ITAT Mumbai holds no Fringe Benefit Tax on sales promotion costs incurred for dealers and customers
Background of the dispute
The case of Apar Lubricant Ltd. Vs DCIT (ITAT Mumbai) revolves around whether advertising, publicity and sales promotion expenditure incurred by an assessee on dealers, distributors and other third parties can be treated as liable to Fringe Benefit Tax (FBT) under Section 115WA read with Section 115WB of the Income Tax Act 1961.
The appeal concerned Assessment Year 2009–10 and arose from reassessment proceedings initiated under Section 147. In the reassessment, the Assessing Officer (AO) treated part of the assessee’s sales promotion expenditure as deemed fringe benefits, and accordingly enhanced the value of fringe benefits for FBT purposes.
The assessee, M/s Apar Chematek Lubricants Ltd. (subsequently merged with M/s Apar Industries Ltd.), contested both:
- the validity of reopening under
Section 147; and - the addition made to the value of fringe benefits on the ground that the expenses did not confer any benefit to employees.
However, before the Income Tax Appellate Tribunal, Mumbai (the Tribunal), the assessee submitted that the case could be fully resolved on the merits of FBT itself, and requested that the question of validity of reopening be left open as a purely academic issue.
Nature of business and expenses incurred
The assessee is in the business of marketing lubricants and related products. For the relevant year, it debited advertising, publicity and sales promotion expenses amounting to Rs. 1,41,01,455/- in its profit and loss account.
Details furnished in original assessment
During the original scrutiny assessment under Section 143(3), the assessee had produced:
- complete ledgers for the relevant accounts;
- supporting documentary evidence (such as invoices and vendor bills);
- a comprehensive explanatory note describing the precise nature of each expense.
It was consistently explained that these expenses represented:
- performance-based incentives and schemes for dealers and distributors;
- distribution of low-value promotional items (e.g., key chains, torches, watches, bags, T-shirts) to dealers/customers;
- payments made to advertising agencies for marketing campaigns;
- charges for exhibition stalls and participation in trade fairs;
- sales commission paid to third-party agents.
The assessee categorically asserted that:
- the expenditure was directed exclusively towards third parties (dealers, distributors, advertising agencies, vendors, customers);
- no part of this expenditure was incurred on employees; and
- therefore, these amounts did not confer any “fringe benefit”, direct or indirect, on employees as envisaged in Chapter XII‑H.
Reassessment proceedings and addition by the AO
Subsequently, a reassessment was initiated with reference to FBT. The premise adopted by the AO was that 20% of the advertising, publicity and sales promotion expenditure ought to be brought to tax as fringe benefits under Section 115WB(2)(D).
AO’s stand
In the reassessment order, the AO:
- treated a segment of the assessee’s sales promotion, advertising and publicity expenses as liable for FBT;
- computed an addition of Rs. 1,08,22,335/- to the value of fringe benefits;
- reasoned that the assessee was distributing promotional articles and incurring publicity-related expenses that, in his view, fell within the deeming fiction of
Section 115WB(2)(D); and - asserted that the assessee had not produced “sufficient” documentary evidence to conclusively support the business nature of the expenditure and its non‑employee character.
Break‑up of expenses and FBT treatment
The material on record, including the assessee’s detailed break‑up, showed that out of the total Rs. 1,41,01,455/-:
- Certain components (such as sales meet expenses) had already been offered and subjected to FBT by the assessee in its original return.
- Several items fell squarely within the exclusionary proviso to
Section 115WB(2)(D)and were therefore not liable to FBT. - Only the balance portion was sought to be taxed by the AO as fringe benefits.