Market Research Expenditure Incurred to Understand Consumer Behaviour and Improve Sales Strategy Constitutes Allowable Revenue Expenditure

ORDER

1. The above Appeal has been filed by the Revenue challenging the order dated 1^st March 2019 passed by the Income Tax Appellate Tribunal, Mumbai (ITAT). The Assessment Year in question is A.Y.2008-09. According to the Revenue, the above Appeal gives rise to the following substantial question of law:-

2. The Assessee e-filed its Return of Income on 25^th September 2008 declaring its income at Rs.10,88,06,290/- under the normal provisions of the Income Tax Act, 1961 (IT Act). Thereafter, on 30^th March 2010 the Assessee e-filed a revised Return of Income declaring its total income at Rs.10,83,97,300. The return was processed under Section 143(1) of the IT Act. Thereafter, the case of the Assessee was selected for scrutiny by issuing a Notice under Section 143(2) of the IT Act. Since there were transfer pricing issues, a reference was made to the Transfer Pricing Officer (TPO) in relation to certain transactions entered into by the Assessee with its Associated Enterprises. There was also an issue regarding the deduction claimed by the Assessee for market research expenses and which it claimed as a revenue expenditure. After a reference was made to the TPO, and his recommendations were obtained, a Draft Assessment Order was passed by the Assessing Officer dated 30^th December 2011. In the said Draft Assessment Order, as far as market research expenses are concerned, the Assessing Officer was of the view that the expenditure incurred in relation thereto helped the Assessee to assess how changing elements of marketing mix like product, price, distribution and promotion, impacts customer behavior. The Assessing Officer came to the conclusion that usually marketing research takes place for brand building, increasing brand awareness and identifying strategies for specific target audience. This brings enuring benefit to the Assessee for the years to come. The Assessing Officer therefore was of the view that the expenditure related to market research expenses will definitely bring enuring benefit to the Assessee and therefore the expenditure in this regard has to be treated as capital in nature. To challenge or take objection to the Draft Assessment Order, the Assessee did not choose to take the DRP route, and therefore, a final Assessment Order dated 3^rd February 2012 was passed by the Assessing Officer.

3. Being aggrieved by the final Assessment Order, the Assessee preferred an Appeal before the CIT (Appeals). On the issue of market research expenses, the CIT (Appeals) upheld the order of the Assessing Officer and held against the Assessee. Being aggrieved by the order of the CIT (Appeals), the Assessee therefore approached the ITAT. The ITAT, for the reasons recorded in the impugned order, held that the expenses incurred by the Assessee towards market research could not be termed as capital in nature and allowed the Appeal of the Assessee on this ground, amongst others. Being aggrieved by this order of the ITAT the Revenue is in Appeal before us.

4. We have heard Mr. Suresh Kumar, the learned counsel appearing on behalf of the Revenue, as well as Mr. Joshi, the learned counsel appearing on behalf of the Assessee. The discussion of the Tribunal in relation to the market research expenses can be found from paragraph 17 onwards of the impugned order. The Tribunal, being the last fact finding authority, firstly noted that during the year under consideration [A.Y.2008-09] the Assessee had incurred market research expenses of Rs.7.36 Crores, the detailed break up of which was set out in tabular form in paragraph 17. The Tribunal noted that from the Assessment Order it was clear that there was no dispute on the nature of the expenses and that they are incurred for the purposes of the business of the Assessee. The Tribunal further noted that the Assessing Officer had accepted that the above expenditure was incurred on various items which helps the Assessee to ascertain changing elements of marketing mix like product, price, distribution and promotion, all which makes impact customer behavior. The Tribunal held that though the Assessing Officer was of the view that these market research expenses takes place for brand building, increasing brand awareness etc, the Tribunal held that the said expenditure incurred was in the normal course of business of the Assessee to understand the consumers, their habits, reactions, and feedback on the products. The Tribunal noted that for this purpose the Assessee had appointed various agencies in relation to various market research activities and accordingly incurred such expenditure to assist the Assessee in improving marketing strategy which ultimately results in higher sales and consequently higher profit for the business. The Tribunal also noted that this was an expenditure which was recurring in nature, and for A.Y.2001-02 to A.Y.2006-07, the Revenue had allowed these very same expenses being revenue in nature while framing the assessment under Section 143(3) of the IT Act. The Tribunal also, in support of its conclusion that the expenditure incurred by the Assessee was revenue in nature, relied upon a decision of this Court in the case of CIT v. Glenmark Pharmaceutical Ltd. [2013] 30 taxmann.com 167/213 Taxman 315/351 ITR 359 (Bombay). All in all, the Tribunal held that looking at the nature of the expenses, the decision of this Court in Glenmark Pharmaceuticals Ltd (supra) as well as the Revenue consistently allowing this expenditure as a revenue expenditure for A.Y.2001-02 to A.Y.2006-07, allowed the Assessee’s Appeal on this issue.

5. After carefully going through the order of the ITAT, we are clearly of the view that the order of the ITAT does not gives rise to any substantial question of law. Having examined the nature of the expenses and coming to a finding that they are incurred in the normal course of business which ultimately results in higher sales and consequently higher profits, the Tribunal, and in our view correctly so, came to the conclusion that the market research expenses incurred by the Assessee are revenue in nature. We find that the Tribunal also correctly placed reliance on the decision of this Court in Glenmark Pharmaceuticals Ltd (supra), wherein the facts were very similar to the facts in the present case. Even on the ground of consistency, we agree with the Tribunal that the market research expenses could not have been termed as capital in nature but revenue in nature. All in all, we find that the Tribunal has correctly appreciated the facts and applied the law in coming to the conclusions that it did in relation to the market research expenses.

6. We accordingly find that the above Appeal does not gives rise to any substantial question of law. It is accordingly dismissed. However, there shall be no order as to costs.

7. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.