2025 (1) TMI 1714 - AT - Income Tax

Advertising, marketing and promotion spend treated as international transaction u/s92B-adjustment deleted for lack of proven arrangement

Where the Revenue treated advertisement, marketing and promotion (AMP) expenditure as an 'international transaction' warranting transfer pricing ... TP Adjustment - AMP expense as international transaction or not? - HELD THAT:- We find substance in the contention of ld. AR that in the absence of any ‘understanding’, ‘arrangement’ or ‘action in concert’, the AMP expense cannot be held as an international transaction as per Section 92B read with Section 92F(v) of the Act. Reliance in this regard is rightly placed by him on the decision of Maruti Suzuki [2015 (12) TMI 634 - DELHI HIGH COURT], wherein held that even if the word ‘transaction’ is given its widest connotation, it is still incumbent on the Revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ as regards AMP spend for brand promotion. Thereafter, the Hon’ble High Court went on to hold that in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provisions of Chapter X of the Act are applicable to the transfer pricing exercise. Thus, the inevitable conclusion is that Chapter X as a whole does not permit such an adjustment. The decision of the Hon’ble Supreme Court in Whirlpool India Case [2024 (11) TMI 1164 - SC ORDER] has recognised the cardinal principles covering this issue that there should be concrete evidence to establish international transactions. As in case of Whirlpool of India Ltd. [2015 (12) TMI 1188 - DELHI HIGH COURT] has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. We are of the considered view that on the basis of AMP expenditure quantum alone assessee cannot be said to have benefitted the AEs’ brand. Brands are not product or services centric, but, more of customer centric. In exercise of brand building or enhancement, it is essential to establish as to how the AMP expenses generated awareness of the brand which was more useful to the foreign AE than to help the assessee in procuring its share of market. Therefore, we are inclined to accept the case of assessee that in the given facts and circumstances, Tax authorities were unable to demonstrate that AMP expenses incurred by the assessee were in any way beneficial to the foreign AE requiring TP adjustment. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the assessee's expenditure on advertisement, marketing and promotion (AMP) constituted an 'international transaction' under Section 92B read with Section 92F(v), so as to permit transfer pricing benchmarking and adjustment. (ii) Whether, in the absence of material showing an 'understanding', 'arrangement' or 'action in concert' with the associated enterprise regarding AMP spend, the Transfer Pricing Officer could sustain AMP adjustments computed through alternative methodologies (including bright line test on a protective basis and residual profit split method on a substantive basis). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (ii) (grouped): AMP spend as an 'international transaction' and permissibility of TP adjustment Legal framework (as discussed by the Tribunal): The Tribunal examined the requirement under Section 92B read with Section 92F(v) that, even where 'transaction' is understood broadly to include an 'arrangement', 'understanding' or 'action in concert' (whether formal or not), the Revenue must still demonstrate, on facts, that such a transaction existed between the assessee and its associated enterprise in relation to AMP spend. The Tribunal further treated the existence of an international transaction as a pre-condition for invoking Chapter X to undertake ALP determination and any corresponding adjustment. Interpretation and reasoning: The Tribunal found that the assessee had not reported any international transaction in respect of the disputed AMP expenses. On a scrutiny of the transfer pricing order and the directions relied upon, the Tribunal held that there was no factual discussion or evidentiary basis demonstrating that AMP expenses were incurred pursuant to any agreement, invoice, work order, mutual understanding, allocation, or concerted conduct with the associated enterprise. The Tribunal emphasized that the assessee operated in a niche business (IT products and IT solutions/services) with a restricted, largely B2B customer base, which made it even more necessary for the tax authorities to place material on record to show that AMP was incurred to create 'marketing intangibles' for the foreign associated enterprise rather than for the assessee's own distribution and services business. The Tribunal rejected the approach of inferring an international transaction merely from the quantum of AMP expenditure or theoretical assumptions of brand benefit. It held that the tax authorities were required to establish on facts that the assessee was obliged to incur AMP for the associated enterprise or that the assessee's remuneration (including gross margins) was structured to account for such AMP on behalf of the associated enterprise. The Tribunal noted that adopting inconsistent methods-bright line test for a 'protective' adjustment and residual profit split method for a 'substantive' adjustment-reflected the absence of concrete transactional evidence linking AMP spend to any compensable obligation of the associated enterprise. The Tribunal also accepted that AMP expenditure does not necessarily equate to brand building for the associated enterprise and that, absent inquiry into how the expenditure created brand value beyond the assessee's local market exploitation, no presumption of foreign benefit could be drawn. It further found that the assessee's marketing and sales decisions (customer identification, advertising medium, promotional activities, discounts) were taken independently and not shown to be dictated by, or coordinated with, the associated enterprise. Conclusions: The Tribunal concluded that, in the absence of any proven 'understanding', 'arrangement' or 'action in concert' between the assessee and its associated enterprise concerning AMP spend, the AMP expenses could not be treated as an 'international transaction' under Section 92B read with Section 92F(v). Consequently, no benchmarking of AMP expenses and no transfer pricing adjustment-whether computed on a substantive basis (residual profit split method) or on a protective basis (bright line test)-could be sustained. Having allowed the ground negating the existence of an international transaction for AMP, the remaining grounds were held to be academic and not requiring adjudication, and the appeal was allowed.