Tax -4 v. Moet Hennessy (I) Pvt. Ltd

$~1 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 408/2022 THE PR. COMMISSIONER OF INCOME TAX -4 ..... Appellant Through:Mr. Ruchir Bhatia, Senior StandingCounsel for Revenue.Counsel for Revenue. versus MOET HENNESSY (I) PVT. LTD. ..... Respondent Through:Mr.SumitMangal,Mr.MayankAggarwal & Ms. Radhika Sharma,Advocates.Aggarwal & Ms. Radhika Sharma,Advocates. % Date of Decision: 02[nd]November, 2022 CORAM: HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMEET PRITAM SINGH ARORA, J (ORAL): ITA 408/2022 1.The Appellant, Revenue, has impugned the common order dated 13[th]December, 2019, passed by the Income Tax Appellate Tribunal (‘ITAT’) incross appeals bearing ITA No. 1051/Del/2016 and ITA No. 1070/Del/2016,for the Assessment Year (‘AY’) 2011-12 in ITA No. 408/2021. 2.Brief facts leading to the filing of the present appeal are that theRespondent, Assessee, filed its Return of Income (‘ROI’) on 30[th]November,2011, for AY 2011-12. The Assessee’s return was processed under Section 143(1) of the Income Tax Act, 1961, (the ‘Act’) and its case was selected forscrutiny assessment. The Assessing Officer (‘AO’) observed that theAssessee Company had entered into international transactions with itsAssociated Enterprises (‘AEs’) and consequently, made a reference to theTransfer Pricing Officer (‘TPO’) for determining the Arms’s Length Price(‘ALP’) of the international transactions under Section 92CA(3) of the Act. 3.The TPO in its order dated 12[th]January, 2015, observed that theAssessee incurred huge Advertising, Marketing and Promotion (‘AMP’)expenditure with the objective of expanding the reach of the AE’s brand inIndia, who is the legal owner of the brand. The TPO thus concluded that theAssesseehascreatedmarketingintangiblesinfavouroftheAE.Consequently, the TPO determined the ALP of international transaction ofpromotion of the brand name, by using the Bright Line Test (‘BLT’), andmade an adjustment of Rs. 7,10,04,420/- on account of AMP expenditureincurred by the Assessee. Pursuant to the aforesaid, the AO passed its draftassessment order under Section 144C of the Act. 4.Being aggrieved by the aforesaid adjustment made by the TPO onaccount of AMP expenditure, the Assessee filed its objection before theDispute Resolution Panel (‘DRP’). The DRP vide its order dated 16[th]November, 2015, allowed the Assessee’s objection, by deleting the ALPadjustment made by the TPO by applying BLT method in light of thejudgment of this Court in Sony Ericsson Mobile Communications India(P.) Ltd. v. Commissioner of Income Tax – III, (2015) 374 ITR 118 (Del). 5.The DRP held that comparables of similar functional intensity are tobe taken into consideration for determining the ALP. However, DRP after observing the comparables concluded that the Assessee herein has a betterfinancial performance when compared to the comparables, with a lowerspend, and therefore held that proposed ALP adjustment is not called for inthe facts of this case. However, the DRP on a separate reasoning disallowed AMPexpenditure for an amount of Rs. 6,64,24,161/- under Section 37(1) of theAct, holding that the Assessee had undertaken promotional activities inviolation of bar on advertising and promotion of liquor in India, as per theprovisions of the Cable Television Network Rule, 1994 and code ofAdvertising Standards Council of India (‘ASCI’). The DRP held that as perthe Explanation 1 to Section 37(1) of the Act, there is bar on allowability ofexpenses that is on account of any activity that is an ‘offence’ or which isprohibited, by law and issued a direction in this regard to the AO. Pursuant, to the aforesaid DRP directions, the AO passed its finalassessment order dated 30[th]December, 2015, under Section 143(3)/144C ofthe Act, confirming the aforesaid disallowance of AMP expenditure for anamount of Rs. 6,64,24,161/- under Section 37(1) of the Act. Pursuant, to the aforesaid DRP directions, the AO passed its finalassessment order dated 30[th]December, 2015, under Section 143(3)/144C ofthe Act, confirming the aforesaid disallowance of AMP expenditure for anamount of Rs. 6,64,24,161/- under Section 37(1) of the Act. 6.Being aggrieved by the aforesaid, cross appeals were preferred beforethe ITAT, wherein the ITAT held the following: - Qua disallowance of Rs. 6,64,24,161/- under Section 37(1) of the Act 6.1.The Assessee in its appeal before ITAT contended that as per Section144C(8) of the Act, DRP may confirm, reduce or enhance the variationproposed in the draft order. However, DRP is not empowered to set asideany proposed variation or issue any direction under Section 144C(5) for further enquiry for passing the assessment order and therefore, thedisallowance proposed under Section 37 (1) of the Act was withoutjurisdiction. 6.2.The ITAT agreed with the contention of the Assessee that thedirection of the DRP to AO for determining the disallowance of AMPexpenditure under Section 37(1) of the Act after hearing the Assessee was inthe nature of a remand. It held that such a direction by DRP is impermissibleunder Section 144C of the Act and held that AO is not empowered to make afresh determination under Section 144C. 6.3.The ITAT also held that the DRP/AO has taken a general view, andthere is no finding of facts, that the provisions of Cable Television NetworkRule, 1994 or ASCI has indeed been violated by the Assessee with respectto the advertisement and promotion. 6.4.Lastly, the ITAT placed reliance and followed the decision of itscoordinate Bench for AYs 2012-13 and 2013-14 in Assessee’s own case,wherein it was held that the expenditure incurred by the Assessee was toenhance its sales and profits and therefore, it cannot be treated as capital innature. ITAT held that the said expenses are revenue in nature having beenincurred for commercial expediency. Consequently, the ITAT deleted thedisallowance of AMP expenses of Rs. 6,64,24,161/-, made in light ofExplanation 1 to Section 37(1) of the Act. Qua discard of the BLT method by DRP and consequent rejection of thecomparables 6.5.The ITAT dismissed the cross appeal filed by Revenue challenging the order of the DRP discarding the BLT applied by TPO and held that thesaid issue has been decided by its coordinate bench for AY 2009-10 and2010-11 and various judicial precedents in favour of the Assessee and heldthat the DRP had rightly deleted the adjustment made, merely on the basis ofALP. The ITAT, further held that no facts contrary to the order passed bythe ITAT in Assessee’s own case for AY 2009-10 & 2010-11 have beenbrought on record. The ITAT consequently, dismissed the appeal of theRevenue. 7.The learned senior counsel for the Revenue states that the ITAT fell inerror in holding that the AMP expenditure incurred by the Assessee isrevenue in nature. He states that the said expenditure is capital in nature. Hestates that the ITAT erred in holding that the BLT was not a proper methodfor bench marking the AMP expenditure ignoring the fact that the Revenuehas not accepted the decision in the case of Sony Ericsson (supra) and hasfiled an SLP against the same. 8.We are unable to accept the contention of the Revenue. The deletionof the transfer pricing adjustment on account of the AMP expenditureproposed by applying BLT method is impermissible as the said method hasbeen expressly negatived by the Court in Sony Ericsson (supra) fordetermining the ALP. Though the judgment of this Court in Sony Ericsson(supra) is pending adjudication before the Supreme Court, yet there is nostay of the said judgment till date. Consequently, in view of the judgmentpassed by the Supreme Court in Kunhayammed & Ors. v. State of Kerala &Anr. (2000) 6 SCC 359, the present appeal is covered by the judgmentpassed by this Court in Sony Ericsson (supra). 8.We are unable to accept the contention of the Revenue. The deletionof the transfer pricing adjustment on account of the AMP expenditureproposed by applying BLT method is impermissible as the said method hasbeen expressly negatived by the Court in Sony Ericsson (supra) fordetermining the ALP. Though the judgment of this Court in Sony Ericsson(supra) is pending adjudication before the Supreme Court, yet there is nostay of the said judgment till date. Consequently, in view of the judgmentpassed by the Supreme Court in Kunhayammed & Ors. v. State of Kerala &Anr. (2000) 6 SCC 359, the present appeal is covered by the judgmentpassed by this Court in Sony Ericsson (supra). 9.We are not persuaded by the contention of the learned counsel for theRevenue that the AMP expenditure incurred by the Assessee is capital innature, the said contention is vague and unsubstantiated from the record. TheRevenue itself has treated the AMP expenditure incurred by the Assessee inthe previous assessment years as a revenue expenditure. The ITAT whileadjudicating the appeals of the Assessee for AY 2009-10 and 2010-11 hasheld that the AMP expenditure incurred by the Assesee was in the nature ofbonafide business expenditure in furtherance of its legitimate businessinterests. The Revenue has not assailed the said findings of ITAT in theappeals filed for the said assessment years. It is therefore, evident thatRevenue’s contention that the AMP expenditure should be treated as capitalexpenditure is without any legal basis. 10.We are of the considered view that there is no substantial question oflaw in the present appeal. The facts and law have been properly andcorrectly assessed by the ITAT. Thus, we see no merits in the appeal and itis accordingly dismissed. MANMEET PRITAM SINGH ARORA, J NOVEMBER 02, 2022/hp MANMOHAN, J