Advertisement and business promotion expenses incurred on commercial expediency would not be disallowed even if somebody else is benefited

ITAT Delhi (the Tribunal) in the case of DCIT v. Maruti Countrywide Auto Financial Services Pvt Ltd. [201 1-TIOL-283- ITAT-DEL] held that expenditure on advertisement and business promotion incurred on the ground of commercial expediency would be treated as normal business expenditure even if somebody other than the taxpayer was also benefited by the said expenditure.

Facts of the case

• The taxpayer was a Non Banking Finance Company engaged in the business of auto finance, lease and hire purchase. As per agreement between the tax payer and Maruti Udyog Ltd (Maruti), the taxpayer has to pay royalty at the rate of 0.35 percent of net loan value disbursed to Maruti.
• In Assessment Year 2005-06, taxpayer had incurred advertisement and business promotion expenditure on print and electronic media amounting to INR 72 million and it has also paid royalty amounting to INR 16.73 million to Maruti.
• The Assessing Officer considered that major part of advertisement spends was towards brand promotion of Maruti and disallowed INR 3 1.52 million holding this expenditure were not incurred wholly and exclusively for the purpose of business of the taxpayer.

Taxpayer’s contentions

• The joint venture and shareholders agreement does not provide for any obligation cast upon the taxpayer to incur such expenditure. Expenditure had no relation with the payment of royalty.
• The taxpayer placed reliance on decisions in the CIT v Chandulal Keshavial & Co. [1960] 38 ITR 601 (SC) and  Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC) to contend that any expenditure incurred on the ground of commercial expediency would be treated as normal business expenditure even if somebody other than the taxpayer was also benefited by the said expenditure.
• Any expenditure incurred voluntarily on the ground of commercial expediency and in order to facilitate the carrying on of the business would be deductible under Section 37 of the Income-tax Act, 196 1(the Act).

Tax department’s Contentions

• The taxpayer has promoted Maruti Brand in the market and hence these expenditures cannot be said to have been incurred wholly and exclusively for the purpose of business of the taxpayer.
• Disallowance of 50 percent of advertisement and business promotion expenses should be made as the entire expenditure is not incurred wholly and exclusively for the purpose of its business.

Tribunal’s ruling

The Tribunal, after considering all the submissions and perusing the material on record, ruled in favour of the taxpayer. The key aspects of Tribunal’s order are summarised below:

• The Tax Payer has been authorized to deal, finance the automobile produced by the Maruti. The promotion of the brand name ‘Maruti’ will directly promote the business of the taxpayer. The Tribunal held that the taxpayer had not incurred those expenditure for the purpose of benefiting Maruti Udyog Ltd.
• The Tribunal placed reliance on various judicial precedents and concluded that if the expenditures are incurred for the purpose of business of the taxpayer and if incidentally those expenditure benefit the other party, then also no part of those expenditures could be disallowed on the ground that the taxpayer did not incur such expenditure wholly and exclusively for the purpose of its business.

Our Comments

This is an important decision of the Delhi Tribunal wherein it is held that the expenditure incurred for business promotion and advertisement based on commercial expediency should not be considered for disallowances even if it incidentally benefits the other party. This judgement is in line with the judgement of Nestle India Ltd Vs DCIT. [2007] 111 TTJ 498 (Delhi). However, in this case, the Tribunal has not considered when the taxpayer is mandatorily required to use the trademark of the JV partner and creation of marketing intangibles.

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