TaxTMI 
TaxTMI 
2025 (2) TMI 1341
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Honorable ITAT in the Assessee own's case for AY 12-13, has held that Assessee's advertisement and sales/product promotion expenses towards third parties does not lead to an international transaction. 3.2. The lower authorities have, in the fact and circumstances of the case and in law, erred in treating the advertisement and sales/product promotion expenses which are in nature of payment to third parties and incurred for the purpose of own business, as an "international transaction with Associated enterprises", 3.3. The lower authorities erred in making an upward TP adjustment of INR 211.70 Crores, towards alleged brand building activities undertaken by the Appellant for its AEs, holding that the said alleged expenditure is to be recovered along with a mark-up. 3.4. The lower authorities erred in alleging that the expenses incurred by the Appellant towards third parties, is brand-building services to its AE, despite the absence of any underlying agreement/arrangement with its AE and without appreciating that the said expenditure was incurred for Appellant own business with domestic unrelated parties. 3.5. The Ld. TPO adopted an arbitr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. Pursuant to the TPO's order, the AO issued a draft order dated 20.09.2023 under section 143(3) r.w.s 144C(1) of the Act incorporating the aforesaid TP adjustment. Aggrieved, assessee filed objections against the draft assessment order before the ld. Dispute Resolution Panel ('DRP' in short) and ld. DRP issued its directions dated 28.05.2024 wherein it upheld the TP adjustment proposed in the draft assessment order. The AO subsequently passed the final assessment order dated 29.06.2024 u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act. Now assessee is in further appeal before us u/s 253(1)(d) of the Act. 4. At the outset, the ld. Counsel submitted that with regard to the upward adjustment towards AMP expenses for brand-building, the Co-ordinate Bench of the Tribunal in assessee's own case in ITA No.1078/Mds/2017, for assessment year 2012-2013 dated 30.01.2018 has held that Assessee's advertisement and sales/product promotion expenses towards third parties does not lead to an international transaction. 5. The ld. Counsel also placed reliance on the following judgments/decisions:- Sl. No Name of the case High Court/ ITAT decisions Citation 1 Maruti Suzuki In....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... this in its own business plan. Though the assessee argued against any adjustment on brand promotion, relying on the judgment of Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd (supra), ld. TPO did not accept it. According to him, in the case of the assessee there was an admission that it was promoting ''Renault'' brand. In our opinion, just because assessee mentioned that marketing expenditure incurred by it helped promotion of Renault brand in India, it cannot be presumed that such expenditure resulted in any ''international transaction. What was observed by the ld. TPO in its order on this issue is reproduced hereunder:- " Here it is the assessee's own admission that its business plan is ''distribution of Renault Cars in India and to promote the Renault brand in India and to create a market share for Renault cars in India. Therefore no further evidence is required to make out an international transactions either by going through BLT or otherwise". Expenditure was incurred by the assessee, to create market share for its Cars and marginal benefits derived by its principal abroad, as an off shoot cannot in our opinion convert it to a international ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....centage, no transfer pricing adjustment can at all be made. Both section 92CA, which provides for making a reference to the Transfer Pricing Officer for computation of the arm's length price and the manner of the determination of the arm's length price by the Transfer Pricing Officer, and section 92CB which provides for the "safe harbour" rules for determination of the arm's length price, can be applied only if the transfer pricing adjustment involves substitution of the transaction price with the arm's length price. Rules 10B, 10C and the new rule 10AB only deal with the determination of the arm's length price. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the arm's length price. 70. What is clear is that it is the "price" of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an arm's length price, an "adjustment" has to be made. The burden is on the Revenue to first show the existence of an ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tity keeping in view its exigencies and its perception of what is best needed to promote its products. The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign associated enterprise for which the foreign associated enterprise is obliged to compensate the Indian entity. The burden of the Revenue's song is this : an Indian entity, whose AMP expense is extraordinary (or "non-routine") ought to be compensated by the foreign associated enterprise to whose benefit also such expense enures. The "non-routine" AMP spent is taken to have "subsumed" the portion constituting the "compensation" owed to the Indian entity by the foreign associated enterprise. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spent by an Indian entity which happens to use the brand of a foreign associated enterprise to be presum....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... C. Srinivasa Setty [1981] 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise. Economic ownership of the brand 77. The next issue is concerning the economic ownership and legal ownership of the brand. According to the Revenue, viewing legal ownership as something distinct from economic ownership "may not be the right way of looking at things". 78. It is necessary at this juncture to examine the history of the relationship between MSIL and SMC. When the licence agreements were originally entered in 1982, MSIL was known as Maruti Udyog Limited ("MUL") and SMC did not hold a single share in Maruti Udyog Limited. In 2003 SMC acquired the controlling interest in MSIL. There are various models of Suzuki motor cars manufactured by MSIL and each model is cove....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ject to transfer pricing. Likewise, payments for use of patents or copyrights are separately assessed. What the present appeals are concerned with is only the AMP expenditure incurred and nothing more. As pointed out by the Revenue the issue is not about the expenditure incurred by MSIL in engaging Indian third parties for AMP but the extent to which the AMP spend can be attributed to enure to the benefit of SMC's brand. This can be a complex exercise and in the absence of clear guidance under the statute and the rules, can result in arbitrariness as a result of proceeding on surmises or conjectures. The Transfer Pricing Officer will need to access data as regards the strength of the foreign associated enterprise's brand and what it commands in the international market and to what extent the presence of the brand in the advertisement actually adds to the benefit of the brand internationally. 82. Para. 6D of the OECD Guidelines deals with "Marketing activities undertaken by enterprises not owning trademarks or trade names". It contains a discussion on promotion of trade marks by distributors of branded goods. It acknowledges the difficulties in determining the exten....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e tests laid down by the law". 85. The Organisation for Economic Co-operation and Development Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an associate enterprise group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. MSIL's higher operating margins 86. In Sony Ericsson it was held that if an Indian entity has satisfied the transactional net margin method, i.e., the operating margins of the Indian enterprise are much higher than the operating margins of the comparable companies, no further separate adjustment for AMP expenditure was warranted. This is also in consonance with rule 10B which mandates only arriving at the net profit by comparing the profit and loss account of the tested party with the comparable. As far as MSIL is concerned, its operating profit margin is 11.19 per cent. which is higher than that of the comparable companies whose profit margin is 4.04 per cen....