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11-04-2019, Miele India, Section 37, 92CA(3), Tribunal Delhi

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5 days 21 hours ago #9155 by amit
Section - 37, 92CA(3)
Order Date - 11-04-2019
Favouring - Assessee
Court - Tribunal Delhi
Appellant - DCIT
Respondent - Miele India Pvt Ltd
Justice - N. K. BILLAIYA AM & K. N. CHARY JM
Citation - 419Taxpundit190
Appeal No. - ITA No. 724/DEL/2016
Asstt. Year - 2010-11



This appeal by the Revenue is preferred against the order of the ld. CIT(A) – 19, New Delhi dated 03.11.2015 pertaining to A.Y 2010-11.

2. Ground No. 1 relates to the deletion of addition of Rs. 3,50,51,978/- on account of pre-operative expenses made by the Assessing Officer. Ground No. 2 relates to the deletion of addition of Rs. 66,39,950/- treated by the Assessing Officer as expenditure on advertisement, the assessee is building a brand image of the parent company and hence capital in nature.

3. Briefly stated, the facts of the case are that the assessee is engaged in trading of high-end kitchen appliances, cooling and coffee machines and laundry and floor care appliances. The return for the year under consideration was E-filed on 27.09.2010 declaring loss of Rs. 7.83 crores. The return was selected for scrutiny assessment and, accordingly, statutory notices were issued and served upon the assessee.

4. During the course of scrutiny assessment proceedings, the Assessing Officer observed that the assessee has not commenced business during the first 7 months of the year under consideration. Accordingly, the Assessing Officer asked the assessee to reply as to why all the expenses for the first 7 months should not be treated as preoperative expenses, which need to be amortized over a period of five years.

5. The assessee filed reply contending that sales had commenced in F.Y. 2008-09 and high value purchase order of Euro 52,853 was placed in the month of March 2009. The key managerial employees had joined the assessee company in F.Y. 2008-09. Infrastructure and administration was set up for smooth functioning in assessment year 2008-09. It was strongly contended that since the business had been set up in the earlier assessment year, therefore, no adverse inference should be drawn and the expenses incurred and claimed by the assessee are not pre-operative expenses.

6. The contention of the assessee did not find any favour with the Assessing Officer, who completed assessment by disallowing expenditure of the first 7 months as pre-operative expenses.

7. Proceeding further, the Assessing Officer found that the assessee is incurring high advertisement and sale expenditure without actual commencement of business, thereby building a brand image of its principal. According to the Assessing Officer, such expenditure should be capitalized as intangible asset and depreciation should be claimed on such expenditure. The Assessing Officer concluded by holding that the expenditure is for future and of enduring nature. Accordingly, he disallowed the expenditure amounting to Rs. 66,39,950/-.

8. The assessee strongly agitated the matter before the ld. CIT(A).

9. After considering the facts and submissions the ld. CIT(A) called for remand report from the Assessing Officer. The Assessing Officer, in his remand report, conceded that the company has commenced its business operations during F.Y. 2009 10 and the first two purchase orders from Ms Navin Electrotech Pvt Ltd and M/s Dhawal International Electronic Pvt Ltd have been received during the previous year 2008- 09. Considering the facts of the case in the light of the remand report, the ld. CIT(A) de eted the addition on account of pre-operative expenses.

10. On the issue of disallowance of administrative expenses, the ld. CIT(A) held as under:

“I have gone through the arguments of the appellant and observations of the Assessing Officer. The Assessing Officer has observed that by incurring expenditure, the Assessing Officer is building a brand image of the parent company. If that was the case, then the Transfer Pricing Officer should have made an adjustment in respect of the same. However, the TPO has given a clear order on the basis of facts & circumstances. Moreover, the appellant has shown that incurring of expenses to the tune of nearly Rs. 72,24,922/- is not isolated or extraordinary. In fact, during the succeeding years, similarly high expenses have been incurred. Advertisement expenses howsoever high may be, have been held to be of revenue nature simply because they do not have lasting value.

a. Delhi High Court in the case of CIT v CitiFinancial Consumer Finance Limited (ITA No. 1820/2010,1974/2010, 01/2011, 05/2011 held as follows:

13. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. This expenditure was incurred to facilitate the assessee’s trading operations. No fixed capital was created by this expenditure. We may also add here that in the Income

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