2019 (12) TMI 1621 - AT - Income Tax

Validity of order passed u/s 143(3) pursuance to the direction passed by DRP u/s 144C(5) - TP Adjustment on AMP expenditure - DRP power to confirm, reduce or enhance the variations proposed in the draft order - arm s length value of international transactions on account of AMP expenditure by the taxpayer by applying BLT - HELD THAT - DRP is not empowered to set aside any proposed variation or issue any direction under sub-section (5) for further enquiry for passing of the assessment order. So, in the instant case, the ld. DRP has indirectly remanded the case back to the AO by observing that these (AMP) expenses are to be disallowed u/s 37(1) and directed the AO to allow the taxpayer an opportunity to file its submissions and thereafter to pass final assessment order, which certainly amounts to remand of the case as there was no such observations made by TPO or AO, as the case may be. AO is not empowered to make fresh determination while passing final assessment order which was not proposed by him in his draft assessment order. So, on these grounds also, disallowance made by the AO u/s 37(1) is not sustainable. Coordinate Bench of the Tribunal while deciding the identical issue in case of PGS Geophysical as (Successor of PGS Exploration (Norway) AS) v 2014 (10) TMI 143 - ITAT DELHI held that, DRP has no authority either to direct the AO/TPO to make further enquiry and to decide the matter and at the best, the DRP can call for the remand report from the Income-tax authority. Also in terms of section 144C (8), DRP does not have power to set aside any proposed variation or issue for further enquiry to the AO . So, we are of the considered view that disallowance made by the AO u/s 37(1) of the Act pursuant to the directions issued by the DRP is not sustainable in the eyes of law. So, question framed is answered in affirmative. Allowability of AMP expenditure - Assessee has undisputedly incurred advertisement and sales promotion expenses periodically, and not at once just to refresh the product and quality to be sold in the memory of its customers. So, it cannot be held to be in the nature of enduring benefit for a trader - Advertisement and sales promotion expenses have been incurred by the assessee just to enhance its sales and profit and cannot be treated as capital in nature. Consequently, advertisement and sales promotion expenses debited by the assessee are ordered to be treated as revenue in nature and addition made/confirmed by the ld. AO/CIT (A) on this score is ordered to be deleted. Thus we are of the considered view that AMP expenditure cannot be considered as capital expenditure by any stretch of imagination, hence the same are revenue in nature having been incurred for commercial expediency. When undisputedly identical AMP expenses have been incurred by the taxpayer since 2009-10 and has been allowed by the Tribunal in AYs 2009-10 2010-11, converse stand taken by the taxpayer in AY 2011-12 is not sustainable being hit by rule of consistency as has been hel in Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT and Municipal Corporation of City of Thane vs. Vidyut Mettalics Ltd. 2007 (9) TMI 399 - SUPREME COURT In view of what has been discussed above, disallowance made by the AO/DRP on account of AMP expenses is not sustainable, hence ordered to be deleted. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of advertisement expenses under Section 37(1) of the Income Tax Act.
2. Errors in computing tax demand and interest under Sections 234B and 234C.
3. Rejection and inclusion of certain comparables by the DRP.
4. Verification of OP/sales and intensity of AMP functions.
5. Exclusion of routine selling and distribution expenses from AMP expenses.

Detailed Analysis:

1. Disallowance of Advertisement Expenses under Section 37(1)
The taxpayer, M/s. Moet Hennessy (I) Pvt. Ltd., contested the disallowance of Rs.6,64,24,161 in advertisement expenses under Section 37(1) of the Act. The TPO initially proposed an adjustment using the Bright Line Test (BLT), which was discarded by the DRP. However, the DRP disallowed the expenses under Section 37(1), stating they were prohibited by law. The Tribunal noted that the DRP cannot introduce new issues not raised by the AO. It held that the DRP's action amounted to an indirect remand, which is not permissible under Section 144C(8). On merits, the Tribunal found that the AMP expenses were revenue in nature and incurred for commercial expediency, citing previous judgments and the taxpayer's consistent treatment of such expenses in earlier years. It concluded that the disallowance was not sustainable and ordered its deletion.

2. Errors in Computing Tax Demand and Interest
The taxpayer highlighted errors in the computation of interest under Sections 234B and 234C, contending that the correct amounts should be Rs.1,68,37,706 and Rs.5,21,961, respectively, instead of Rs.1,94,50,024 and Rs.9,72,092. The Tribunal acknowledged this as a calculation error and directed the AO to correct it by giving credit for TDS.

3. Rejection and Inclusion of Certain Comparables by the DRP
The Revenue challenged the DRP's rejection of certain comparables accepted by the TPO and the inclusion of others. The Tribunal noted that the BLT method used by the TPO was not legally sustainable, as established by multiple judgments, including those in the taxpayer's own case for previous years. The Tribunal upheld the DRP's decision to discard the BLT and rejected the Revenue's appeal.

4. Verification of OP/Sales and Intensity of AMP Functions
The Revenue's appeal included objections to the DRP's direction to verify OP/sales and the intensity of AMP functions. The Tribunal did not find merit in these objections, noting that the DRP's directions were consistent with established legal principles and prior decisions.

5. Exclusion of Routine Selling and Distribution Expenses from AMP Expenses
The Revenue also contested the exclusion of routine selling and distribution expenses from AMP expenses. The Tribunal upheld the DRP's decision, aligning with its stance on the nature of AMP expenses and their treatment as revenue expenditure.

Conclusion:
The Tribunal allowed the taxpayer's appeal, deleting the disallowance of AMP expenses and correcting the computation errors in interest. It dismissed the Revenue's appeal, affirming the DRP's rejection of the BLT method and the inclusion/exclusion of certain comparables. The Tribunal's decision was pronounced on December 13, 2019.

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