Tri­bunal Re­jects 2008 Tax Claim Against Pepsi

Says ICC World Cup spon­sor­ship amount is de­ductible while cal­cu­lat­ing to­tal tax

The Economic Times - - Companies: Pursuit Of Profit - Deepshikha.Sikar­war @times­

New Delhi: The in­come-tax au­thor­i­ties have been clean­bowled by an ap­pel­late tri­bunal, which re­jected a claim re­lated to Pep­siCo’s spon­sor­ship of the ICC World Cup dur­ing in 2008.

The tri­bunal al­lowed the spon­sor­ship amount as a de­duc­tion while cal­cu­lat­ing in­come-tax for the year. The tax de­part­ment had held that since the ex­pen­di­ture ben­e­fit­ted other Pepsi group en­ti­ties across the globe, the ex- pen­di­ture could not be said to have been in­curred wholly and ex­clu­sively for the busi­ness of Pep­siCo In­dia Hold­ings Pri­vate Ltd.

Prov­ing that an ex­pense has been in­curred wholly and ex­clu­sively for the pur­pose of busi­ness has been a mat­ter of dis­pute for long be­tween tax­pay­ers and tax au­thor­i­ties. There have been a num­ber of cases deal­ing with ad­ver­tis­ing, mar­ket­ing and pro­mo­tion ex­penses of an In­dian en­tity be­ing at­trib­uted to the over­seas group com­pany’s brand-build­ing ac­tiv­ity, with the tax au­thor­i­ties chal­leng­ing the ‘arms-length price’ of the trans­ac­tion.

The Delhi In­come Tax Ap­pel­late Tri­bunal has held that Pep­siCo’s spon­sor­ship fee of 3.8 crore paid to the In­ter­na­tional Cricket Coun­cil be al­lowed as a de­duc­tion un­der sec­tion 37 (1) of the In­come- Tax Act, 1961. This amount was for spon­sor­ing crick­et­ing events dur­ing 2008.

The tri­bunal ob­served that com­pa­nies use sports events as a plat­form to ad­ver­tise their range of prod­ucts as it has a very high view­er­ship and any such ex­pen­di­ture in­curred is osten­si­bly for pro­mo­tion of busi­ness only and hence, no dis­al­lowance is called for.

“What is rel­e­vant for an ex­pense to be al­low­able as rev­enue ex­pense is that whether it has been in­curred dur­ing the course of busi­ness and is for the pur­pose of busi­ness. Ben­e­fit fac­tor to other re­lated par­ties is rel­e­vant un­der trans­fer pric­ing pro­vi­sion and not while al­low­ing busi­ness ex­pense un­der u/s 37 (1),” it said.

“The rul­ing pro­vides an im­por­tant guid­ance as to al­lowa­bil­ity of ex­pen­di­ture in the hands of the ben­e­fi­ciary and not any other group com­pany,” said Vikas Vasal, part­ner and na­tional leader, tax and growth ad­vi­sory, at Grant Thron­ton.

In­ter­est­ingly, the Ban­ga­lore ap­pel­late tri­bunal last month de­nied GMR Projects a de­duc­tion un­der this sec­tion for ex­penses in­curred as an as­so­ciate spon­sor of the Delhi Dare­dev­ils team for the fourth sea­son of the In­dian Premier League. It said the tax­payer failed to prove that such ex­pen­di­ture was in­curred wholly and ex­clu­sively for the pur­pose of its busi­ness.

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