AMP advertising and marketing spend as an "international transaction" u/s92B for transfer pricing-adjustment and re-benchmarking rejected.

Whether advertisement, marketing and sales promotion (AMP) expenditure could be characterised as an "international transaction" under s.92B of the Income-tax Act for Chapter X transfer pricing adjustment was decided by applying the HC ruling in Sony Ericsson. The HC held that AMP spend, absent a qualifying international transaction, cannot be treated or categorised as an international transaction; consequently, no transfer pricing adjustment could be made by the TPO/AO in respect of AMP expenditure, and the Revenue's position failed. Whether the ITAT could direct a fresh benchmarking/comparability analysis based on the Special Bench parameters in LG Electronics was answered against the Revenue, holding such direction unsustainable; the assessee succeeded on this issue as well.

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Issues Involved:
1. Determination of arm's length price (ALP) of advertisement, marketing, and sales promotion (AMP) expenses.
2. Jurisdiction of the Transfer Pricing Officer (TPO) to make transfer pricing adjustments.
3. Whether AMP expenses can be treated as an international transaction.
4. Application of the Bright Line Test (BLT) for determining ALP.
5. Economic ownership and legal ownership of the brand.
6. Impact of earlier judgments and the Supreme Court's directions.
7. Allowability of AMP expenses under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Determination of ALP of AMP Expenses:
The primary issue in these appeals is the determination of the ALP of AMP expenses incurred by the Assessee, MSIL. The TPO had benchmarked the AMP expenses using the BLT, comparing MSIL's AMP expenses with those of comparable companies. The TPO concluded that the excess AMP expenses incurred by MSIL were for promoting the brand 'Suzuki' owned by its Associated Enterprise (AE), SMC, and made a transfer pricing adjustment accordingly.

2. Jurisdiction of the TPO:
The ITAT and the High Court considered whether the TPO had the jurisdiction to make a transfer pricing adjustment in relation to AMP expenses. The Court concluded that the TPO could examine whether AMP expenses by themselves constitute an international transaction, even in the absence of a specific reference by the Assessing Officer (AO).

3. AMP Expenses as an International Transaction:
The Court examined whether AMP expenses incurred by MSIL could be treated and categorized as an international transaction under Section 92B of the Income Tax Act. The Court held that AMP expenses incurred by MSIL could not be treated as an international transaction, as the Revenue failed to demonstrate the existence of an agreement or understanding between MSIL and SMC regarding the AMP spend.

4. Application of the Bright Line Test (BLT):
The Court noted that the decision in Sony Ericsson had expressly negatived the use of the BLT for determining the ALP of an international transaction involving AMP expenses. Consequently, the Court held that the existence of an international transaction on account of the quantum of AMP expenditure by MSIL could not be established using the BLT.

5. Economic Ownership and Legal Ownership of the Brand:
The Court discussed the concepts of economic and legal ownership of the brand. It was noted that the co-brand 'Maruti-Suzuki' used by MSIL did not belong to SMC and could not be used by SMC either in India or elsewhere. The Court found that the benefit of MSIL's AMP spend to SMC was incidental and not substantial enough to infer an international transaction.

6. Impact of Earlier Judgments and Supreme Court's Directions:
The Court addressed the effect of the earlier decision in the writ petition filed by MSIL and the Supreme Court's directions. It concluded that the earlier judgment of the Division Bench of the High Court in the writ petition by MSIL could not preclude MSIL from contesting the finding regarding the existence of an international transaction concerning AMP expenses.

7. Allowability of AMP Expenses under Section 37(1):
The Court observed that once AMP expenses are allowed under Section 37(1) of the Act, they cannot be disallowed for the purpose of Chapter X by attributing some part of the expenditure to promoting the brand of the foreign AE. However, the Court did not dwell further on this aspect as it was not necessary for the answers to the central questions arising in the case.

Conclusion:
The Court answered the questions framed in favor of the Assessee, holding that AMP expenses incurred by MSIL could not be treated and categorized as an international transaction under Section 92B of the Act. Consequently, the TPO could not make any transfer pricing adjustment in respect of such expenses. The impugned orders of the ITAT, DRP, AO, and TPO were set aside, and the appeals were allowed with no orders as to costs.

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