Business expenditure – Section 37(1) – A. Y. 2005- 06 – Payments for advertising and publicity to residents by assessee resident agent – Deduction u/s. 37(1) cannot be denied by invoking transfer pricing provisions merely because foreign principals (TV Channels) also benefit by the expenditure especially when benefit to foreign principals defy quantification – Such payments are not required to be reflected in Form No. 3CEB as these are resident to resident payments and not international

The assessee is a company incorporated in India and engaged in the business of distribution of T.V. channels popularly known as National Geographic and History Channel. The assessee also acts as airtime advertising Sales Representative for its foreign principals NGC Asia and FOX. For the A. Y. 2005-06, the assessee had claimed expenditure of Rs. 6,21,31,262/- u/s. 37(1) of the Act being the amount paid to residents for advertising and publicity. The Assessing Officer held that the benefit of the expenditure was not only to the assessee but also to the foreign principals. He found that such benefit was not disclosed in Form 3CEB. He allowed only one third of the expenditure and disallowed the balance two third. CIT(A) allowed full expenditure. He held that since expenses were made to Indian residents they were not covered in Form 3CEB as section 92 covers only international transactions. The Tribunal upheld the decision of the CIT(A). On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The main grounds on which the revenue has questioned the order of the tribunal are (a) non-disclosure in form 3CEB of the fact that the principal is also a beneficiary of the advertising expenses; (b) that the advertising and promotional expenses are not wholly for the benefit of the assessee but it also benefited the principal who was an associated enterprise; (c) that advertising and publicity expenses were far higher than the amount of revenue earned and lastly, that although foreign principals i.e. Associated Enterprise benefited from advertising and publicity no compensation was paid by the foreign principals to the assessee to avail of such benefits.

ii) It was admitted position that the assessee is a agent of foreign principal and would naturally benefit from advertising carried on by agent in India. However, these benefits were not ascertainable. The contention of the assessee that the benefits were not ascertainable or taxable in view of extra territory appears to be correct and justified. In the instant case we find that the assessee has not suppressed any information. It has offered to tax its income from both business, namely, distribution business as well as advertisement and promotion business. In the assessment year in question, the Assessing Officer has proceeded to grant 33.33% of the total advertising expenses as allowable deduction. We do not find any justification for such restriction of the same.

iii) The contention that the expenditure should have been wholly and exclusive for the purpose of business of the assessee u/s. 37(1) read with provisions of section 40A(2) as being excessive and unreasonable does not appeal to us. There can be no doubt in the instant case, that in view of decision of the Supreme Court in Sassoon David (supra) it cannot be said that the expenditure was not wholly or exclusively for benefit of the assessee. The mere fact that foreign principals also benefited does not entail right to deny deduction u/s. 37(1). Furthermore, it is seen that all the amounts earned by the assessee were brought to tax, especially in view of the fact that the payment of expenses were made to Indian residents and there payments were not required to be included in Form 3CEB since section 92 which governs the effect of Form 3CEB covers only international transactions. Furthermore, it is seen that the respondents income from subscription fee is variable and through commission received on the advertising sales is 15% of the value of Ad-sales. The Assessing Officer’s contention that the assessee received fixed income is not justified and there is certainly, in our view, a direct nexus between the amount spent on advertising and publicity, and the appellant’s revenue

iv) Advertisers who advertise on these channels act through media houses and advertising agencies and they work to media plans designed in the manner so as to maximise value for the advertiser. They will evaluate expenditure with channel penetration in the market place inasmuch as only channels with high viewership would justify the higher advertising rates which is normally sold in seconds. Merely having high quality content will not ensure high viewership. This content has to be publicised. The great reach of the publicity, the higher chances of larger viewership. The larger the viewership, the better chances of obtaining higher advertisement revenue. The higher advertisement revenue, the higher will be commission earned by the respondent-assessee. Accordingly, we have no doubt that there is a direct nexus between advertising expenditure and revenue albeit the fact that there may be a lean period before revenue picks up notwithstanding high amount spent on such publicity. This justifies the higher expenditure vis-a-vis revenue noticed by the department.

v) It is also not necessary that the foreign enterprises must compensate the Indian agent for the benefit it receives or it may receive from the advertisement and promotion of its channels by agent in India. The agent in India earns commission from ad-sales and distribution revenue, both of which have sufficiently compensated the assessee. We would not expect the revenue to determine the sufficiency of the compensation received by the agent and as such we do not find any justification in this ground either.

vi) In the circumstances we answer questions of law in the affirmative in favour of the assessee and against the revenue. In the result the appeal is dismissed.”