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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision : 18th September, 2018
+ ITA 1010/2018 & CM APPL.37728/2018
THE PR. COMMISSIONER OF INCOME TAX -6....Appellant
Through: Mr.Ruchir Bhatia, Adv.
versus
MARY KAY COSMETIC PVT. LTD. .....Respondent
Through: Mr.Prakash Kumar and
Ms.Rashmi Singh, Advs.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J.(ORAL):
This appeal by the Revenue under Section 260A of the Income
Tax, 1961 ('Act' for short) in the case of M/s Mary Kay Cosmetics Pvt.
Ltd. ('respondent - assessee' for short) pertains to the Assessment Year
2010-11 and impugns the order dated 28th March, 2018 of the Income
Tax Appellate Tribunal (,,Tribunal for short).
2. The respondent-assessee a wholly owned Indian subsidiary of
M/s Mary Kay Inc., a company incorporated in United States of
America, was appointed and had acted as an exclusive distributor of
products manufactured by and procured from the holding company,
i.e. M/s Mary Kay Inc., and its associated enterprises. As a distributor
the respondent-assessee had undertaken marketing and sales activities
of the products manufactured, procured and purchased from M/s Mary
Kay Inc. and their associated companies.
3. In the return for the Assessment Year 2010-11 filed on 13th
October, 2010 the respondent-assessee had declared loss of
Rs.10,06,07,118/-.
ITA No.1010/2018 Page 1 of 4
4. The respondent-assessee had, in the transfer pricing report,
declared three international transactions and applied Transaction Net
Margin Method with Operating Costs/Total Cost as the Profit Level
Indicator to determine the Arms Length Price for (i) purchase of
finished goods and (ii) purchase of products for business and applied
Comparable Uncontrolled Price Method to determine Arms Length
Price for (iii) reimbursement of expenses as per details given below:
S.No Description of the transactions Amount (in Rs.)
(a) Purchase of finished goods 32,501,399
(b) Purchase of products for business 1,288,481
(c) Reimbursement of expenses 1,997,176
5. The Assessing Officer vide Assessment Order dated 21 st March,
2013, did not disturb the Arms Length Price as declared in respect of
the three international transactions, but he treated advertisement and
sales promotion expenses of Rs.2,78,95,257/- as a separate and an
independent international transaction. The Assessing Officer observed
that advertisement and sales promotion expenses of Rs.2,28,76,787/-
on the turnover of Rs.11,07,04,873/-, in the ratio of 25.2 per cent, was
exceptionally high. He applied "Bright Line Method" by referring to
advertisement, marketing and sales promotion expenses viz. the sales
ratio in the case of M/s Hindustan Unilever of 13.14 per cent, M/s
Jyothy Laboratories of 7.4 per cent and M/s Surya Vinayak of 0.09
percent. Accordingly, transfer pricing addition of Rs.2,28,76,787/-
ITA No.1010/2018 Page 2 of 4
was made. In alternative, the Assessing Officer held that the
expenditure incurred by the respondent-assessee on advertisement and
sales promotion of Rs.2,28,76,787/- was not allowable under Section
37(1) of the Act. The respondent-assessee not being the brand owner
should not have incurred these expenses as they were incurred for
promoting a brand belonging to the associated enterprise.
6. The Commissioner of Income Tax (Appeals) vide order dated
11th June, 2014 reversed the findings and deleted the addition made by
the Assessing Officer by applying "Bright Line Method". He held that
expenditure incurred on advertisement and sales promotion was
allowable under Section 37(1) of the Act.
7. The aforesaid decision has been affirmed by the Tribunal by the
impugned order which has dismissed the appeal filed by the Revenue.
The Tribunal, while doing so, has referred to the earlier decision in the
case of the respondent-assessee relating to Assessment Year 2009-10.
8. The issue whether the respondent-assessee is entitled to
deduction of advertisement and sales promotion expenses under
Section 37(1) of the Act is covered against the Revenue by decision of
this Court in Sony Ericsson Mobile Communications India Pvt. Ltd.
vs. Commissioner of Income Tax - III, (2015) 374 ITR 118 (Delhi)
and Commissioner of Income Tax vs. Whirlpool of India Ltd., (2016)
381 ITR 154 (Delhi). In Sony Ericsson Mobile Communications
India Pvt. Ltd. (supra), a decision authored by one of us (Sanjiv
Khanna, J.), "Bright Line Method" has been disapproved and rejected.
9. We have examined the Assessment Order and do not find any
good ground and reason given therein to treat advertisement and sales
ITA No.1010/2018 Page 3 of 4
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.
10. ITA No.213/2018 filed by the Revenue in the case of the
respondent-assessee against the order of the Tribunal for the
Assessment Year 2009-10 was dismissed by this Court vide order
dated 20.2.2018. This order also records that the respondent-assessee
having suffered losses had closed its business in India.
11. There is no merit in the present appeal and the same is
dismissed as it is covered by the afore-stated decisions. No costs.
SANJIV KHANNA, J
CHANDER SHEKHAR, J
SEPTEMBER 18, 2018/rk
ITA No.1010/2018 Page 4 of 4
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