ACIT, New Delhi V. M/s Swatch Group (India) Pvt. Ltd., New Delhi

ITA 2264/DEL/2009

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7254 (ITAT-DELHI)
• Duration Of Justice: 10 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 01-06-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 26-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DINESH ANTIL
• Keywords: Transfer pricing; Business expenditure; International transaction; Question of law; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 13; 22; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI N.K. CHOUDHARY, JUDICIAL M EMBER ITA NO. 2264/DEL/2009 [ASSESSMENT YEAR: 2004-05] THE A.C.I.T VS. SWATCH GROUP [INDIA[ PVT LTD CIRCLE 7(1) 4 TH FLOOR, DLF RECTANGLE ONE NEW DELHI PLOT NO. D-4, SAKET DISTT. CENTRE SAKET, NEW DELHI PAN: AAFCS 7516 R [APPELLANT] [RESPONDENT] DATE OF HEARING : 20.01.2020 DATE OF PRONOUNCEMENT : 30.01.2020 ASSESSEE BY : SHRI NAGESHWAR RAO, ADV SHRI SANDEP S. KARHAIL, ADV REVENUE BY : SHRI DINESH ANTIL, SR. DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX [APPEALS] IX, NEW DELH I DATED 31.03.2009 PERTAINING TO ASSESSMENT YEAR 2004-05. 2 2. SUBSTANTIVE GRIEVANCES OF THE REVENUE READ AS UN DER: 1. THE LD. CIT(A) ERRED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN DELETING THE ADDITION OF RS. 4,01,47,762/- MADE BY THE ASSESSING OFFICER ON ACCOU NT OF DIFFERENCE IN ARMS LENGTH PRICE 2. THE LD. CIT(A) ERRED IN LAW , ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN DELETING THE ADDITION OF RS. 1,86,81,972/- MADE BY THE ASSESSING OFFICER ON ACCOU NT OF ADVERTISEMENT AND BUSINESS PROMOTION. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE- COMPANY IS A WHOLLY OWNED SUBSIDIARY OF THE SWATCH GROUP LIMITED, SWITZERLAND. SWATCH INDIA IS DISTRIBUTOR OF WATCHES MANUFACTURED BY SWATCH GROUP BRANDS, IN INDIA. THE COMPANY COMMENCE D ITS OPERATIONS FROM JANUARY 2002 IN INDIA. THE COMPANY ALSO PROVID ES CUSTOMER SERVICES IN THE NATURE OF AFTER SALES SERVICES TO C USTOMERS. SWATCH GROUP INDIA HAS THE EXCLUSIVE LICENSE TO UNDERTAKE WHOLESALING OPERATIONS OF SWATCH GROUP BRANDS IN INDIA. SWATCH GROUP INDIA ADAPTS GLOBAL ADVERTISING CAMPAIGNS FOR ITS PRODUCT S IN INDIA. 3 4. FOR ALL BRANDS PRESENT IN THE COUNTRY, INTERNATI ONAL CELEBRITIES ARE USED IN LOCAL PERIODICALS AND MAINLINE, WHICH M ENTION BRAND RETAILERS IN SPECIALLY CREATED DEALER PANELS. IN AD DITION TO PRIMARY ADVERTISING IN THE PRINT MEDIA, THE COMPANY RELIES ON BELOW-THE-LINE MARKETING ACTIVITIES, WHICH INCLUDES IN-STORE PROMO TIONS, SALES PROMOTIONS AND PUBLIC RELATIONS CAMPAIGN. SWATCH GR OUP INDIA RELIES SOLELY ON THE PRINT MEDIA, AND DOES NOT USE TELEVIS ION OR RADIO AS A MEDIUM. 5. GROUP INDIA DIRECTLY SELLS TO THE RETAILERS. THE RE ARE NO SUB- DISTRIBUTORS INVOLVED IN THE ENTIRE NETWORK. SWATCH GROUP INDIA SUPPLIES TO APPROXIMATELY 160 RETAIL OUTLETS IN IND IA. IT IS ALSO RESPONSIBLE FOR PROVIDING AFTER SALES SUPPORT AND S ERVICE FACILITY TO ITS DEALERS. IT HAS A NETWORK OF 13 SERVICE CENTRES ALL OVER THE COUNTRY. ITS INDIAS HEADQUARTERS AT NEW DELHI OFFICE IS THE MOT HER SERVICE CENTRE FOR OMEGA, LONGINES, SWATCH AND TISSOT. THE STANDAR D WARRANTY FOR SWATCH GROUP WATCHES IS TWO YEARS ON THE WATCH MECH ANICS. THE WARRANTY DOES NOT EXTEND TO THE EXTERIOR OF THE WAT CH AND HOLDS GOOD ONLY IF THE GUARANTEE CARD IS COMPLETE WITH VENDOR S NAME, DATE OF SALE AND OTHER DETAILS SPECIFIED THEREIN. 4 6. DURING THE YEAR, THE ASSESSEE HAS UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS: 7. RESALE PRICE METHOD FOR IMPORT OF WATCHES AND SP ARES FOR RESALE HAS BEEN APPLIED BY THE ASSESSEE. THE SECOND TRANSA CTION HAS BEEN CLUBBED WITH THE IMPORT OF WATCHES ON THE GROUND TH AT SUBSIDY BEING A SUPPORT FOR DISCOUNTED PRICE OF PRODUCTS IN INDIA BY SWATCH GROUP INDIA IS CONSIDERED AS A SUBSIDY ON THE COST OF GOO DS SOLD AND HENCE IS CLOSELY LINKED TO THE TRADING BUSINESS OF SWATCH GR OUP INDIA. THE TRANSACTION RELATING TO PRICING SUPPORT/SUBSIDY TO SUPPORT AND PUSH SALES OF SWATCH INDIA HAS ALSO BEEN ANALYZED USING THE RPM METHOD. SL NO . INTERNATIONAL TRANSACTIONS METH OD VALUE (IN RS.) 1 IMPORT OF WATCHES AND SPARES FOR RESALE RPM 23, 41 , 86,927 2 PRICING SUPPORT/SUBSIDY TO SUPPORT AND PUSH SALES OF SWATCH INDIA RPM 3,43,44.890 3 IMPORT OF SPARES FOR AFTER- SALES SERVICE TNM M 5,13,052 4 COST REIMBURSEMENT FOR IMPLEMENTATION OF FIREWALL COST RECH 2,77,600 5 REIMBURSEMENT OF TRAVEL COSTS, COMMUNICATION COSTS, ETC TO AES COST RECH 26,08.409 6 INTEREST ON EXTERNAL COMMERCIAL BORROWING CUP 3,26,693 5 8. THE GROSS MARGIN OF M/S SWATCH GROUP INDIA HAS B EEN COMPUTED AT 26.10% AND GROSS MARGIN FOR THE COMPARABLES HAS BEEN COMPUTED AT 24.78% AND THE TRANSACTION WAS REPORTED TO BE AT AL P AT ARMS LENGTH. THE ASSESSEE HAS COMPUTED THE GROSS MARGIN AS UNDER : SUMMARY OF FINANCIALS FOR TRADING/ (ALL FIGURES IN RS.) DISTRIBUTION BUSINESS YEAR ENDING 31 S1 MARCH 2004 SALES 401.065.696 OPENING STOCK 44,024.469 ADD : PURCHASE VALUE OF TRADED PRODUCTS PURCHASE VALUE OF TRADED PRODUCTS (NET OF MARKETING SUBSIDY ) 199.842.038 CUSTOMS DUTY 150.350.604 OTHER EXPENSES RELATED TO PURCHASES 1.107,890 LESS : CLOSING STOCK 98,957,492 COST OF GOODS SOLD 296.367.509 GROSS PROFIT 104.698.187 GROSS MARGIN 26.10% 6 9. THE TPO OBSERVED THAT IN THE PURCHASE VALUE OF T RADED PRODUCTS, PURCHASE VALUE OF TRADED PRODUCT HAS BEEN USED NET OF MARKETING SUBSIDY. THE MARKETING SUBSIDY IS OF RS. 3,43,44,890/-. IN AUDITED PROFIT AND LOSS ACCOUNT, PRICING SUPPORT/SU BSIDY HAS BEEN SHOWN UNDER THE HEAD SERVICE INCOME AND FOR CALCU LATION OF ACCOUNTING RATIO, THIS MARKETING SUBSIDY HAS NOT BE EN TAKEN EITHER IN THE SALES OR IN THE COST OF SALES. ACCORDINGLY, A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE ASKING IT TO JUSTIFY ITS CLAIM OF AGGREGATION OF MARKETING SUBSIDY WITH COST OF IMPORT, WAGES AND SALE THEREOF. 10. IN ITS REPLY, THE ASSESSEE EXPLAINED THAT IT F ORCED TO FOLLOW- PRICE LINES THAT ARE ACCEPTABLE IN THE INDIAN MARKE T, AND HENCE SOLD SWATCH PRODUCTS AT COMPETITIVE PRICES IN ORDER TO P USH SALES VOLUMES. THEREFORE, IN ORDER TO SUPPORT AND PUSH SA LES OF SWATCH INDIA, THE AES PROVIDED PRICE BY THE AES WAS IN FACT A GESTURE OF GENUINE ASSISTANCE AND SUPPORT AND COULD BE CONSIDE RED AS A MARKETING SUPPORT SERVICE THAT WAS PROVIDED BY THE AES TO SWATCH INDIA. 11. IT WAS EXPLAINED THAT THE PRICE SUPPORT OR MARK ETING SUBSIDY AMOUNTING TO RS. 34,344,890/- WHICH WAS RECEIVED FR OM THE VARIOUS BRANDS, BEING A SUPPORT FOR PRICING OF PRODUCTS IN INDIA BY SWATCH 7 INDIA, WAS CONSIDERED AS A SUBSIDY ON THE COST OF G OODS SOLD AND HENCE WAS TREATED AS BEING CLOSELY LINKED TO THE TR ADING BUSINESS OR DISTRIBUTION BUSINESS OF SWATCH INDIA 12. AFTER CONSIDERING THE REPLY OF THE ASSESSEE, TH OUGH THE TPO WAS CONVINCED WITH THE APPLICATION OF RPM AS MAM, BUT W AS NOT CONVINCED WITH THE AGGREGATION OF PRICE SUPPORT OR MARKETING SUBSIDY RECEIVED FROM THE AES. THE TPO OBSERVED FROM THE FUNCTIONS P ERFORMED, ASSETS USED AND RISK ASSUMED IT IS HELD THAT THE MARKETING SUPPORT SERVICES RECEIVED BY M/S SWATCH INDIA IS NOT FOR THE DISCOUN TING OF THE PRODUCT BUT FOR THE FUNCTIONS PERFORMED BY M/S SWATCH INDIA . 13. PRODUCT DISCOUNT IS PRODUCT SPECIFIC AND IT IS NEVER LUMPSUM OR COMPANY SPECIFIC, THEREFORE, THE TREATMENT OF PRICI NG SUPPORT/SUBSIDY IN TP IS NOT CORRECT. THE TPO, ACCORDINGLY, EXCLUD ED RS. 3,43,44,890/- FROM THE INTERNATIONAL TRANSACTIONS FOR IMPORT OF W ATCHES AND SPARES FOR RESALE. HOWEVER, THE TPO CONCLUDED BY STATING T HAT FOR THIS YEAR OF TRANSFER PRICING STUDY, NO ADVERSE INFERENCE HAS BE EN DRAWN AND THIS INTERNATIONAL TRANSACTION IS HELD TO BE AT ARM'S LE NGTH. 8 14. COMING TO THE ANALYSIS OF COMPARABLES, THE TPO OBSERVED THAT THOUGH THE METHOD SELECTED BY THE ASSESSEE IS CORRE CT BUT THE SELECTION OF COMPARABLE IS NOT APPROPRIATE FOR THE FACT OF THE CASE AND AS PRODUCT OF SWATCH INDIA IS OF UNIQUE INTANGIBLE, IF COMPARABLES USED BY THE ASSESSEE ARE ADOPTED, RESULTS WILL BE INACCU RATE. 15. THEREAFTER, FRESH SEARCH WAS UNDERTAKEN BY THE TPO AND FOLLOWING COMPARABLES WERE USED: S. NO COMPANY NAME 31 - DEC - 03 31-DEC-02 1 SRM SPA 54.37% 55.62% 2 CALVELLINI PIETRO SPA 28.11% 28.99% 3 DA RO DASSI ROVEDA SPA 32.24% 29.04% 4 FARO SPA 14.16% 11.35% 5 ITALGALA SPA NA 18.43% 6 PROMOTIONAL SPA 18.27% 19.85% 7 SONGA ANTONIO SPA 22.34% 20.37% AVERAGE GROSS PROFIT MARGIN 28.25% 26.24% 16. THE TPO FINALLY CONCLUDED BY HOLDING THAT TH E GP MARGIN OF COMPARABLES IDENTIFIED AS ABOVE, WILL BE USED FOR B ENCH MARKING OF INTERNATIONAL TRANSACTION AND ALP WAS DETERMINED AS UNDER: 9 G.P. SALES OF COMPARABLE - 28.25% = ALP SALES OF SWATCH INDIA - 40.26,80.400 ARMS LENGTH GP - 0.2825X40.26,89,460 G.P. SHOWN BY SWATCH INDIA - 11,37,59,772 ADJUSTMENT REQUIRED - 7,36,12,010 VALUE OF INTERNATIONAL TRANSACTION- 4,01,47,762 ALP OF INTERNATIONAL TRANSACTION - 23,41,86,927 % OF ADJUSTMENT TO ALP - 19,40,39,165 20.6% ADJUSTMENT OF RS. 4,01,47,762 (20.6%) IS MORE THAN 5%, PROVISO TO SECTION 92C(2) IS NOT APPLICABLE. 17. THE ASSESSEE AGITATED THE MATTER BEFORE THE LD. CIT(A) AND VEHEMENTLY STATED THAT THE COMPARABLES USED BY THE TPO WERE NOT IN ACCORDANCE WITH THE PROVISIONS OF LAW. IT WAS BROU GHT TO THE NOTICE OF THE LD. CIT(A) THAT FOREIGN COMPARABLES HAVE BEEN U SED AND IT WAS CONTENDED THAT WHEN THE TESTED PARTY IS AN INDIAN T AXPAYER, INDIAN COMPANIES SHOULD HAVE BEEN SELECTED AS COMPARABLES TO TEST THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTIONS. 18. IT WAS CONTENDED THAT THE TPO SELECTED FOREIGN COMPARABLES WHICH ARE PRIMARILY ITALIAN COMPANIES, WHICH OPERAT E IN A WELL DEVELOPED MARKET LIKE ITALY AND EUROPE. IN CONTRAS T, THE ASSESSEE 10 OPERATES IN A SIGNIFICANTLY UNDER DEVELOPED OR DEVE LOPING LUXURY WATCH MARKET, WHICH SUFFERS FROM A HIGH UNORGANIZED MARKE T AND A SIGNIFICANT GREY MARKET FOR THE LUXURY WATCH SEGMEN T, HIGH CUSTOMS DUTY ON IMPORT OF LUXURY WATCHES, PRICE SENSITIVE C ONSUMER BEHAVIOUR AND LOW PER CAPITA GDP. 19. IT WAS ALSO BROUGHT TO THE NOTICE OF THE FI RST APPELLATE AUTHORITY THAT BESIDES THE DIFFERENCES, THERE ARE SIGNIFICANT DIFFERENCES IN TERMS OF TAXES, DUTIES, ETC LEVIED IN THE INDIAN MARKET V IS A VIS ITALY ON THE IMPORT OF LUXURY WATCHES, WHICH RESULT IN SIGNIFICA NT BEARING ON THE GROSS AND OPERATING MARGINS OF THE INDIAN COMPANIES ENGAGED IN RESALE OF IMPORTED LUXURY WATCHES IN INDIA. 20. AFTER CONSIDERING THE FACTS AND SUBMISSIONS AND REFERRING TO RULE 10B(2) OF THE IT RULES AND ALSO REFERRING TO THE OE CD TP GUIDELINES FOR MULTINATIONALS AND TAX ADMINISTRATORS, THE LD. CIT( A) OBSERVED THAT USE OF FOREIGN COMPARABLES IS APPROPRIATE IN LIGHT OF T HE LACK OF INFORMATION ON COMPARABLES DEALING IN LUXURY WATCHE S IN THE YEAR UNDER CONSIDERATION. 11 21. HOWEVER, THE LD. CIT(A) FURTHER OBSERVED TH AT ALTHOUGH THE USE OF FOREIGN COMPARABLES HAS BEEN AGREED, BUT IT IS E SSENTIAL TO UNDERTAKE REASONABLE ADJUSTMENTS TO ESTABLISH COMPA RABILITY BETWEEN THE FOREIGN COMPARABLES USED AND THE ASSESSEE. ONE OF THE ADJUSTMENTS RELATED TO CUSTOMS DUTY. THE LD. CIT(A ) WAS OF THE OPINION THAT THE TPO WHILE SELECTING THE FOREIGN CO MPARABLES DID NOT CONSIDER THE DIFFERENCES IN CUSTOM DUTY RATE PREVAL ENT IN INDIA VIS A VIS ITALY. 22. THE FIRST APPELLATE AUTHORITY OBSERVED THAT THE HIGH CUSTOM DUTY RATES ON LUXURY WATCHES IN INDIA ACCOUNTED FOR 32.3 7% OF THE NET SALES OF THE ASSESSEE AND CUSTOM DUTY PAID BY THE ASSESSE E ON THE IMPORT OF WATCHES AND SPARES WAS ABOVE 50% OF THE TOTAL COST OF GOODS SOLD. ACCORDING TO THE LD. CIT(A), HIGH CUSTOM DUTY RATES IN INDIA ARE BOUND TO HAVE SIGNIFICANT BEARING ON THE GROSS MARGINS AS WELL AS OPERATING MARGINS OF THE ASSESSEE VIS A VIS ITALIAN COMPARABL ES. 23. ACCORDINGLY, THE LD. CIT(A) WAS CONVINCED T HAT HIGH COST OF IMPORTING GOODS INTO INDIA SHOULD BE ADJUSTED FOR, SINCE THE FOREIGN COMPARABLES OPERATING IN ITALY ENJOY THE BENEFIT OF NIL OR NEGLIGIBLE CUSTOMS DUTY AND DO NOT HAVE TO SPEND THE SAME PROP ORTION OF IMPORT 12 DUTY COST AS THE ASSESSEE. HENCE, IN VIEW OF THE P ROVISION OF RULE 10B(2)(D) AND 10B(3) OF THE RULES, APPROPRIATE ADJU STMENTS FOR DIFFERENCES ON ACCOUNT OF GEOGRAPHICAL LOCATION, SI ZE OF MARKET, LEVEL OF COMPETITION, GOVERNMENT REGULATIONS IS CALLED F OR AND THE LD. CIT(A) ACCORDINGLY, HELD THAT REASONABLE QUANTITATI VE ADJUSTMENTS SHOULD BE MADE IN ORDER TO MAKE A COMPARISON OF THE PROFITABILITY OF THE ASSESSEE VIS A VIS THE COMPARABLE COMPANIES AND COMPUTED THE GROSS MARGIN AS UNDER: YEAR ENDING 31 ST MARCH 2004* SALES 401,065,696 OPENING STOCK 44,024,469 ADD: PURCHASE VALUE OF TRADED PRODUCTS PURCHASE VALUE OF TRADED PRODUCTS (NET OF MARKETING SUBSIDY) 199,842,038 CUSTOMS DUTY (NORMALIZING TO 5 PERCENT OF PURCHASE VALUE) 9,992,102 OTHER EXPENSES RELATED TO PURCHASES 1,107,890 LESS: CLOSING STOCK 98,957,492 COST OF GOODS SOLD 156,009,007 GROSS PROFIT 245,056,689 GROSS MARGIN 61.10% 13 24. SINCE THE GROSS MARGIN COMPUTED AS ABOVE WAS 61 .10% WHICH WAS HIGHER THAN THE MARGIN OF THE COMPARABLE COMPANIES, THE LD. CIT(A) DIRECTED FOR DELETION OF THE ADJUSTMENT OF RS. 40,1 0,65,606/-. 25. BEFORE US, THE LD. DR STRONGLY SUPPORTED THE FI NDINGS OF THE TPO. IT IS THE SAY OF THE LD. DR THAT ANY ADJUSTMENT CAN ONLY BE MADE IN CASE OF COMPARABLES AND NOT IN CASE OF THE ASSESSEE . THE LD. DR VEHEMENTLY STATED THAT THE LD. CIT(A) ALLOWED THE A DJUSTMENTS ON ACCOUNT OF DIFFERENCES IN CUSTOMS DUTY, WHICH ISSUE WAS NEVER RAISED BY THE ASSESSEE BEFORE THE TPO AND THE LD. CIT(A) O UGHT TO HAVE GIVEN AN OPPORTUNITY TO THE TPO OR SHOULD HAVE CALLED FOR REMAND REPORT. THE LD. DR PRAYS FOR RESTORATION OF THIS ISSUE TO T HE FILE OF THE TPO FOR FRESH ADJUDICATION. 26. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE RE ITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. IT IS TH E SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE LD. CIT(A) WAS WE LL WITHIN HIS POWERS FOR MAKING ADJUSTMENT HIMSELF. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT IF THERE IS ANY ERROR IN CALCULATION OF THE LD . CIT(A), THE LD. DR SHOULD HAVE POINTED OUT THE SAME AND THERE IS NO NE ED FOR RESTORATION OF THE ISSUE TO THE FILE OF THE TPO. 14 27. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW. THERE IS NO DISPUTE IN SO FAR AS THE APPLICATION OF THE MOST APPROPRIATE METHOD IS CONCERNED. THE ASS ESSEE HAS USED RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD IN BENCH MARKING ITS INTERNATIONAL TRANSACTIONS AND THE TPO HAS ACCE PTED THE SAME. IN OUR CONSIDERED VIEW, THE ENTIRE QUARREL REVOLVES AR OUND THE ADJUSTMENT OF CUSTOM DUTY GIVEN BY THE LD. CIT(A) I N THE HANDS OF THE APPELLANT. RELIABILITY AND ACCURACY OF ADJUSTMENT WOULD LARGELY DEPEND UPON THE AVAILABILITY OF RELIABLE AND ACCURA TE DATA. 28. IN OUR CONSIDERED OPINION, FOR CERTAIN TYPES OF ADJUSTMENTS, RELEVANT DATA FOR COMPARABLES MAY EITHER NOT BE AVA ILABLE IN PUBLIC DOMAIN OR MAY NOT BE RELIABLY DETERMINABLE BASED ON INFORMATION AVAILABLE IN PUBLIC DOMAIN, WHEREAS, IT MAY BE POSS IBLE TO MAKE EQUALLY RELIABLE AND ACCURATE ADJUSTMENTS ON THE TE STED PARTY WHOSE DATA WOULD GENERALLY BE EASILY ACCESSIBLE. 29. RULE 10B(3)(II) PROVIDES FOR MAKING 'REASONABLY ACCURATE ADJUSTMENTS' FOR ELIMINATING ANY MATERIAL DIFFERENC ES BETWEEN THE TWO TRANSACTIONS BEING COMPARED. IT IS AN UNDISPUTED FA CT THAT IMPORT OF WATCHES CARRY HEAVY CUSTOMS DUTY WHICH MAY NOT BE T HERE IN SO FAR AS ITALIAN COMPANIES ARE CONCERNED. THE PURPOSE OR IN TENT OF THE 15 COMPARABILITY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT, THE VALUES STATED FOR THE INTERNATIONAL TRANSACTIONS ARE AT AL P. WE ARE OF THE VIEW THAT THE REGULATIONS DO NOT RESTRICT OR PROVID E THAT ADJUSTMENTS CANNOT BE MADE ON THE RESULTS OF THE TESTED PARTY. WE ARE ALSO OF THE VIEW THAT NET PROFIT MARGIN OF THE TESTED PARTY DRA WN FROM ITS FINANCIAL ACCOUNTS CAN BE SUITABLY ADJUSTED TO FACILITATE ITS COMPARISON WITH OTHER UNCONTROLLED ENTITIES/TRANSACTIONS AS PER SUB -CLAUSE (I) OF RULE 10B(1)(E) OF THE RULES. THERE IS NO SPECIFIC PROVI SION IN RULE 10B(1)(E)(III) OF THE RULES, WHICH WOULD IMPEDE THE ADJUSTMENT OF THE PROFIT MARGIN OF THE TESTED PARTY. 30. AS FAR AS RATE OF CUSTOM DUTY IS CONCERNED, IT CAN BE EASILY TAKEN FROM THE OFFICIAL WEBSITE OF THE EUROPEAN UNION AND WE FIND THAT THE RATE AT THE RELEVANT POINT OF TIME WAS 4.5% WHEREAS THE CUSTOM DUTY PAID BY THE ASSESSEE ACCOUNTS FOR MORE THAN 75% OF THE PURCHASE VALUE AND 50% OF THE TOTAL COST OF GOODS SOLD. IN OUR CO NSIDERED OPINION, SUCH DIFFERENCE ON ACCOUNT OF CUSTOM DUTY PAID BY T HE ASSESSEE AND THAT EXISTING IN THE LOCATION WHERE COMPARABLE COMP ANIES OPERATE, CANNOT BE IGNORED. CONSIDERING ALL THESE FACTS IN TOTALITY, WE DECLINE TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). GROUND NO. 1 IS, ACCORDINGLY, DISMISSED. 16 31. FACTS RELATING TO GROUND NO. 2 SHOW THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE CLAIMED AN EXPENDITURE OF RS. 2,80,22,958/- ON ADVERTISEMENT AND BUSINESS PROMOTI ON. THE ASSESSING OFFICER NOTICED THAT THESE EXPENSES WERE INCURRED O N SPONSORSHIP OF EVENTS/NEWSPAPER/MAGAZINES/ELECTRONIC MEDIA/ALL PAI NTING. THE ASSESSING OFFICER WAS OF THE FIRM BELIEF THAT THE A DVERTISEMENT EXPENSES WERE CAPITAL IN NATURE AND BRING ENDURING BENEFIT TO THE ASSESSEE AND ACCORDINGLY, AMORTIZED THE EXPENDITURE IN THREE YEARS AND THEREBY ALLOWED 1/3 RD OF THE EXPENDITURE IN THE CURRENT A.Y AND BALANCE 2/3 OF THE EXPENDITURE WAS ADDED BACK. 32. THE ASSESSEE AGITATED THE MATTER BEFORE THE LD. CIT(A) AND IT WAS EXPLAINED THAT THE EXPENDITURE WAS PRIMARILY INCURR ED BY THE ASSESSEE ON THE VISUALS, BANNERS AND OTHER VISIBILITY MATERI AL INSTALLED AT RETAILERS PREMISES INCLUDING BUSINESS EXPENSES FOR HOLDING RETAILERS CONFERENCES, PARTICIPATION IN EXHIBITIONS, IN-STORE EXPENSE FOR VARIOUS NEW STORES OPENED DURING THE YEAR, PRINTING OF BANN ERS AND LEAFLETS, ETC. IT ALSO INCLUDED EXPENSES ON ADVERTISEMENTS I N NEWSPAPERS, MAGAZINES AND ELECTRONIC MEDIA IN INDIA. IT WAS ST RONGLY CONTENDED THAT SINCE THE ASSESSEE IS ENGAGED IN DISTRIBUTION OF WATCHES OF VARIOUS SWATCH GROUP BRANDS IN INDIA VIZ. OMEGA, RADO, TISS OT, LONGINES AND 17 SWATCH, IT IS IMPERATIVE FOR THE ASSESSEES BUSINES S TO HAVE A MARKETING STRATEGY IN PLACE TO PROMOTE DISTRIBUTION OF PRODUC TS DEALT IN. 33. THEREFORE, ANY EXPENDITURE INCURRED ON MARKETIN G STRATEGY ESSENTIALLY TO PROMOTE BUSINESS OBJECTIVES AND SALE OF PRODUCTS DEALT IN IS LEGITIMATE BUSINESS EXPENDITURE WHICH WAS INCURR ED IN THE ORDINARY COURSE OF ASSESSEES DISTRIBUTION BUSINESS AND HENC E IT IS PURELY A REVENUE EXPENDITURE. IT WAS EXPLAINED THAT SUCH EX PENDITURE ON ADVERTISEMENT IS AN ONGOING AND CONTINUOUS PROCESS. IN A COMPETITIVE SCENARIO, IT WOULD BE DIFFICULT TO HOLD THE LONG LA STING BENEFIT ACCRUED FROM SUCH ADVERTISEMENT EXPENDITURE. 34. AFTER CONSIDERING THE FACTS AND SUBMISSIONS, TH E LD. CIT(A) OBSERVED THAT ADVERTISEMENT EXPENDITURE DOES NOT FA LL UNDER AN ALLOWABLE EXPENDITURE UNDER ANY SECTION BETWEEN SEC TION 30 TO SECTION 36 AND IT IS AN ALLOWABLE EXPENDITURE U/S 37 OF THE ACT. THE LD. CIT(A) FURTHER OBSERVED THAT TO CLAIM AN EXPENDITURE AS AN ALLOWABLE EXPENDITURE ONLY THAT EXPENDITURE IS ALLOWABLE WHIC H IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IT IS N OT IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL NATURE. THERE IS NO SUCH CLAUSE WHICH ALLOWS THE ASSESSING OFFICER TO AMORTIZE THE ADVERT ISEMENT EXPENDITURE 18 UNLESS IT FALLS UNDER THE CATEGORY OF CAPITAL EXPEN DITURE. ACCORDINGLY, THE LD. CIT(A) DIRECTED FOR DELETION OF ADDITION OF RS. 1,86,81,972/-. 35. BEFORE US, THE LD. DR STRONGLY SUPPORTED THE FI NDINGS OF THE ASSESSING OFFICER. IT IS THE SAY OF THE LD. DR THA T THE ASSESSEE HAS INCURRED AMP EXPENSES FOR BRAND BUILDING. THE LD. DR FURTHER STATED THAT THE ASSESSEE ITSELF HAS ENTERED INTO AN AGREEM ENT WITH ITS AE FOR PROVIDING TEST MARKETING SERVICES AND EXPENSES ON B RAND PROMOTION IS EVIDENTLY CAPITAL EXPENDITURE AND HAS BEEN RIGHTLY TREATED AS SUCH BY THE ASSESSING OFFICER. 36. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE RE ITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. IT IS TH E SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT SWATCH GROUP COMPANIE S WHICH OWN RESPECTIVE BRANDS HAVE DIRECTLY ENGAGED OR SIGNED C ELEBRITIES AS BRAND AMBASSADORS AND THE SPEND OF THE ASSESSEE IS TO PRO MOTE ITS BUSINESS IN INDIA AND HAS NOTHING TO DO WITH BRAND BUILDING OF THE SWATCH GROUP. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY STATED THAT THE ASSESSEE HAS CLAIMED EXPENDITURE OF RS. 2,80,22,958/- WHEREA S CELEBRITIES USED AS BRAND AMBASSADORS ARE CINDY CRAWFORD AND PIERCE BROSNAN FOR 19 OMEGA, AISWARYA RAI FOR LONGINES, LISA RAY FOR RADO AND MICHAEL OWEN FOR TISSOT BRAND. THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOWHERE NEAR THE PRICE CHARGED BY THESE CELEBRITIES WHICH ITSELF SHOWS THA T BRAND AMBASSADORS HAVE BEEN USED BY SWATCH GROUP OF COMPANIES AND NOT BY THE ASSESSEE. 37. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW. AT THE VERY OUTSET, WE HAVE TO S AY THAT CONSIDERING THE NAMES OF THE BRAND AMBASSADORS AS MENTIONED ELS EWHERE, WE ARE OF THE CONSIDERED OPINION THAT THE ADVERTISEMENT SP END BY THE ASSESSEE IS PEANUTS TO THE FACE VALUE OF THESE CELE BRITIES. FURTHER, WE FIND THAT SIMILAR ISSUE AROSE IN A.Y 2005-06 AND TH E MATTER TRAVELLED UPTO THE HON'BLE HIGH COURT OF DELHI. THE RELEVANT FINDINGS OF THE HON'BLE HIGH COURT READ AS UNDER: THE RETURN FILED BY THE ASSESSEE FOR THE A.Y. 2005 -06 HAD REFLECTED EXPENDITURE OF RS.6,38,01,509/- INCURRED ON ADVERTISEMENT AND PUBLICITY OF ITS BRAND NAMELY SW ATCH FOR PROMOTION OF ITS BUSINESS. IT IS AN ADMITTED CASE T HAT ASSESSEE COMPANY OPERATES IN THE MEDIUM AND HIGH END LUXURY WATCH SEGMENTS IN INDIA. THE EXPENDITURE WAS INCURRED BY THE 20 ASSESSEE ON SPONSORSHIP OF THE EVENTS, NEWSPAPER/ MAGAZINE/ELECTRONIC MEDIA ADVERTISEMENT, BANNERS, W ALL PAINTING AND HOARDINGS ETC. THE ASSESSING OFFICER WAS OF THE VIEW THAT SUCH EXPENDITURE WILL GIVE BENEFIT OF ENDURING NATU RE TO THE ASSESSEE BECAUSE THE EXPENSES WILL HELP THE ASSESSE E TO PROMOTE ITS BRAND AND PRODUCTS FOR A LONGER PERIOD. ON THIS PREMISE THE ASSESSING OFFICER AMORTIZED THE TOTAL E XPENSES FOR THREE YEARS ALLOWING DEDUCTION OF 1/3 RD OF EXPENSES ONLY FOR THE YEAR IN QUESTION AND LEFT 2/3 RD OF THE EXPENSES FOR THE NEXT TWO YEARS. DISSATISFIED WITH THE AFORESAID DISALLOW ANCE BY THE ASSESSING OFFICER, THE ASSESSEE PREFERRED APPEAL BE FORE CIT(A) AND SUCCESSFULLY CHALLENGED THE AFORESAID OR DER INASMUCH AS THE CIT(A) ALLOWED THE ENTIRE EXPENDITU RE TREATING THE SAME AS REVENUE IN NATURE AND ALSO STATED THAT THERE WAS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE. THE REVENU E FILED AN APPEAL AGAINST THIS ORDER OF CIT(A) WHICH HAS BEEN DISMISSED BY THE TRIBUNAL VIDE THE IMPUGNED ORDER DATED 30 RD NOVEMBER 2010. THE TRIBUNAL HAS ALSO REFERRED TO THE DECISIO N RENDERED BY THE SPECIAL BENCH OF ITAT IN THE CASE OF ACIT, A HMEDABAD V ASHIMA SYNTHETIC LTD (CITATION NOT GIVEN IN THE I MPUGNED ORDER). IN THE SAID DECISION, THE SPECIAL BENCH OF THE TRIBUNAL HAS CONSIDERED A NUMBER OF JUDGMENTS INCLUDING ALAM BIC CHEMICALS WORKS CO. LTD.V CIT 177 ITR 377, MADRAS I NDUSTRIAL DEVELOPMENT CORPORATION 225 ITR 802, KEDARNATH JUTE MANUFACTURING CO. LTD. 82 ITR 363 AND AMAR RAJA BATTERIES LTD. V ACIT 91 ITD 2080, HYDERABAD ETC. WE ARE OF THE CONSIDERED OPINION THAT THE EXPENDITURE INCURRE D ON 21 ADVERTISEMENTS IN THE AFORESAID MANNER HAS TO BE TR EATED AS REVENUE IN THE NATURE AND WAS THEREFORE FULLY ALLOW ABLE. THIS ISSUE HAS BEEN CONSIDERED BY THIS COURT AS WELL IN DETAIL IN THE CIT-V VS. M/S PEPSICO INDIA HOLDINGS PVT. LTD., ITA NO.319 /2010 DECIDED ON 30 TH MARCH, 2011. WE, THUS, FIND THAT NO SUBSTANTIAL QUESTION OF LAW ARISES IN THIS APPEAL. THE APPEAL IS HEREBY DISMISSED. 38. THE SLP FILED BY THE REVENUE WAS DISMISSED BY T HE HON'BLE SUPREME COURT VIDE ORDER DATED 04.02.2013 IN CC 301 6/2013. CONSIDERING THE FACTS OF THE CASE IN LIGHT OF THE D ECISION OF THE HON'BLE HIGH COURT [SUPRA], NO INTERFERENCE IS CALLED FOR. GROUND NO. 2 IS DISMISSED. 39. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO. 2264/DEL/2009 IS DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30.01. 2020. SD/- SD/- [N.K. CHOUDHARY ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30 TH JANUARY, 2020. 22 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT ASST. REGISTRAR 4. CIT(A) ITAT, NEW DELHI 5. DR DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER