CIT Vs. Discovery Communication India (Delhi High Court ), ITA 1297/2010, Date of Decision: 24.11.2014
Advertisement expenditure was incurred
in terms of the license agreement granting the distribution rights to
the assessee by the associated enterprise, Discovery Asia Inc. Under
this agreement, the respondent assessee had procured right to
distribute the signals of Discovery Channel and Animal Planet Channel and right to collect revenue arising or generated from distribution. Accordingly,
the assessee had received subscription revenue of Rs 23.46 crores, Rs.
37.49 crores and Rs. 39.89 crores from the cable operators in the three
assessment years. The agreement mandated and required that the assessee
to develop and expand viewership of the Discovery Channel and Animal
Planet Channel, which had started with a status of a “free to air channel” and made transition to a “pay channel”. Increased viewership obviously meant increased subscription revenue and earnings.
It was manifest and self-evident that the assessee would have
undertaken publicity, advertisement and incurred expenditure on
increasing awareness and greater market retention, penetration and
expansion. Thus, the finding of the appellate authorities was that
advertisement expenditure was related to and had direct nexus with the licence agreement for distributorship and subscription fee collection.
There was a separate agreement between
the respondentassessee and associate enterprises under which the
assessee had acted as an advertisement sale representative. As an
advertisement sale representative, the assessee was entitled to 15% of
the gross receipts as its income for the services rendered and performed
by them. The balance 85% was transferred to the associated enterprise
abroad.
The Assessing Officer‟s enigmatic and
equivocal pronouncement that the entire advertisement revenue should
have been retained as income is mere an incantation. The programmes were
prepared and aired in India by the foreign associate enterprise, which
had incurred expenditure or paid for the software and airing them. The
finding that the entire or 100% expenditure on advertisement expenses
were incurred for higher and increased advertisement revenue, is
fanciful and reflects a spirit of creativity than realism. Unintendedly,
the Assessing officer, as noticed below, impeached and transgressed
into the domain of international transaction price fixation, without
realising that the Transfer Pricing officer had accepted the price. The
Assessing Officer, as noticed below under section 37(1) of the Act,
cannot go into the question of reasonableness of advertisement or any
other expense.
The Assessing Officer, thus,
fallaciously and wrongly held that the entire expenditure, on
advertisement, incurred by the assessee related only to the
advertisement sales commission or receipt and was not incurred to
increase subscription fee by promoting the two channels.
Noticeable, the entire subscription fee was retained by the assessee
and nothing was repatriated or paid to the associated enterprises
abroad.
Section 37 (1) of the Act.
Under Section 37(1) of the Act any
expenditure not being in the nature of expenditure described in Sections
30 to 36 of the Act, has to be allowed as a deduction in computing
income chargeable under the head “Profit and Gains from Business and
Profession”, if the following conditions are satisfied: (a) it is not
capital expenditure; (b) it is not personal expenditure; and (c) it
should be expended wholly and exclusively for the purpose of business.
The first two conditions are negative in
nature, while the third condition or requirement is positive. It is not
the case of the Revenue that the expenditure on advertisement was
capital or personal in nature. The expression „expenditure‟denotes idea
of spending or paying out. It is not the case of the Revenue that the
expenditure was not incurred or was not genuine, but fictious. 10.2. The
question raised is whether the expenditure was wholly and exclusively
for the purpose of assessee‟s business. The words „wholly and
exclusively‟though not synonymous, and are sufficiently wide, but are
not restricted to expenditure solely incurred for the purpose of earning
of profits. For an amount spent as an admissible expenditure under
Section 37(1), the same should be for the purpose of business and not
for the purpose of earning income. (see Sree Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC) and CIT vs. Birla Spinning and Weavings Ltd. (1971) 82 ITR 166 (SC). In CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), it has been observed :
“The expression
“for the purpose of the business” is wider in scope than the expression
“for the purpose of earning profits”. Its range is wide : it may take in
not only the day to day running of a business but also the
rationalization of its administration and modernization of its
machinery; it may include measures for the preservation of the business
and for the protection of its assets and property from expropriation,
coercive process or assertion of hostile title; it may also comprehend
payment of statutory dues and taxes imposed as a pre-condition to
commence or for carrying on of a business; it may comprehend many other
acts incidental to the carrying on of a business.”
Thus, any expenditure which is laid down
for business which in the present case consisted of distribution of
channels and earning of subscription revenue, advertisement agency
commission etc. would be wholly and exclusively for the purpose of
business and allowable.
Whether an expenditure was wholly and
exclusively incurred or laid out for the purpose of business of
profession, must be determined from the angle and as per the assessee s
perspective and choice. It is subjective. What one assessee may want to
incur, another may not like to incur the same or similar expenditure.
The quantum may also differ and vary. Section 37(1) does not curtail or
prevent an assessee from incurring an expenditure which he feels and
wants to incur for the purpose of business. Expenditure incurred may be
direct or may even indirectly benefit the business in form of increased
turnover, better profit, growth etc. As long as the expenditure incurred
is “wholly and exclusively’ for the purpose of business, the Assessing
Officer cannot by applying of his own mind, disallow whole or a part of
the expenditure. The Assessing Officer cannot question the
reasonableness by putting himself in the arm-chair of the businessman
and assume status or character of the assessee. However, exception can
be created by a statutory provision like Section 40A(2), when the
revenue as per the statutory mandate may have jurisdiction to examine
the issue of price/consideration. For incurring advertisement
expenditure, in the relevant years, there were no statutory
stipulations.
When expenditure is incurred for
assessee‟s own business, the mere fact that the expenditure would inure
or benefits a third party or the third party incidentally obtains some
advantage, would not affect or distract from the finding that the
expenditure was wholly and exclusively was for assessee‟s business. For
example, a retail trader may advertise
different products which may incidentally benefit the manufacturers,
but this does not mean that advertisement expenditure fails to meet the
requirement of “wholly and exclusively”. Law in this regard is well
settled. Relevant would be to refer to authoritative pronouncement of
the Supreme Court in CIT v. Chandulal Keshavlal & Co., Petlad, [1960] 38 ITR 601, observing: -
“In deciding whether a payment of money is a deductible
expenditure one has to take into consideration questions of commercial
expediency and the principles of ordinary commercial trading. If the
payment or expenditure is incurred for the purpose of the trade of the
assessee it does not matter that the payment may inure to the benefit of
a third party (Usher’s Wiltshire Brewery Ltd. v. Bruce [6 Tax Cas 399].
Another test is whether the transaction is properly entered into as a
part of the assessee’s legitimate commercial undertaking in order to
facilitate the carrying on of its business; and it is immaterial that a
third party also benefits thereby (Eastern Investments Ltd. v. CIT
[(1951)SCR594]. But in every case it is a question of fact whether the
expenditure was expended wholly and exclusively for the purpose of trade
or business of the assessee. In the present case the finding is that it
was laid out for the purpose of the assessee’s business and there is
evidence to support this finding.”
In CIT v. Royal Calcutta Turf Club, [1961] 41 ITR 414, Supreme court followed the earlier judgment in Chandulal Keshavlal(supra) to hold : -
“The question as
to whether the expenses of running the school for jockeys is deductible
has to be decided taking into consideration the circumstances of this
case. The business of the respondent was to run race meetings on a
commercial scale for which it is necessary to have races of as high an
order as possible. For the popularity of the races run by the respondent
and to make its business profitable it was necessary that there were
jockeys of requisite skill and experience in sufficient numbers who
would be available to the owners and trainers because without such
efficient jockeys the running of race meetings would not be commercially
profitable. It was for this purpose that the respondent started the
school for training Indian jockeys Therefore any expenditure which was
incurred for preventing the extinction of the respondent’s business
would, in our opinion, be expenditure wholly and exclusively laid out
for the purpose of the business of the assessee and would be an
allowable deduction. This finds support from decided cases. In CIT v.
Chandulal Keshavlal & Co. [(1951) SCR 594 ] this Court held that in
order to justify a deduction the disbursement must be for reasons of
commercial expediency; it may be voluntary but incurred for the
assessee’s business; and if the expense is incurred for the purpose of
the business of the assessee it does not matter that the payment also
enures to the benefit of a third party.”
In Sassoon J. David and Co Pvt Ltd, Bombay v. CIT, Bombay, (1979) 3 SCC 524, the Supreme Court has held: -
“21. The
next contention urged on behalf of the Department was that since Davids
and Tatas were indirectly benefited by the retrenchment of the services
of the employees of the Company and payment of compensation to them and
since there was no necessity to retrench the services of all the
employees, the expenditure in question could not be treated as an
expenditure laid out wholly and exclusively for business purposes of the
Company. It has to be observed here that the expression “wholly and
exclusively” used in Section 1 0(2)(xv) of the Act does not mean
“necessarily”. Ordinarily it is for the assessee to decide whether any
expenditure should be incurred in the course of his or its business.
Such expenditure may be incurred voluntarily and without any necessity
and if it is incurred for promoting the business and to earn profits,
the assessee can claim deduction under Section 10(2)(xv) of the Act even
though there was no compelling necessity to incur such expenditure. It
is relevant to refer at this stage to the legislative history of Section
37 of the Income Tax Act, 1961 which corresponds to Section 1 0(2)(xv)
of the Act. An attempt was made in the Income Tax Bill of 1961 to lay
down the „necessity‟ of the expenditure as a
condition for claiming deduction under Section 37. Section 37(1) in the
Bill read “any expenditure … laid out or expended wholly, necessarily
and exclusively for the purposes of the business or profession shall be
allowed ….” The introduction of the word “necessarily” in the above
section resulted in public protest. Consequently when Section 37 was
finally enacted into law, the word „necessarily‟
came to be dropped. The fact that somebody other than the assessee is
also benefited by the expenditure should not come in the way of an
expenditure being allowed by way of deduction under Section 10(2)(xv) of
the Act if it satisfies otherwise the tests laid down by law.”
As per the findings recorded by the
Tribunal and the Commissioner of Income Tax (Appeals), the respondent
assessee was engaged in the business of distribution of television
channels and had retained 100% of the subscription As per the agreement
between the respondent assessee and the associated enterprise, it was
the obligation and the duty of the respondent assessee to advertise and
promote the channels. Similarly, the assessing was acting as a selling
agent for advertisements to be aired on the channels. It was entitled to
retain 15% of the gross-receipts as income and pass on or transfer 85%
of the gross receipts to the foreign enterprises.
Thus, one of the functions being
performed by the assessee was to advertise and promote the channels and
to earn subscription revenue. Another function was to secure/procure
advertisements. The assessee earned 15% commission for the last
mentioned function. The assessee was earning revenue in view of the said
functions being performed. Expenditure incurred on advertisement was
clearly relateable and laid out for the purpose of business of the
respondent assessee and was not extraneous or unconnected with the same.
Consequently, it could not have been disallowed as was done by the
Assessing Officer on the ground that it was not laid or incurred wholly
or exclusively for the purpose of business.
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