Tax -6 v. Moet Hennessy India Pvt. Ltd

Signature Not Verified $~ 5 & 32 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 133/2022 & CM APPLs. 20326-27/2022THE PR. COMMISSIONER OF INCOMETHE PR. COMMISSIONER OF INCOME TAX -6..... AppellantThrough:Mr. Ruchir Bhatia, Senior StandingCounsel for Revenue.Through:Mr. Ruchir Bhatia, Senior StandingCounsel for Revenue. versus MOET HENNESSY INDIA PVT. LTD...... RespondentThrough:Mr.SumitMangal,Mr.MayankAggarwal & Ms. Radhika Sharma,Advocates. +ITA 892/2019 & CM APPL. 44787/2019 THE PR. COMMISSIONER OF INCOMETAX -6TAX -6 ..... AppellantThrough:Mr.SunilAgarwal,Sr.StandingCounsel for Revenue with Mr. TusharGupta, Jr. Standing Counsel & Mr.Utkarsh Tiwari, Advocates.Counsel for Revenue with Mr. TusharGupta, Jr. Standing Counsel & Mr.Utkarsh Tiwari, Advocates. versus MOET HENNESSY INDIA PVT. LTD. ..... Respondent Through:Mr.SumitMangal,Mr.MayankAggarwal & Ms. Radhika Sharma,Advocates. Date of Decision: 02[nd]November, 2022 % CORAM:HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA ITA 133/2022 & ITA Nos. 892/2019 J U D G M E N T MANMEET PRITAM SINGH ARORA, J (ORAL): CM APPLs. 20326-27/2022 in ITA 133/2022 (for condonation of delay in-filing and refiling the appeal)-CM APPL. 44787/2019 in ITA 892/2019 (for condonation of delay in refiling the appeal) Keeping in view the averments in the application, the delay in filingand re-filing the appeal is condoned. Accordingly, the present applications stand disposed of. ITA 133/2022ITA 892/2019 1.The Appellant, Revenue, has impugned order dated 23[rd]August, 2018,passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No.1906/Del/2014 for the Assessment Year (‘AY’) 2009-10, in ITA No.892/2019. 1.1.The Revenue, has impugned order dated 9[th]April, 2019, passed by theITAT in ITA No. 85/Del/2015 for the AY 2010-11 in ITA No. 133/2022. 2.The Assessee filed its Return of Income (‘ROI’) for AY 2009-10, on30[th]September, 2009, declaring loss of Rs. 8,70,19,143/-. The Assessee’sreturn was processed under Section 143(1) of the Income Tax Act, 1961(‘the Act’), and its case was selected for scrutiny assessment, wherein theAssessing Officer (‘AO’) observed that the Assessee Company had enteredinto international transactions with its Associated Enterprises (AEs). TheAO consequently, made a reference to the Transfer Pricing Officer (‘TPO’) for determining the Arms’s Length Price (‘ALP’) of the internationaltransactions under Section 92CA(3) of the Act. 2.1.The TPO in its order dated 29[th]January, 2013, observed that theAssessee has 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 then proceeded to applythe Bright Line Test (‘BLT’) method and made an adjustment of Rs.6,64,70,841/- on account of AMP expenditure incurred by the Assessee, andheld it to be an international transaction. Pursuant to the aforesaid, the AOpassed its draft assessment order under Section 144C of the Act. 2.2.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 26[th]December, 2013, disposed of the Assessee’s objection and confirmed theadjustment made by the TPO on account of AMP expenditure, by relying onthe decision rendered by the special bench of the ITAT in LG ElectronicsIndia Pvt. Ltd. v. ACIT, (2013) 140 ITD 41 (Del). 2.3.Pursuant, to the DRP directions, the AO passed its final assessmentorder dated 29[th]January, 2014, under Section 143(3) read with 144C(1) ofthe Act, determining the total loss at Rs. 2,05,48,300/- after making anadjustment of Rs. 6,64,70,841/- on account of AMP expenditure incurred bythe Assessee. 2.4.Being aggrieved by the aforesaid, the Assessee preferred an appealbefore the ITAT, wherein the ITAT vide its order dated 23[rd]August, 2018,allowed the Assessee’s appeal and deleted the ALP adjustment of Rs. 2.3.Pursuant, to the DRP directions, the AO passed its final assessmentorder dated 29[th]January, 2014, under Section 143(3) read with 144C(1) ofthe Act, determining the total loss at Rs. 2,05,48,300/- after making anadjustment of Rs. 6,64,70,841/- on account of AMP expenditure incurred bythe Assessee. 2.4.Being aggrieved by the aforesaid, the Assessee preferred an appealbefore the ITAT, wherein the ITAT vide its order dated 23[rd]August, 2018,allowed the Assessee’s appeal and deleted the ALP adjustment of Rs. 6,64,70,841/- made on account of AMP expenditure incurred by theAssessee. The ITAT concluded that there is no material on the record tosuggest there was ‘an arrangement, understanding or action in concert’between the Assessee and its AE, with respect to the expenditure incurred bythe Assessee and was of the opinion that the said expenditure was in natureof bonafide business expenditure in furtherance of its legitimate businessinterest. The ITAT further held that there was no legally sustainable basis ormaterial brought on record for the TPO to arrive at the conclusion that therewas an international transaction, other than the fact that the TPO has appliedBLT method to reach the aforesaid conclusion. Further, the ITAT held thatsince the BLT method has already been negatived by this Court in SonyEricsson Mobile Communications India (P.) Ltd. v. Commissioner ofIncome Tax – III, (2015) 374 ITR 118 (Del), there is no reason to remit thematter back to the TPO, as prayed for by the Revenue. 3.The facts giving rise to the controversy in the AY 2010-11 are similarto that of AY 2009-10 with respect to the ALP adjustment of AMPexpenditure. The ITAT in AY 2010-11, held that the issue of absence ofinternational transaction already stands decided in favour of the Assessee byits predecessor bench in AY 2009-10. The ITAT relied on the decision ofthis Court in Sony Ericsson (Supra) and Maruti Suzuki vs. CIT, [2016] 381ITR 117, to hold that the Revenue has failed to discharge the onus to provethe existence of an international transaction between the Assessee and its AEand held that there doesn’t exist any cogent material to treat the AMPexpenditure as international transaction.ITAT vide its impugned orderdated 9[th]April, 2019, allowed the appeal filed by the Assessee and deleted the adjustment of Rs. 712,19,145/- made on account of AMP expenditureincurred by the Assessee. 4.The learned senior standing counsel for the Revenue states that theITAT erred in holding that the AMP expenses is not an internationaltransaction and in doing so it ignored the nature and purpose of suchexpenses which are meant to create intangible asset for its AE in India. Hestates that the ITAT erred in holding that the AMP expenses incurred by theAssessee is not a separate international transaction. 5.He states that ITAT failed to appreciate that in the case of SonyEricsson (Supra) this Court has held that there exists an internationaltransaction between the assessee therein, who was a ‘distributor’, and itsAE. He states that the facts of this case are similar since the Assesee hereinas well is a ‘distributor’ for its AE. 6.He states that the ITAT erred in not following the decision of thisCourt in the case of Sony Ericsson (Supra) with respect to remand to theTPO for fresh determination of the ALP. 7.He further states that since the Respondent, Assessee, is admittedlynot the ‘manufacturer’ of the goods and is merely a ‘distributor’ for its AE,the judgements in the case of Bausch & Lomb Eyecare Pvt. Ltd. vs.Additional Commissioner of Income Tax, [2016] 381 ITR 227 and MarutiSuzuki (Supra), cannot be relied upon. He states that since in the case ofMaruti Suzuki (Supra) and Bausch & Lomb (Supra), the Assessee thereinwas a manufacturer as well as the seller of the goods and it was in thesespecific facts that the Court held that the expenditure incurred by theAssessee therein for advertisement and promotion was for its own benefit. 7.He further states that since the Respondent, Assessee, is admittedlynot the ‘manufacturer’ of the goods and is merely a ‘distributor’ for its AE,the judgements in the case of Bausch & Lomb Eyecare Pvt. Ltd. vs.Additional Commissioner of Income Tax, [2016] 381 ITR 227 and MarutiSuzuki (Supra), cannot be relied upon. He states that since in the case ofMaruti Suzuki (Supra) and Bausch & Lomb (Supra), the Assessee thereinwas a manufacturer as well as the seller of the goods and it was in thesespecific facts that the Court held that the expenditure incurred by theAssessee therein for advertisement and promotion was for its own benefit. 8.We have heard the learned counsel for the parties. It is admitted onrecord that the contention of the Revenue that there exists an internationaltransaction between the Assessee and its AE, is not based on any agreementexecuted between the said parties. The sole basis for making this adjustmentwas a presumption drawn by the TPO that huge AMP expenditure wasincurred by the Assessee to expand the reach of its AE’s brand in India. Therelevant finding of the TPO in its order for AY 2009-10 read as under: “4.1 It is seen that the assessee has incurred an extremely highlevel of advertising and market promotion (AMP) expenditure. Insuch cases there is a possibility that the objective of the heightenedlevel of AMP expenditure is to expand the reach of the AE's brandin India. The AE is the legal owner of the brand. Therefore thebeneficiary of the efforts of the assessee is the AE as the brandvalue increases significantly given the efforts of the assessee. Theassessee is thereby creating marketing intangible in favour of theAE…” (Emphasis Supplied) It is evident from the aforesaid that the TPO has determined theexistence of an international transaction on a matter of a presumption, whichruns counter to the decision of this Court in Maruti Suzuki (supra). 9.The ITAT while allowing the Assessee’s appeal for AY 2009-10 hasafter considering the material on record held that there was no internationaltransaction between the Assessee and its AE. The relevant findings of theITAT are as under: - “9.On a careful consideration of all these factors, including theinconsistency in the approach of the AO/TPO with respect to theAMPexpenditurebeinginthenatureofaninternational Signature Not Verified transaction as expenditure incurred on behalf of the assessee,including the quantum and nature of expenditure and including lackof any material to suggest that there was "an arrangement,understanding or action in concert" with respect of the expenditureincurred by the assessee and including the fact that, in ourconsidered view, the expenditure incurred by the assessee was innature of bonafide business expenditure in furtherance of itslegitimate business interests, we are of the considered view thatthere is no legally sustainable basis for the TPO coming to theconclusion that there was an international transaction, undersection 92B, on the facts of this case. It was only on the basis ofbright line test that the impugned ALP adjustment was made butthat approach has already been negatived by Hon'ble Courts above.We see no reasons to remit the matter to the file of the TPO, as isprayed for by the learned Departmental Representative. A remandto the assessment stage cannot be a matter of routine; it has to beso done only when there is anything in the facts and circumstancesto so warrant or justify. In any case, there are direct judicialprecedents from Hon'ble jurisdictional High Court which clearlysuggest that the matter regarding existence of internationaltransaction under section 92B, as far as possible, should be decidedat the level of Tribunal itself… 10. In the present case, no new facts have emerged and all the factsbrought to record, during the course of the assessment proceedings,do not indicate legally sustainable basis for coming to theconclusion that there was an internal transaction in respect of AMPexpenses incurred by the assessee. We are, therefore, of theconsidered view that the plea of the assessee, on the peculiar factsof this case, does indeed deserve to be upheld that there is nomaterial on record to hold that there was an internationaltransactions, in terms of the provisions of Section 92B, nor anymaterial has been brought on record to even remotely suggest soand, therefore, that there is no good reason to remit the matter tothe assessment stage for building a case afresh. Respectfullyfollowing the binding judicial precedents, we delete the impugned Signature Not Verified ALP adjustment which was made solely on the basis of bright linetest. The plea of the learned counsel was indeed well taken andmeritsacceptance.TheimpugnedALPadjustmentofRs6,64,70,841, accordingly, stands deleted.” 10.The Revenue has not brought on record any material to assail theaforesaid finding of the ITAT as regards the absence of any internationaltransaction. 11.In similar facts, the Court in Maruti Suzuki (supra) set aside the orderof the TPO/AO, which had determined the AMP expenditure as aninternational transaction, without any evidence on record and only on thebasis of BLT. The relevant findings of this Court are as under: “65. The transfer pricing adjustment is not expected to be made bydeducing from the difference between the ‘excessive’ AMPexpenditure incurred by the Assessee and the AMP expenditure of acomparable entity that an international transaction exists and thenproceed to make the adjustment of the difference in order todetermine the value of such AMP expenditure incurred for the AE.And, yet, that is what appears to have been done by the Revenue inthe present case. It first arrived at the ‘bright line’ by comparingthe AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since onapplying the BLT, the AMP spend of MSIL was found ‘excessive’the Revenue deduced the existence of an international transaction.It then added back the excess expenditure as the transfer pricing‘’adjustment. This runs counter to legal position explained in CIT v.EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required aTPO “to examine the ‘international transaction’ as he actuallyfinds the same.” In other words the very existence of aninternational transaction cannot be a matter for inference orsurmise. 66. As already noticed, the decision in Sony Ericsson has doneaway with the BLT as means for determining the ALP of an Signature Not Verified international transaction involving AMP expenses.…” (Emphasis Supplied) 12.We are unable to agree with the contention of the learned counsel forthe Revenue that in the facts of the present appeal(s), the matter should beremanded to TPO in terms of Sony Ericsson (Supra). He states that in thesaid decision this Court held that there exists an international transactionbetween the Assessee therein, who was a ‘distributor’, and its AE. We areunable to accept the said contention of the learned counsel for the Revenuethat since the Assessee herein is a ‘distributor’ for its AE, the corollary ofthis fact is that there exists an international transaction with respect to AMPexpenditure, incurred by the Assessee. In the case of Sony Ericsson (Supra),the finding of this Court that the Assessee(s) therein may have aninternational transaction with their AE(s) for AMP expenditure was basedon the terms of the agreement between the Assessee(s) and their AE(s) in thesaid case. The relevant paragraph of the judgment read as follows: “52. The contention that AMP expenses are not internationaltransactions has to be rejected. There seems to be an incongruity inthe submission of the assessee on the said aspect for the simplereason that in most cases the assessed have submitted that theinternational transactions between them and the AE, residentabroad included the cost/value of the AMP expenses, which theassessee had incurred in India. In other words, when the assessedraise the aforesaid argument, they accept that the declared price ofthe international transaction included the said element or functionof AMP expenses, for which they stand duly compensated in theirmargins or the arm's length price as computed.”transactions has to be rejected. There seems to be an incongruity inthe submission of the assessee on the said aspect for the simplereason that in most cases the assessed have submitted that theinternational transactions between them and the AE, residentabroad included the cost/value of the AMP expenses, which theassessee had incurred in India. In other words, when the assessedraise the aforesaid argument, they accept that the declared price ofthe international transaction included the said element or functionof AMP expenses, for which they stand duly compensated in theirmargins or the arm's length price as computed.” (Emphasis Supplied) Signature Not Verified The aforesaid finding of the Court is not premised on the status of theassessee(s) being that of a distributor. 13.We are also unable to agree with submission of the learned counselfor the Revenue that in the judgment of Maruti Suzuki (Supra) and Bausch& Lomb (Supra), the findings of this Court with respect to absence ofinternational transaction emanated from the fact that the assessee(s) thereinwere a manufacturer in addition to being a seller. 14.The issue with respect to deletion of transfer pricing adjustment onaccount of AMP expenses, determined on BLT method, by the ITAT issquarely covered by the decisions of this Court in the case of Maruti Suzuki(Supra) and Bausch & Lomb (Supra). We are, therefore, not inclined toframe any substantial question of law on this issue. The facts and law havebeen correctly assessed by the ITAT and we therefore, do not find anymerits in the appeal and the accordingly, the same are dismissed. MANMEET PRITAM SINGH ARORA, J MANMOHAN, J NOVEMBER 02, 2022/hp