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The Commissioner of Income Tax-LTU, Whirlpool of India Ltd. Versus Whirlpool of India Ltd., Deputy Commissioner of Income-Tax

2015 (12) TMI 1188 - DELHI HIGH COURT

Transfer pricing adjustment - Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act? - Held that:- As far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP o .....

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92F(v) of the Act is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue’s Appeal viz., "Whether the ITAT erred in deleting the addition of ₹ 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue. - ITA 610/20 .....

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th January 2014 passed by the Income Tax Appellate Tribunal ( ITAT ) in ITA No. 426/Del/2013 for the Assessment Year ( AY ) 2008-09. The issue 2. These appeals concern the issue of transfer pricing ( TP ) adjustment in relation to the incurring of advertisement, marketing and sales promotion ( AMP ) expenses by the Indian entities involved in international transactions with their respective foreign associated enterprises ( AEs ). The case of the Revenue is that the arm s length price ( ALP ) of .....

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imbursed by the foreign AE. The ITAT's decision in LG Electronics 3. Before discussing the facts of the present case it requires to be noticed that the issue of making of TP adjustments to AMP expenses was considered by the Special Bench of the ITAT in a batch of cases. By a majority of 2:1, the Special Bench of the ITAT in LG Electronics India Pvt. Ltd. v. ACIT (2013) 140 ITD 41 (Del), inter alia decided: (i) A TP adjustment in relation to AMP expenses incurred by the Assessee for creating .....

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lly rational manner, then the Transfer Pricing Officer (TPO) would determine whether the said transaction required re-characterisation. If the Assessee failed to supply the details of the value of such international transaction, the onus was on the TPO to determine its ALP on some rational basis by identifying the comparable domestic cases. It was further held that the initial burden to show that the international transaction with the AE was at ALP was on the Assessee. The decision of this Court .....

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Communications India Pvt. Ltd, Discovery Communications India, Daikin Air-conditioning (India) Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. The Court explained the features particular to three of the said Assessees i.e Sony Mobile Communications India Pvt. Ltd., Reebok India Company and Canon India Pvt. Ltd. In the case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, the TNMM had been followed for the sourcing of goods and exports f .....

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rketing and Promotion Expenses (AMP Expenses' for short) was beyond jurisdiction and bad in law as no specific reference was made by the Assessing Officer, having regard to retrospective amendment to Section 92CA of the Income Tax Act, 1961 by Finance Act, 2012. (ii)Whether AMP Expenses incurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1961, a tra .....

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rking/comparability analysis should be undertaken by the Transfer Pricing Officer by applying the parameters specified in paragraph 17.4 of the order dated 23.01.2013 passed by the Special Bench in the case of LG Electronics India (P) Ltd.? 7. The summary of the conclusions of the Division Bench in Sony Ericsson (supra) was as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA(2B) and how it cured the defect .....

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X were satisfied nothing shall impede the law contained therein to come into play. (iv) Chapter X dealt with ALP adjustment whereas Section 40A(2)(b) dealt with the reasonability of quantum of expenditure. (v) TNMM applied with equal force on single transaction as well as multiple transactions as per the scheme of Chapter X and the TP Rules. Thus, the word transaction would include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for dete .....

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/TPO accepted and adopted the TNMM, but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expense and was not diverse. It was factored in the net profit of the inter-linked transaction. The TNMM proceeded on the assumption that functions, assets and risks being broadly similar and once suitable adjustments have been made, all things get taken .....

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ch in LG Electronics Case went beyond Chapter X of the Act. Even international tax jurisprudence and commentaries do not recognise BLT for bifurcation of routine and non-routine expenses. (ix) Segregation of aggregated transactions requires detailed scrutiny without which there shall be no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax exper .....

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d can be accepted if it is proved by the Assessee. The burden is on the Assessee. It cannot be assumed. (xii) After the order of the Supreme Court in the Maruti Suzuki case, the judgment of the Delhi High Court does not continue to bind the parties. This position was misunderstood by the majority of the Special Bench in the LG Electronics Case. (xiii) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further proces .....

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should be included or excluded from cost. A studied scrutiny of CP Method would indicate that when the said Method is applied by treating AMP expenses as an independent transaction, it would not make any difference whether the same are routine or non-routine, once functional comparability with or without adjustment is accepted. (xv) The task of arm s length pricing in the case of tested party may become difficult when a number of transactions are interconnected and compensated but a transaction .....

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or immediately related to brand building exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as brand building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (x .....

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L Appliances Case were neither invoked in the present case nor were the conditions satisfied. (xix) An order of remand to the ITAT for de novo consideration would be appropriate because the legal standards or ratio accepted and applied by the ITAT was erroneous. On the basis of the legal ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, .....

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AO/TPO would be justified. A practical approach is required and the ITAT has sufficient discretion and flexibility to reach a fair and just conclusion on the ALP. Relevant Facts 8. As far as the present appeals are concerned the Assessee, Whirlpool of India Ltd ( WOIL ), is a subsidiary of Whirlpool Corporation, USA ( Whirlpool USA') and is engaged in production, sales and distribution of whirlpool appliances. The company s product portfolio includes washing machines, refrigerators, microwav .....

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9. During the financial year ( FY ) 2007-08, the international transactions entered into by WOIL were as follows:- Name of International transaction Method selected Value of international transaction (INR) Sale of finished goods TNMM 1,263,245,853 Sale of spares 30,117,767 Purchase of raw material components and spares for export manufacturing 50,236,010 Purchase of raw material, Components and spares for domestic manufacturing CPM 230,094,932 Purchase of finished goods and spares of resale TNM .....

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al transactions undertaken by WOIL. The documents prescribed under Rule 10D of the Income Tax Rules, 1962 ( Rules ) and other details sought by the TPO were submitted by WOIL. The Assessee also submitted a transfer pricing study ( TP study ) dated 24th September 2008 for the FY 2007-08. The order of the TPO 11. By an order dated 20th October 2011, the TPO determined that the extent of AMP expenditure incurred by the Assessee was to expand the reach of the AE's brand in India. The Assessee wa .....

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hich was a very strong name in the global consumer durables industry) and that the AMP expenses incurred by it was for furthering its own business and commercial interests . It further contended that all the marketing related decisions were taken by WOIL and not by Whirlpool USA. However, the TPO concluded that the increased sales would come up only when you are able to so position your brand in the market that it will have such powerful recall value that the customer will choose it over your co .....

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1,433,626,136 towards discounts and incentives which aggregated to the total of ₹ 1,960,626,136. When compared to the total sales, the ratio of AMP sales worked out to 11.12%. The TPO then compared this with other consumer goods manufacturers in India in whose case the average advertising plus marketing/sales ratio worked out to 3.78%. It was accordingly concluded that: by achieving this increased level of sales, you have promoted the brand of your AE. It has already been discussed that a .....

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by you : ₹ 17,622,456,000 Arm's length level of AMP exp (3. 78% of sale) : ₹ 666,128,836 Amount actually spent on AMP exp. :Rs.1,960,626,136 Amount spent on creation of marketing intangible :Rs. 1,294,497,300 13. The TPO did not stop at determining the reimbursable amount at ₹ 1,294,497,300. Since the brand building exercise also involved an amount of service, the TPO held that it called for a mark-up which was taken to equal to the prime lending rate of the State Bank of I .....

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id on the market intangibles at ₹ 1,807,310,769 being the difference between the actual AMP expense incurred and the ALP calculated at 0.87% of the sales. This sum was, therefore, directed to be added to the income of the Assessee. The orders of the AO 14. The AO drew a draft assessment order on 15th December 2011 on the basis of the above order of the TPO. The Assessee then took the matter before the Dispute Resolution Panel ( DRP ) which by its order dated 28th September 2012, affirmed t .....

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f the Act, making the above TP adjustment to the AMP under Section 92CA of the Act. Impugned order of the ITAT 16. Aggrieved by the above order, WOIL filed ITA No. 426/2013 before the ITAT. In the impugned order dated 13th January 2014, the ITAT followed its judgment in LG Electronics (supra). The ITAT noted that there is a general proposition that if an expenditure is deductible under Section 37(1) of the Act as having been incurred wholly and exclusively for the business purpose, the same has .....

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ions and the amount spent by the Assessee in relation to an international transaction of building brand for its foreign AE could not be considered as a case of disallowance under Section 37 (1) of the Act, since Section 37(1) and Section 92 of the Act operated in different fields. 18. Therefore, according to the ITAT, what was required to be done in terms of the judgment of the Special Bench of the ITAT in LG Electronics (supra) was that overall AMP expenses had to be processed to find out what .....

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l amount incurred for the promotion of the brand of the foreign AE de hors the mark-up . It was, accordingly held that the AO was not justified in observing alternatively that a sum of ₹ 180 crores was not allowable under Section 37(1) of the Act. The matter was accordingly remitted to the AO/TPO for re-working the TP adjustment on account of the AMP expenses in the light of the decision of the Special Bench of the ITAT in LG Electronics (supra). Questions urged by the Revenue 19. In the a .....

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directing the TPO to exclude the expenses incurred in connection with sales from AMP expenses by treating them as expenses not adding to the value of marketing intangible legally owned by the AE by drawing analogy from Section 37 (3A) once present in the Act without giving any reasons for the same? (iii) Whether the ITAT erred in directing the TPO/AO to exclude the expenses incurred in connection with sales from AMP expenses when similar expenses have not been excluded by the TPO from the AMP e .....

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so filed an appeal ITA No. 228 of 2015. The Assessee urged the following questions: (a) Whether on the facts and in the circumstances of the case, the ITAT erred in law in upholding, in principle, transfer pricing adjustment made by the assessing officer/TPO in respect of expenditure incurred on AMP expenses? (b) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that the AMP expenses, etc., unilaterally incurred by the appellant in India could n .....

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f its foreign AE and further that such a transaction was in the nature of provision of service by the Assessee to the AE? (d) Whether on the facts and in the circumstances of the case, the ITAT erred in law in not appreciating that such a TP adjustment could not at all be made in respect of AMP expenses which were found to constitute legitimate, bona fide and deductible business expenditure and the Assessee was the economic owner of the benefit of such expenses? (e) Whether on the facts and in t .....

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tion 21. As far as the above questions projected by the Revenue are concerned, Questions (ii) and (iii) stand answered by the decision in Sony Ericsson (supra) in favour of the Assessee and against the Revenue. In that decision, this Court held that the expenses in connection with sales and marketing are to be excluded for the purposes of determination of AMP expenses. Question (i) also stands answered by that decision inasmuch as it has been held that fourteen factors specified in para 17.4 of .....

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the decision of the majority of the Special Bench of the ITAT in L.G Electronics and held that the BLT could not be adopted for determining the ALP of an international transaction involving the AMP expenses. 24. The following questions are framed for consideration in the Assessee s appeal: (i) Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act? (ii) If the answer to the above q .....

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ndertaken only if in the first place, there was an international transaction between the Assessee and its AE as defined under Section 92B of the Act. In other words, there should be mutual agreement or arrangement or action in concert . (ii) Such agreement, arrangement or understanding should be for the allocation or apportionment of or contribution to the cost or expenses incurred by the Assessee in connection with benefit, service or facility provided to the AE. (iii) A unilateral action by on .....

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India and Reebok India and not to the case in hand where the Assessee was also a manufacturer of household products under the trademark Whirlpool . (v) In order to benchmark an expense under Chapter X of the Act, having regard to the ALP, the sine quo non is that the expense should arise under an international transaction with a foreign AE. Chapter X does not envisage the benchmarking of transactions between the Indian entity and third parties in India where there is no income arising to an Indi .....

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ITR 26, it was submitted that such expense incurred by WOIL wholly or exclusively for its business was allowable as such under Section 37 of the Act. (vii) Once the BLT has been discarded as a valid methodology either for deducing the existence of an international transaction or for determining ALP, there has to be some other recognized method for first determining the international transaction involving AMP expense and thereafter ascertaining ALP for such transaction. The re-characterisation of .....

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hat even if marketing intangible is created as a consequence of non-routine AMP expenses incurred by the Indian entity, the economic ownership of such intangibles vested in the Indian entity, which could exploit the same for furthering its business interest. It cannot, therefore, be said that the marketing intangibles created by the WOIL was transferred to the AE only because the existing AMP expenses needed to be compensated. (ix) Referring to paras 7.12 and 7.13 of the OECD guidelines it was s .....

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in different jurisdictions. There is in fact no mutual arrangement between WOIL and Whirlpool USA for allocation or apportionment or contribution of AMP expenses. Submissions of counsel for the Revenue 26. Mr. G.C. Srivastava, learned Special counsel for the Revenue, made an elaborate argument and also filed written submissions. He made an extensive reference to the TP study submitted by the Assessee which according to him shows that the Assessee is engaged both in manufacturing and distributio .....

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s manufacturing for the benefit of the group entities and its status is akin to that of a contract manufacturer. Therefore the AMP activity is not for the sole benefit of the Assessee but for the group as a whole. 27. According to the Revenue, the TP report shows that the market risks with respect to the product including customer acceptance are borne by the Whirlpool Group. Therefore, it was not open to urge that AMP functions of the appellant are solely for its own benefit . Considering the As .....

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ame and that the manner of the use of the trademark has to be approved by Whirlpool USA; Clauses 6.1, 6.2 and 6.3 indicate that the contents of the advertisements for brand promotion also needs to be approved. It was seen that during the FY in consideration, the Assessee had received a grant of ₹ 1.66 crores from its AE. In the earlier year, it received ₹ 4.22 crores. The nature of this grant had not been specified and this was also not shown as an international transaction in the TP .....

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ks and name . Therefore, it could not be said that AE is not concerned with what the appellant does or benefit is not intended or not arising to the AE. Clause 3.1 of the agreement states that the goodwill connected with the marks shall continue to inure to the benefit of the AE. Further the licensor i.e., Whirlpool USA has power to assign the rights to any other entity. In such circumstances, no licensee could ever undertake such AMP expenses if the benefits of such expenditure could be taken a .....

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transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or .....

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erson and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. 32. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step .....

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that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The TP adjustment envisages the substitution of the price of such international transaction with the ALP. 34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity .....

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ing or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have acted in concert . 36. The expression "acted in concert" has been interpreted by the Supreme Court in Daiichi Sankyo Company Ltd. v. Jayaram Chigurupati 2010(6) MANU/SC/0454/2010, which arose in the context of acquisition of shares of Zenotech Laboratory Ltd. by the Ranbaxy Group. The question that was examined was whether at the relevant time t .....

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g in concert" unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. For, de hors the element of the shared common objective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or .....

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of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being. 37. The provisions under Chapter X do envisage a separate entity concept . In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely .....

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e 38. The clauses of the TLA which had been referred to in extenso by Mr. Srivastava go to show that Whirlpool USA was protective of its brand. However, it is not discernible from the clauses of the said TLA 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 a presumption that as a result of the TLA, there must have been an understanding between Whirlpool USA and WOIL and th .....

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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 further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. 40. Mr. Srivastava submitted that Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in .....

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d by the Court in Sony Ericsson (supra).Therefore, it is not possible to view this as a machinery provision. The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. 41. Recently this Court has in its decision dated 11th December 2014 in ITA No. 110 of 2014 (Maruti Suzuki India Ltd. v. C .....

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o to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour rules for determination of the ALP, can be applied only if the TP adjustment in .....

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ince it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next step is to ascertain the disclosed 'price' of such a transaction and thereafter ask whether it is at ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdict .....

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this was sought to be explained by stating that Section 37 and Chapter X operate in different domains and merely because an expense was incurred wholly or exclusively for the Indian entity it would not mean that it is also not incurred for the foreign AE. The question then is to what extent the Indian entity should be compensated for the expenses incurred by it on behalf of the foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian .....

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e 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 AO 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 AO to determine what should be the fair 'compensation' an Indian entity would be entit .....

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modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 45. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explici .....

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d by WOIL was for promoting the brand of Whirlpool USA. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law . Conclusion 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals .....

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