Facts of the Case

The assessee, Moet Hennessy (India) Pvt. Ltd., filed its return of income for AY 2011–12, which was subjected to scrutiny. The Assessing Officer (AO) referred international transactions with Associated Enterprises (AEs) to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP).

The TPO observed that the assessee incurred significant Advertising, Marketing and Promotion (AMP) expenses allegedly for promoting the brand owned by its AE and treated the same as creating marketing intangibles. Applying the Bright Line Test (BLT), the TPO made an adjustment of ₹7.10 crore.

The Dispute Resolution Panel (DRP) deleted the ALP adjustment following judicial precedent but disallowed ₹6.64 crore under Section 37(1), alleging violation of law relating to advertisement of liquor.

The ITAT deleted the disallowance and dismissed the Revenue’s appeal, leading to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether AMP expenditure incurred by the assessee is capital or revenue in nature.
  2. Whether the Bright Line Test (BLT) is a valid method for determining ALP in AMP transactions.
  3. Whether disallowance under Section 37(1) can be made on alleged violation of law.
  4. Whether DRP has jurisdiction to remand or issue directions beyond statutory limits under Section 144C.

Petitioner’s (Revenue’s) Arguments

  • AMP expenditure incurred by the assessee should be treated as capital expenditure.
  • The ITAT erred in rejecting the BLT method for benchmarking AMP expenses.
  • The Revenue contended that the decision in Sony Ericsson is under challenge before the Supreme Court and should not be relied upon.

Respondent’s (Assessee’s) Arguments

  • AMP expenditure was incurred for business promotion and commercial expediency, hence allowable as revenue expenditure.
  • BLT method is judicially rejected and cannot be used for ALP determination.
  • DRP exceeded its jurisdiction by directing fresh determination, which is impermissible under Section 144C.
  • No violation of law (Cable Television Rules/ASCI) was established with evidence.

Court’s Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and held:

1. BLT Method Invalid

The Court reaffirmed that the Bright Line Test is impermissible for determining ALP, as already held in Sony Ericsson Mobile Communications India Pvt. Ltd.

2. AMP Expenditure is Revenue in Nature

The Court upheld ITAT’s finding that AMP expenditure was incurred for business purposes and cannot be treated as capital expenditure.

3. No Violation of Law Established

Disallowance under Section 37(1) was rejected as there was no factual finding proving violation of statutory provisions regarding advertisement.

4. DRP Jurisdiction Limited

Directions issued by DRP amounting to remand were held beyond its statutory powers under Section 144C.

5. No Substantial Question of Law

The Court held that no substantial question of law arises and dismissed the appeal.

Important Clarifications

  • BLT method cannot be used for benchmarking AMP transactions.
  • AMP expenses incurred for business promotion are revenue in nature.
  • Disallowance under Section 37(1) requires clear evidence of illegality, not assumptions.
  • DRP cannot remand or direct fresh inquiries beyond its statutory scope.
  • Pending SLP does not dilute binding nature of High Court judgment unless stayed.

Sections Involved

  • Section 37(1) – Allowability of Business Expenditure
  • Section 92CA – Transfer Pricing (ALP determination)
  • Section 144C – DRP Proceedings
  • Section 143(3) – Assessment
  • Section 143(1) – Processing of Return

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/58902112022ITA4082022_211005.pdf

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