Income Tax Appellate Tribunal - Delhi
Swarovski India Pvt. Ltd., New Delhi vs Acit, New Delhi on 2 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 4080/DEL/2013 (A.Y 2006-07)
I.T.A .No. 1287/DEL/2015 (A.Y 2010-11)
Swarovski India Pvt. Ltd. Vs ACIT
1A-1D, Vandhana Building, Circle-22(2)
11, Tolstoy Marg, New Delhi New Delhi
AAGCS4052D
(APPELLANT) (RESPONDENT)
Appellant by Sh. S. K. Agarwal, CA, Sh.
Nitin Bansal, CA, Sh. Nitish
Gupta, CA, Sh. Manoj
Pardarshi, CA, Sh.
Raghavender Prabhakar,
CA
Respondent by Sh. Sanjay I Bara, CIT DR
Date of Hearing 13.02.2018
Date of Pronouncement 02.04.2018
ORDER
PER SUCHITRA KAMBLE, JM
These two appeals are filed by the assessee for A.Y. 2006-07 against the CIT(A)-X order dated 23.04.2013 and for A.Y. 2010-11 against the Assessment Order dated 24/12/2014 passed by ACIT - Circle 22(2), new Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961.
2. The grounds of appeal are as under:-
I.T.A .No. 4080/DEL/2013 (A.Y 2006-07)
1. That on facts and in law the Learned Commissioner of Income Tax (Appeals) - X, New Delhi [ Ld. CIT(Appeals)'] has erred in confirming the disallowances made by Deputy Commissioner of Income-tax, Circle 7(1), New Delhi ('Ld AO') and that the order so passed by the Ld. CIT(Appeals) is bad in law.
2. 2.i. That the Ld CIT(Appeals) has erred in both law and on facts in confirming the disallowance of expenditure incurred on management service fees amounting to Rs. 18,38,562, on the ground that the same is a capital expenditure and in not accepting the appellant's claim that it is in the nature of revenue expenditure.
ii. The Ld CIT(appeals) has grossly erred in doing so, as this amount has been consistently allowed as a revenue expenditure in all the preceding years;
3. 3.1. That the Ld CIT(Appeals) has erred in both law and on facts in confirming the disallowance of expenditure incurred on software and EDP charges amounting to Rs. 10,46,963 paid to Swarovski Hong Kong Ltd. on the ground that the same is a capital expenditure and in not accepting the appellant's claim that it is in the nature of revenue expenditure.
ii. The Ld CIT(appeals) has grossly erred in doing so, as this amount has been consistently allowed as a revenue expenditure in all the preceding years.
4. That the Ld CIT(Appeals) has erred in both law and on facts in disallowing two third of expenditure incurred on advertisement and publicity expenses (incurred on various items such as sponsorships of events, newspapers / magazines / electronic media advertisement, banner wall paintings and hoardings) amounting to Rs. 2,49,15,519, on the ground that benefit will accrue over a period of three years.
5. Without prejudice to the appellate's contention that the advertisement and publicity expenses are revenue in nature, the Ld CIT(Appeals) has erred in not allowing the proportionate reduction in respect of advertisement and publicity expenses as disallowed in proceedings for AY 2004-05 and AY 2005-06.
6. Without prejudice to above grounds, the Ld AO has erred, on the facts and circumstances of the case and in law, in adjusting the brought forward losses of prior years to the extent of the assessed income eligible for deduction under section 10B of the Act.
7. That the Ld CIT(Appeals) has erred in law and on facts in confirming the levy of interest under section 234B of the Act.
8. That the Ld CIT(Appeals) has erred in law and on facts in confirming the levy of interest under section 234D of the Act and further in withdrawing the interest under section 244A of the Act.
9. That the Ld CIT(Appeals) has erred in law and on facts in not withdrawing the penalty proceedings initiated by the Ld AO under section 271(1 )(c) of the Act against the Appellant for each of the additions made in the assessment order.
All the above grounds of appeal are independent and without prejudice to one another.
2006-07
3. Swaroski India Pvt. Ltd. (the assessee) was incorporated on 11.10.1996 under the Companies Act, 1956. During the year under consideration, the assessee company was engaged in the business of selling high-end crystal components for jewellery, fashion accessories, home decoration etc. The assessee filed its return of income for A.Y. 2006-07 declaring loss of Rs.90,82,195/- on 30.11.2006. The return was processed under Section 143(1) of the Income Tax Act, 1961. Notice u/s 143(2) dated 09.10.2007 was issued and duly served upon the assessee. The case was referred to Transfer Pricing Officer. The Transfer Pricing Officer passed order dated 30.10.2009 whereby the TPO accepted the transfer pricing adopted by the assessee company in respect of the international transactions entered during the period under consideration and a fresh notice u/s 142(1) dated 03.11.2009 was issued and served upon the assessee. In response to these notices, the CA and Authorised Representative of the assessee appeared from time to time and filed necessary details and other related documents/evidences which were placed on record by the Assessing Officer. The Assessing Officer made total addition of Rs.1,87,12,849/- towards disallowance of management service fee, software & EDP charges and Advertisement & Publicity expenses.
4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
5. The Ld. AR submitted that there is no Transfer Pricing issue in the present appeal. As relates to Ground No. 2, the Ld. AR submitted that this year is the first year of dispute. In earlier years and subsequent years, the expenditure incurred on management service fees was accepted by the Revenue department. The Ld. AR submitted that in subsequent years, the CIT(A) vide order dated 28.01.2017 held in para 6.1.3.3 that " In my considered opinion, from the above it can be construed that the underlying purpose of the appellant in incurrence of management fee expenditure is to acquire the managerial support services for the day-to-day operations of the appellant's business on an on-going basis, for which quarterly payments were made. Accordingly, by virtue of the above expense, the appellant acquires no enduring benefit, nor does the underlying nature of services obtained by the appellant involve transfer of ay technology or asset or technical information / know-how in any manner. Following the above cited judgments, the same should be considered as revenue in nature."
6. As relates to Ground No. 3, the Ld. AR submitted that the expenditure incurred on software and EDP charges amounting to Rs.10,46,963 paid to Swarovski Hong Kong Ltd. are business expenditure and the same should not have been treated as capital expenditure. In fact, the assessee has filed all the invoices to that extent. There was no assets acquired by the assessee, it is a period cost. Therefore, the same are revenue expenditure.
7. As relates to Ground No. 4, the Ld. AR submitted that the Tribunal in A.Ys. 2004-05 and 2005-06 (ITA Nos. 5621 & 5496/DEL/2014 and ITA Nos.5622 & 5497/DEL/2014 orders dated 10.02.2017) allowed the issue in favour of the assessee. The extracts of both the decision is as follows:
ITA Nos.5621 & 5496/DEL/2014 "14.2 After considering the rival submissions and perusing the relevant material on record, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in CIT vs. Citi Financial Consumer Fin. Ltd. (2011) 335 ITR 29 (Del) in which it has been held that the entire expenditure on publicity and advertisement is allowable fully in the year in which it is incurred. We, therefore, uphold the impugned order on this score. Similar view has been taken by the Tribunal in the assessee's own case for A.Y. 2002-03. It is however, made clear that no further deduction for the remaining 2/3rd of the total expenditure, directed to be allowed by the AO in subsequent two years, be granted as the same will lead to double deduction. If such a deduction has been allowed, then the same be accordingly reversed pro tanto. This ground of the Revenue is not allowed."
ITA Nos.5622 & 5497/DEL/2014 "6.2 Both the sides are in agreement that the facts and circumstances of this ground are, mutatis mutandis, similar to those for the A.Y. 2004-05. Following the view taken in our order for the A.Y. 2004-05, we hold that the entire amount of advertisement and publicity expenses should be allowed as deduction in the year of incurring itself. It is however, made clear no further deduction for 2/3rd of the total expenditure for the earlier years be granted as the same will lead to double deduction. If such a deduction has already been allowed, then the same should be reversed to that extent. This ground of the Revenue is not allowed."
8. As relates to Ground No. 5, 7, 8, and 9, the Ld. AR submitted that the same are consequential.
9. As relates to Ground No. 6 the same is not pressed by the Ld. AR.
10. The Ld. DR submitted that ground No. 2, nature of services is vague. The Ld. DR relied upon the orders of the CIT(A) and Assessing Officer. As relates to Ground No. 3, the Ld. DR submitted that computer peripherals are capital expenditure and rightly disallowed by the Assessing Officer. As relates to Ground No. 4, the Ld. DR relied upon the order of the Assessing Officer and the CIT(A).
11. We have heard both the parties and perused all the record. As relates to Ground No. 1, the same is general and therefore not adjudicated herein. Ground No. 2 is relating to disallowance of expenditure incurred on management service fees amounting to Rs.18,38,562/-. The CIT (A) treated the said expenditure as capital expenditure and not accepted the claim of the assessee that it is in the nature of the Revenue expenditure. The Ld. AR submitted that in subsequent years and in earlier years, the Revenue has accepted this expenditure as Revenue Expenditure and only in this particular year, the same has been treated as capital expenditure. After going through the order of subsequent year passed by the CIT (A) vide order dated 21/08/2017. There is a clear finding that incurrence of management fee expenditure is to acquire the managerial support services for the day to day operations of the assessee's business and ongoing basis for which quarterly payments were made there was no endeavor benefit or any underline nature of service obtain by the assessee which involves transfer of technology or asset or technical information/knowhow in any manner. It is pertinent to note that the Revenue in particular years has accepted this expenditure as Revenue Expenditure and segregated this particular year by disallowing it as capital expenditure but while doing so, the Revenue has not given any finding to the extent that as to why these are capital expenditure.
12. As relates to Ground No. 3, regarding disallowance of expenditure incurred on Software EDP Charges amounting to Rs.10,46,963/- paid to Swarovski Hong Kong Ltd on the ground that the same is a capital nature. The said charges are business expenditure and cannot be treated as capital expenditure. The assessee has field all the invoiced to that effect. There was no assets acquired by the assessee and it is a period cost but from the order of the Assessing Officer it can be seen that the said details as contemplated by the assessee was not before the Assessing Officer . Therefore, this aspect has to be verified at the level of. Therefore, this issue is remanded back to the file of the Assessing Officer to see these expenses according to the evidence produced by the assessee. Needless to say, the assessee be given opportunity of hearing as per principals of natural justice. Ground No. 3 is partly allowed for statistical purpose.
13. Ground No. 4 is related to disallowance of 2/3rd expenditure incurred on an advertisement and capacity expenses amounting to Rs.2,49,15,519/- on the ground that benefit will accrue over a period of 3 years. The Ld. AR submitted that this issue has been allowed in favour of the assessee in A.Y. 2005-06 and 2004-05 which is quoted hereinunder:
ITA Nos.5621 & 5496/DEL/2014
"14.2 After considering the rival submissions and perusing the relevant material on record, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in CIT vs. Citi Financial Consumer Fin. Ltd. (2011) 335 ITR 29 (Del) in which it has been held that the entire expenditure on publicity and advertisement is allowable fully in the year in which it is incurred. We, therefore, uphold the impugned order on this score. Similar view has been taken by the Tribunal in the assessee's own case for A.Y. 2002-03. It is however, made clear that no further deduction for the remaining 2/3rd of the total expenditure, directed to be allowed by the AO in subsequent two years, be granted as the same will lead to double deduction. If such a deduction has been allowed, then the same be accordingly reversed pro tanto. This ground of the Revenue is not allowed."
ITA Nos.5622 & 5497/DEL/2014 "6.2 Both the sides are in agreement that the facts and circumstances of this ground are, mutatis mutandis, similar to those for the A.Y. 2004-05. Following the view taken in our order for the A.Y. 2004-05, we hold that the entire amount of advertisement and publicity expenses should be allowed as deduction in the year of incurring itself. It is however, made clear no further deduction for 2/3rd of the total expenditure for the earlier years be granted as the same will lead to double deduction. If such a deduction has already been allowed, then the same should be reversed to that extent. This ground of the Revenue is not allowed."
Thus, the issue is squarely covered in favour of the assessee.
14. Ground No. 4 is allowed in favour of the assessee.
15. Ground No. 5, 7, 8 & 9 are consequential. Ground No. 6 is not pressed, hence dismissed.
16. In result, ITA No. 4080/DEL/2013 filed by the assessee is partly allowed.
Now we are taking up the appeal for A.Y. 2010-11 and grounds for the same are as under:
I.T.A .No. 1287/DEL/2015 (A.Y 2010-11)
1. On facts and in law, the Learned Joint Director of Income Tax, Transfer Pricing Officer - ll(2) "Ld. TPO") and Learned Assistant Commissioner of Income Tax, Circle 22(2), New Delhi / Learned Assessing Officer ("Ld. AO") erred in determining, and Learned Dispute Resolution Panel - III, New Delhi ("Ld. DRP") erred in confirming an addition of Rs 84,461,391 to the income of the Appellant, on account of the difference in the Arm's Length Price of the alleged international transaction of creation of marketing intangible through incurring Advertisement, Marketing and Promotion expenses ("AMP expenses").
2. On without prejudice basis to other grounds and on facts, the Ld. AO erred in ignoring, and the Ld. DRP erred in confirming the action of Ld. AO in ignoring the rectification order issued by the Ld. TPO under Section 154 read with Section 92 CA(5) of the Act, thereby considering the erroneous figure of Rs 84,461,391 as the addition instead of Rs 81,784,027.
3. On facts and in law, the Ld. AOand Ld. TPO erred in alleging, and the Ld. DRP erred in confirming the action of Ld. AO/ Ld. TPO in alleging that the purported AMP expenses incurred by the Appellant constituted an international transaction between the Appellant and its overseas Associated Enterprise ("AE").
4. On facts and in law, the Ld. Assessing Officer and Ld.TPO erred in invoking,and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO in invoking the provisions of Section 92F(v) of the Act in relation to the AMP expenses incurred by the Appellant by construing that the Appellant and its overseas AE had an arrangement, understanding or acted in concert.
5. On facts and in law, the Ld. AO and the Ld. TPO erred in holding, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO in holding that by incurring excessive AMP expenses, the Appellant led to creation of a marketing intangible in India (the legal ownership of which vested with the overseas AE), and that a direct benefit arose to the overseas AE on account of the same, for which an appropriate compensation to the Appellant from overseas AE was necessary.
6. On facts and in law, the Ld. AO and Ld. TPO erred in failing to apply, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO in failing to apply any of the methods prescribed under section 92C(1) of the Act as the 'most appropriate method' for benchmarking the alleged international transaction of AMP expenses incurred by the Appellant.
7. On facts and in law, the Ld. TPO erred in applying the bright line limit as a statistical tool for determining routine and non-routine expenditure in respect of the alleged AMP expenditure, thereby contravening the provisions of Chapter X of the Act.
8. On facts and in law, the Ld. AO and the Ld. TPO erred in disregarding, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO of disregarding the fact that significantly higher total profits earned by the Appellant vis-a-vis the comparable companies already include (i) the arms' length return for Distribution business, as well as (ii) any alleged activities represented by alleged excessive AMP expenses, if any during the year and amply offset any return which should have been earned by the Appellant in relation to the allegedly excessive AMP expenses incurred by it.
9. On facts and in law, the Ld. AO and Ld. TPO erred in violating, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO of violating the fundamental Matching Principle of Accounting, in so far as costs incurred in the form of alleged excessive AMP expenses were imputed (using bright line methodology) to determine the corresponding required AMP Revenue, however, the said costs were continued to be (double) counted for the ongoing Distribution business, instead of being deducted against the alleged AMP Revenue.
10. On facts and in law, the Ld. AO and Ld. TPO erred in not appreciating, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO of not appreciating that as per the Purchase & Supply agreement (2009) entered into with the overseas AE, the Appellant was provided a license to distribute Swarovski branded products in India for an indefinite term, and therefore appropriate companies for comparison of AMP expenses would have been similar long term licensed distributors of foreign brands, and not routine distributors undertaking nil brand promotion, as erroneously considered by the Ld. TPO, Ld. AO and Ld. DRP.
11. On facts and in law, the Ld. AO and Ld. TPO erred in rejecting, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO of rejecting 2 comparable companies i.e. D'Damas Jewellery (India) Private Limited and Gitanjali Gems Retail Limited, for the purpose of the computation of the Bright line limit, thereby disregarding the provisions of Rule 10B(2) of the Rules.
12. On facts and in law, the Ld. AO and Ld. TPO erred in considering, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO of considering certain selling related expenses (as provided in table below) under the ambit of AMP expenses allegedly leading to creation of marketing intangible:
Nature of Expenses Amount (in Rs.)
Commission on sales 25,342,705/-
Discounts (other than cash discounts) 13,577,321
Point of Purchase Materials 11,591,693
8,394,607
Catalogue/Newspaper/Calendar/Bill
Board/Hoarding/Signage/Visuals/Graphics
Distribution expenses 2,573,983
Miscellaneous expenses (printing expenses,
travelling/boarding/lodging expenses,
1,803,745
sampling expenses, market research
expenses, courier expenses etc.)
Total 63,284,054
13. On facts and in law, the Ld. AO and Ld. TPO erred in imputing, and the Ld. DRP erred in confirming the action of Ld. AO / Ld. TPO of imputing (in an arbitrary and adhoc manner), a profit mark-up of 12.25% on the allegedly excessive AMP expenses incurred by the Appellant, thereby disregarding the provisions of Rule 10B of the Rules.
Corporate tax adjustment
14. On the facts and circumstances of the case and in law the learned Assistant Commissioner of Income tax, Circle 22(2), New Delhi ('AO') under directions issued by the Hon'ble Dispute Resolution Panel- II ('DRP') has erred in disallowing expenditure incurred on software and EDP charges advertisement and publicity expenses, and interest on late deposit of service tax to the Appellant's total income.
15. That on the facts and circumstances of the case and in law, the AO has erred in proposing and the DRP has further erred in confirming the disallowance of expenditure incurred towards software and EDP charges amounting to Rs. 67,79,613 on the premise that the same is in the nature of capital expenditure incurred for the acquisition of capital asset being 'computer and software'.
16. The AO has erred and DRP has further erred in proposing / confirming the disallowance of expenditure on software and EDP charges by merely relying on the decision of the predecessors of the AO and holding such expenditure to be capital in nature without assigning any specific reason to this effect.
17. Without prejudice to the above the AO / DRP has erred in not allowing consequent depreciation on software and EDP charges which was disallowed as depreciable capital expense in earlier years i.e. AY 2006-07 through 09-10.
18. That the AO has erred in proposing and the DRP has further erred in confirming the action of the AO by disallowing advertisement and publicity expenses of Rs. 2,67,75,393 and in holding that advertisement and publicity expenses incurred by the assessee are towards creation of intangibles, eligible for depreciation @ 25%.
18.1 That the AO has erred and the DRP has further erred in confirming the stand of the AO that advertisement and publicity expenses give rise to advantage of enduring nature to the appellant, leading to creation of intangible assets being goodwill, reputation and creditability and hence capital in nature.
18.2 That the AO has erred in holding and the DRP has further erred in confirming that advertisement and publicity expenses incurred by the appellant result in the creation of an intangible asset in the form of 'Brand' which is of similar nature as capital assets as mentioned in section 32(1 )(ii) of the Income-tax Act, 1961 ('the Act').
19. Without prejudice to the above, the AO has erred and the DRP has further erred in holding that the expenditure incurred by the appellant on advertisement and publicity will benefit the entire range of Swarovski products i.e. the holding company based in Austria.
20. The AO / DRP has erred in law and in facts by referring to judgments pronounced by the Hon'ble Courts in various cases without appreciating their applicability to the facts of the case.
21. Without prejudice to the above that advertisement and publicity expenses shall not be disallowed, the AO / DRP has erred in not allowing the consequential deduction or depreciation on advertisement and publicity expenses which was disallowed in earlier years
22. The AO has erred in proposing and the DRP has further erred in confirming the disallowance of interest paid on late deposit of service tax of Rs. 9,601 under section 37(1) and 40(a) of the Act.
23. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act as per the impugned order consequential to the above disallowances.
24. On the facts and in law, the Ld. AO erred in levying an interest of Rs 4,1781,114 under section 234B of the Act.
25. On the facts and in law, the Ld. AO erred in levying an interest of Rs 193,257 under section 234D of the Act.
2010-11
17. During the year under consideration, the assessee company is engaged in the business relating to import, manufacture, sale and export of all kind of high end crystal components for jewellery, fashion accessories and home decoration, etc. The assessee filed a return declaring an income of Rs, 10,23,55,073/- (before setting off losses) on 27.09.2011, through E-filing acknowledgment no. 161380911270910. The case was selected under scrutiny and notice u/s 143(2) was issued and served upon the assessee within the statutory limit. Further Notice under section 142(1) along with specific questionnaire was issued and hearing of the case took place from time to time. In response to the statutory notices Chartered Accountant and Authorized representative attended the proceedings form time to time and case was discussed with them. A draft assessment order u/s 144C dated 18/02/2014 was passed by erstwhile DCIT, Circle-7(1), New Delhi and sent to the assessee by speed post. During the course of assessment proceeding, the case was referred to TPO u/s 92CA for computation of Arms Length Price (ALP). A TPO vide order dated 29.01.2014 proposed to make an adjustment of Rs. 84,461,391/- to the taxable income of the assessee. The assessee preferred objections before the Dispute Resolution Panel-III, New Delhi. The directions of the Dispute Resolution Panel u/s 145C(5) of the Income Tax Act, 1961 passed vide order dated 14/11/2014 was received by the Assessing Officer on 03/12/2014. The final assessment order is accordingly passed by this office after incorporating the directions of the Dispute Resolution Panel mentioned above. An addition of Rs.8,44,61,391/- to the total income of the assessee was made on account of transfer pricing adjustment. The Assessing Officer observed that the assessee paid certain amount of Software & EDP charges to its group entity M/s D. Swarovski & Co. for providing operational IT services and for individual business application development services. Vide order sheet entry dated 11.10.2013 & 08.11.2013 the assessee asked to submit the detail of expense and explanation as to why Software & EDP charges should not be treated as capital expense. Vide reply dated 05.12.2013, the assessee submitted that an amount of Rs. 1,69,49,032/- was paid to M/s D. Swarovski & Co. for providing operational IT services and for individual business application development services. The assessee furnished the reasons for treating such expenditure as revenue in nature. The assessee submitted that under the respective agreement, D. Swarovski & Co. provided services related to internet browsing services, providing VPN access including security authentication, documentation and data management, antivirus management and security checks etc. to the assessee which are of the similar nature as provided by D. Swarovski & Co. in the last year as well. The assessee contended that such expenses should be allowed as business expenditure under section 37(1) since the above expense is incurred towards carrying out business operations of the assessee more efficiently and there is no capital asset or benefit of enduring nature which is acquired by the company. The Assessing Officer held that these expenses are squarely covered under capital asset as computer and software. In this case reliance was placed on the decision of CIT Vs. Arawali Construction Co. Pvt. Ltd. 259 ITR 30 wherein Hon'ble Rajasthan High Court held that the expenditure on acquiring computer software is an expenditure of capital in nature and has upheld the decision of AO to allow the depreciation thereon. Thus, the Assessing Officer disallowed Rs. 1,69,49,032, as revenue expenditure and allowed depreciation @60% on it. Consequently, an addition of Rs. 67,79,613 was made to the income of the assessee.
18. The Assessing Officer also disallowed an amount of Rs.3,57,00,524/- towards advertisement and publicity charges. The Assessing Officer asked the assessee to submit the detail of expense and explanation as to why advertisement & publicity charges should not be treated as capital expense. Vide reply dated 05.12,2013, the assessee furnished nature of expenses included in such advertisement and publicity expenses and also furnished justification on why it should be allowed as a deduction to the assessee. The Assessing Officer observed that the assessee incurred expenses towards Media Advertisements, PR Agency fees, communication materials and others which are classified under the head of Advertisement and publicity expenses and claimed as an expense in the current year. In the submissions furnished by the AR of the assessee, it was mentioned that the advertisement and publicity expenses was incurred to attract customers in a highly competitive and dynamic environment and it was required on a consistent basis year after year. The assessee however claimed that the same should be allowed as a revenue expense. The submission of the assessee was rejected by the Assessing Officer. The Assessing Officer observed that besides such aggressive advertisement and business promotion in the nature of blitzkrieg also create an enduring advantage to the company' as the image gets imprinted in the minds of the customers which is not very easy to dislodge. Since an exact apportionment of the profits accruing to the parent company as also the component of enduring advantage accruing to the assessee company on account of advertisement and business promotion expenses was not feasible to work out therefore the contention of the assessee was not accepted by the Assessing Officer. In the case of advertisement the question of brand building does not arise. If the advantage consists merely in facilitating the assessee's trading operations of enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite period. There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. The assessee spent substantial amount out of its own resources for increasing popularity, awareness and visibility of the Swarovski brand though various ways and means both within India. The representatives of the assessee contended that the efforts leading to increased awareness and visibility of Swarovski brand will benefit the assessee company in the form of increased sales and turnover and thereby the expenditure justifiable. In the detailed submission on the issue the assessee basically contended that the expenditure was incurred on visual medium like lifestyle magazines, catalogues, mailers, public relation exercise, etc as in the earlier years. The submission made by the assessee was rejected by the Assessing Officer and inclined to accept the position taken by earlier Assessing Officer in the preceding years wherein it was upheld that the above advertisement and publicity expenses will benefit the entire product range of Swarovski products i.e. the holding company based in Austria. There are several crystal items apart from the main products like accessories and decorative items under the same brand Swarovski, which is not being either, marketed or sold by the assessee company in India. The details of these expenditure shows that the expenditure is incurred on sponsorship of the events, newspapers / magazines / electronic media advertisement, banners wall painting and hoardings which are nothing but capital in nature and were incurred to promote their brands and products, the benefit of which is enduring in nature which goes beyond the previous year relevant to assessment year under consideration. There is no dispute or doubt that increases in the awareness, popularity and the visibility of the brand in India Market will lead to better sales and turnover and therefore, increased profit and revenues for the assessee. But this will also benefit the entire product range of the assessee group products. Therefore, the benefit of advertisement and publicity are of enduring nature available over a much longer period of time than the accounting period relevant for AY under consideration alone. In view of this, the part of expenditure on advertisement and publicity becomes capital in nature as it is leading to the creation of the intangible assets being goodwill, reputation and creditability. It was held by various courts in various decisions that when expenditure is made with a view to bringing into an asset or advantage for the enduring benefit of the business, such expenditure is not revenue but a capital expenditure. The amount spent on advertisement and sale promotion was held to be capital in nature by the Assessing Officer and creating of intangible asset in form of 'Brand' which is of similar nature of capital assets as mentioned in section 32(l)(ii) of the IT Act. Therefore, amount claimed as advertisement & sales promotion expense of Rs. 35700524/- was disallowed as revenue expenditure, however, assessee was allowed to claim depreciation @25% on such amount. Therefore, an amount of Rs.2,67,75,393/- was disallowed and added to the income of the assessee.
19. The Assessing Officer while dealing with disallowance of Interest on late deposit of TDS & service tax observed that the assessee claimed rate & taxes. Vide questionnaire dated 09.01.2014 assessee was asked to submit the detail of rate & taxes justify the claim in the preview of provision of Income Tax Act. Vide reply dated 05,02.2014 assessee submitted the detail of the above expenses and the Assessing Officer observed that assessee paid interest of Rs.28070/- on late payments of service tax, WCT and TDS. The submission of the assessee were duly considered but the Assessing Officer did not find the same as satisfactory. The Assessing Officer held that in the case of Bharat Commerce & Industries v. CIT (1998) 230 ITR 733 (SC) the Hon'ble Supreme Court held that interest on late payment of TDS or any tax is as good as payment of taxes. Accordingly, interest on tax cannot be taken out of preview of tax. This decision was also followed by the Ahmedabad Bench of ITAT in the case of Income Tax Officer v. Royal Packaging which has held that interest for late payment of direct taxes is not deductible. The Assessing Officer further observed that the DRP vide order dated 14/11/2014 observed that Rs. 18,469 being interest on delay in deposition of TDS was already added to the computation of income by the assessee, the remaining Rs. 9,601 was upheld. Therefore, following the direction of DRP, sum of Rs. 9,601/- was disallowed u/s 37(1) and 40(a) of the Income Tax Act, 1961 and added back to the total income of the assessee.
20. The Ld. AR submitted that the AMP issue should be set aside to the file of the TPO/AO as held in the earlier year by the Tribunal. The relevant extracts of the same are as under:
ITA Nos.5621 & 5496/DEL/2014 "8.3 On perusal of the order of the Ld. CIT(A), it emerges that while holding AMP expenses as an international transaction, he did not have the benefit of the judicial precedents now available for consideration, in some of which the transaction of AMP expenses has been held as an international transaction, in others as not an international transactions, while still in some others, the matter has been restored for fresh consideration in the light of the judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del), in which the AMP expenses as an international transaction has been accepted. In another judgment dated 28.01.2016 of the Hon'ble Delhi High Court in Sony Ericson Mobile Communications (India) Pvt. Ltd. (for the AY 2010-11), the question as to whether AMP expenses is an international transaction, has been restored for a fresh determination. There are three recent judgments of the Hon'ble Delhi High Court, viz., Rayban Sun Optics India Ltd. vs. CIT (dt.14.09.2016), Pr. CIT vs. Toshiba India Pvt. Ltd. (dt. 16.08.2016) and Pr. CIT vs. Bose Corporation (India) Pvt. Ltd. (dt. 23.08.2019) in all of which similar issue has been restored for fresh determination in the light of the earlier judgment in Sony Ericsson Mobile Communications India Pvt. Ltd. (supra). Respectfully following the predominant view of the Hon'ble High Court, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter would end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon'ble High Court, after allowing a reasonable opportunity of being heard to the assessee."
The Ld. AR also relied upon the decision of Nikon India Pvt. Ltd. Vs. DCIT [ITA No. 6314/del/2015, A.Y 2011-12,] wherein the Tribunal held as under:
"19. We have heard the rival submissions and perused the relevant material on record. The ld. AR tried to harp on certain agreements and other documents to buttress his point that there was no international transaction on account of AMP expenses in terms of the judgment in the case of Whirlpool (supra). On perusal of the order of the TPO, it emerges that there is no discussion about any of these documents. Since the TPO held AMP expenses to be an international transaction, he did not have any occasion to consider these documents in the light of the judicial view now available for consideration. Respectfully following the Tribunal orders of co-ordinate benches, placed on record by the ld. DR, we are of the considered opinion that it would be in the fitness of things il the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments of the Hon'ble High Court, after allowing a reasonable opportunity of being heard to the assessee. In doing so, the selling expenses directly incurred in connection with sales not leading to brand promotion, should not be brought within the ambit of AMP expenses. This view taken by the Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. vs. AC1T (2013) 152 TTJ (Del) 273 (SB) has been upheld by the Hon'ble Delhi High Court in the case of Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del. The contention of the ld. DR that SLP has been admitted against the exclusion of selling expenses from the ambit of AMP expenses in the case of Amadus India Ltd., does not alter the legal position prevailing as on today."
As relates to Ground No. 3 and 4, the same are as per earlier A.Y.2006-07. Ground No. 15, 16, 17 and 21, 23, 24, 25 are consequential. Ground No. 22 is allowable expenditure.
21. The Ld. DR relied upon the order of the TPO, Assessment Order and DRP directions. The Ld. DR submitted that the submissions of A.Y.2006-07 wherein common issues are involved be taken as submissions in this assessment year.
22. We have heard both the parties. As relates to Ground No. 1 to 13 for AMP, in light of decisions in assessee's own case the same is remanded back to the file of the TPO/AO for further verification. Needless to say that the assessee be given full opportunity of hearing by following principles of natural justice. Thus, Ground No. 1 to 13 are allowed for statistical purpose. Ground No. 14, 15, 16, 17 are similar to that of A.Y. 2006-07 as relates to Ground No. 3 therein, this issue is remanded back to the file of the Assessing Officer to see these expenses according to the evidence produced by the assessee. Needless to say, the assessee be given opportunity of hearing as per principals of natural justice. Ground Nos. 14, 15, 16, 17 are allowed for statistical purpose. AS relates to Ground No. 18, 19, 20 are similar to Ground No. 4 of the A.Y. 2006- 07, this issue is allowed in favour of the assessee. Ground No. 22 is allowable expenditure in light of the submissions of the Ld. AR which was not denied by the Ld. DR, therefore, Ground No. 22 is allowed. Ground Nos. 21, 23, 24, 25 are consequential so in light of directions in the merit of the case hereinabove, the TPO/AO has to decide the same accordingly.
23. In result, ITA No.1287/DEL/2015 is partly allowed for statistical purpose.
Order pronounced in the Open Court on 2nd April, 2018.
Sd/- Sd/-
(R. K. PANDA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 02/04/2018
R. Naheed *
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date
1. Draft dictated on PS
2. Draft placed before author PS
3. Draft proposed & placed before .2018 JM/AM
the second member
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the PS/PS
Sr.PS/PS 02.04.2018
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 02.04.2018 PS
8. Date on which file goes to the AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.