$~R-14,15 & 16
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 24th November, 2014.
+ ITA 1297/2010
COMMISSIONER OF INCOME TAX ..... Appellant
Through Mr. N.P. Sahni, Sr. Standing Counsel
with Mr. Nitin Gulati, Jr. Standing Counsel.
versus
DISCOVERY COMMUNICATION INDIA ..... Respondent
Through Mr. Piyush Kaushik, Advocate.
ITA 1101/2011
CIT ..... Appellant
Through Mr. N.P. Sahni, Sr. Standing Counsel
with Mr. Nitin Gulati, Jr. Standing Counsel.
versus
DISCOVERY COMMUNICATION INDIA ..... Respondent
Through Mr. Piyush Kaushik, Advocate.
ITA 489/2013
THE COMMISSIONER OF INCOME TAX -IV..... Appellant
Through Mr. N.P. Sahni, Sr. Standing Counsel
with Mr. Nitin Gulati, Jr. Standing Counsel.
versus
DISCOVERY COMMUNICATION INDIA ..... Respondent
Through Mr. Piyush Kaushik, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
ITA 1297/2010, 1101/2011 & 489/2013 Page 1 of 18
SANJIV KHANNA, J. (ORAL)
Revenue has filed these appeals under Section 260A of
the Income Tax Act, 1961(Act, for short) relating to assessment
years 2002-03, 2003-04 and 2004-05 in the case of the
respondent-assessee, Discovery Communication India. In the
three appeals the following questions were framed for hearing
and adjudication:-
ITA 1297/2010 (Assessment Year 2002-03)
"a) Whether the Income Tax Appellate Tribunal (in
short "tribunal") was correct in law and on facts in
affirming the order of Commissioner of Income
Tax (Appeals) [in short "CIT(A)"] whereby the
CIT(A) has deleted the addition of Rs.
2,61,54,952/- added by the Assessing Officer inter
alia on the ground that there was no obligation on
the part of the assessee to incur huge advertisement
expenses?
b) Whether the tribunal while deleting the
disallowance made by the Assessing Officer was
correct in law and on facts in ignoring the fact that
the assessee has acted as agent of the foreign
company for booking advertisement?"
ITA 1101/2011 (Assessment Year 2003-04)
"(1) Whether the Income Tax Appellate Tribunal
was correct in law and on fact in affirming the
order of CIT (A), whereby the CIT(A) has deleted
the addition of Rs.67.15 lacs made by the
Assessing Officer while disallowing the
proportional advertisement expenses?
(2) Whether the order of the Income Tax
Appellate Tribunal, which is a final fact authority,
is not perverse as it has not gone through the facts
ITA 1297/2010, 1101/2011 & 489/2013 Page 2 of 18
properly and merely relied on its own order for the
A.Y. 2002-03?"
ITA 489/2013 (Assessment Year 2004-05)
"Whether the Assessing Officer was right in
making addition of Rs.1,24,18,732/- on account of
disallowance of proportionate advertisement
expenditure?"
2. The respondent-assessee is a company and during the
years in question was a subsidiary of M/s. Discovery Channel
Mauritius (98% shares), M/s. Discovery Communication, LLC,
USA (1% shares) and M/s. Discovery Productions Inc., USA
(1% shares).
3. The respondent-assessee was engaged in the business of
distribution, marketing and production of high quality
educational and entertainment satellite television programmes
for satellite television Channels i.e. Discovery and Animal
Planet.
Assessment Year 2002-03
4.1. In the return of income filed for assessment year 2002-03,
the respondent-assessee had declared ,,nil income after setting
off brought forwards losses of Rs.4,85,39,897/-. This return was
subsequently revised but again declaring ,,nil income after
adjustment of brought forward losses of Rs.4,82,34,363/-.
4.2. During the period relevant to the assessment year 2002-
ITA 1297/2010, 1101/2011 & 489/2013 Page 3 of 18
03, the respondent-assessee had shown programmes sourcing fee
of Rs.5,20,91,937/-, facilitation fees of Rs.1,28,75,927/-,
subscription fees of Rs 23,46,50,460, agency commission and
marketing commission fee of Rs.3,69,91,065/-, programming
revenue of Rs.65,00,000/- and other income of Rs.54,75,642/-.
4.3. The Assessing Officer observed that the assessee had
shown gross advertisement revenue of Rs.15,12,06,722/-, but
only 15% i.e., Rs.2,30,26,266/- had been credited to the profit
and loss accounts as commission earned on advertisement
revenue and the balance amount had been paid/repatriated to the
foreign associated enterprises abroad. He opined and considered
that the advertisement expenses to the tune of Rs.2,61,54,952/-
were exorbitant, as the assessee had declared taxable
advertisement receipts of Rs.2,30,26,266/-. Advertisement
expenses of Rs. 2,61,54,952, he observed were unjustified as the
assessee had retained 15% of the total advertisement sale
revenue and not the entire or 100% of the advertisement
revenue. He rejected the contention of the assessee that
advertisements expenses incurred were relatable to earning
subscription fee of more than Rs. 23.46 crores, the major source
of income/receipt. The Assessing Officer held that the
subscription revenue collected from the cable operators did not
ITA 1297/2010, 1101/2011 & 489/2013 Page 4 of 18
require advertisement expenses. Accordingly, 100% or the
entire advertisement expenditure of Rs.2,61,54,952/- was
disallowed as non-business expenditure or as expenditure not
relateable to the respondent-assessees business, but business of
the associated enterprises resident abroad.
ITA 1101/2011 (Assessment Year 2003-04)
5.1. The respondent-assessee filed a return declaring ,,nil
income. In the profit and loss account, the assessee had
disclosed programme sourcing fee of Rs.4,22,48,648/-,
superscription fees of Rs.3,74,99,0580/-, agency commission of
Rs.4,59,53,913/-, marketing income of Rs.14,62,341/- and other
income of Rs.13,71,488/-. The Assessing Officer noticed that
that advertisement sale commission of Rs.2.78 crores was
earned, whereas the assessee had claimed advertisement
expenses of Rs.2,37,57,000/-. Rs.2.78 crores was only 15% of
the total receipts and the balance 85% had been transferred or
paid to the related or associated enterprise abroad. He rejected
the assessees submission that advertisement expenditure was
relatable to subscription revenue of Rs.37.49 crores and the said
expenditure had to be incurred in terms of the licence agreement,
which required the assessee to publicize and increase the reach
and viewership of the two channels. The advertisement
ITA 1297/2010, 1101/2011 & 489/2013 Page 5 of 18
expenses, he held, had direct nexus with the advertisement
revenue. The Assessing Officer then observed that as the
assessee had retained 15% of the advertisement revenue as sale
commission and the balance 85% had been repatriated or paid to
the associated enterprises abroad, therefore advertisement
expenses of Rs.2.37 crores should not be entirely disallowed.
This, he observed, would be unreasonable, therefore
advertisement expenses of Rs.67.15 Lacs were disallowed.
ITA 489/2013 (Assessment Year 2004-05)
5.2. For the assessment year 2004-05, the assessee had filed
return declaring income of Rs.17,87,44,860/-. In the profit and
loss accounts, the assessee had shown programme sourcing
receipt of Rs.2,54,16,606/-, superscription fees of
Rs.39,89,28,282/-, agency commission of Rs.7,03,47,271/-,
marketing fee of Rs.5,86,783/- and other income of
Rs.1,00,16,153/-. The Assessing Officer noticed that the
assessee had shown advertisement sale commission of
Rs.5,32,44,990/-, which was only 15% of the gross
advertisement receipts. He referred to the assessment order for
the assessment years 2002-03 and 2003-04 and held that 85% of
the advertisement receipts had been transferred to the associated
enterprises abroad. The assessee had pleaded and urged that it
ITA 1297/2010, 1101/2011 & 489/2013 Page 6 of 18
was under a contractual obligation as per the license agreement
to publicize and promote the two channels, and had earned
subscription revenue of Rs.39.89 crores, which was directly
relatable to the advertisement expenses of Rs.3.10 crores, but the
Assessing Officer did not agree. The assessing officer quantified
the disallowance at Rs 1,24,18,732, as advertisement expenses
relatable to 85% of the advertisement sale receipts transferred to
the associated enterprises abroad.
First Appeal and Order of the Tribunal.
6. The respondent-assessee succeeded in the first appeal
before the Commissioner of Income Tax (Appeals). Appeals
filed by the Revenue stand dismissed by the Income tax
Appellate Tribunal (Tribunal, for short) vide its impugned
orders.
Factual findings as recorded by the tribunal and the legal
effect of said findings on merits:-
7. The comprehensive and perspicuous finding of the
appellate authorities is that 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
ITA 1297/2010, 1101/2011 & 489/2013 Page 7 of 18
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.
8. There was a separate agreement between the respondent-
assessee 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
ITA 1297/2010, 1101/2011 & 489/2013 Page 8 of 18
associated enterprise abroad.
9. The Assessing Officers 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.
9.1. 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
ITA 1297/2010, 1101/2011 & 489/2013 Page 9 of 18
paid to the associated enterprises abroad.
Section 37 (1) of the Act.
10. 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.
10.1. 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 assessees 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
ITA 1297/2010, 1101/2011 & 489/2013 Page 10 of 18
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.
10.3. 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 assessees
perspective and choice. It is subjective. What one assessee may
want to incur, another may not like to incur the same or similar
ITA 1297/2010, 1101/2011 & 489/2013 Page 11 of 18
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.
10.4. When expenditure is incurred for assessees 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 assessees business. For
example, a retail trader may advertise different products which
ITA 1297/2010, 1101/2011 & 489/2013 Page 12 of 18
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
ITA 1297/2010, 1101/2011 & 489/2013 Page 13 of 18
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 10(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 10(2)(xv) of the Act. An attempt was made in the
ITA 1297/2010, 1101/2011 & 489/2013 Page 14 of 18
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."
11. 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
fee. 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.
12. 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
ITA 1297/2010, 1101/2011 & 489/2013 Page 15 of 18
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.
Difference between expenditure incurred and price paid for
functions performed.
13. The Assessing Officer has failed to notice the difference
between expenditure incurred by the assessee towards
advertisement and publicity and the price paid to the assessee by
the associated foreign enterprise for services rendered etc. The
first relates to expenditure or an outgoing paid for the business.
The second relates to income or price paid for the transactions
between the respondent assessee and the associated enterprise
and which would constitute an international transaction. The
second aspect is linked and connected with the income earned
i.e. price paid for the service rendered, goods sold etc. An
international transaction with an associated enterprise can be
ITA 1297/2010, 1101/2011 & 489/2013 Page 16 of 18
subjected to transfer pricing adjustment under Chapter X of the
Act read with the applicable rules by the Transfer Pricing
Officer by applying functions performed, risk assumed and the
asset deployed, criteria/principle. The Transfer Pricing Officer is
required to select appropriate method specified in section 92C of
the Act and determine/compute the arms length price. In the
present case, the Transfer Pricing Officer did not make any
adjustment and has accepted the transfer pricing between the
respondent assessee and the related enterprises i.e. the
compensation paid or retained by the respondent assessee in
view of the functions performed, risk assumed and asset
deployed etc.
14. Once, we hold that one of the functions to be performed
by the respondent assessee was to incur advertisement and
promotion expenditure, then the expenditure incurred for the
said purpose should be allowed under section 37(1) of the Act,
as incurred wholly and exclusively for purpose of the said
assessee. In such cases, as in present case, disallowance made by
the Assessing Officer treating the advertisement expenditure as
non-business expenditure must fail and flounder. However,
adequate compensation/price should be paid for the same by the
associated enterprise, with reference to the functions, risk and
ITA 1297/2010, 1101/2011 & 489/2013 Page 17 of 18
assets. In case, the respondent-assessee was not being paid
adequate consideration or compensated by its associated
enterprise, necessary adjustments could have been made by the
Transferring Pricing Officer in accordance with the Act. It is an
accepted position that the Transfer Pricing Officer did not deem
it appropriate and proper to make any adjustment in respect of
these international transactions. The price received by the
assessee for the international transaction was accepted by the
Transfer Pricing Officer.
15. In view of the aforesaid discussion, it is held that
advertisement and promotion expenditure was rightly treated, by
the tribunal, as one of the functions which the respondent
assessee was mandated and required to perform for the purpose
of his business and would, therefore, be allowable as a business
expenditure under Section 37(1) of the Act.
16. In view of the aforesaid legal position, the question No.1
in all the three appeals is answered in favour of the respondent-
assessee and against the revenue. The question No.2 in ITA
Nos. 1297/2010 and 1101/2011 is also answered in favour of the
respondent-assessee and against the appellant-Revenue.
The appeals are disposed of. No order as to costs.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
NOVEMBER 24, 2014
NA
ITA 1297/2010, 1101/2011 & 489/2013 Page 18 of 18
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