Mere usage of name of Foreign AE not automatically convert a transaction into an international transaction.

[Vivek Jalan]

In many cases, licensed manufacturers operate as risk bearing entrepreneurs, and there is no existence of an ‘agreement’ or ‘arrangement’ or ‘understanding’ with the AE regarding AMP expenditure, the initial onus is on the revenue to show that there is an international transaction for AMP spend. The mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign AE or for the creation/promotion of new/existing markets for the AE, cannot by itself be enough to demonstrate that there is an arrangement with the parent company for this activity. The Revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between the AEs whereby the assessee is obliged to spend on AMP in order to promote the brand of the AE. As held by the Supreme Court in COMMISSIONER OF INCOME-TAX, BANGALORE VERSUS BC SRINIVASA SETTY (AND OTHER APPEALS) - 1981 (2) TMI 1 - SUPREME COURT  and PNB FINANCE LTD. VERSUS COMMISSIONER OF INCOME TAX-I, NEW DELHI - 2008 (11) TMI 7 - SUPREME COURT , in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. This would be notwithstanding the fact that –

1. The assessee company outsources its entire production requirements to toll manufacturers/contract manufacturers on a licence basis.

2. The assessee procures the raw materials and gets it converted from the third party toll manufacturers.

3. The usage of the foreign brand of the AE as the name of the manufactured product, for eg. Savlon. It cannot be construed that the assessee is not a manufacturer at all and only a distributor simplicitor. The same was held in the case of M/S PHILIPS INDIA LTD. (FORMERLY PHILIPS ELECTRONICS INDIA LTD.) VERSUS ACIT, CIRCLE-12 (2) , KOLKATA - 2018 (4) TMI 503 - ITAT KOLKATA dated 4th April, 2018. The same was also reiterated in the case of PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATA VERSUS M/S. ORGANON (INDIA) PVT. LTD. - 2023 (3) TMI 676 - CALCUTTA HIGH COURT.

The landmark decision though shall always remain the Maruti Decision of 2015. However, this apart, it is advised for taxpayers in such cases to have the following safeguards

1. They should have clear intercompany arrangements by which the transaction is clear.

2. The TP documentation and day-to-day business conduct of the taxpayers have to be such to clearly demonstrate that there is no agreement or tacit understanding with the AE for AMP spends.

3. It must be depicted by the Cost Sheet or any other means or MIS that the AMP expenses are inbuilt in the pricing and duly factored in.

4. It must be depicted that the selling expenses do not construe an AMP spend.

5. Incase there is an understanding then it must be demonstrated by intercompany arrangements, TP documentation and day-to-day business conduct that the decision pertaining to AMP spends has been taken independent of the manufacturing business.