Income Tax Appellate Tribunal - Chandigarh
Glaxo Smithkline Consumer Healthcare ... vs Assessee on 25 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'A', CHANDIGARH
BEFORE SHR I T.R.SOOD, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.933 /Chd/2012
(Assessment Year : 2009-10)
Glaxo Smithkline Consumer Vs. The Addl.C.I.T.,
Healthcare Ltd., Range IV,
DLF Plaza Towers, Chandigarh.
DLF Cit y, Phase 1,
Gurgaon.
PAN: AACCS0144E
(Appellant) (Respondent)
Appellant by : S/Shri Ajay Vohra &Neeraj Jain
Respondent by : Shri Amarveer, DR
Date of hearing : 25.06.2013
Date of Pronouncement : 27.06.2013
O R D E R
Per SUSHMA CHOWLA, J.M. :
The appeal filed by the assessee is against the order of the Commissioner of Income Tax (Appeals), Chandigarh dated 02.07.2012 relating to assessment ye a r 2009-10 against the order passed u/s 115WE(3) of Income Tax Act, 1961 (in short 'the Act').
2. The assessee 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. 15,87,73,592 against returned value of fringe benefits of Rs. 9,28,29,725.
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 distribution of articles/items like badminton rackets, biscuits, etc., amounting to Rs. 32,97,19,335 as liable to fringe benefit tax ("FBT") 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').2
2.1 That the Commissioner of Income Tax (Appeals) failed to appreciate that the provisions of FBT as contained in Chapter XII-H of the Act were not applicable since no benefit was derived by the employee, whether directly / indirectly collectively, as a result of incurring of the aforesaid expenditure by the appellant."
3. The learned A.R. for the assessee at the outset pointed out that the issue raised in the present appeal is covered by the order of the Tribunal in assessee's own case relating to assessment years 2006-07 and 2008-09 wherein similar issue of the expenditure incurred on distribution of articles was held to be not liable of fringe benefit as the same had been incurred for the purpose of sale promotion and publicity.
4. The learned D.R. for the Revenue placed reliance on the order of the authorities below. However, the learned D.R. for the Revenue fairly admitted that similar issue had arisen before the Tribunal in assessee's own case in the earlier years.
5. The brief facts of the case are that the assessee was engaged in manufacture and sale of health care and food products. The assessee for the year under consideration had filed return of income of fringe benefit declaring total value of fringe benefit at Rs.9,28,29,725/-. The Assessing Officer noted that in the Audit Report furnished in Form No.3CD, in Column No.6 of the Schedule treated the expenditure of sale promotion amounting to Rs.37,11,40,439/- as fringe benefit under section 115WB(2)(D) and had shown value of fringe benefit under the said head at Rs.7,42,28,088/-. From the perusal of the Profit & Loss Account the Assessing Officer noted that the expenditure of Rs.32,97,19,335/- on freebies like badminton racket, toys, etc. given free to the customers upon purchase of company's products i.e. horlicks and boost were not included as fringe benefit under 3 the provisions of section 115WB(2)(D) of the Act. The explanation of the assessee in this regard is incorporated under para 2.1 at pages 2 and 3 of the assessment order. The claim of the assessee that the said expenditure incurred on freebies amounting to Rs.32.97 crores does not fall within the scope of fringe benefit was rejected by the Assessing Officer and the expenditure of Rs.32.97 crores incurred on freebies was deemed as fringe benefit under the provisions of section 115WB(2)(D) of the Act and addition of Rs.6,59,43,867/- i.e. 20% of the total expenditure was added to the value of fringe benefit declared by the assessee.
6. The CIT (Appeals) upheld the order of the Assessing Officer.
We find that identical issue of assessability of value of fringe benefit computed under the provisions of section 115WB(2)(D) of the Act arose before the Tribunal in assessee own case in ITA No.931/Chd/2009 relating to assessment year 2006-07, ITA No.256/Chd/2011relating to assessment year 2007-08 and ITA No.83/Chd/2012 relating to assessment year 2008-09. The Tribunal vide order dated 19.7.2012 while adjudicating the issue in ITA No.931/Chd/2009 vide paras 13 to 22 at pages 7 to 14 of the order held as under:
"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 deemed to have been provided by an employer to his employees, during the previous year, is to be charged @ 30% on the value of such fringe benefits. It has been further provided under section 115WA(2) of the Act that not withstanding where no income tax is payable by an employer on his total income computed under the Act, the tax on fringe benefits shall be payable by such employer.4
14. Fringe benefits is defined under section 115WB of the Act. Sub-section (1) to section 115WB of the Act relates to the consideration provided by the employer to its employees for employment as provided 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 shall be deemed to have been provided by an employer to his employees. Sub-section (2) to section 115WB entails the provisions of the benefits by an employer to his employees, if the employer had in the course of carrying on his business incurred any expenditure or made any payment 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, 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 5 Rs.24,11,16,498/- were fringe benefits incurred by the assessee for the purposes sale promotion and publicity. The second issue arising in the present appeal is in relation to the expenditure incurred on samples of company's products given free to the customers amounting to Rs.5,97,20,311/- being incurred for the purposes sale promotion and publicity. 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 expression 'sale promotion and publicity' falling within the scope of the 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)"
- 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' 6
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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.
[ 2 5 7 I T R 6 4 5 ( 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 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 1 9 9 5 ) 5 3 T T J ( D e l ) 4 0 8]
"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 expenditure has been incurred by the employer in the course of his carrying of the business and the same would be deemed to have been provided by the employer to his employee. Sub-section (1) to section 115WB of the Act which defines fringe benefits for the purposes of Chapter-XII-H i.e. any consideration for employment provided by the employer to his employee, would govern the deeming provisions laid 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 employment provided by the employer to his employee, would not be 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:
7"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 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 8 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 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 9 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. 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 10 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 company's products free to the customers alongwith sale of products of 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."
7. The facts of the present case are identical to the facts in the earlier years and following the order of the Tribunal (supra) we hold that the expenditure incurred on freebies amounting to Rs.32.97 crores is not fringe benefit covered under the provisions of section 115WB(2)(D) of the Act and the same is not includible in the hands of the assessee. In view thereof, we direct the Assessing Officer to exclude the value of fringe benefit amounting to Rs.6.59 crores i.e 20% of Rs.32.97 crores from the total value of the fringe benefit assessed in the hands of the assessee. The grounds of appeal Nos. 1 to 2.1 are thus allowed.
8. The ground No.3 raised by the assessee being consequential i.e. charging of interest under section 234B of the Act is dismissed.
9. In the result, the appeal filed b y the assessee is partly allowed.
Order pronounced in the open court on this 27th day of June, 2013.
Sd/- Sd/-
(T.R.SOOD) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 27 t h June, 2013
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh 11