Revenue cannot interpret an agreement in its own way to include other costs

Advocate Akhilesh Kumar Sah

If the parties to the agreement are bound by the terms and conditions mentioned therein and the Revenue cannot interpret the said agreement in its own way to include the other costs: Coca-Cola India Inc. case

Very recently, in Coca-Cola India Inc. vs. DCIT [ITA No.2179/Del/2006 A.Y.: 2001-02, decided on 27.06.2018], the following grounds were raised by assessee-company in the appeal before Delhi ITAT:

• The CIT(A) failed to appreciate that the only adjustments made to income computed protectively is for items discussed in paras 18,19,20 of the assessment order which does not include any addition of notional income at 5% of marketing expenditure. The CIT (A) therefore grossly erred in upholding this addition of the notional income to the protective part of assessment order.
• The CIT (A) erred in wrongly presuming that marketing expenditure in question, which was incurred by service receiving parties, to be a reimbursement in the hands of the appellant.
• Without prejudice, the CIT(A) erred in upholding addition of notional sums to the income computed, purely based on presumptions and contrary to express written understanding.
• Without prejudice, the CIT(A) erred in holding that appellant should have charged 5% mark-up on the above direct expenditure of the service receiving entities failing to appreciate that the appellant company can only charge 5% of cost like salary of employees etc., incurred by the appellant itself in rendering these services.
• Without prejudice, the CIT(A) erred in failing to appreciate that the appellants have already billed the respective service receiving entities for expenses incurred by appellant company in rendering any services in connection with the respective entities marketing activities together with the agreed mark-up, which income has been offered to tax.

In the above grounds of the appeal, the only issue of addition of Rs.10,56,00,755/- sustained by the  CIT(A) towards markup 5% on marketing expenditure, was involved.

The brief facts qua the issue in dispute were that the assessee i.e. Coca-Cola India Inc, USA (CCI) being a foreign company having branch office in India, entered into three separate agreements with Coca-Cola India Private Limited (CCIPL), Hindustan Coca Cola Beverages Private Limited (HCCBPL), and the Hindustan Coca-Cola Marketing Company Private Limited (HCCMCPL), for providing marketing support and other services. In view of the service agreements, the assessee managed entire advertising and marketing work of these companies through its employees.

The cost of the advertising and marketing consisted of the cost of the employees of the assessee company for supervision of the work and the cost paid to other agencies like media agencies, celebrities etc. The cost of employees and related expenses had been debited by the assessee in its books of accounts whereas the expenses paid directly to media agencies, celebrities etc had been paid from the bank accounts of the three companies. These bank accounts, issue of cheques , montoring of work etc., were managed by the employees of the assessee company.

The assessee raised invoices on those three companies for reimbursement of the employee and other related costs incurred by the assessee along with a markup 5% on such cost, and accordingly shown income in its books of accounts.

According to the AO, the assessee was required to charge markup of 5% on the entire cost of advertisement and marketing, including the cost incurred directly from the bank account of those 3 companies. Accordingly, he held that the assessee was exclusively responsible for marketing strategies, advertise and publicity and sales promotion. He observed that the CCIL claimed marketing expenses of Rs.127,69,54,968/-, HCCBPL claimed advertisement publicity in sales promotion expenses of Rs.77,88 63,238/- and HCCMCPL claimed advertisement publicity in sales promotion expenses of Rs.5,61,96,933/-. Accordingly, he worked out 5% of the expenses incurred on marketing by these three companies expenses (Rs.6,38,47,748/- for CCIL, Rs.3,89,43,161/- for HCCBPL and Rs. 28,09,846/- for HCCMCPL) aggregating to Rs.10,56,00,755/-.

On further appeal, the CIT(A) upheld the addition.

On appeal before ITAT Delhi by the assessee-company, the learned Members observed that according to the service agreement, the CCIL was required to pay 5% markup on the actual cost incurred by the assessee under the expenses head listed in the Exhibit-A on the paper book in respect of the appeal. The contention of the Revenue was that all the expenses even paid directly to the media or the celebrities etc by the CCIL (and other two companies) should be included in the actual cost for the purpose of markup 5%. The learned Members of the ITAT Delhi opined that the finding of the CIT(A) on the issue in dispute was not correct. When the agreement between the assessee and the CCIL ( also other two companies) has clearly specified that markup will be charged on the actual cost of the expenses mentioned in the Exhibit-A, the Revenue cannot direct the assessee to charge 5% markup on the entire expenditure on marketing and advertisement incurred by the CCIL and other two companies. The parties to the agreement are bound by the terms and conditions mentioned therein and the Revenue cannot interpret the said agreement in its own way to include the other costs. Even otherwise, if the 5% markup on other cost is considered as income in the hands of the assessee, then the same would have to be allowed as expenditure in the hand of those three companies and thus entire exercise would be revenue neutral exercise. There is no dispute as far as rendering of services are concerned. But the service agreement has specified 5% markup only on the actual cost related to the salaries and allowances of employees, their moving and relocation expenses, staff welfare, service charges for the use of the assets. The learned Members of the ITAT Delhi reversed the finding of the  CIT(A) on the issue in dispute and deleted the addition of Rs.10,56,00,755/-.

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