The Pr. Commissioner Of Income Tax -3 v. M/S Amway India Enterprises

$~29 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 313/2022 THE PR. COMMISSIONER OF INCOME TAX -3..... AppellantThrough:Mr. Sanjay Kumar, Advocate.versus M/s AMWAY INDIA ENTERPRISES..... Respondent Through:None. %Date of Decision: 8[th]September, 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): 1.Present Income Tax Appeal has been filed challenging the order dated8[th]October, 2021 passed by Income Tax Appellate Tribunal (‘ITAT’) inITA No. 2833/Del/2018 for the Assessment Year (‘AY’) 2013-14. 2.The respondent assessee is engaged in the business of direct selling ofconsumer products through multi-level marketing. The assessee filed itsreturn for AY 2013-14 declaring an income of Rs.3,04,03,40,790/-. Since,the assessee admittedly had international transaction with its AssociatedEnterprises (‘AEs’), the case was referred to the Transfer Pricing Officer(‘TPO’) for determination of Arm’s Length Price (‘ALP’). The TPO videorder dated 31.10.2016, recommended an adjustment of Rs.15,66,27,250/-on account of ALP determined for royalty payment and Rs.7,54,77,412/- onaccount of managerial remuneration to the director. The Assessing Officer ITA 313/2022 (‘AO’) vide order dated 31.01.2017 confirmed the addition made by theTPOandassessedtheincomeoftheassesseetothetuneofRs.3,27,24,45,452/-. 3.Aggrieved by the same, the assessee preferred an appeal before theCommissioner of Income Tax (Appeals) [‘CIT(A)’], which was partlyallowed vide order dated 28.02.2018, the AO/TPO was directed to delete theaddition made on account of transfer pricing adjustment for transactionrelated to royalty. 4.Aggrieved by the order of the CIT(A), the Revenue herein preferredan appeal before the ITAT, challenging the deletion of the adjustment oftransaction related to royalty, however vide the impugned order, the ITATdismissed the appeal by confirming the order of the CIT(A). 5.In the present appeal, the learned counsel for the Appellant states thatthe ITAT erred in confirming the order of the CIT(A) and failed toappreciate the fact that the royalty payment is excessive and not at arm’slength on consideration of Advertisement, Marketing and Promotion(‘AMP’) expenses incurred by the assessee for the benefit of the AE’strademark and brand. He states that the ITAT erred in not appreciating thatthe foundation of the adjustment with respect to royalty payment suggestedby the TPO was that the assessee was incurring huge commissionexpenditure, which has created marketing intangibles for its AEs, and, forincurring this expenditure, the assessee should be compensated with apayment from the AE and that there may not be a need for a huge paymentof royalty as rightly noted by the TPO. He also states that the ITAT andCIT(A) has wrongly placed reliance on the judgment of this Court in ChrysCapital Investment Advisors (India) Pvt. Ltd. v. Deputy Commissioner of ITA 313/2022 Income Tax, ITA No. 417/2014, passed on 27.04.2015. 6.He further states that the ITAT erred in confirming the order ofCIT(A) whereby it was held that the rejection of two comparables, namely,Columbia Laboratories Inc. and Premier Consumer Products Inc., by theTPO while retaining the balance four comparables was based on a summaryfashion and that no cogent reason was provided for arriving at this opinion. 7.In this regard, the CIT(A) held as follows, ITA 313/2022 Income Tax, ITA No. 417/2014, passed on 27.04.2015. 6.He further states that the ITAT erred in confirming the order ofCIT(A) whereby it was held that the rejection of two comparables, namely,Columbia Laboratories Inc. and Premier Consumer Products Inc., by theTPO while retaining the balance four comparables was based on a summaryfashion and that no cogent reason was provided for arriving at this opinion. 7.In this regard, the CIT(A) held as follows, “7.9. The contention of the TPO is not backed by anycogent reason but is based on conjectures and surmiseswhich will not stand the test of judicial scrutiny. Acomparable cannot be excluded merely on the groundthat it shows a very high rate of royalty. The TPO hasnot discussed if there are any material facts like natureofentity,businessmodel,termsofagreement,geographicalareaetc.pertainingtoColumbiaLaboratories Inc. and Premier Consumer Products Inc.,which render them incomparable to the appellant. Asstated above, he has merely rejected them on the groundthat the rate of payment for royalty is very high. In viewof the same the contention of the appellant is notacceptable. This principle has been upheld by theHon’ble Delhi High Court in the case of Chrys CapitalInvestment Advisors India Private Limited ITA No.417/2014 which lays down the fundamental ratio that acomparable should not be rejected simply on the groundthat is margin is extremely high (or low) in relativecomparison to the date pertaining to its peers.7.10. In view of the above discussion and in view of thefacts and the circumstances of the case, the ground ofappeal 1-6 are decided in favour of the appellant. TheAO/TPO is directed to delete the addition made onaccount of transfer pricing adjustment for transactionrelated to royalty.” 8.The ITAT concurred with the aforesaid finding of the CIT(A) and in this regard held as follows:- “It is specifically observed by the CIT(A) that therejection of the two comparables by the TPO, are basedon conjectures and surmises. It is pertinent to note thatthe filters used by the TPO does not indicate that thehigh rates in respect of determination of ALP of royaltyis one of the criteria of the rejection while confrontingthe assessee. The ratio laid down by the Hon’ble HighCourt in the case of Chrys Capital Investment (supra) isapplicable in the present case. Hence there is no need tointerfere with the findings of the CIT(A). The appeal ofthe Revenue is dismissed.” 9.A perusal of the above order reveals that the ITAT and CIT (A), bothfact finding authorities have concurrently held that the rejection of the twocomparables by the TPO is based on conjectures and surmises and thus,deleted the addition made on account of transfer pricing adjustment fortransaction related to royalty. Learned Counsel for the appellant concedesthat if the rejected two comparables are taken into consideration, thepayment made by the assessee to its AEs towards royalty would be at arm’slength and no adjustment would be merited. He also concedes that the saidtwo comparables comply with all the filters prescribed by the TPO. In thisview of the matter, we therefore find that the reliance placed by CIT(A) andITAT on the judgment of this Court in Chrys Capital Investment (supra),was correct. The relevant portion of the said judgment reads as follows, “44. In light of the above findings, this Court concludesas follows:as follows: (a)The mere fact that an entity makes high/extremelyhigh profits/losses does not, ipso facto, lead to itsexclusion from the list of comparables for thepurposesofdeterminationofALP.Insuchcircumstances, an enquiry under Rule 10B(3) oughthigh profits/losses does not, ipso facto, lead to itsexclusion from the list of comparables for thepurposesofdeterminationofALP.Insuchcircumstances, an enquiry under Rule 10B(3) ought “44. In light of the above findings, this Court concludesas follows:as follows: (a)The mere fact that an entity makes high/extremelyhigh profits/losses does not, ipso facto, lead to itsexclusion from the list of comparables for thepurposesofdeterminationofALP.Insuchcircumstances, an enquiry under Rule 10B(3) oughthigh profits/losses does not, ipso facto, lead to itsexclusion from the list of comparables for thepurposesofdeterminationofALP.Insuchcircumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether thematerial differences between the assessee and thesaid entity can be eliminated. Unless such differencescannot be eliminated, the entity should be includedas a comparable.…………………..”(Emphasis Supplied) 10.In this view of the matter, no substantial questions of law arise forconsideration and accordingly, the appeal is dismissed. MANMEET PRITAM SINGH ARORA, J SEPTEMBER 08, 2022kv MANMOHAN, J ITA 313/2022