PRINCIPAL COMMISSIONER OF INCOME TAX DELHI 7 vs. M/S TIMEX GROUP INDIA LTD.

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ITA/674/2023HC DelhiDLHC01048288202301 December 2023Bench: HON'BLE MR. JUSTICE RAJIV SHAKDHER,HON'BLE MR. JUSTICE GIRISH KATHPALIA4 pages
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What did the High Court hold?

The Delhi High Court noted that the Tribunal, in its order for AY 2008-09, had ruled that the excessive AMP expenditure did not constitute an international transaction and that the adjustment made by the revenue was unsustainable. This finding was based on the assessee being a full-fledged manufacturer and incurring AMP expenses to enhance its sales in India, not for promoting an AE's brand or creating intangibles for the AE. The Tribunal had also disapproved the Bright Line Test, referencing judgments from coordinate benches of the High Court in Sony Ericsson India Pvt. Ltd. v. CIT and Maruti Suzuki India Ltd. v. CIT. Furthermore, the Tribunal had emphasized that the revenue must discharge the onus of proving an international transaction, citing Bausch & Lamb Eye Care (India) Pvt. Ltd. v. Additional CIT and Honda Siel Power Products Ltd. v. Dy. CIT. Since the revenue's counsel could not demonstrate any difference in facts or law between AY 2008-09 and AY 2010-11, the High Court found that a substantial question of law arose. The court closed the appeal, subject to the condition that if the revenue succeeded in its pending Special Leave Petition (SLP) concerning the Sony Ericsson case, it would have the liberty to revive the instant appeal. The matter was remitted to the Assessing Officer in both AYs.

What were the facts?

The appellant, Principal Commissioner of Income Tax, Delhi 7, has appealed against an order dated March 27, 2023, passed by the Income Tax Appellate Tribunal (Tribunal) concerning Assessment Year (AY) 2010-11. The appeal challenges the adjustment made by the Transfer Pricing Officer (TPO) regarding Advertising, Marketing, and Promotion (AMP) expenses by applying the Bright Line Test. The revenue acknowledges that for AY 2008-09, the Tribunal had ruled in favor of the respondent assessee, M/s Timex Group India Ltd. The impugned order for AY 2010-11 incorporates relevant parts of the Tribunal's prior order for AY 2008-09, which held that excessive AMP expenditure did not constitute an international transaction and the adjustment made by the revenue was unsustainable. The Tribunal had also disapproved the Bright Line Test and emphasized the revenue's onus to prove an international transaction.

What were the issues?

1. Whether the adjustment made by the Transfer Pricing Officer (TPO) concerning Advertising, Marketing, and Promotion (AMP) expenses by applying the Bright Line Test was sustainable in law, considering the provisions related to international transactions and transfer pricing. Assessee's contentions: The assessee argued that its primary engagement was in manufacturing operations, and the AMP expenditure incurred was for the benefit of its operations in India, not for promoting an associated enterprise (AE) or creating intangibles for the AE. The assessee relied on previous Tribunal orders and High Court judgments, including Sony Ericsson India Pvt. Ltd. v. CIT (2015) and Maruti Suzuki India Ltd. v. CIT (2016), which held that excessive AMP expenditure did not fall under the category of an international transaction and disapproved the Bright Line Test. The assessee also contended that the revenue had the onus to prove an international transaction had occurred, citing Bausch & Lamb Eye Care (India) Pvt. Ltd. v. Additional CIT (2016) and Honda Siel Power Products Ltd. v. Dy. CIT (2016). Revenue's contentions: The revenue, represented by Mr. Sunil Agarwal, Senior Standing Counsel, stated that the sole issue for consideration was the sustainability of the TPO's adjustment concerning AMP expenses using the Bright Line Test. Mr. Agarwal did not dispute that the factual and legal position for AY 2010-11 was the same as for AY 2008-09, for which the Tribunal had ruled in favor of the assessee.

Which sections of the Income-tax Act were involved?

Section 68

AI-generated summary — verify with the full judgment below

ITA 674/2023

Page 1 of 4

$~27 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 674/2023

PRINCIPAL COMMISSIONER OF INCOME TAX DELHI 7

..... Appellant Through: Mr Sunil Agarwal, Senior Standing Counsel with Mr Shivansh B. Pandya and Mr Utkarsh Tiwari, Advocates.

versus

M/S TIMEX GROUP INDIA LTD.

..... Respondent

Through: Counsel (appearance not given).

CORAM:

HON'BLE MR. JUSTICE RAJIV SHAKDHER

HON'BLE MR. JUSTICE GIRISH KATHPALIA

O R D E R %

01.12.2023

[Physical Hearing/Hybrid Hearing (as per request)]

CM APPL. 61978/2023 1. Allowed, subject to just exceptions. ITA 674/2023 2. This appeal concerns Assessment Year (AY) 2010-11. 3. Via the instant appeal, the appellant/revenue seeks to assail the order dated 27.03.2023 passed by the Income Tax Appellate Tribunal [in short “Tribunal”]. 4. Mr Sunil Aggarwal, learned senior standing counsel who appears on behalf of the appellant/revenue, says that the only issue which arises for consideration is: whether the adjustment made by the Transfer Pricing Officer (TPO), concerning Advertising, Marketing and Promotion (AMP Digitally Signed By:VAISHALI CHAUHAN Signing Date:11.12.2023 17:18:20 Signature Not Verified

ITA 674/2023

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expenses) by applying the Bright Line Test was sustainable. 4.1 It is, however, not disputed by Mr Sunil Agarwal that in Assessment Year (AY) 2008-09, the Tribunal via order dated 16.11.2021 has ruled in favour of the respondent/assessee. 5. As a matter of fact, the order impugned in the instant appeal, to which we have made a reference above, extracts the relevant parts of the Tribunal’s order dated 16.11.2021. For convenience, a part of the order dated 16.11.2021 which is embedded in the impugned order and concerns the respondent/assessee is extracted hereafter: “7. It is not in dispute that the case of the assessee has been that the primacy engagement of the assessee is in manufacturing operations and the AMP expenditure incurred by it is to the benefit of its operations in India. In the case of the assessee, Tribunal took into consideration the submissions made by the Ld. DR that the matter relating to the international transaction involving AMP expenses is pending before the Apex Court and addition of the Hon’ble Apex Court would be binding upon all the authorities and therefore, while returning a finding that the assessee is a full-fledged manufacturer and the entire AMP expenses were incurred by it to enhance its sale in India and not for promoting the brand of its AE and for creating intangibles for its AE, the alleged excessive AMP expenditure does not fall in the category of international transaction and therefore the adjustment made by the Revenue on account of incurrence of AMP expenses is not sustainable in law, set aside the orders of the authorities below and restored the matter to the file of the learned Assessing Officer to act in accordance with the Findings of the Hon’ble Apex Court to be given in the pending matters.”

6.

A perusal of the aforesaid extract would show that the Tribunal ruled in AY 2008-09 that the excessive AMP expenditure did not fall in the category of an international transaction and, therefore, the adjustment made qua the same was unsustainable in the eyes of law. This conclusion was based on a finding of fact that the respondent/assessee was primarily engaged in manufacturing operations and that AMP expenditure had been Digitally Signed By:VAISHALI CHAUHAN Signing Date:11.12.2023 17:18:20 Signature Not Verified

ITA 674/2023

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incurred to benefit its own operation, and not for promoting an associated enterprise (AE). 7. We may note that the Tribunal also disapproved the TPO’s approach of applying the Bright Line Test in benchmarking the AMP expenses. This view was based on a judgment rendered by a coordinate bench of this court in Sony Ericsson India Pvt. Ltd. V. CIT (2015) 374 ITR 118 (Del.) and Maruti Suzuki India Ltd. v. CIT (2016) 381 ITR 117. 8. The Tribunal also highlighted the fact that before ascertaining the arms’ length price on an international transaction concerning AMP expenditure, the appellant/revenue would have to discharge the onus that an international transaction had occurred between the assessee and the associated enterprise. This view was also founded on the decision of the coordinate benches of this court rendered in Bausch & Lamb Eye Care (India) Pvt. Ltd. viz Additional CIT (2016) 351 ITR 227 (Del.) and Honda Siel Power Products Ltd. v. Dy. CIT (2016) 237 Taxman 304. 8.1 Mr Sunil Aggarwal, learned senior standing counsel, has not been able to demonstrate that the position which obtained in the period in issue i.e., AY 2010-11, was any different from that which obtained in AY 2008- 09, both in terms of facts and in law. 9. We may, however, note that the Tribunal both in the period in issue i.e., AYs 2010-11, and in 2008-09, has remitted the matter to the file of the Assessing Officer (AO). 10. We are also informed that the appellant/revenue has lodged an appeal against the decision rendered by this court in Sony Ericsson. 10.1. Therefore, this appeal is closed as according to us, a substantial question of law arises for consideration by this court. Digitally Signed By:VAISHALI CHAUHAN Signing Date:11.12.2023 17:18:20 Signature Not Verified

ITA 674/2023

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11.

It is, however, made clear that if the appellant/revenue were to succeed in the pending SLP preferred qua Sony Ericsson, then it would have liberty to revive the instant appeal. 12. The Registry will, therefore, dispatch a copy of the order passed today to the respondent/assessee via all modes. CM APPL. 61977/2023 [Application filed on behalf of the appellant seeking condonation of delay of 42 days in filing the appeal] 13. In view of the order passed above, the application for condonation of delay has been rendered infructuous.

RAJIV SHAKDHER, J.

GIRISH KATHPALIA, J.

DECEMBER 01, 2023 MS

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Digitally Signed By:VAISHALI CHAUHAN Signing Date:11.12.2023 17:18:20 Signature Not Verified

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