Mary Kay Cosmetics Pvt. Ltd., Gurgaon V. DCIT, Circle-16(1), New Delhi

ITA 7333/DEL/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5219 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 19-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 271(1)(c); 92C

Judgement Text

ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.7333/DEL/2018 ASSESSMENT YEAR: 2009- 10 MARY KAY COSMETICS PVT. LTD., 837 & 838, SECTOR 38, OPPOSITE HUDA MARKET, GURGAON, HARYANA-122001 VS DY.COMMISSIONER OF INCOME TAX, CIRCLE 16(1), NEW DELHI. APPELLANT RESPONDENT ASSESSEE BY : SHRI K.M. GUPTA, ADV . DEPARTMENT BY: MS RINKU SINGH, SR. DR DATE OF HEARING : 28.02.2019 DATE OF PRONOUNCEMENT : 24.05.2019 O R D E R PER SUDHANSHU SRIVASTAVA, JM : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEAL S)-33, NEW DELHI {CIT (A) } VIDE DATED 17.08.2018 FOR ASSESSME NT YEAR 2009- 10 WHEREIN VIDE THE IMPUGNED ORDER, THE LD. FIRST A PPELLATE AUTHORITY HAS UPHELD THE IMPOSITION OF PENALTY AMOU NTING TO RS. 69,50,435/- IMPOSED U/S 271(1)(C) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED 'THE ACT'). ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 2 2.0 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF MARY KAY IN C., USA AND WAS INCORPORATED IN NOVEMBER 2006. THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF MARKETING AND DISTRIBUTI ON OF MARY KAY PRODUCTS IN INDIA. THE RETURN OF INCOME FOR TH E YEAR UNDER CONSIDERATION WAS FILED AT A LOSS OF RS. 9,81,15,97 4/-. THE INCOME OF THE ASSESSEE WAS ASSESSED AT A LOSS OF RS . 5,64,18,900/- AFTER MAKING A TOTAL ADDITION OF RS. 4,16,97,074/- ON ACCOUNT OF ADVERTISEMENT AND MARKETING PROMOTION (AMP) EXPENSES AFTER MAKING REFERENCE TO THE TRANSFER PRI CING OFFICER. PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT WERE A LSO INITIATED ON THIS ADDITION. THE ASSESSEE PREFERRED AN APPEAL AG AINST THE QUANTUM ADDITION BEFORE THE LD. COMMISSIONER OF INC OME TAX (A) WHO ALLOWED PARTIAL RELIEF TO THE ASSESSEE BY EXCLU DING SELLING AND DISTRIBUTION EXPENSES AND MODIFYING THE COMPARABLES SELECTED BY THE ASSESSING OFFICER. THE ADDITIONS MADE BY THE ASSESSING OFFICER WERE REDUCED TO RS. 2,04,48,472/- BY THE LD . CIT (A). THE ASSESSEE APPEALED FURTHER BEFORE THE ITAT THE APPEA L WAS NOT PRESSED AND THE SAME WAS DISMISSED BY THE ITAT. SU BSEQUENTLY, THE ASSESSING OFFICER PASSED AN ORDER U/S 271(1)(C) OF THE ACT LEVYING PENALTY OF RS. 69,50,435/- ON ACCOUNT OF TH E TRANSFER ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 3 PRICING ADDITION AS CONFIRMED BY THE LD. COMMISSION ER OF INCOME TAX (A). THE ASSESSEES APPEAL AGAINST THE PENALTY WAS CONFIRMED BY THE LD. COMMISSIONER OF INCOME TAX (A) AND NOW T HE ASSESSEE IS BEFORE THIS TRIBUNAL AND HAS RAISED THE FOLLOWIN G GROUNDS OF APPEAL:- 1. ON THE FACT, IN LAW AND IN CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)] ERRED IN UPHOLDING THE ACTION OF THE LD. ASSESSING OFFICER (AO) IN IMPOSING THE PENALTY U/ S 271(1)(C) OF THE INCOME-TAX ACT, 1961 (ACT) FOR CONCEALMENT OF INCOME BY THE APPELLANT. 2. ON THE FACT, IN LAW AND IN CIRCUMSTANCES OF THE CASE, LD. CIT(A) ERRED BY NOT APPRECIATING THE FACT THAT THE NOTICE DATED DECEMBER 31, 2011 ISSUED BY THE LD. AO UNDER SECTION 274 READ WITH SECTION 271(1)(C) OF TH E ACT DID NOT SPECIFY WHETHER THE PENALTY PROCEEDINGS ARE BEING INITIATED ON ACCOUNT OF CONCEALMENT OF INCOME , OR FURNISHING OF INACCURATE PARTICULARS BY THE APPELLA NT. 3. ON THE FACT, IN LAW AND IN CIRCUMSTANCES OF THE CASE LD. CIT(A) ERRED IN UPHOLDING PENALTY UNDER SECTION 271(1)(C) OF THE ACT READ WITH EXPLANATION 1 WITHOU T APPRECIATING THAT, BEING A TRANSFER PRICING ADDITIO N UNDER SECTION 92C OF THE ACT, THE EXPLANATION 1 TO SECTION 271(1)(C) HAD NO IMPLICATION, AS SUCH THIS ISSUE IS GOVERNED BY THE CONDITIONS PRESCRIBED UNDER EXPLANATION 7 TO SECTION 271(1)(C) OF THE INCOME TA X ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT'). 4. ON THE FACT, IN LAW AND IN CIRCUMSTANCES OF THE CASE LD. CIT(A) ERRED BY DISREGARDING THE ORDER OF THE HONBLE HIGH COURT OF DELHI IN APPELLANTS OWN CASE FOR AY 2010-11 WHEREIN ADVERTISEMENT AND SALES PROMOTION EXPENSES WERE HELD NOT TO BE A SEPARATE A ND INDEPENDENT INTERNATIONAL TRANSACTION. ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 4 3.0 THE LD. AUTHORISED REPRESENTATIVE (AR) SUBMITT ED THAT THE PENALTY HAS BEEN IMPOSED ON THE ADDITION PERTAI NING TO ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES WHI CH WAS A TRANSFER PRICING ADJUSTMENT AND THE HONBLE DELHI H IGH COURT IN SUBSEQUENT ASSESSMENT YEAR 2010-11 IN ASSESSEES OW N CASE IN ITA NO. 1010/2018, VIDE ORDER DATED 18.09.2018, HAS HELD THAT AMP EXPENSES SHOULD NOT BE TREATED AS A SEPARATE AN D INDEPENDENT INTERNATIONAL TRANSACTION AND SHOULD BE REGARDED AS A FUNCTION PERFORMED BY THE ASSESSEE ENGAGED IN MAR KETING AND DISTRIBUTION. IT WAS SUBMITTED THAT THIS BEING THE DICTA OF THE HONBLE HIGH COURT IN ASSESSEES OWN CASE, NO PENAL TY IS LEVIABLE IN THIS CASE. THE LD. AR ALSO SUBMITTED THAT AD VERTISEMENT AND MARKETING PROMOTION EXPENDITURE IS NOT AN INTERNATI ONAL TRANSACTION AS HAS BEEN HELD BY THE HONBLE DELHI H IGH COURT IN MARUTI SUZUKI INDIA LIMITED IN ITA NOS. 110/2014 AN D 710/2015. FURTHER RELIANCE FOR THIS PROPOSITION WA S PLACED ON ANOTHER ORDER OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF BAUSCH & LOMB EYECARE (INDIA) PVT. LTD. IN ITA NO. 643/2014. 3.1.0 THE LD. AR ALSO SUBMITTED THAT NO SPECIFIC CHARGE WAS SPECIFIED IN THE SHOW CAUSE NOTICE ISSUED U/S 2 71(1)(C) READ WITH SECTION 274 OF THE ACT DATED DECEMBER 30, 2011 . HENCE, THE ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 5 PENALTY SO LEVIED IS ILLEGAL AND LIABLE TO BE DELET ED. IN THIS REGARD, RELIANCE WAS PLACED ON THE FOLLOWING JUDGEMENTS: CIT VS MANJUNATHA COTTON & GINNING FACTORY (359 IT R 565) (KARNATAKA) HPCL MITTAL ENERGY LTD. VS. ACIT (IT APPEAL NOS. 5 10, 554 TO 556 (ASR.) OF 2014) CIT VS. SSA'S EMERALD MEADOWS (SPECIAL LEAVE TO AP PEAL (C) NO. 11485 OF 2016) 3.2.0 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT THE PENALTY HAS BEEN IMPOSED IN RELATION TO THE ADDITION MADE U NDER CHAPTER-X OF THE ACT. THUS, EXPLANATION 1 TO SECTIO N 271(1)(C) OF THE ACT, CANNOT BE INVOKED. ON THE CONTRARY, THE EX PLANATION 7 TO SECTION 271(1)(C) OF THE ACT WAS APPLICABLE. IT WAS SUBMITTED THAT THE ASSESSEE HAD SUBMITTED ALL THE REQUISITE DETAIL S IN RESPECT OF ITS ALL INTERNATIONAL TRANSACTIONS. IN THIS REGARD, RELIANCE WAS PLACED ON THE FOLLOWING JUDGEMENTS: DCIT VS. RBS EQUITIES INDIA LTD. [2011 ] 133 ITD 7 7 (MUM. - TRIB.) ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 6 ACIT VS. BOSTON SCIENTIFIC INDIA (P.) LTD. [2016] L77 TTJ 729 (DELHI - TRIB.) HALCROW CONSULTING INDIA (P) LTD. [2018] 194 TTJ 3 29 (DELHI - TRIB.) 3.3.0 THE LD. AR ALSO SUBMITTED THAT THE ADJUSTMEN T MADE ON ACCOUNT OF ADVERTISEMENT AND MARKETING PROMOTION (AMP) EXPENSE BEING AN INTERNATIONAL TRANSACTION UNDER PR OVISIONS OF TRANSFER PRICING IS A DEBATABLE ISSUE OR MERE DIFFE RENCE OF OPINION AND, THEREFORE, PENALTY U/S 271(1)(C) OF THE ACT CA NNOT BE LEVIED ON A DEBATABLE ISSUE. IN THIS REGARD, RELIANCE WAS PLACED ON THE FOLLOWING JUDGEMENTS: CIT VS. RELIANCE PETROPRODUCTS PVT. LTD. (230 CTR 320) (SC) HAIER APPLIANCES (I) PVT. LTD. VS. DCIT (ITA NOS. 3549 & 3571 (DELHI) OF 2010 & 507 (DELHI) OF 2011) 4.0 IN RESPONSE, THE LD. SR. DEPARTMENTAL REPRE SENTATIVE (DR) SUBMITTED THAT THE CHARGE FOR INITIATING THE PENALTY HAS NOT BEEN SPECIFIED IS IN CORRECT INASMUCH AS ON PAGE 74 OF THE ASSESSMENT ORDER, PEN ALTY U/S 271(1)(C) OF THE ACT WAS SPECIFICALLY INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME. IT WAS SUBMITTED THAT THERE ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 7 WAS APPLICATION OF MIND BY THE ASSESSING OFFICER AN D, THEREFORE, MERE NON-STRIKING OF THE IRRELEVANT PORTION OF THE NOTICE U/S 274 OF THE ACT CANNOT BE TAKEN AS AN ERROR WHICH WOULD VITIATE THE ENTIRE PROCEEDINGS. IT WAS ALSO SUBMITTED THAT THI S ISSUE OF THE DEFECT IN NOTICE WAS NEVER RAISED BY THE ASSESSEE E ITHER DURING THE COURSE OF PENALTY PROCEEDINGS OR EVEN BEFORE TH E LD. FIRST APPELLATE AUTHORITY AND, THEREFORE, THE SAME HAD CA USED NO PREJUDICE TO THE ASSESSEE AS THE ASSESSEE CLEARLY U NDERSTOOD AS TO WHAT WAS THE PURPORT AND IMPORT OF THE NOTICE ISSUE D U/S 274 OF THE ACT. THE LD. SR. DR ALSO FILED WRITTEN SUBMISS IONS IN SUPPORT OF HER CONTENTIONS AND LIST OF JUDICIAL PRECEDENTS ON WHICH SHE HAS VEHEMENTLY RELIED ON AND WHICH HAVE BEEN PLACED ON RECORD. 4.1 IT WAS ALSO SUBMITTED THAT EVEN THOUGH THE HON BLE DELHI HIGH COURT FOR ASSESSMENT YEAR 2010-11 IN ASS ESSEES OWN CASE MIGHT HAVE HELD THAT THE AMP EXPENSES SHOULD N OT BE TREATED AS A SEPARATE INDEPENDENT INTERNATIONAL TRA NSACTION, UNDER THE INCOME TAX ACT, ASSESSMENT YEARS ARE INDE PENDENT OF EACH OTHER AND IT MIGHT BE POSSIBLE THAT THE FACTS IN THAT YEAR WOULD BE DIFFERENT FROM THE YEAR UNDER CONSIDERATIO N AND, THEREFORE, THE SAME ANALOGY CANNOT BE APPLIED TO DE LETE THE PENALTY IN THIS YEAR. ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 8 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE P ERUSED THE MATERIAL AVAILABLE ON RECORD. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE TRANSFER PRICING ADJUSTMENT HA S BEEN MADE WITH RESPECT TO THE AMP EXPENDITURE BY APPLYING THE BRIGHT LINE TEST. THE ASSESSEE HAD RAISED OBJECTIONS BEFORE TH E ASSESSING OFFICER TO THE EFFECT THAT BRIGHT LINE TEST COULD N OT BE APPLIED IN THE CASE OF THE ASSESSEE. WE ALSO NOTE THAT NOW TH ERE ARE NUMEROUS JUDICIAL PRECEDENTS IN WHICH THE HONBLE C OURTS HAVE DISAPPROVED AND REJECTED THE BRIGHT LINE METHOD. I N THE CASE OF ERICSSON MOBILE COMMUNICATIONS INDIA (P) LTD. VS. C IT-2 REPORTED IN (2015) 374 ITR 118 (DEL), THE HONBLE DELHI HIGH COURT HAS SPECIFICALLY DISAPPROVED AND REJECTED THE BRIGHT LI NE METHOD. ALTHOUGH, THE ASSESSEE DID NOT PRESS ITS APPEAL IN THE QUANTUM PROCEEDINGS BEFORE THE ITAT, THE SAME DOES NOT LEAD TO THE INFERENCE THAT THE ASSESSEE HAD ACCEPTED THE BRIGHT LINE METHOD AND THE CONSEQUENT TRANSFER PRICING ADJUSTMENTS IN THE YEAR UNDER CONSIDERATION. IT IS ALSO A FACT ON RECORD T HAT THE ASSESSEE COMPANY HAS DISCONTINUED ITS BUSINESS OPERATIONS. FURTHER, A PERUSAL OF THE ASSESSMENT ORDERS FOR THIS YEAR AND FOR ASSESSMENT YEAR 2010-11 SHOWS THAT AMP EXPENSES HAVE BEEN TREA TED AS INTERNATIONAL TRANSACTION ON THE SAME REASONING AND BY APPLYING ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 9 THE BRIGHT LINE METHOD. THE DEPARTMENT ALSO COULD N OT POINT OUT ANY DISTINGUISHING FACTS BETWEEN ASSESSMENT YEAR 20 09-10 AND 2010-11. FURTHER, WE ALSO NOTE THAT THE HONBLE DE LHI HIGH COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 20 10-11 HAS DISMISSED THE DEPARTMENTS APPEAL AND HAS HELD THAT THERE WERE NO GOOD GROUNDS AND REASONS TO TREAT ADVERTISEMENT AND SALES EXPENSES AS A SEPARATE AND INDEPENDENT INTERNATIONA L TRANSACTION IN THE CASE OF THE ASSESSEE. THE HONB LE HIGH COURT HELD THAT THE REVENUE HAD ERRED IN NOT TREATING THI S ACTIVITY AS A FUNCTION PERFORMED BY THE ASSESSEE WHO WAS ENGAGED IN MARKETING AND DISTRIBUTION. UNDISPUTEDLY, THE ASSE SSEE IS ENGAGED IN MARKETING AND DISTRIBUTION OF MARY KAY P RODUCTS IN INDIA AND THE OBSERVATION OF THE HONBLE DELHI HIGH COURT IN ASSESSMENT YEAR 2010-11 IN ASSESSEES OWN CASE WOUL D APPLY MUTATIS MUTANDIS IN THIS YEAR ALSO. ONCE IT IS HELD THAT AMP EXPENDITURE IS NOT AN INTERNATIONAL TRANSACTION, TH E TRANSFER PRICING ADJUSTMENT WOULD HAVE NO FEET TO STAND. EV EN THOUGH IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ACCE PTED THE ADDITION IN THIS REGARD IN THE QUANTUM PROCEEDINGS, THE FACT REMAINS THAT SUCH ADDITION WAS NOT SUSTAINABLE IN V IEW OF THE OBSERVATION OF THE HONBLE DELHI HIGH COURT IN ASSE SSEES OWN ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 10 CASE THAT THE AMP EXPENDITURE WAS NOT TO BE CONSIDE RED AS A SEPARATE INTERNATIONAL TRANSACTION. BE AS IT MAY, RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE DELHI HIGH CO URT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11 ON IDENTICAL FACTS, WE HOLD THAT THE AMP EXPENDITURE COULD NOT H AVE BEEN TREATED AS A SEPARATE INTERNATIONAL TRANSACTION AND , THEREFORE, THE PENALTY IMPOSED ON SUCH TRANSFER PRICING ADJUSTMENT IS NOT SUSTAINABLE. THEREFORE, WITHOUT GOING INTO THE LEG AL QUESTION OF THE VALIDITY OF THE NOTICE ISSUED U/S 274 OF THE AC T, WE HOLD THAT SINCE THE IMPUGNED TRANSACTION COULD NOT BE CONSIDE RED AS A SEPARATE AND INDEPENDENT INTERNATIONAL TRANSACTION, THE PENALTY SHOULD NOT HAVE BEEN IMPOSED. ACCORDINGLY, WE ASID E THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) ON THE IS SUE AND DIRECT THE ASSESSING OFFICER TO DELETE THE PENALTY. 6.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE STAN DS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24.05.2019. SD/- SD/- (G.D. AGRAWAL) (SUDHANSHU SRIVASTA VA) VICE PRESIDENT JUDICIAL MEMBER DATED: 24 TH MAY, 2019 GS ITA NO. 7333/D/2018 ASSESSMENT YEAR 2009-10 11 COPY FORWARDED TO: - 1) APPELLANT 2) RESPONDENT 3) CIT(A) 4) CIT 5) DR BY ORDER ASSTT. REGISTRAR 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.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE 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