ELCA COSMETIC PRIVATE LIMITED, NEW DELHI VS. DCIT CIRCLE-8(1), NEW DELHI, ITA 246/DEL/2021
In a decisive order dated February 14, 2025, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that ₹4 crore incurred by an Indian company on tester and promotional expenses is allowable as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The ruling reiterates that such spending is a standard business practice in the cosmetics and personal care industry and integral to sustaining brand presence and driving sales.
Background: Disallowance of Marketing Expenses
The case arose when the Assessing Officer (AO) disallowed ₹4,00,00,000 claimed as tester and promotional expenses by the assessee during AY 2015–16, stating lack of direct evidence showing business benefit and treating the expense as either capital or gratuitous in nature.
The assessee, however, maintained that the expenses were:
- Routine and recurring in nature
- Commercially expedient, aimed at market visibility and customer engagement
- Supported by prior rulings in the assessee’s favor for AYs 2006–07 and 2007–08
Assessee’s Argument
Represented by Shri Mukesh Butani, C.A., and legal counsel, the assessee:
- Cited prior ITAT rulings in their own favor (ITA No. 4704/Del/2010, [ITA No. 5710/Del/2010]) where similar disallowances were overturned.
- Submitted documentary evidence, including:
- Bill of entry and invoices showing testers were shipped to retail stores
- Year-on-year expense-to-sales ratio to prove expenses were not excessive
- GIS cost breakdowns to show consistency in marketing expenses
They emphasized that testers are integral to cosmetics retail strategy, enabling customers to experience products before purchase, thereby boosting sales.
Revenue’s Stand
The Departmental Representative argued:
- The assessee failed to show how employee-distributed samples led to increased sales.
- The AO’s remand report questioned the nexus between promotional outlay and business benefit, treating the expenditure as vague and discretionary.
Tribunal’s Observations
The Tribunal held:
- Business necessity, not direct traceability of outcome, is the key under Section 37(1).
- Courts must not step into the shoes of a businessman to determine how best to incur expenses (relying on SC ruling in S.A. Builders).
- Prior ITAT rulings and judicial precedents (including Salora International Ltd.) support such promotional expenditure as revenue in nature.
The Bench concluded that the assessee had:
- Provided adequate justification and documentation
- Established a direct nexus between the expense and its line of business
- Demonstrated consistency in accounting treatment across years
Verdict and Significance
The ITAT deleted the ₹4 crore disallowance, marking a clear precedent that in fast-moving consumer industries like cosmetics, expenses on testers and product promotions are not only customary but essential.
This decision further strengthens the position that commercial prudence of a business must be respected, and tax authorities should not second-guess valid operational strategies backed by facts.