Transfer pricing on advertising spend needs a real international transaction; raw material benchmarking was remitted for fresh review.

Advertising and marketing spend cannot be recharacterised as an international transaction for transfer pricing merely because it exceeds comparable entities' expenditure. The Revenue must first establish a real agreement, arrangement or understanding showing that the Indian entity incurred the spend for the foreign associated enterprise; the bright line test cannot create a transaction where none is identified. On raw material imports, the benchmarking adopted below was not adequately examined, including the assessee's documentary support and alternative gross margin plea, so the matter was remitted for fresh consideration by the Assessing Officer / Transfer Pricing Officer.

---

---

Issues: (i) Whether advertising and marketing expenditure could be treated as an international transaction and subjected to transfer pricing adjustment in the absence of an explicit arrangement with the foreign associated enterprise. (ii) Whether the transfer pricing adjustment on import of raw materials was sustainable on the benchmarking adopted by the lower authorities.

Issue (i): Whether advertising and marketing expenditure could be treated as an international transaction and subjected to transfer pricing adjustment in the absence of an explicit arrangement with the foreign associated enterprise.

Analysis: The existence of an international transaction cannot be inferred merely because the assessee's advertising and marketing spend exceeds that of comparables. The legal precondition under Chapter X is the existence of an identified transaction, and the Revenue must first establish an agreement, arrangement, or understanding showing that the Indian entity was obliged to incur such expenditure for the benefit of the foreign associated enterprise. The bright line test cannot be used to create the transaction itself, and in the absence of a machinery provision to determine the price of an assumed transaction, transfer pricing adjustment is not permissible.

Conclusion: The advertising and marketing expenditure could not be treated as a separate international transaction for transfer pricing adjustment.

Issue (ii): Whether the transfer pricing adjustment on import of raw materials was sustainable on the benchmarking adopted by the lower authorities.

Analysis: The assessee's benchmarking, including certificates and market-based material, was not adequately examined, and the contention that third-party vendors were not associated enterprises was not properly addressed. The assessee's alternative plea on gross margin comparison also required consideration if the primary benchmarking failed. The appropriate course was to remit the matter for fresh examination of the benchmarking of raw material imports in accordance with law.

Conclusion: The transfer pricing adjustment on import of raw materials was set aside for fresh examination by the Assessing Officer / Transfer Pricing Officer.

Final Conclusion: The assessee succeeded on the advertising and marketing issue, and the raw material transfer pricing issue was remitted for reconsideration, while the Revenue's challenge to the restriction of adjustment to international transactions alone failed.

Ratio Decidendi: An alleged transfer pricing adjustment cannot be sustained unless the Revenue first establishes a real international transaction with an ascertainable price, and excessive expenditure compared with comparables or incidental benefit to an associated enterprise cannot by itself create such a transaction.

---