2018 (9) TMI 1761 - HC - Income Tax

Entitlement to deduction of advertisement and sales promotion expenses under Section 37(1)- addition made by the Assessing Officer by applying Bright Line Method - Held that - We have examined the Assessment Order and do not find any good ground and reason given therein to treat advertisement and sales promotion expenses as a separate and independent international transaction and not to regard and treat the said activity as a function performed by the respondent-assessee, who was engaged in marketing and distribution. Further, while segregating/debundling and treating advertisement and sales promotion as an independent and separate international transaction, the Assessing Officer did not apportion the operating profit/income as declared and accepted in respect of the international transactions. See Sony Ericsson Mobile Communications India Pvt. Ltd. vs. Commissioner of Income Tax - III, (2015 (3) TMI 580 - DELHI HIGH COURT) and Commissioner of Income Tax vs. Whirlpool of India Ltd., (2015 (12) TMI 1188 - DELHI HIGH COURT)

Summary

Issues:
1. Transfer pricing adjustments related to advertisement and sales promotion expenses.
2. Allowability of advertisement and sales promotion expenses under Section 37(1) of the Income Tax Act.
3. Application of the "Bright Line Method" for determining arm's length price.
4. Comparison with previous decisions in similar cases.

Transfer Pricing Adjustments:
The case involved an appeal by the Revenue regarding transfer pricing adjustments made by the Assessing Officer in relation to advertisement and sales promotion expenses incurred by the respondent-assessee. The Assessing Officer treated these expenses as a separate international transaction due to their high ratio compared to turnover. The Commissioner of Income Tax (Appeals) reversed this decision, holding that the expenses were allowable under Section 37(1) of the Act. The Tribunal affirmed this decision, referencing a previous case involving the same assessee for the Assessment Year 2009-10.

Allowability of Expenses:
The key issue was whether the respondent-assessee was entitled to deduct advertisement and sales promotion expenses under Section 37(1) of the Act. The Tribunal, following previous decisions, held in favor of the assessee, emphasizing that the expenses were part of the functions performed in marketing and distribution activities. The Tribunal rejected the application of the "Bright Line Method" by the Assessing Officer, which was also disapproved in previous judgments.

Application of "Bright Line Method":
The Assessing Officer applied the "Bright Line Method" to determine the arm's length price for the advertisement and sales promotion expenses. However, this method was disapproved in earlier cases, including the decision authored by one of the judges in this case. The Tribunal found no valid grounds to treat these expenses as a separate international transaction, especially considering the nature of the respondent-assessee's business activities.

Comparison with Previous Decisions:
The judgment highlighted that the case was in line with previous decisions such as Sony Ericsson Mobile Communications India Pvt. Ltd. and Whirlpool of India Ltd., which supported the deduction of advertisement and sales promotion expenses under Section 37(1) of the Act. The Court dismissed the appeal by the Revenue, noting that the issues raised had already been addressed in earlier rulings. The dismissal was also influenced by the fact that the respondent-assessee had closed its business in India due to losses.