PCIT Vs Marico Limited (Bombay High Court)
Summary: The Bombay High Court dismissed the Revenue’s Income Tax Appeal concerning Assessment Year 2008-09, holding that the market research expenses incurred by Marico Limited were revenue in nature. The Revenue had challenged the Income Tax Appellate Tribunal’s order dated 1 March 2019 deleting the disallowance of Rs.7.36 crore made by the Assessing Officer.
Marico had originally filed its return of income on 25 September 2008 declaring income of Rs.10,88,06,290 under the normal provisions of the Income Tax Act, 1961 and subsequently filed a revised return on 30 March 2010 declaring total income of Rs.10,83,97,300. The return was processed under Section 143(1), following which the case was selected for scrutiny under Section 143(2). A reference was also made to the Transfer Pricing Officer concerning certain transactions with Associated Enterprises. In relation to the market research expenditure, the Assessing Officer treated the expenditure claimed as revenue expenditure by the assessee as capital expenditure.
The Assessing Officer considered that the market research expenditure helped Marico assess changing elements of the marketing mix, including product, price, distribution and promotion, and considered that marketing research generally contributed to brand building, increased brand awareness and identification of strategies for specific target audiences. On this basis, the Assessing Officer concluded that the expenditure provided an enduring benefit and was capital in nature. The assessee did not pursue the DRP route against the Draft Assessment Order, and the final Assessment Order was passed on 3 February 2012.
The Commissioner of Income Tax (Appeals) upheld the Assessing Officer’s treatment. Marico thereafter approached the ITAT. The ITAT, being the last fact-finding authority, examined the nature of the expenditure and noted that Rs.7.36 crore had been incurred towards market research during A.Y. 2008-09. It found that there was no dispute that the expenditure was incurred for the purposes of the assessee’s business. The Tribunal noted that the expenditure enabled Marico to understand consumers, their habits, reactions and feedback on its products. Various agencies had been appointed for different market research activities, with the expenditure assisting Marico in improving its marketing strategy, ultimately resulting in higher sales and profits.
The ITAT also noted that the expenditure was recurring in nature and that the Revenue had allowed the very same expenses as revenue expenditure for A.Ys. 2001-02 to 2006-07 while framing assessments under Section 143(3) of the Income Tax Act. The Tribunal relied upon the Bombay High Court’s decision in CIT Vs. Glenmark Pharmaceuticals Ltd., 351 ITR 359 (Bom), as supporting its conclusion that the expenditure was revenue in nature. The ITAT accordingly allowed the assessee’s appeal on the issue.
Before the High Court, the Revenue contended that the market research expenses were for brand building, increasing brand awareness and identifying strategies for specific target audiences and therefore produced an enduring benefit in future years, warranting capital treatment.
The High Court considered the Tribunal’s reasoning and observed that the ITAT had examined the nature of the expenses and found that they were incurred in the normal course of Marico’s business and ultimately resulted in higher sales and consequently higher profits. The High Court agreed with the Tribunal that the market research expenses were revenue in nature.
The High Court further held that the Tribunal had correctly relied upon the decision in Glenmark Pharmaceuticals Ltd., where the facts were found to be very similar. The Court also agreed with the Tribunal on the ground of consistency, observing that the market research expenses could not have been treated as capital expenditure when the Revenue had consistently allowed the same expenditure as revenue expenditure for A.Ys. 2001-02 to 2006-07.
The High Court concluded that the ITAT had correctly appreciated the facts and applied the law in relation to the market research expenses. It held that the Revenue’s appeal did not give rise to any substantial question of law and dismissed the appeal. There was no order as to costs.
Cases Discussed
- CIT Vs. Glenmark Pharmaceuticals Ltd., 351 ITR 359 (Bom) — relied upon by the ITAT and affirmed by the High Court as supporting the treatment of the expenditure as revenue in nature.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The above Appeal has been filed by the Revenue challenging the order dated 1st March 2019 passed by the Income Tax Appellate Tribunal, Mumbai (ITAT). The Assessment Year in question is A.Y.2008-09. According to the Revenue, the above Appeal gives rise to the following substantial question of law:-
A. Whether on the facts and circumstances of the case and in law the Hon9ble ITAT is correct in deleting the disallowance of market research expenses of Rs.7,36,00,000/- made by the AO and confirmed by the Ld. CIT(A) without appreciating the fact that the market research expenses are for brand building, increasing brand awareness and identifying strategy for specific target audience which has enduring benefit in the forthcoming years and therefore should be treated as capital expenditure?
2. The Assessee e-filed its Return of Income on 25th September 2008 declaring its income at Rs.10,88,06,290/- under the normal provisions of the Income Tax Act, 1961 (IT Act). Thereafter, on 30th March 2010 the Assessee e-filed a revised Return of Income declaring its total income at Rs.10,83,97,300. The return was processed under Section 143(1) of the IT Act. Thereafter, the case of the Assessee was selected for scrutiny by issuing a Notice under Section 143(2) of the IT Act. Since there were transfer pricing issues, a reference was made to the Transfer Pricing Officer (TPO) in relation to certain transactions entered into by the Assessee with its Associated Enterprises. There was also an issue regarding the deduction claimed by the Assessee for market research expenses and which it claimed as a revenue expenditure. After a reference was made to the TPO, and his recommendations were obtained, a Draft Assessment Order was passed by the Assessing Officer dated 30th December 2011. In the said Draft Assessment Order, as far as market research expenses are concerned, the Assessing Officer was of the view that the expenditure incurred in relation thereto helped the Assessee to assess how changing elements of marketing mix like product, price, distribution and promotion, impacts customer behavior. The Assessing Officer came to the conclusion that usually marketing research takes place for brand building, increasing brand awareness and identifying strategies for specific target audience. This brings enuring benefit to the Assessee for the years to come. The Assessing Officer therefore was of the view that the expenditure related to market research expenses will definitely bring enuring benefit to the Assessee and therefore the expenditure in this regard has to be treated as capital in nature. To challenge or take objection to the Draft Assessment Order, the Assessee did not choose to take the DRP route, and therefore, a final Assessment Order dated 3rd February 2012 was passed by the Assessing Officer.
3. Being aggrieved by the final Assessment Order, the Assessee preferred an Appeal before the CIT (Appeals). On the issue of market research expenses, the CIT (Appeals) upheld the order of the Assessing Officer and held against the Assessee. Being aggrieved by the order of the CIT (Appeals), the Assessee therefore approached the ITAT. The ITAT, for the reasons recorded in the impugned order, held that the expenses incurred by the Assessee towards market research could not be termed as capital in nature and allowed the Appeal of the Assessee on this ground, amongst others. Being aggrieved by this order of the ITAT the Revenue is in Appeal before us.
4. We have heard Mr. Suresh Kumar, the learned counsel appearing on behalf of the Revenue, as well as Mr. Joshi, the learned counsel appearing on behalf of the Assessee. The discussion of the Tribunal in relation to the market research expenses can be found from paragraph 17 onwards of the impugned order. The Tribunal, being the last fact finding authority, firstly noted that during the year under consideration [A.Y.2008-09] the Assessee had incurred market research expenses of Rs.7.36 Crores, the detailed break up of which was set out in tabular form in paragraph 17. The Tribunal noted that from the Assessment Order it was clear that there was no dispute on the nature of the expenses and that they are incurred for the purposes of the business of the Assessee. The Tribunal further noted that the Assessing Officer had accepted that the above expenditure was incurred on various items which helps the Assessee to ascertain changing elements of marketing mix like product, price, distribution and promotion, all which makes impact customer behavior. The Tribunal held that though the Assessing Officer was of the view that these market research expenses takes place for brand building, increasing brand awareness etc, the Tribunal held that the said expenditure incurred was in the normal course of business of the Assessee to understand the consumers, their habits, reactions, and feedback on the products. The Tribunal noted that for this purpose the Assessee had appointed various agencies in relation to various market research activities and accordingly incurred such expenditure to assist the Assessee in improving marketing strategy which ultimately results in higher sales and consequently higher profit for the business. The Tribunal also noted that this was an expenditure which was recurring in nature, and for A.Y.2001-02 to A.Y.2006-07, the Revenue had allowed these very same expenses being revenue in nature while framing the assessment under Section 143(3) of the IT Act. The Tribunal also, in support of its conclusion that the expenditure incurred by the Assessee was revenue in nature, relied upon a decision of this Court in the case of CIT V/S Glenmark Pharmaceuticals Ltd [351 ITR 359 (Bom)]. All in all, the Tribunal held that looking at the nature of the expenses, the decision of this Court in Glenmark Pharmaceuticals Ltd (supra) as well as the Revenue consistently allowing this expenditure as a revenue expenditure for A.Y.2001-02 to A.Y.2006-07, allowed the Assessee9s Appeal on this issue.
5. After carefully going through the order of the ITAT, we are clearly of the view that the order of the ITAT does not gives rise to any substantial question of law. Having examined the nature of the expenses and coming to a finding that they are incurred in the normal course of business which ultimately results in higher sales and consequently higher profits, the Tribunal, and in our view correctly so, came to the conclusion that the market research expenses incurred by the Assessee are revenue in nature. We find that the Tribunal also correctly placed reliance on the decision of this Court in Glenmark Pharmaceuticals Ltd (supra), wherein the facts were very similar to the facts in the present case. Even on the ground of consistency, we agree with the Tribunal that the market research expenses could not have been termed as capital in nature but revenue in nature. All in all, we find that the Tribunal has correctly appreciated the facts and applied the law in coming to the conclusions that it did in relation to the market research expenses.
6. We accordingly find that the above Appeal does not gives rise to any substantial question of law. It is accordingly dismissed. However, there shall be no order as to costs.
7. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
