Principles for deduction of business expenditure (brand promotion & consultancy charges) set out

In order to determine whether the expenditure is not sustainable, the AO has to first return a finding that the payment made is excessive u/s 40-A (2). If it is found to be so, then the AO has to determine what constitutes the fair market value of the services rendered and disallow the difference between what is claimed and what is such value determined (as fair market value). In the absence of such exercise, an ad hoc method of disallowance is not permissible. Also, the revenue cannot place itself in the arm chair of businessman or in the position of the Board of Directors and assume the role of deciding what is the reasonable expenditure having regard to the circumstances of the case. As regards brand promotion expenses, one is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognised, and allowed. The revenue’s arguments on this point too are insubstantial.

CIT vs. Modi Revlon Ltd (Delhi High Court)