Case Number: ITA 802/DEL/2021
Appellant: Microsoft Corporation (India) Pvt. Ltd., New Delhi
Respondent: Additional Commissioner of Income Tax (Addl. CIT), National E-Assessment Centre, New Delhi
Assessment Year: 2016-17
Case Filed on: 2021-06-28
Order Type: Final Tribunal Order
Date of Order: 2022-08-01
Pronounced on: 2022-08-01
This case involves Microsoft Corporation (India) Pvt. Ltd., which filed an appeal against the Additional Commissioner of Income Tax (Addl. CIT), National E-Assessment Centre, New Delhi. The appeal challenges the disallowance of 50% of the advertisement, publicity, and sales promotion expenses as capital expenditure for the assessment year 2016-17.
The appellant raised several grounds of appeal:
The case was heard by the Income Tax Appellate Tribunal (ITAT) Delhi Bench “I” with Sh. Saktijit Dey, Judicial Member, and Dr. B. R. R. Kumar, Accountant Member, presiding over the matter. The appellant was represented by Sh. Nageswar Rao, Adv., and Sh. Akshay Uppal, Adv., while the respondent was represented by Sh. Mahesh Shah, CIT DR, and Sh. Mrinal Kumar Das, Sr. DR.
The AO observed that the appellant, a wholly-owned subsidiary of Microsoft Corporation (USA), incurred advertisement, publicity, and sales promotion expenses to promote Microsoft products and build the Microsoft brand in India. The AO disallowed 50% of such expenses as capital expenditure, leading to an addition of Rs. 188,08,60,000.
The appellant contended that it provided market and support services for Microsoft products in India and incurred expenses solely for business purposes. These transactions were approved as arm’s length by the TPO. The appellant relied on decisions in Seagram Manufacturing Pvt. Ltd. and Nestle India Ltd. to support its contention that such expenses should be considered revenue in nature.
The DRP upheld the AO’s conclusion, distinguishing the appellant’s case from the cited precedents. The DRP noted that the appellant’s agreements with overseas entities included specific terms for promoting Microsoft’s trademarks and brands, making the expenses capital in nature.
After considering the arguments and perusing the material on record, the ITAT found that the ad-hoc capitalization of 50% of advertising expenses lacked legal validity. The DRP failed to substantiate how the expenses culminated in brand building and promotion of the Microsoft brand globally. The tribunal held that no tangible asset was created, and the expenses could not be treated as capital in nature.
The ITAT directed the AO to grant TDS credit after due verification and to pass an order under section 154 for the deduction under section 80G, credit of DDT, and interest under section 115P within 21 days from the date of the order.
The ITAT allowed the appeal filed by Microsoft Corporation (India) Pvt. Ltd., ruling that the advertisement, publicity, and sales promotion expenses could not be treated as capital expenditure. The tribunal directed the AO to grant TDS credit and address the pending issues related to deductions and tax credits. This case highlights the importance of proper substantiation and adherence to legal principles in tax assessments.
Order Pronounced in the Open Court on 01/08/2022
Signed:
Saktijit Dey, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
Assistant Registrar, ITAT, New Delhi
Manage the increasing number of hearings effortlessly by leveraging the legal AI revolution We are India's Leading revolutionary AI-powered legal platform where you can get enough insights into top cases and judgements.
Research Platform