deeming provisions of sub-section (2) of section 115WB, applies only when the expenditure is in the nature of considered for employment. Thus, while restoring the issue back to the file of Assessing Officer for adjudication afresh, we direct the Assessing Officer to apply the proposition of law as interpreted by us while determining the value of 12 fringe benefit. On the issue of expenditure incurred on conference and meetings, the Assessing Officer shall consider bifurcation submitted to him with respect to the expenditure incurred on the agents and brokers and pass appropriate orders. "Fringe benefit" cannot arise when expenditure is incurred on persons who are not employees. On the issue of club membership fee, the payments made to LIMRA and Actuarial Society of India, are to be excluded as they are not payments to clubs. With these observations, we restore the issue back to the file of Assessing Officer for adjudication afresh." (underline provided by us)
19. Further before the Hon'ble Delhi High Court in T & T Motors Ltd. Vs. ACIT (2012) 341 ITR 332 (Delhi) the issue deliberated upon was the cost of accessories provided fee of cost to the customers who purchased car and whether the same was an item of hospitality or sale promotion liable to FBT. The Hon'ble High Court observed as under:
"13. Clause (D) to Section 115WB(2) stipulates that sales promotion including publicity are deemed to be fringe benefit. The term 'sales promotion' and 'publicity' have to be interpreted. These terms have not been specifically defined for the purpose of this Section and, therefore, we have to read them and understand them as used in common parlance or popular sense and then interpret the words 'sale promotion' and 'publicity' with reference to the provisions and the context in which they have been used. Interpretation based upon normal day to day usage and common man understanding of the said terms has to be kept in mind. Both the terms contemplate, expenditure incurred on efforts made to promote sales which can take various forms but are not limited to mere publication or advertisements in media but would include varied activities which can be understood and treated as sales promotion or publicity expenses.
14. In Smith Kline & French (India) Ltd. v. CIT, [1992] 193 ITR 582/[1991] 59 Taxman 387 (Kar.), it has been held that in normal commercial sense and in common parlance sales promotion and publicity are activities to gain goodwill in market. These need not be confined to the act of media propaganda but can involve indirect approaches. In CIT v. Statesman Ltd. [1992] 198 ITR 582 /[1993] 70 Taxman 267 (Cal.), it was observed that the term 'sales promotion' occurring under Section 37(3A), necessarily should involve the element of publicity and advertisement to popularize or increase sales.
15. The Supreme Court in ESKAYEF v. CIT, [2000] 6 SCC 451, approved the view taken in Smith Kline & French India Ltd. case (supra) and held that in the case of prescription drugs, the target of any sale promotion would only be the doctors and distribution of samples of drugs to doctors was to make them aware that such drugs were available in the market and they should prescribe them in appropriate cases. This would tantamount to publicity and sales promotion. The Supreme Court did not approve the view taken in CIT v. Ampro Food Products, [1995] 215 ITR 904 (AP), wherein distinction was drawn between bare minimum expenses to carry on the trade [which was followed in CIT v. J&J Dechane Laboratories (P) Ltd., [1996] 222 ITR 11 (AP)] and expenditure under the head advertisement and publicity or sales promotion.
16. The object and purpose behind FBT and Section 115WB(2)(D) is different from Section 37(3A). Expenditure incurred as stipulated in 13 clause (i) to (viii) have to be excluded and not to be treated as sales promotion expenditure including publicity. Clause (vii) to Section 115WB(2)(D) expressly stipulates that expenditure on distribution of sample either free of cost or at concessional rate is not sales promotion or publicity for FBT."
20. The Hon'ble High Court further held as under:
"17. A careful reading of clause (i), (ii), (iv), (v), (vi) and (viii) of Section 115WB(2)(D) elucidates that the legislature has excluded from FBT expenditure in form of payments to third persons. The exemption in these clauses, it is apparent, has been granted because this is not a fringe benefit which is enjoyed by the "employee/recipient" but it is an expenditure incurred for the purpose of business and the payment is income earned by the third party. In the hands of the said recipient the expenditure is taxable as income earned."
21. The Hon'ble Delhi High Court further relied upon the ratio laid down as under:
"18. We may reproduce the following observations of Madras High Court in Tuticorin Alkali Chemicals & Fertilizers (supra ), wherein it has been held as under:-
"The term "sales promotion" is not to be confused with the sales actually effected. While "sales promotion" are measures taken by the assessee to promote generally the sales of the products manufactured by it, or dealt with by it, individual sales made in the normal course of business on commercial terms either directly to the customer, or through its wholesale and other dealers to whom, under the terms of trade discounts and commissions are allowed, cannot be regarded as sales promotion. This court in the case of CIT v. India Pistons Ltd. [20011 250 ITR 279 has held that sale of a product at a discount did not amount to a sales promotion expense. It was observed in that judgment that:
"The sales promotion normally refers to an activity which is intended to promote the sale of all the products by way of advertisement or special campaigns. Offering a discount on the price in effect is only an instant of the sale of the company's product at a lower price and cannot be regarded as expenditure on sales promotion.""
19. On the basis of factual matrix on record and as found by the Assessing Officer, we are of the view that the expenditure incurred on accessories which were supplied to customers who have purchased cars cannot be treated as sale promotion including publicity expenses under clause (D). In the present case, the said expenditure cannot be categorized as expense incurred for promotion of sales with a view to gain publicity and popularize the product. The customers in the present case have purchased the cars, they have paid money or sale consideration for purchase of cars. As a sales package, the appellant has provided and given some accessories for which no independent or additional charge has been levied. The customer, however, in actual fact has paid for the said accessories as the cost of the accessories is inbuilt in the sale consideration paid by the customer. Only when a customer pays the sale consideration, some accessories are provided and fixed in the car as per mutual agreement or on the request made by the customer. Until and unless a customer purchases a car, no accessories are provided or furnished. The customer was not given a largesse but was offered and has managed to get a better deal for the consideration paid. 14 The customer has paid out his of pocket, but he has bargained and secured a favourable deal. The interpretation suggested by the Revenue is contrary to the interest of the customers or public interest. The interpretation as suggested by the Revenue would mean that the car dealer would have to pay FBT, if he enters into and gives a better deal to the customer who purchases a car with extra fitments and accessories. We do not think that it is the intention of the legislature to impose FBT on the car dealer who offers a better deal with fitments and accessories to a customer who is making payment for purchase of the car in question. (underline provided by us)"
22. In the facts of the present case before us the assessee has offered freebies to its customers upon purchase of company's products i.e. horlicks, boost. The said products are given to the customers at the time when the customers purchase assessee's products and the same is akin to sale discount given by the assessee to its customers and consequently the same was sales expense in the hands of the assessee. By way of offering freebies, the assessee had received lesser margin of profits and such expenditure is not in the nature of sale promotion expenses. Following the ratio laid down by the Hon'ble Delhi High Court in T & T Motors Ltd. (supra), we are of the view that the expenditure incurred by the assessee on freebies amounting to Rs.24.11 crores is not a fringe benefits covered under the provisions of section 115WB(2)(D) of the Act. Similarly the expenditure incurred by way of giving samples of c o m p a n y' s p r o d u c t s f r e e t o t h e c u s t o m e r s a l o n g w i t h s a l e o f p r o d u c t s o f the assessee company was in the nature of sale expense and cannot be included as fringe benefits under section 115WB(2(D) of the Act.
23. The third issue raised in the present appeal is in relation to the treatment of expenditure incurred on celebrity endorsement for advertisement being treated as sale promotion or publicity. We find that the said issue is covered by the ratio laid down by the Delhi Bench of the Tribunal in Glaxo Smithkline Asia Pvt. Ltd. Vs. DCIT (ITA N o . 1 3 5 7 / D e l / 2 0 1 0 ) r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 6 - 0 7 , w h e r e i n v i d e order dated 25.11.2011 it has been held that the said expenditure does n o t c o m e u n d e r t h e p u r v i e w o f s a l e p r o m o t i o n i n c l u d i n g p u b l i c i t y. Following the same we hold that the expenditure of Rs.85,28,219/- 15 incurred by the assessee on celebrity endorsement for advertisement of its products is not liable to FBT under the provisions of section 115WB(2(D) of the Act.
24. The Assessing Officer while disallowing the claim of the assessee had placed reliance on the Circular No.8 of 2005 dated 29.8.2005 under which in response to FAQ No.66 it has been stated that any expenditure on free offers such as freebies or similar products to trader or consumer was for the purposes of sale promotion and publicity and accordingly liable to FBT. We find that the said Circular being contrary to the express language of the Statute is not binding. Mere reliance on the said Circular by the Assessing Officer to disentitle the assessee of its claim is unwarranted, in view of the express provisions of section 115WB(2(D) of the Act.
25. Further the CIT (Appeals) while upholding the order of the Assessing Officer had relied upon the decision of the Chandigarh Bench of the Tribunal in the case of the assessee itself reported in 112 TTJ 94(Chd) (supra) the issue before the Tribunal was two folds i.e. A) allowability of the expenditure on promotional and trading marketing ex penses and; B) product development expenses. The CIT (Appeals) has reproduced the findings of the I.T.A.T. at pages 6 to 8 of the appellate order. The perusal of the said findings of the Tribunal reflect that the promotional and trading marketing expenses including the expenditure of boost, badminton racket, tennis ball, etc. and product development expenses for nutribar chocolate. The Tribunal vide para 9 referred to the promotional and trade marketing expenses and observed that Such expenditure has been incurred on existing products of the assessee and include cost of presentation items, gifts, etc. given to the customers on the sale of the product, expenditure on advertisement material etc. The expenditure can be viewed as if actuality discount in-kind allowed to the 16 customers and expenditure on advertisement of the existing products of the assessee.
26. The product development expenses were referred in para 10 of the order of the Tribunal and the said expenses were held to be revenue in nature. The observation of the CIT (Appeals) that the assessee had made certain arguments that the product development expenses were necessary for increasing profitability of the assessee and now the assessee was taking contradictory stand that such expenditure was reducing its profits is irrelevant as the expenditure booked on freebies was under the head promotional and trade marketing expenses and not under the product development expenses, The two items of expenditure have been separately dealt in by the Tribunal vide paras 9 and 10 as reproduced by the CIT (Appeals) itself in its order at pages 7 and 8 of the appellate order.
27. The next objection of the CIT (Appeals) was because of the j u d g m e n t o f H o n ' b l e M a d r a s H i g h C o u r t i n P r i n t s S ys t e m P r o d u c t s [ 2 4 3 ITR 8 (Mad)] wherein it has been held that the terms publicity and sale promotion had wide amplitude and expenditure incurred on fashion show, consumer gifts and free samples and gifts within the ambit of section 37(3) of the Act, we find that the Jurisdictional High Court in CIT Vs. Indo Asian Switchgears (P) Ltd. (supra) have held to the contrary and we are bound by the Jurisdictional High Court. Further the issue raised in the present appeals i.e. computation of fringe benefits is deliberated upon b y the Hon'ble Delhi High Court in T & T. Motors Ltd. Vs. ACIT (supra). In view thereof, we direct the Assessing Officer to allow the expenditure incurred on freebies amounting to Rs.24.11 crores, samples of c o m p a n y' s products amounting to Rs.5.97 crores and celebrity endorsement amounting to Rs.85.28 lacs not being fringe benefits liable to FBT. The grounds of appeals No.1 to 4 raised b y the assessee in ITA No.931/Chd/2009 are thus allowed.17
28. The issue in ground No.5 i.e. charging of interest under section 234D and withdrawing of interest 244A of the Act being consequential is dismissed.
29. The facts in ITA No.256/Chd/2011 and ITA No.83/Chd/2012 are similar to the facts in ITA No.931/Chd/2009. Our decision in ITA No.931/Chd/2009 shall apply mutatis and mutandis to ITA No.256/Chd/2011 and ITA No.83/Chd/2012.
30. In the result, all the appeals of the assessee are allowed.
O r d e r p r o n o u n c e d i n t h e o p e n c o u r t o n t h i s d a y o f 1 9 t h J u l y, 2 0 1 2 .
Sd/- Sd/-
(T.R.SOOD) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated 19 t h Jul y, 2012
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh