Service charges (assessee’s appeal)
(i) whether the services rendered benefited group companies.
(ii) whether the expenses were incurred to take care of the TCCC brand image.
(iii) whether rendering services to the bottlers could be a ground for making disallowance.
(iv) whether disallowance of foreign travel expenses of the wives was justified.
Marketing expenses (assessee’s appeal)
(v) whether disallowance could be made on ad hoc basis.
(vi) whether expenditure on films/TV and brand buildings were capital expenditure.
(vii) whether Rs. 31,19,919 deserved to be allowed as the payments were made by account payee cheques and it constituted a small fraction of the total expenditure of Rs. 73,79,03,469.
Marketing expenses (Department’s appeal)
(viii) whether the disallowance of prior period expenditure should have been Rs. 5,76,75,624 as claimed by the Department, instead of disallowance of Rs. 4,11,61,718 confirmed by CIT(A).
(ix) whether the disallowance on account of differences/no reply should have been Rs. 1,89,99,955 as claimed by the Department instead of disallowance of Rs. 31,19,919 confirmed by the CIT(A).
The position in law, in relation to Section 37(1) of the Act, as emerging from the decisions of the Supreme Court, discussed in the above paras, can be summarized as under:
(i) the expenses incurred should be ‘incidental’ to the carrying on of the business of the assessee.
(ii) the expression “wholly and exclusively” used in Section 37(1) of the IT Act, 1961, does not mean ‘necessarily’.
(iii) an expenditure incurred ‘voluntarily’ without any ‘necessity’, would be permissible for deduction under Section 37(1) if it was incurred for promoting the assessee’s business.
(iv) the fact that somebody other than the assessee was also benefited by the expenditure, should not come in the way of an expenditure being allowed for deduction under Section 37(1).
(v) the AO cannot justifiably claim to put himself in the armchair of the businessman to decide whether to incur an expenditure and how much to incur.
(vi) the requirement of ‘commercial expediency’ has to be determined from the point of view of a prudent businessman and not from the point of view of the AO.
(vii) the test is : existence of a ‘nexus’ between the expenditure and the ‘purpose of business’.(Para 18.8)
INCOME TAX APPELLATE TRIBUNAL- PUNE
Appeal No. 1257/Pn/2003; (Assessee’s appeal)
&
1269/Pn/2003; (Department’s appeal)
Coca Cola India (P) Ltd.
Versus
Deputy Commissioner of Income Tax
Date of Judgment: 30/6/2008
O R D E R
Ahmad Fareed, A.M.
1. The present proceedings in this case are a sequel to the directions given by the Bombay High Court in Writ Petn. No. 7459 of 2006, dt. 12th Feb., 2007.
Background
2. The cross-appeals, against the order of the CIT(A) dt. 14th Aug., 2003 for asst. yr. 1997-98, filed by the assessee and by the Department in ITA Nos. 1257/Pn/2003 and 1269/Pn/2003 respectively, were decided by Tribunal Pune, vide its order dt. 5th Oct., 2005. The miscellaneous applications filed by the assessee in Misc. Appln. No. 19/Pn/2006 and by the Department in Misc. Appln. No. 29/Pn/2007, in relation to the aforesaid order of the Tribunal dt. 5th Oct., 2005 were disposed of by the Tribunal vide its orders dt. 7th July, 2006 and 5th July, 2007 respectively.
3. The assessee then filed a Writ Petn. No. 7459 of 2006, before the Bombay High Court, challenging the orders of the Tribunal dt. 5th Oct., 2005 (supra) and dt. 7th July, 2006 (supra). While allowing the writ petition, in its order dt. 12th Feb., 2007, Coca Cola India (P) Ltd. v. ITAT and Ors. , the High Court held as under:
29. For all the aforesaid reasons, we set aside the impugned order passed by the Tribunal dt. 5th Oct., 2005, as well as the order passed on a miscellaneous application dt. 7th July, 2006, insofar as it pertains to the claim relating to service charges and marketing expenses and remit the case to the Tribunal for disposal of the appeal in accordance with law.
30. Accordingly, the writ petition succeeds. Rule is made absolute in terms of prayer Clause (a) with no order as to costs.
4. The Clause (a) of the assessee’s writ petition, referred to above, reads as under:
(a) this Hon’ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records of the petitioner’s case and after examining the legality and validity thereof quash and set aside the impugned orders dt. 5th Oct., 2005 (to the extent it deals with the deduction for service charges and marketing expenses) and 7th July, 2006 [Exhs. “E” and “K” passed by respondent No. 1 under Sections 254(1) and 254(2) of the Act respectively].
5. In order to comply with the directions given by the Bombay High Court (supra), the learned Authorised Representative of the assessee Shri S.E. Dastur, and the learned Departmental Representatives, Shri S.D. Kapila and Shri Pradeep Sharma, were heard on 16th Jan., 2008, 17th Jan., 2008, 18th Jan., 2008 and on 28th Jan., 2008.
Brief facts
6. The assessee company is a 100 per cent subsidiary of Coca Cola South Asia India Molding, Hongkong, which in turn is a subsidiary of Coca Cola South Asia Holding, Singapore. The ultimate holding company of the assessee is The Coca Cola Company, USA (TCCC for short), engaged in the manufacture of certain ‘beverage essence’ and ‘beverage bases’ used in the preparation of non-alcoholic beverages which are sold under the trademarks : “Coca Cola”, “Coke”, “Fanta” and “Sprite”. TCCC is the registered owner in India of the trademarks “Coca Cola”, “Coke”, “Fanta” and “Sprite”.
6.1 The assessee company had entered into an agreement with TCCC on 1st June, 1993 pursuant to which an ordinary gratuitous non-exclusive licence was granted to the assessee and accordingly the assessee had been manufacturing and selling non-alcoholic beverage bases, also known as ‘concentrates’, and beverages made out of such ‘concentrates’ (p. 17 of the assessee’s paper book, Vol. I).
6.2 The assessee company had also entered into a service agreement dt. 1st April, 1995 (p. 14 of the paper book, Vol. I), with Coca Cola India Inc. USA (CCI Inc. for short) which has its branch office in Delhi. The CCI Inc. is a subsidiary of Coca Cola Holdings India Inc. (USA) which in turn is the subsidiary of TCCC.
6.3 The assessee company sells ‘concentrate’ only to the bottlers authorized by TCCC. There were about 60 bottlers during the previous year relevant to 1997-98 and each one of them had entered into an agreement with TCCC. A sample of such an agreement is at p. 38 of the paper book Vol. III.
6.4 During the previous year relevant to 1997-98, the business activities of the assessee comprised of manufacturing of beverage bases (concentrates), and bottling of beverages. The return for asst. yr. 1997-98 was filed on 28th Nov., 1997 declaring loss of Rs. 46,74,77,640. A revised return was filed on 19th Dec., 1997 declaring loss of Rs. 46,62,27,370. In the assessment order passed by the AO under Section 143(3) on 31st March, 2000, the AO determined the loss at Rs. 12,52,40,834 after making disallowances/additions aggregating to Rs. 34,09,86,536, which included, inter alia, the impugned two items as under:
—————————————————-
Particulars (Rs.)
—————————————————-
Service charges 10,80,04,482
—————————————————-
Marketing expenses 17,99,74,343
—————————————————-
7. The assessee had claimed Rs. 46,35,12,031 under the head ‘Service charges’ out of which the AO made a disallowance of Rs. 10,80,04,482, computed in para 7(iii) of his order, as under:
