TaxTMI 
TaxTMI 
2025 (3) TMI 468
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....- "(a) Whether the Income Tax Appellate Tribunal ["ITAT"] was justified on facts and in law in deleting addition of Rs. 35,09,33,103/- on account of expenses incurred by the assessee for advertisement, marketing and promotion ["AMP"] for brand-building for brand owned by the associated enterprise? (b) Whether the ITAT was justified on facts and in law in holding that the Revenue needs to establish on the basis of tangible material or evidence that there exists an international transaction regarding brand-building by way of AMP expenses despite the fact that it was held by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [374 ITR 118] that transaction of excess AMP is an international transaction?" 3. The appeals were thereafter extensively heard on 19 February 2025, and when we had passed the following order: - "1. Having heard Mr. Gupta, learned counsel appearing for the appellant at some length, we take note of the following position which emerges from the record. 2. The respondent-assessee is stated to be one of the companies under the Beam Global Group and was engaged in the busines....
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....being an 'agreement' or 'arrangement' for incurring such AMP expenses. 30. The aforesaid view that existence of an International transaction is a sine qua non for invoking the transfer pricing provisions contained in Chapter X of the Act, can be further supported by analysis of section 92 (1) of the Act, which seeks to benchmark income / expenditure arising from an international transaction, having regard to the arm's length price. The income /expenditure must arise qua an international transaction meaning thereby that the (i) income has accrued to the Indian tax payer under an international transaction entered into with an associated enterprise; or (ii) expenditure payable by the Indian enterprise has accrued / arisen under an international transaction with the foreign AE. The scheme of Chapter X of the Act is not to benchmark transactions between the Indian enterprise and unrelated third parties in India, where there is no income arising to the Indian enterprise from the foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not see....
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.... of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, whether such activity or business is carried on, directly or through one or more of its units or divisions or subsidiaries, or whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places; (iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on; (iv) "specified date" means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year;] (v) "transaction" includes an arrangement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding." It is the aforesaid statutory provision which appears to have constituted the foundation for the findings ultimately returne....
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....the assessee on the said aspect for the simple reason that in most cases the assessee have submitted that the international transactions between them and the associated enterprise, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessee raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed." 46. The said passage has to be read in the context of the discussion preceding it which concerns the assessees whose appeals were being disposed of by the said judgment. It is in the context of those assessees that para 52 notes that "in most cases the assessee have submitted that the international transactions between them and the associated enterprise, resident abroad included the cost/value of the AMP expenses ". 47. As regards the submission regarding the bright line test having been rejected in the decision in Sony Ericsson is concerned, the court notes that the decision in Sony Ericsson expressly n....
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....Suzuki" which had a high degree of name recognition. The Revenue has been unable to dispute that MSIL has the highest market share of automobiles manufactured in India (about 45 per cent.) and year on year growth of turnover of about 21 per cent. In other words, the AMP expenses incurred by it have substantially benefitted MSIL. 50. The second aspect which the Revenue has been unable to dispute is that SMC's AMP expenditure worldwide has been 7.5 per cent. of its sales whereas MSIL is spending only 1.87 per cent. of its total sales towards AMP. Therefore, this belies the possibility of any "arrangement" or "understanding" between MSIL and SMC whereby MSIL is obliged to incur the AMP expenditure for and on behalf of SMC. 51. The result of the above discussion is that in the considered view of the court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present asses....
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....he residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction having a bearing" on its "profits, incomes or losses", for a "transaction" there has to be two parties. Therefore for the purposes of the "means" part of clause (b) and the "includes" part of clause (c), the Revenue has to show that there exists an "agreement" or "arrangement" or "understanding" between MSIL and SMC whereby MSIL is obliged to spend excessively on AMP in order to promote the brand of SMC. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to section 92B are described as "international transaction". This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction. 61. The submission of the Revenue in this regard is : "The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any compensation for the service or benefit". Even if the w....
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.... that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the associated enterprise. and, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the "bright line" by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the bright line test, the AMP spend of MSIL was found "excessive" the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing "adjustment". This runs counter to legal position explained in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi), which required a Transfer Pricing Officer "to examine the 'international transaction' as he actually finds the same". In other words the very existence of an international transaction cannot be a matter for inference or surmise. 65. As already noticed, the decision in Sony Ericsson has done away with the bright line test as means for determining the arm's length price of an international tr....
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....here is any "machinery" provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to section 92F(ii) which defines arm's length price to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions". Since the reference is to "price" and to "uncontrolled conditions" it implicitly brings into play the bright line test. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the arm's length price. The court does not see this as a machinery provision particularly in light of the fact that the bright line test has been expressly negatived by the court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established dehors the bright line test. 69. There is nothing in the Act which indicates how, in the absence of the bright line test, one can discern the existence of an international transaction as far as AMP expenditure is concerned. The court finds consid....
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....price adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a transfer pricing adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spent by the assessee on application of the bright line test, is excessive, thereby evidencing the existence of an international transaction involving the associated enterprise. The quantitative determination forms the very basis for the entire transfer price exercise in the present case. 72. As rightly pointed out by the assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP transfer pricing adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the m....
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....the portion of such AMP spend that the Indian entity should be compensated for ? 75. As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to section 40A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the Assessing Officer "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods". In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction". The Assessing Officer in such an instance deploys the "best judgment" assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding "machinery" provision in Chapter X which enables an Assessing Officer to determine what should be the fair "compensation" an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which c....
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.... to be presumed to involve an international transaction. and this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to section 92B of the Act". 12. In order to enable Mr. Gupta, learned counsel, to address submissions in the aforesaid light, let the appeal be called again on 25.02.2025 as part heard in the category of "End of Board"." 4. As was noted by us on the previous occasion, the fundamental question which stands posited is in respect of the AMP expenditure incurred and whether it would constitute an international transaction. On facts, there does not appear to be a serious dispute with respect to the relationship between the respondent-assessee and Fortune Brands, which was the ultimate holding company. Beam India Holding, the respondent-assessee, is stated to be a constituent of the Beam Global Group engaged in the business of manufacture, sale, marketing and trading of Indian Made Foreign Liquor [IMFL]. These products are marketed using brands owned by and licensed to it by the global entity. 5. In order to holistically examine the question which stands raised as well as to appreciate the contentions ....
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....een clarified that the distributor incurs marketing expenditure above and beyond what independent enterprises are required to do and has no right of recovery or reimbursement from foreign parent; so that profit are lower than what unrelated party would accept and it will therefore be considered to have assumed significantly greater and higher risk than arm's length party. In this case expectation of ATO is likely to be that the distributor would obtain an additional return form trademark owner possibly through a reduction in the transfer price. Of course, the marketing expenditure here would be considered in excess of bright line test. 5.7 It is seen in the case of the assessee that in order to promote the brand of the AE in Indian market and to develop market for products manufactured, the assessee company incurred huge expenditure both on promotion of brands owned by the parent AE and on development of market in India. The promotion of brand of the AE and development of the market for the product manufactured are not routine AMP expenditure and such sale promotion expenditure would not be incurred by a third party as this is also incurred to meet the aspirational nee....
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....pondent-assessee coming to be rejected by the Dispute Resolution Panel [DRP] and orders of assessment being framed, appeals came to be instituted before the Income Tax Appellate Tribunal [ITAT]. It is the orders passed on those appeals which have given rise to the present matters arriving on the board of this Court. The Tribunal, while evaluating the view expressed by the TPO, has held as follows: - "8. During the transfer pricing assessment proceedings, the TPO noticed that the assessee has incurred an extremely high level of advertising and market promotion expenditure [AMP]. The TPO was of the opinion that the objective of heightened level of AMP expenditure is to expand the reach of the AE's brand in India. Since the assessee is not the legal owner of the brand, therefore, the beneficiary of the efforts of the assessee is the AE as the brand value increases significantly given in the efforts of the assessee. 9. Referring to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Edition 2010, the TPO formed a belief that investment in marketing intangibles is derived from amongst other company's level of AMP, particularly th....
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.... regarding the AMP spend of MSIL. It is pointed out that the BLT has been applied to the AMP spend by MSIL to (a) deduce the existence of an international transaction involving SMC and (b) to make a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. XXX 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL. Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Assessee MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Assessees whose cases have been disposed of by that judgment and wh....
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....gards AMP spend for brand promotion. In other words, for both the 'means' part and the 'includes' part of Section 92B (1) what has to be definitely shown is the existence of transaction whereby MSIL has been obliged to incur AMP of a certain level for SMC for the purposes of promoting the brand of SMC. XXX 68....................In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly negatived by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de hors the BLT." 24. In the light of the aforesaid finding of the Hon'ble High Court, before embarking upon a benchmarking analysis, the Revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference. xxxx xxxx ....
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....e foreign payee or there is no payment of expense by the Indian enterprise to the associated enterprise. Conversely, transfer pricing provisions enshrined in Chapter X of the Act do not seek to benchmark transactions between two Indian enterprises." 9. As is manifest from the above, the Tribunal has essentially intervened and set aside the orders of assessment in light of the Revenue having failed to demonstrate on the basis of any tangible material that an international transaction between the assessee and its Associated Enterprise [AE] had come into existence. It has thus held that the existence of an international transaction cannot rest on a mere inference or surmise. In the context of these appeals it essentially held that it would be wholly erroneous to assume that the expenditure was incurred for the benefit of the AE merely because it was conceived or estimated to be excessive. The Tribunal has also, and in our considered opinion, correctly held that the mere relationship between parties would not be sufficient to presume that an international transaction had come into being or that there was an arrangement in place to undertake AMP for the benefit of the brand owner. It....
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....lpool, USA, was protective of its brand. However, it is not discernible from the clauses of the said trade name licence agreement that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of Whirlpool, USA. The Revenue has been unable to explain why there should be a presumption that as a result of the trade name licence agreement, there must have been an understanding between Whirlpool, USA, and WOIL and that WOIL will spend "excessively" on AMP in order to promote the "Whirlpool" brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might enure to the brand of Whirlpool USA, a proportion of the AMP expenses incurred must be attributed to it. 39. It is in this context that it is submitted, and rightly, by the assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and fu....
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....g of AMP expenditure by the assessee involves an international transaction in that regard, with B&L, USA. A similar contention by the Revenue, namely, that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also enure to the associated enterprise is itself sufficient to infer the existence of an international transaction has been negatived by the court in Maruti Suzuki India Ltd. (supra) as under (page 146 of 381 ITR): "The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage'. First of all, there has to be a clear statutory mandate for such an exercise. The court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to section 92F(ii) which defines arm's length price to mean a price 'which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditio....
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.... enterprise to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign associated enterprise is able to be located in some agreement, written (for e.g., the sample agreements produced before the court by the Revenue) or otherwise, how should a Transfer Pricing Officer proceed to benchmark the portion of such AMP spend that the Indian entity should be compensated for ?" 14. Answering this question yet again in favour of the assessee, our Court in Pr. Commissioner of Income Tax vs. Moet Hennessy Pvt. Ltd. 2022 SCC OnLine Del 3977 observed: - "8. We have heard the learned counsel for the parties. It is admitted on record that the contention of the Revenue that there exists an international transaction between the assessee and its associated enterprises, is not based on any agreement executed between the said parties. The sole basis for making this adjustment was a presumption drawn by the Transfer Pricing Officer that huge advertising, marketing....
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....icer coming to the conclusion that there was an international transaction, under section 92B, on the facts of this case. It was only on the basis of bright line test that the impugned arm's length price adjustment was made but that approach has already been negatived by the hon'ble courts above. We see no reasons to remit the matter to the file of the Transfer Pricing Officer, as is prayed for by the learned Departmental Representative. A remand to the assessment stage cannot be a matter of routine ; it has to be so done only when there is anything in the facts and circumstances to so warrant or justify. In any case, there are direct judicial precedents from the hon'ble jurisdictional High Court which clearly suggest that the matter regarding existence of international transaction under section 92B, as far as possible, should be decided at the level of Tribunal itself. .. In the present case, no new facts have emerged and all the facts brought to record, during the course of the assessment proceedings, do not indicate legally sustainable basis for coming to the conclusion that there was an internal transaction in respect of advertising, marketing and promotion ....
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....he relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not. Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any t....
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.... (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes. xxxx xxxx xxxx 92F. Definitions of certain terms relevant to computation of arm's length price, etc.-In Sections 92, 92A, 92B, 92C, 92D and 92-E, unless the context otherwise requires- ............ (v) "transaction" includes an arrangement, understanding or action in concert- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding." 16. Section 92B defines an "international transaction", and which is an expression which appears in Sections 92, 92C, 92D and 92E, to mean a transaction between two or more AEs in the nature of purchase, sale or lease of tangible or intangible property, provision of services, lending or borrowing of money or any other transaction having a bearing on the profits, income, losses or assets of such AE....
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....r income of current year. Therefore, there is a need to amend the definition of international transaction in order to clarify the true scope of the meaning of the term. "international transaction" and to clarify the term "intangible property" used in the definition. It is, therefore, proposed to amend section 92B of the Act, to provide for the explanation to clarify meaning of international transaction and to clarify the term intangible property used in the definition of international transaction and to clarify that the 'international transaction' shall include a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets or such enterprises at the time of the transaction or at any future date. This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent assessment years." 19. As is manifest from the above, the Legislature essentially appears to have borne in consideration the conciseness of the terms in which the prov....