Delhi High Court
Commissioner Of Income Tax vs Samsung India Electronics Ltd. on 3 September, 2012
Author: R.V.Easwar
Bench: S. Ravindra Bhat, R.V. Easwar
$~19, 20 & 24
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 3rd September, 2012.
+ ITA 98/2010
+ ITA 113/2010
+ ITA 143/2010
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Ms. Suruchi Aggarwal, Sr. Standing
Counsel.
versus
SAMSUNG INDIA ELECTRONICS LTD. ..... Respondent
Through: Mr. Satyen Sethi and Mr. Arta Trana
Panda, Advocates.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V.EASWAR, J: (OPEN COURT)
These are three appeals filed by the revenue under Section 260A of the
Income Tax Act, 1961 („Act‟, for short) and they relate to the assessment years
1996-97, 1997-98 and 1998-99. They are directed against the common order
passed by the Income Tax Appellate Tribunal („Tribunal‟, for short) on
28.11.2008 in cross appeals filed by the assessee and the revenue.
2. The assessee is a company dealing in consumer durables such as
televisions, cameras, video recorders, washing machines, refrigerators, etc..
ITA 143/2010
ITA Nos.98, 113 & 143 of 2010 Page 1 of 12
3. In ITA 143/2010, the only substantial question of law is whether, on the
facts and in the circumstances of the case, the Tribunal is right in law in holding
that the assessee was entitled to the allowance for entertainment expenditure
incurred on its employees. The assessee incurred deduction of `4,85,305/- as
entertainment expenditure. It was claimed by the assessee that 35% of the
aforesaid amount represented expenditure incurred on the food and beverage for
the employees while they were entertaining the assessee‟s customers on behalf
of the assessee. This amounted to `1,69,857/-. In calculating the allowance for
entertainment expenses under Section 37(2) of the Act, the assessee deducted
the allowance claimed in respect of the employees from the total entertainment
expenditure incurred and applied the limits for deduction prescribed by the
Section on the balance amount and calculated the disallowance on account of
entertainment expenditure accordingly. The Assessing Officer, however, took
the view that no allowance in respect of the entertainment expenditure incurred
on the employees could be granted and accordingly reworked the disallowance
at `2,37,653/- in the following manner :
Total Entertainment Expenditure (As per report)
`4,85,305/-
Allowable u/s 37(2)
First `10,000 100% `10,000/-
Remaining `4,75,305/- @ 50% `2,37,652/- `2,47,652/-
Entertainment Exp. Disallowable `2,37,653/-
The CIT(Appeals) having allowed the assessee‟s claim, the revenue preferred
an appeal to the Tribunal which endorsed the decision of the CIT(Appeals).
ITA Nos.98, 113 & 143 of 2010 Page 2 of 12
4. A perusal of the order of the Tribunal shows that it has considered the
claim of the assessee that 35% of the expenditure incurred on entertainment is
attributable to the entertainment of the employees while they were entertaining
the assessee‟s customers to be reasonable and therefore such portion of the
expenditure has to be excluded at the threshold and the limits prescribed by
Section 37(2) have to be applied only on the balance of expenditure. This is not
an unreasonable view of the section. The question as to how much is to be
attributed to the entertainment of the employees is a matter of esteem. We are,
therefore, answer the question in the affirmative, in favour of the assessee and
against the revenue.
ITA 113/2010
5. This relates to the assessment year 1997-98. The first question relates to
the computation to the disallowance of entertainment expenses under Section
37(2). We have already answered a similar question in ITA 143/2010 in favour
of the assessee. The controversy being the same, this question is decided in
favour of the assessee and against the revenue.
6. The second question of law is whether the Tribunal was right in holding
that the assessee is entitled to the depreciation on the increase in the cost of
fixed assets due to fluctuation in the foreign exchange rate. During the relevant
previous year, the liability to pay foreign exchange for the machinery purchased
by the assessee went up by `35,699/- on account of adverse exchange rate
fluctuations. Treating this amount as part of the cost of the assets, the assessee
claimed depreciation of `4,462/- on the additional cost represented by the
aforesaid law. The claim was rejected by the Assessing Officer on the ground
ITA Nos.98, 113 & 143 of 2010 Page 3 of 12
that mere increase in the law on account of adverse exchange rate fluctuations
cannot be taken note of for the purpose of calculating depreciation and that the
adjustment to the cost of the asset can be made only at the time of actual
payment of the increased foreign exchange and not on notional basis. On
appeal the CIT(Appeals) directed the Assessing Officer to allow the
depreciation as claimed.
7. The revenue carried the matter in appeal before the Tribunal and
accepted the decision of the CIT (Appeals) following the judgment of this Court
in CIT Vs. Woodward Governor India P. Ltd. (2007) 294 ITR 451. In that
judgment, it was held that the increase on account of fluctuations in the rate of
foreign exchange prevailing on the last day of the financial year is not notional
or contingent and has to be adjusted in the actual cost of assets in terms of
Section 43A, in the year in which there is variation in the exchange rate,
irrespective of the date on which it is paid.
8. This issue now stands concluded by the judgment of the Supreme Court
in CIT vs. Woodward Governor India P. Ltd. (2009) 312 ITR 254 in which the
judgment of this Court was affirmed. The question having been concluded by
the judgment of the Supreme Court (supra) we answer the substantial question
of law in favour of the assessee and against the revenue.
9. The next question of law is whether payment made by the assessee to the
UP State Electricity Board (UPSEB) for laying electric transmission lines in the
assessee‟s premises represents revenue expenditure or capital expenditure.
10. The amount paid by the assessee is `26,67,106/-. In the books of
account the expenditure was shown as pre-operative expenses. The claim was
ITA Nos.98, 113 & 143 of 2010 Page 4 of 12
made by the assessee in the appeal filed before the CIT(Appeals) by way of an
additional ground which was admitted and adjudicated upon. The
CIT(Appeals) admitted the ground for adjudication and held, on merits, that the
transaction lines were not owned by the assessee and the property in them
remained with the UPSEB. This, according to the CIT (Appeals), was one of
the conditions under which the UPSEB supplied power through the
transmission lines. It was held by him following the judgment of the Supreme
Court in Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR 1 that there was no
enduring advantage to the assessee and that the payment represented
expenditure in the revenue field and was deductable.
11. The revenue carried the matter in appeal before the Tribunal. The
Tribunal, on the facts, held that the judgment of this Court in CIT Vs. Saw
Pipes Ltd. (2000) 300 ITR 35 was applicable and accordingly agreed with the
CIT(Appeals).
12. In our opinion, the question of law has to be answered in favour of the
assessee in view of the judgment of this Court cited above. That was also a
case where expenditure was incurred by the assessee for laying of electricity
transmission lines, which did not become the property of the assessee. It was
held that the expenditure did not bring in any enduring benefit and was
deductible as revenue expenditure. Accordingly, the question of law is
answered in favour of the assessee and against the revenue.
ITA 98/2012
13. This appeal relates to the assessment year 1998-99. The first question of
law is whether the Tribunal was right in endorsing the decision of the
ITA Nos.98, 113 & 143 of 2010 Page 5 of 12
CIT(Appeals) deleting the addition of `1,20,88,657/- towards value of the
closing stock. The facts relating to this question are briefly that in the profit
and loss account the assessee had deducted the aforesaid amount from the value
of the closing stock and declared only the net amount of `38,02,59,482 as the
value. When asked to explain, the assessee submitted that it makes a provision
for defective stock at the end of the year and this is divided into four types of
stock namely, category sale, defective but not repairable, demo stock and write
off for special value rates. It was also submitted that in the case of category
sale, a provision of 35% on dealer price is made on the assumption that the sale
price would only be 65%. In the case of defective but repairable stock, a
provision is made on account of estimated repairable stock. In the case of demo
stock it was written off in three years at 25%, 50% and 100% in the third year.
In the fourth category fell VCDs, video recorders etc. which remained unsold
for more than one year and these are written off in two years. They were
accordingly, valued at 37.5% of the cost.
14. The Assessing Officer did not accept the assessee‟s explanation.
According to him the assessee is a multinational having strong presence in more
than 40 countries and it spends a fortune in establishing this brand name. Even
granting the pace at which technology develops in the field of consumer
durables it is not possible to accept the claim that the goods produced by the
assessee become junk in a short period of a year or six months. The Assessing
Officer also noted that the stock had not become defunct or unsalable and that
there was no method to justify the reduction in the value of the stock as was
done by the assessee. Accordingly, he refused to allow the provision for
defective stock and added the amount of `1,20,88,654/-.
ITA Nos.98, 113 & 143 of 2010 Page 6 of 12
15. On an appeal the CIT(Appeals) allowed the assessee‟s claim as follows :
"I have considered the matter carefully. I have also seen the list
of defective damages and other types of stocks which have been
duly inspected and certified as also the price marked down by the
concerned technicians for each item as per details submitted.
This is not a case of creating provisions for defunct or defective
stocks but actual reduction in value of stock due to reasons as
certified by the company's experts. I, therefore, hold that the
A.O. erred in his view that the reduced value of stock was on
account of a provision for unascertained and contingent liability
when on verification it is found that they are actual defective or
damaged stock necessitating reduction in pricing. The addition
therefore, is unjustified and accordingly deleted. (Relief
`1,20,88,654/-)."
16. The revenue carried the matter in appeal before the Tribunal. The
Tribunal confirmed the decision of the CIT(Appeals) in the following words :
"32. In the appeal filed by the revenue, ground has been taken
for deleting addition of `1.20 crores made by the A.O. on account
of reduction in value of closings stock of finished goods. We have
considered the rival contentions and found from the record that
since the starts of its operation in the assessment year 1996-97,
the assessee company was consistently valuing the defective stock
at the realizable value being lower then cost. Similar write down
in the valuation of such stock was allowed by the department in
the assessment year 1996-97 and 1997-98. However, during the
year under consideration, by disturbing the method of valuation,
the A.O. made addition. Jurisdictional High Court in case of CIT
Vs. Bharat Commercial and industrial Ltd. (240 ITR 256), upheld
the order of the tribunal alone claiming the loss arising out of
valuation of slow moving raw material as estimated realizable
value. Since the finding recorded by the CIT(A) has not been
controverted by Ld. D.R., we, therefore, do not find any reason to
interfere in the finding of CIT(A) for deleting the addition on
ITA Nos.98, 113 & 143 of 2010 Page 7 of 12
account of valuation of closing stock of finished goods in respect
of its defective/obsolete stock."
We have considered the facts and the submissions. The revenue has accepted
similar claims in the assessment made for the assessment years 1996-97 and
1997-98. A consistent method of valuing the stock has been adopted by the
assessee. It was also accepted by the revenue. It would, therefore, be improper
to allow the revenue to change its position only for one year, which would upset
the method of valuation of the stock for a particular year thereby resulting in a
distorted version of the profits. The method of valuation of closing stock can
be disturbed only if it is found that the method followed is such that true profits
and gains cannot be deduced therefrom. These are basic principles in income
tax law and need no repetition or citing of authority. In the case of CIT Vs.
Bharat Commerce and Industries Ltd. (1999) 240 ITR 256 cited by the
Tribunal the loss arising out of the reduced valuation of slow moving raw
material on the basis of estimated realisable value was held allowable. We do
not find any infirmity in the orders passed by the CIT(Appeals) and the
Tribunal on this point, having regard to the method adopted by the assessee
consistently. We accordingly answer the question of law in favour of the
assessee and against the revenue.
17. The second question of law is whether the Tribunal was right in law in
confirming the decision of the CIT(Appeals) deleting the disallowance of the
brand building and dealer loyalty expenditure. In the books of account the
assessee treated the expenditure of `6,93,81,635/- as deferred revenue
expenditure. The expenditure consisted of `1.60 crores on brand building,
`5.01 crore on dealer loyalty and `0.31 crores on others. The Assessing Officer
ITA Nos.98, 113 & 143 of 2010 Page 8 of 12
noted that the assessee had entered into an agreement with Samsung Electronics
Company Ltd. of Korea, which is the parent company under which a part of the
expenditure inured for the benefit of the brand "Samsung" and therefore the
expenditure cannot be said to be wholly and exclusively incurred for the
purpose of the assessee‟s business. He accordingly disallowed the entire
expenditure of `6,93,81,635/-.
18. On appeal the CIT(Appeals) noted that there is no concept of deferred
revenue expenditure in income tax law and that since the assessee was the
exclusive dealer of Samsung products in India the entire benefit from the sales
promotion and dealer loyalty would accrue exclusively to it and therefore the
expenses were revenue in nature. Having said that, the CIT(Appeals) observed
that since both the assessee and the appellant company in Korea benefited from
the advertisements, 50% of the expenditure should be disallowed. He
accordingly, allowed only 50% of the expenditure.
19. Both the assessee and the revenue filed cross appeals before the
Tribunal, the assessee challenging the disallowance of 50% sustained by the
CIT(Appeals) and the revenue challenging the relief of 50% granted by the
CIT(Appeals). The Tribunal discussed the issue in paragraphs 26 to 29 and
paragraph 35 of its order. The following are the findings of the Tribunal :
a) the assessee, in addition to its activities in consumer durables, had its
own manufacturing facilities;
b) the expenditure was incurred to promote the brand and to increase its
presence in the market so as to sell its entire production;
ITA Nos.98, 113 & 143 of 2010 Page 9 of 12
c) in terms of the agreement with the parent company, the advertisement
expenditure amounting to `13 crores was reimbursed by the parent company in
Korea since part of the expenditure inured to the benefit of the parent company;
d) due to the incurring of the expenses, the sales of the assessee had
increased substantially as follows :
June 99 Dec.99 Mar.00 Mar.01 Mar.02
Sales 41,254 60,644 54,542 56,779 76,386
Qty.
Sales 53,70,40,746 74,18,78,271 66,16,91,561 77,29,82,225 88,31,12,779
Value
e) the reasonableness of the expenditure has to be seen from the point of
view of the businessman and the mere fact that some part of the expenditure
inured to the benefit of another entity does not entitle the income tax authorities
to disallow a part of the expenditure.
In coming to the aforesaid conclusion the Tribunal relied on the following
judgments :
(i) CIT Vs. Walchand and Co. Private Ltd. (1967) 65 ITR 381
(ii) CIT Vs. Dalmia Cement (B) Ltd. (2002) 254 ITR 377 (Del.)
(iii) Sassoon J. David and Co. (P)Ltd. Vs. CIT (1979) 118 ITR 261 (SC)
On this basis the Tribunal allowed the assessee‟s appeal and dismissed the
appeal filed by the revenue with the result that the entire expenditure of
`6,93,81,635/- stood allowed.
ITA Nos.98, 113 & 143 of 2010 Page 10 of 12
20. We have considered the facts and the submissions. The finding of the
Tribunal that a part of the advertisement expenditure is reimbursed by the
parent company is not under challenge. This itself should settle the issue in
favour of the assessee because even if it is assumed that a part of the
expenditure inured for the benefit of the parent company, the assessee is getting
compensated for it. The view that in any case, expenditure, the benefit of
which inures partly to the assessee and partly to another person, cannot be
allowed as a deduction, we are afraid, is not the correct view to take in law
since it has been settled by a long line of cases that expenditure incurred by the
assessee in the running of his business cannot be disallowed merely on the
ground that a part of the expenditure results in some benefit to a third party.
The principle to be applied in such cases was articulated by Lord Atkinson in
Usher's Wiltshire Brewery Ltd. Vs. Bruce (1914) 6 TC 399 (HL):
"I confess I am unable to see upon what principle money
designedly spent by the brewer with the sole and exclusive object
of maintaining this market place for his own goods, and
promoting, through the action of the salesman, the sale of those
goods therein, ceases to be an expenditure wholly and exclusively
for his (the brewer's) trade because, incidentally, it may benefit
the salesman."
Lord Sumner stated in the same case that the mere fact that to some extent the
expenditure inures to the benefit of a third party cannot in law defeat the effect
of the finding as to the whole and exclusive nature of the purpose. This
principle was applied in India by the Supreme Court in Eastern Investment
Ltd. Vs. CIT (1951) 20 ITR 1, CIT Vs. Royal Calcutta Turf Club (1961) 41
ITR 414 and CIT Vs. Chandulal Keshavlal and Co. (1960) 38 ITR 601.
Having regard to the legal position adumbrated in the aforesaid cases we do not
ITA Nos.98, 113 & 143 of 2010 Page 11 of 12
find any error of law in the approach adopted by the Tribunal. Accordingly, the
question of law is answered in favour of the assessee and against the revenue.
21. In the result, all the three appeals filed by the revenue are dismissed with
no order as to costs.
R.V.EASWAR, J.
S. RAVINDRA BHAT, J.
SEPTEMBER 03, 2012 vld ITA Nos.98, 113 & 143 of 2010 Page 12 of 12