2019 (5) TMI 1424 - AT - Income Tax

Penalty u/s 271(1)(c) - addition pertaining to advertisement, marketing and promotion expenses which was a transfer pricing adjustment - HELD THAT - Hon ble Delhi High Court in assessee s own case for assessment year 2010-11 2018 (9) TMI 1761 - DELHI HIGH COURT has dismissed the department s appeal and has held that there were no good grounds and reasons to treat advertisement and sales expenses as a separate and independent international transaction in the case of the assessee. The Hon ble High Court held that the revenue had erred in not treating this activity as a function performed by the assessee who was engaged in marketing and distribution. Undisputedly, the assessee is engaged in marketing and distribution of Mary Kay products in India and the observation of the Hon ble Delhi High Court in assessment year 2010-11 in assessee s own case would apply mutatis mutandis in this year also. Once it is held that AMP expenditure is not an international transaction, the transfer pricing adjustment would have no feet to stand. Even though in the year under consideration, the assessee has accepted the addition in this regard in the quantum proceedings, the fact remains that such addition was not sustainable in view of the observation of the Hon ble Delhi High Court in assessee s own case that the AMP expenditure was not to be considered as a separate international transaction. Respectfully following the judgment of the Hon ble Delhi High Court in the assessee s own case for assessment year 2010-11 on identical facts, we hold that the AMP expenditure could not have been treated as a separate international transaction and, therefore, the penalty imposed on such transfer pricing adjustment is not sustainable. - Decided in favour of assessee

Summary

Issues:
1. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961 for concealment of income.
2. Lack of specificity in the notice issued under section 274 regarding the penalty proceedings.
3. Applicability of Explanation 1 and Explanation 7 to Section 271(1)(c) of the Act.
4. Treatment of Advertisement and Marketing Promotion (AMP) expenses as an international transaction.

Analysis:

Issue 1: Imposition of Penalty
The assessee appealed against the penalty imposed under section 271(1)(c) of the Act for concealment of income. The Ld. AR argued that the Hon'ble Delhi High Court had ruled in a subsequent assessment year that AMP expenses should not be considered a separate international transaction. This argument was supported by referencing similar judgments, asserting that the penalty was unjustified due to the nature of the expenses.

Issue 2: Specificity in Notice
The Ld. AR contended that the notice issued under section 274 did not specify the exact charge for initiating the penalty, rendering it illegal and liable for deletion. Several judicial precedents were cited to support this argument, emphasizing the importance of clarity in penalty notices.

Issue 3: Applicability of Explanations
The Ld. AR argued that Explanation 1 to Section 271(1)(c) was not applicable in this case, and instead, Explanation 7 should be considered due to the nature of the addition made under Chapter-X of the Act. Various judgments were cited to support the submission that all necessary details regarding international transactions were provided, thus challenging the validity of the penalty.

Issue 4: Treatment of AMP Expenses
The Tribunal analyzed the transfer pricing adjustment made concerning AMP expenses and the application of the Bright Line Test. Referring to judicial precedents disapproving the Bright Line method, the Tribunal highlighted that the Hon'ble Delhi High Court had previously ruled in the assessee's favor regarding the treatment of AMP expenses. It was concluded that since the expenses were not considered a separate international transaction, the penalty imposed on the transfer pricing adjustment was unsustainable, leading to the direction to delete the penalty.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the penalty was not justified based on the treatment of AMP expenses as per the rulings of the Hon'ble Delhi High Court. The order to delete the penalty was issued based on the lack of sustainability of the transfer pricing adjustment.