Adidas India Marketing Pvt. Ltd., New Delhi v. ITO, New Delhi

ITA 1889/DEL/2010 | 2004-2005
Pronouncement Date: 07-01-2011 | Result: Allowed

Appeal Details

RSA Number 188920114 RSA 2010
Assessee PAN AAACA5313P
Bench Delhi
Appeal Number ITA 1889/DEL/2010
Duration Of Justice 8 month(s) 10 day(s)
Appellant Adidas India Marketing Pvt. Ltd., New Delhi
Respondent ITO, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 07-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted A
Tribunal Order Date 07-01-2011
Date Of Final Hearing 12-11-2010
Next Hearing Date 12-11-2010
Assessment Year 2004-2005
Appeal Filed On 27-04-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `A: NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA VICE PRESIDENT AND SHRI C.L.SETHI JUDICIAL MEMBER. I.T. A. NO.1889/DEL/2010 ASSESSMENT YEAR: 2004-05 ADIDAS INDIA MARKETING PVT. LTD. ASSESSING OFFIC ER C/O N. NARASIMHAN & CO. VS. WARD 1(2) NEW D ELHI. 211 HANS BHAWAN 1 BAHADUR SHAH ZAFAR MARG NEW DELHI. PAN: AAACA5313P (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ANIL JAIN CA. RESPONDENT BY: SHRI PEEYUSH SOWKAR SR. DR. O R D E R PER C.L. SETHI JUDICIAL MEMBER: THE ASSESSEE IS IN APPEAL AGAINST THE ORDER DATED 0 3.03.2010 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) PE RTAINING TO THE ASSESSMENT YEAR 2004-05. 2. THE VARIOUS GROUNDS OF APPEAL RAISED BY THE ASSE SSEE ARE DIRECTED AGAINST THE CIT(A)S ORDER IN CONFIRMING THE ASSESS ING OFFICERS ACTION OF 2 DISALLOWING THE SUM OF RS.21 72 787/- OUT OF THE IN TEREST PAYMENT MADE BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. 3. THE ASSESSEE COMPANY IS A SUBSIDIARY OF ADIDAS I NDIA PVT. LTD. DURING THE YEAR THE ASSESSEE HAD INCURRED EXPENDIT URE ON BRAND PROMOTION AND DEBITED THE SAME TO THE HOLDING COMPANY. THE A SSESSEE WAS REQUIRED TO PAY ROYALTY TO THE HOLDING COMPANY AS PER THE TECHN ICAL ASSISTANCE AGREEMENT. HOWEVER DUE TO HUGE LOSSES NO ROYALTY PAYABLE AS PER THE TECHNICAL ASSISTANCE AGREEMENT WAS ACTUALLY PAID FO R THE LAST YEARS. THEREFORE THE AMOUNT DEBITED TO THE HOLDING COMPAN Y TOWARDS EXPENDITURE INCURRED ON BRAND PROMOTION REMAINED OUTSTANDING. IN THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED BY THE ASSESSI NG OFFICER THAT THE ASSESSEE HAD DEBITED BALANCE OF RS.1 81 06 555/- RE CEIVABLE FROM ITS HOLDING COMPANY NAMELY M/S. ADIDAS INDIA PVT. LTD. THE AO ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE INTEREST @ 12% SHOULD NOT BE DISALLOWED OUT OF THE TOTAL INTEREST PAID AS THE BORROWED FUNDS WERE BEING INCURRED FOR NON- BUSINESS PURPOSES BEING ADVANCES GIVEN TO HOLDING C OMPANY. IN REPLY THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD INCURRED E XPENDITURE ON BRAND PROMOTION AND DEBITED THE SAME TO THE HOLDING COMPA NY AND NO AMOUNT WAS ACTUALLY PAID BY THE ASSESSEE COMPANY TO HOLDING CO MPANY OUT OF THE BORROWED FUND FOR NON-BUSINESS PURPOSES. IT WAS FUR THER CLARIFIED BY THE 3 ASSESSEE BEFORE THE ASSESSING OFFICER THAT THE ASSE SSEE WAS REQUIRED TO PAY ROYALTY TO HOLDING COMPANY BUT DUE TO LOSSES NO RO YALTY WAS PAID FOR THE LAST YEARS AS A RESULT THEREOF THE AMOUNT DEBITED TO TH E HOLDING COMPANY ON ACCOUNT OF EXPENDITURE ON BRAND PROMOTION REMAINED OUTSTANDING. IN THE LIGHT OF THESE FACTS THE ASSESSEE CONTENDED BEFORE THE AO THAT THE AMOUNT SPENT ON BRAND PROMOTION WAS INCURRED FOR THE PURPO SE OF BUSINESS SPECIALLY WHEN THE ASSESSEE WAS TRADING IN GOODS WITH THE BRA ND NAME (ADIDAS) AND THE DEBIT BALANCE WAS MAINLY BECAUSE OF NON-PAYMENT OF ROYALTY BY THE ASSESSEE COMPANY TO THE HOLDING COMPANY. THE ASSES SEE FURTHER POINTED OUT THAT THE CLOSING BALANCE AS ON 31 ST MARCH 2004 HAS COME DOWN TO RS.1 81 06 555/- FROM THE OPENING BALANCE OF RS.1 8 7 36 555/- AND THUS THEE WAS A DECREASE IN DEBIT BALANCE BY RS.6 30 000 /- DURING THE YEAR AGAINST THE OPENING BALANCE. THE ASSESSEES SUBMISSIONS WE RE CONSIDERED BY THE AO. THE AO OBSERVED THAT OVER THE YEAR THE ASSESSE E COMPANY DEBITED BRAND PROMOTION EXPENSES TO THE HOLDING COMPANY AND SO THE DEBIT BALANCE REMAINED PAYABLE. THE AO FURTHER OBSERVED THAT WHE N THE ASSESSEE WAS RUNNING IN HUGE LOSSES AND THE ASSESSEE BORROWED FU NDS BOTH FROM BANKS AND NON-BANKING PARTIES AND WAS INCURRING LIABILITY OF HUGE INTEREST COST THE AMOUNT DEBITED TO THE HOLDING COMPANY COULD NOT BE CONSIDERED FOR BUSINESS EXPEDIENCY. THE AO FURTHER OBSERVED THAT THERE WAS A NEXUS BETWEEN 4 BORROWED FUNDS AND DEBIT BALANCE OUTSTANDING AGAINS T THE HOLDING COMPANY. THE AO HAS THEREFORE TAKEN A VIEW THAT SUCH INTER EST-FREE ADVANCES BY THE ASSESSEE COMPANY TO HOLDING COMPANY ARE NOT JUSTIFI ED IN TERMS OF BUSINESS NEEDS. THE AO THEREFORE WORKED OUT THE INTEREST @ 12% ON THE CLOSING BALANCE OF RS.1 81 06 555/- AMOUNTING TO RS.21 62 7 87/- AND DISALLOWED THE SAME FROM THE TOTAL INTEREST EXPENSES AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4. BEING AGGRIEVED THE ASSESSEE PREFERRED AN APPEA L BEFORE THE CIT(A). 5. THE ASSESSEE REITERATED ALL THOSE CONTENTIONS AN D SUBMISSIONS THAT WERE MADE BEFORE THE AO. THE ASSESSEES SUBMISSION S HAVE BEEN SUMMARIZED BY THE CIT(A) IN HIS ORDER AS UNDER:- 1) IT WAS SUBMITTED BY THE AR THAT THE OUTSTANDING AMO UNT WITH THE HOLDING COMPANY WAS NOT IN THE NATURE OF ANY AD VANCE BUT WAS ACTUALLY ON ACCOUNT OF ADVERTISEMENT EXPEND ITURE DUE FROM THEM. ACCORDINGLY THE ASSESSING OFFICER W AS NOT JUSTIFIED IN TREATING AS AN ADVANCE AND DISALLOWING THE INTEREST PAYMENT. 2) THE AR FURTHER ARGUED THAT THE INTEREST FREE ADVANC ES MADE BY THE APPELLANT COMPANY TO THE HOLDING COMPANY IS GUIDED BY THE PRINCIPAL OF COMMERCIAL EXPEDIENCY IN VIEW O F THE FACT THAT THE AMOUNT WAS MAINLY SPENT BY THE APPELL ANT COMPANY TOWARDS ADVERTISEMENT AND PROMOTION OF BRAN D ADIDAS IN INDIA. ACCORDINGLY SINCE THIS ARRANGEMEN T WAS ALSO OUT OF COMMERCIAL EXPEDIENCY AND FURTHER SINCE THE ASSESSING OFFICER HAD NOT ESTABLISHED ANY NEXUS BET WEEN THE FUNDS BORROWED BY THE APPELLANT COMPANY AND THE AMO UNTS ALLOWING WITH THE HOLDING COMPANY THIS DISALLOWANC E MADE BY THE ASSESSING OFFICER WAS NOT JUSTIFIED. 5 6. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS AND THE AOS STAND THE CIT(A) CONFIRMED THE AOS ACTION BY OBSERVING AS UN DER:- I HAVE GONE THROUGH THE OBSERVATIONS OF THE ASSES SING OFFICER AND THE SUBMISSIONS OF THE AR OF THE APPELL ANT IT IS OBSERVED THAT THE AMOUNT OUTSTANDING WITH THE HOLDI NG COMPANY WAS CERTAINLY IN THE NATURE OF AN INTEREST FREE ADVANCE PROVIDED BY THE APPELLANT TO ITS HOLDING COMPANY. IT IS ALSO AN UNDISPUTED FACT THAT NO INTEREST WAS BEING CHARGED BY THE APPELLANT COMPANY ON THIS AMOUNT WHICH WAS EFFECTIV ELY IN THE NATURE OF THE ADVANCE. THE AR HAS TRIED TO ARGUE T HAT THIS AMOUNT WAS LYING WITH THE HOLDING COMPANY OUT OF CO MMERCIAL EXPEDIENCY AND THEREFORE THERE WAS NO REASON FOR DI SALLOWING ANY INTEREST BEING PAID BY THE APPELLANT ON OTHER LOANS/DEPOSITS. BE AS IT MAY THE BASIC FACT REMAINS THAT THE AMOU NT WHICH SHOULD HAVE BEEN RECEIVED BY THE APPELLANT CO MPANY FROM ITS HOLDING COMPANY WAS NOT RECEIVED AND THE S AME COULD HAVE BEEN UTILIZED FOR REPAYING THE VARIOUS LOANS/D EPOSITS ON WHICH INTEREST BEING PAID BY THE APPELLANT. THE APP ELLANT IS CERTAINLY SUBSIDIZING ITS HOLDING COMPANY BY NOT CH ARGING ANY INTEREST ON THE OUTSTANDING AMOUNT. TO THAT EXTENT THE INTEREST BEING PAID BY THE APPELLANT ON ITS LOANS/DEPOSITS I S NOT JUSTIFIED FOR BUSINESS PURPOSES. THE ASSESSING OFFICER HAS R IGHTLY DISALLOWED THIS AMOUNT OF INTEREST AND THE AR OF TH E APPELLANT HAS NOT PROVIDED ANY CONVINCING REASON FOR JUSTIFYI NG THE INTEREST FREE ADVANCE PROVIDED TO ITS HOLDING COMPA NY. ACCORDINGLY I AM OF THE OPINION THAT IN VIEW OF TH E FACTS AND CIRCUMSTANCES THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER IS FULLY JUSTIFIED. AS A RESULT THIS GROUN D OF THE APPELLANT IS DISMISSED. 7. STILL AGGRIEVED THE ASSESSEE IS IN APPEAL BEFOR E US. 6 8. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULL Y PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUG H VARIOUS DOCUMENTS AND PAPERS PLACED IN THE PAPER BOOK FILED BY THE ASSESS EE. WE HAVE ALSO DELIBERATED UPON THE POSITION OF LAW EXPLAINED IN T HIS REGARD BY BOTH THE PARTIES. 9. FROM THE ORDERS OF THE AUTHORITIES BELOW AND MAT ERIALS ON RECORD IT IS CLEAR THAT NO AMOUNT WAS ACTUALLY PAID BY THE ASSES SEE TO ITS HOLDING COMPANY. THE AMOUNT REMAINING OUTSTANDING AGAINST THE HOLDING COMPANY IS ON ACCOUNT OF ADVERTISEMENT AND BRAND PROMOTION EXPENSES WHICH HAVE BEEN INCURRED BY THE ASSESSEE BUT DEBITED TO THE AC COUNT OF THE HOLDING COMPANY. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSE E COMPANY IS AN HUNDRED PER CENT SUBSIDIARY OF ITS HOLDING COMPANY. THE HO LDING COMPANY AND THE ASSESSEE COMPANY HAD ENTERED INTO A TECHNICAL ASSIS TANCE AGREEMENT WHEREBY THE HOLDING COMPANY WAS TO PROVIDE EXCLUSIV E NON-TRANSFERABLE NON-ASSIGNABLE RIGHT TO MANUFACTURE DISTRIBUTE AND SELL THE LICENSED PRODUCTS IN INDIA NEPAL AND BHUTAN ON PAYMENT OF ROYALTY @ 5% OF THE SALES EFFECTIVE OF THE LICENSED PRODUCTS IN THE AFORESAID TERRITORIES. THE ASSESSEE HAD INCURRED EXPENDITURE ON ADVERTISEMENT AND PROMO TION OF ITS BRAND NAME. THE ASSESSEE HAD DEBITED PART OF THE EXPENDITURE ON ADVERTISEMENT TO ITS OWN PROFIT AND LOSS ACCOUNT ALSO. IN THE ASSESSMENT YE AR 1997-98 THE 7 ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSESSEE TO POPULARIZE THE PRODUCTS WAS DISALLOWED BY THE AO BUT ULTIMATELY FO UND TO BE ADMISSIBLE BY THE TRIBUNAL AND THE ORDER OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE HONBLE HIGH COURT. IN THAT YEAR IT WAS OBSERVED THAT MERELY BECAUSE THE ASSESSEE WAS PAYING ROYALTY @ 5% TO ITS HOLDING COM PANY WOULD NOT MEAN THAT THE ASSESSEE COULD NOT INCUR THE EXPENDITURE O N ADVERTISEMENT TO POPULARIZE THE PRODUCTS DEALT WITH BY IT IN INDIAN MARKET. NO DOUBT BRAND NAME OF ADIDAS IS ALREADY A WELL-KNOWN BRAND WHICH BELONGS TO THE PARENT COMPANY OF THE ASSESSEE. HOWEVER TO POPULARIZE TH E SAID PRODUCT IN INDIA AND TO PROMOTE ITS SALE IN INDIAN TERRITORIES IT B ECAME NECESSARY TO INCUR EXPENDITURE ON ADVERTISING TO PROPAGATE THE AFORESA ID BRAND NAME. THE BENEFIT THEREOF HAS TO NECESSARILY ACCRUE TO THE AS SESSEE AS THE MAIN PURPOSE OF THE ADVERTISEMENT WAS TO AUGMENT THE SALES. THE FACT THAT THE ADVERTISEMENT EXPENDITURE WAS INCURRED BASED ON COM MERCIAL PRACTICE AND COMMERCIAL EXPEDIENCY WAS ACCEPTED BY THE TRIBUNAL. IT IS THEREFORE CLEAR THAT THE ADVERTISEMENT EXPENDITURE EVEN IF DEBITED BY THE ASSESSEE TO ITS OWN PROFIT AND LOSS ACCOUNT COULD HAVE BEEN ALLOWED AS ADMISSIBLE EXPENDITURE IN THE HANDS OF THE ASSESSEE WITHIN THE MEANING OF SEC . 37 OF THE ACT AS SO ALLOWED IN THE ASSESSMENT YEAR 1997-98. IN THE PRE SENT ASSESSMENT YEAR UNDER CONSIDERATION THE PART OF THE ADVERTISEMENT E XPENDITURE WAS AGREED TO 8 BE BORNE BY HOLDING COMPANY. THE ASSESSEE HAD INCU RRED EXPENDITURE ON ADVERTISEMENT AND DEBITED THE SAME TO THE ACCOUNT O F HOLDING COMPANY. THE ACT TO INCUR EXPENDITURE ON ADVERTISEMENT TO PROMOT E THE BRAND NAME IS UNDOUBTEDLY BASED ON BUSINESS INTEREST AND COMMERCI AL EXPEDIENCY. FURTHER THE ASSESSEE HAS BEEN BENEFITED BY NOT PAY ING THE ROYALTY @ 5% OF THE SALES DURING THE YEAR UNDER CONSIDERATION WHICH WAS REQUIRED TO BE PAID BY THE ASSESSEE AS PER TECHNICAL ASSISTANCE AGREEME NT DATED 14.02.1997 AND THEREFORE THE AMOUNT DEBITED TO THE ACCOUNT OF THE HOLDING COMPANY REMAINED OUTSTANDING OTHERWISE THE SAME WOULD HAVE BEEN ADJUSTED AGAINST THE ROYALTY PAYABLE BY THE ASSESSEE COMPANY TO THE HOLDING COMPANY. FURTHER NO ACTUAL AMOUNT HAS BEEN PAID BY THE ASSE SSEE TO THE HOLDING COMPANY DURING THE YEAR UNDER CONSIDERATION. THERE WAS OUTSTANDING OPENING BALANCE OF RS.1 87 36 555/- AT THE OPENING OF THE YEAR WHICH HAS BEEN REDUCED TO RS.1 81 06 555/- AT THE END OF THE YEAR WHICH GOES TO SHOW THAT NO FURTHER AMOUNT HAS ACTUALLY BEEN GIVEN BY T HE ASSESSEE TO ITS HOLDING COMPANY. IN THE COURSE OF HEARING IT HAS BEEN POI NTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE IDENTICAL ADDITIO N MADE BY THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 2003-04 HAS BEEN DEL ETED BY THE CIT(A) VIDE ORDER DATED 22.10.2010 BY APPLYING THE PRINCIPLE LA ID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT (2007) 288 ITR 1 9 (SC) AND IN THAT RESPECT THE LEARNED COUNSEL FOR T HE ASSESSEE RELIED UPON THE AFORESAID DECISION OF THE HONBLE SUPREME COURT. I N THE CASE OF S.A. BUILDERS (SUPRA) THE HONBLE SUPREME COURT HAS OBS ERVED THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS INCLUDES E XPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT IS IMMATE RIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. THE HONBLE SUPREME COURT FURTHE R OBSERVED THAT THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INC URRED UNDER ANY LEGAL OBLIGATION BUT YET IT IS ALLOWABLE AS BUSINESS EXPE NDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. IN THE PRESEN T CASE THE EXPENDITURE INCURRED TOWARDS ADVERTISEMENT FOR AND ON BEHALF OF HOLDING COMPANY ARE UNDOUBTEDLY ON GROUNDS OF COMMERCIAL EXPEDIENCY INA SMUCH AS THE ASSESSEE UNDOUBTEDLY WOULD BE BENEFITED BY MAKING ADVERTISEM ENT OF THE BRAND NAME ADIDAS TO AUGMENT AND PROMOTE SALE EFFECTED BY THE ASSESSEE IN THE NOTIFIED TERRITORIES. 10. IN THE LIGHT OF THE REASONS GIVEN ABOVE WE THE REFORE HOLD THAT THE CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ASSESSIN G OFFICERS ACTION IN DISALLOWING THE SUM OF RS.21 72 787/- OUT OF THE IN TEREST PAID BY THE ASSESSEE DURING THE YEAR. THE ORDERS OF THE AUTHORITIES BEL OW ARE THEREFORE REVERSED 10 AND THE GROUND RAISED BY THE ASSESSEE IS ALLOWED BE ING DECIDED IN FAVOUR OF THE ASSESSEE. THE ASSESSING OFFICER SHALL MODIFY T HE ASSESSMENT ORDER ACCORDINGLY. 11. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 12. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 7 TH JANUARY 2011. SD/- SD/- (G.E. VEERABHADRAPPA) (C.L. SETHI) VICE PRESIDENT JUDICIAL MEMBER DATED: 7 TH JANUARY 2011. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR ITAT.