DCIT, Circle 16(1) vs Microsoft Corporation (India) Pvt. Ltd.

“2.3

I have no doubt in my mind that the Advertisement, Publicity and Sales Promotion expenses also included expenses incurred for efforts to make Microsoft USA's trademarks, service marks and trade names well known in India. I have also gone through the case laws relied on by the assessee. The facts of the assessee are distinguishable and the ratios of the case laws are not applicable to the case of the assessee. Keeping in view the fact that other activities were also undertaken for incurring Advertisement, Publicity and Sales Promotion expenses, I hold that 25% of 'Advertisement, Publicity and Sales Promotion' (25% of Rs. 236,70,27,601 = Rs. 59,17,56,900) expenses are incurred for brand building/promotion (which is an intangible asset) which is capital in nature and is accordingly, disallowed.”

“ 4.3 Analysis and Decision on AMP Grounds

The examination of the facts and legal principles reveals several critical flaws in the Assessing Officer's position.

First, the AO's conclusion is based on a narrow and potentially mis contextualized interpretation of the Appellant's agreements. The Appellant has pointed out that a license agreement, effective from the same financial year (FY 2012-13), explicitly states that its AMP activities do not constitute "brand building" for the parent company. This clause directly contradicts the AO's primary argument. Furthermore, the fact that the Appellant is compensated on a cost-plus basis for these expenses is a crucial point that the AO has failed to address adequately. The TPO's acceptance of this arrangement at an arm's length price, as noted in the assessment order, reinforces the commercial nature of these expenses.

The TPO's nil adjustment demonstrates that the transaction was properly classified as a service provision, not a unilateral capital contribution to the parent. This suggests that the AO's disallowance is a collateral challenge to a matter already settled in the transfer pricing proceedings.

Second, the AO's application of the "enduring benefit" test is a simplistic and mechanical one, disregarding the nuanced legal interpretation provided by the Supreme Court in Empire Jute Co. Ltd. vs. CIT (Supra). As the Appellant correctly argued, in the fast-paced and highly competitive technology market, advertising is a continuous necessity rather than a one-time investment with a lasting effect. The precedents cited, particularly the decisions of the Mumbai Tribunal in Star India (P) Ltd. vs. Addl. CIT (103 ITD 73) and the Delhi High Court in Seagram Manufacturing Pvt Ltd v. CIT[TS-695-HC-2016(DEL)] (Delhi HC), are directly on point. They affirm that as long as the expenditure is commercially expedient for the subsidiary's business, its deductibility is not compromised by the incidental benefit it may confer on the parent company.

Third, the arbitrary nature of the 25% disallowance is a significant legal flaw. The AO's order provides no basis for this specific percentage, conceding only that "other activities" were also undertaken for incurring the expenses. The law is well-settled that additions cannot be made on mere guesswork or ad-hoc estimations. A disallowance must be supported by cogent evidence and a reasoned calculation. The Appellant's reliance on cases like GIVO Ltd. (Supra) is well-founded and directly applicable to the circumstances.

Based on this comprehensive analysis, the conclusion is inescapable. The AMP expenses are an integral part of the Appellant's revenue-earning process under its cost-plus business model. They are a legitimate business necessity and were incurred wholly and exclusively for the purpose of the Appellant's business. The AO's disallowance is not supported by the facts of the case, is based on a selective reading of the agreements, and contradicts well-established legal principles.

The following judicial precedents provide conclusive support for this determination:

i.

"in deciding whether a payment of money is a deductible expenditure, one has to take into consideration questions of commercial experience and principle of ordinary commercial trading. Another test is whether the transaction is properly entered into as a part of the Assessee legitimate commercial undertaking in order to facilitate the carrying on of its business and it is immaterial that the third party also benefits thereby... “…..CIT vs. Chandulal Keshavlal and Co. (1960) 38 ITR 601 (SC)

ii.

"...no disallowance could be made on the ground that it was not necessary for the Assessee to incur such expenditure or it benefited the third party. Accordingly, the AO was not justified in considering these factors for the purpose of disallowance. The only relevant factor is whether incurring of expenditure was for the purpose of Assessee's business....if Assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure would be in the interest of Assessee's business though it may also benefit its principal. Accordingly, no disallowance was warranted in law Star India (P) Ltd. vs. Addl. CIT 103 ITD 73.

In light of the foregoing, Grounds 1, 2, 3, 4, and 5 of the appeal are allowed. The disallowance of Rs.59,17,56,900/- on account of AMP expenses is hereby deleted. Given this decision, Ground 6, which was filed as a "without prejudice" claim for depreciation on the disallowed amount, becomes academic and is therefore dismissed.”

“1.

Whether on the facts and in the circumstances in the case, the ld. CIT(A) was right in deleting the addition of Rs 59,17,56,900/- made on account of treating 25% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that a huge outlay on the advertisement and marketing ultimately results into creating / improving the value of brand name of the company which is an intangible assets?

2.

Whether on the facts and in the circumstances in the case, the ld. CIT(A) was right in deleting the addition of Rs. 59,17, 56,900/- made on account of treating 25% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fac that such expenses were incurred though in an accounting year, but yields benefits for several years and therefore, the entire AMP expenditure incurred by the assessee during the relevant AY cannot be considered as expended wholly and exclusively for the purpose of the business of the assessee transacted during the relevant accounting year?

“3.

That the Ld. AO and Hon'ble DRP have erred in facts and in law in treating 50% of the expenditure incurred on advertisement, publicity and sales promotion as capital expenditure disregarding the fact that the expenditure incurred is revenue in nature.

3.1

That on the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP has grossly erred in disallowing 50% of the expenditure on notional/ ad-hoc basis without any cogent evidence and reasoning.

3.2

That on the facts and in the circumstances of the case and in law, the Ld. AO and Hon'ble DRP has grossly erred in not appreciating the principles laid down by Jurisdictional High Court judgments cited during the course of the assessment proceedings that the advertisement, publicity and sales promotion expenditure is revenue in nature.

6.

We find that the determination of ALP or the capitalization of 50% of advertising expenses on ad-hoc basis has no legal validity. The Id. DRP distinguished the case laws relied upon by the assessee but could not substantiate by the way of any adjudication how the 50% of the expenses on account of advertisement, publicity and sales incurred by the assessee culminated in brand building and promotion of the Microsoft brand globally. In the absence of any tangible explanation or reasoning given in treating the advertisement expenses as capital as no corporeal asset has been created, we hold that no the expenses incurred cannot be treated as capital in nature.”

“5.1

The Revenue has also filed the appeal raising the following grounds:-

(1)

Whether on the facts and in the circumstances in the case, the Ld. CIT(A) was right in deleting the addition of Rs. 165,18,15,000/- made on account of treating 50% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that a huge outlay on advertisement and marketing ultimately results into creating/improving the value of brand name of the company which is an intangible assests?

(2)

Whether on the facts and in the circumstances in the case, the Ld. CIT(A) was right in deleting the addition of Rs. 165,18,15,000/- made on account of treating 50% of advertisement, publicity and sales promotion expenses as Capital Expenditure ignoring the fact that such expenses were incurred though in an accounting year, but yields benefits for several years and therefore, the entire AMP expenditure incurred by the assessee during the relevant AY cannot be considered as expended wholly and exclusively for the purpose of the business of the assessee transacted during the relevant accounting year?"

6.

Heard and perused the record. The Id. AR submitted that the issue involved in the appeal of the Revenue is covered in favour of the assessee in assessee's own case for AY 2016-17 in ITA No.802/Del/2021 vide order dated 01.08.2022. The relevant observation of the Tribunal at para 6 of the said order read as under:-

"6.

We find that the determination of ALP or the capitalization of 50% of advertising expenses on ad-hoc basis has no legal validity. The Id DRP distinguished the case laws relied upon by the assessee but could not substantiate by the way of any adjudication how the 50% of the expenses on account of advertisement, publicity and sales incurred by the assessee culminated in brand building and promotion of the Microsoft brand globally. In the absence of any tangible explanation or reasoning given in treating the advertisement expenses as capital as no corporeal asset has been created, we hold that no the expenses incurred cannot be treated as capital in nature."

6.1

As there are no distinguishing facts or proposition of law pointed by ld. DR, to vary with the conclusions of co-ordinate bench, we find no substance in the grounds of appeal. The appeal of the Revenue dismissed.”