9911796707
TMI Blog2025 (3) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business of manufacture, sale, marketing and trading of Indian Made Foreign Liquor. The IMFL was sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne 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 seek to benchmark transactions between two Indian enterprises." 6. As is manifest from the above, the Tribunal was constrained to interfere with the view expressed by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 returned by the Tribunal and which have been referred to hereinabove. 8. Although the appellants also seek to draw sustenance from the Explanation which came to be inserted in Section 92B by virtue of Finance Act, 2012 with retrospective effect from 01 April 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 negatived the use of the bright line test both as forming the base and determining if there is an international transaction and secondly for the purpose of determining the arm's length price. Once bright line test is negatived, there is no basis on which it can be said in the present case that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted 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 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 who did not dispute the existence of an international transaction regarding AMP expenses. xxxx xxxx xxxx 57. The court next turns to the principal contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 word "transaction" is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if resort is had to section 92F (v) which defines "transaction" to include "arrangement", "understanding" or "action in concert", "whether formal or in writing", it is still incumbent on the Revenue to show the existence of an "understanding" or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable 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 transaction involving AMP expenses. The Revenue's contentions 66. It is contended by the Revenue that the mere fact that the Indian entity is engaged in the activity of creation, promotion or maintenance of certain brands of its foreign associated enterprise or for the creation/promotion of new/existing markets for the associated enterprise, is by itself enough to demonstrate that there is an arrangement with the parent company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 considerable merit in the contention of the assessee that the only transfer pricing adjustment authorised and permitted by Chapter X is the substitution of the arm's length price for the transaction price or the contract price. It bears repetition that each of the methods specified in section 92C (1) is a price discovery method. Section 92C (1) thus is explicit that the only manner of effecting a transfer pricing adjustment is to substitute the transaction price with the arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 machinery provisions of Chapter X of the Act being applicable to an AMP transfer pricing adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 73. It bears repetition that the subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agencies to whom it is making payments for the AMP expenses. The Revenue is not joining issue, the court was told, that the Indian entity would be entitled to claim su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the 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 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether 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 which were addressed, we deem it appropriate to take note of the following observations which appear in the order of the Transfer Pricing Officer [TPO] dated 24 January 2013 and pertaining to AY 2009-10. While the principal conclusions already stand extracted in our order of 19 February 2025, we deem it appropriate to additionally take note of the following observations which appear in that order of the TPO: - "5. It is seen that the assessee has incurred an extremely high level of advertising and market promotion (AMP) expenditure. In such cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 needs of a consumer to own a globally branded product." 6. Similarly, the order of the TPO dated 29 January 2016, and which pertains to AY 2012-13, carries the following significant observations insofar as the issue of AMP constituting an international transaction is concerned: - "1.2 During the course of proceedings for earlier years, this office has taken a stand that bright line test should be applied and any AMP expenditure incurred by the taxpayer in excess of the expenditure incurred by the comparables should be considered as the expenditure incurred by the taxpayer for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 those that transcend from routine cost. The TPO was of the opinion that agent should be reimbursed or compensated for this additional AMP expenditure along with service charges. The TPO further observed 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. According to the TPO, promotion of brand of the AE and development of the market forthe product manufactured are not routine AMP expenditure and such sale promotion expenditure would not be incurred by a thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 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 who did not dispute the existence of an international transaction regarding AMP expenses. XXX 60. As far as clause (a) is concerned, SMC is a non-resident. It has, since 2002, a substantial share holding in MSIL and can, therefore, be construed to be a non-resident AE of MSIL. While it does have a number of 'transactions' with MSIL on the issue of licensing of IPRs, supply of raw materials, etc. the question remains whether it has any 'transaction' concerning the AMP expenditure. That brings us to clauses (b) and (c). They cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of MSIL is "any other transaction ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 xxxx 26. Respectfully following the judgment of the Hon'ble High Court of Delhi [supra], we hold that BLT has no mandate under the Act and accordingly, the same cannot be resorted to for the purpose of ascertaining if there exists an international transaction of brand promotion services between the assessee and the AE. 27. Considering the facts of the case in hand, in the light of judicial decisions discussed hereinabove, we are of the considered opinion that the Revenue needs to establish on the basis of some tangible material or evidence that there exists an international transaction for provisions of brand building services between the assessee and the AE. xxxx xxxx xxxx 29. In our understanding of the facts and law, mere agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 was thus observed that before undertaking a benchmarking of AMP expenses, it was incumbent upon the TPO to have found that an international transaction had, in fact, occurred. 10. The view that has been taken by the Tribunal, in essence, follows what our Court had enunciated in Maruti Suzuki India Ltd. vs. Commissioner of Income Tax 2015 SCC OnLine Del 13940 and which we had an occasion to notice in our order of 19 February 2025. As is manifest from a reading of the passages from Maruti Suzuki extracted in that order, we have no hesitation in observing that the existence of an international transaction cannot rest or be founded upon a mere surmise or conjecture. As is evident from the principles which were elucidated in Maruti Suzuki, our Court had stoutly negated the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, 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 further how the arm's length price of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the Transfer Pricing Officer. xxxx xxxx xxxx 46. As already mentioned, merely because there is an incidental benefit to Whirlpool, USA, it cannot be said that the AMP expenses incurred 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 benefited 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"." 13. In Bausch and Lomb Eyecare (India) vs. Addl. Commissioner of Income Tax 2015 SCC OnL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision 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 the 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.. .. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 and promotion expenditure was incurred by the assessee to expand the reach of its associated enterprise's brand in India. The relevant finding of the Transfer Pricing Officer in its order for the assessment year 2009-10 read as under : "4.1 It is seen that the assessee has incurred an extremely high level of advertising, marketing and promotion (AMP) expenditure. In such cases there is a possibility that the objective of the heightened level of advertising, marketing and promotion expenditure is to expand the reach of the associated enterprise's brand in India. The associated enterprises is the legal owner of the brand. Therefore the beneficiary of the efforts of the assessee is the associated enterprises as the brand value increases significantly given the efforts of the assessee. The assessee is thereby creating marketing intangible in favour of the associated enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 expenses incurred by the assessee. We are, therefore, of the considered view that the plea of the assessee, on the peculiar facts of this case, does indeed deserve to be upheld that there is no material on record to hold that there was an international transaction, in terms of the provisions of section 92B, nor any material has been brought on record to even remotely suggest so and, therefore, that there is no good reason to remit the matter to the assessment stage for building a case afresh. Respectfully following the binding judicial precedents, we delete the impugned arm's length price adjustment which was made solely on the basis of bright line test. The plea of the learned counsel was indeed well taken and merits acceptance. The impugned arm's length price adjustment of Rs. 6,64,70,841, accordingly, stands deleted." 10. The Revenue has not brought on record any material to assail the aforesaid finding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, 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 type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) 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 of such enterprises at the time of the transaction or at any future date; (ii) the expression "intangible property" shall include- (a) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring on the profits, income, losses or assets of such AEs. It further brings within its fold a mutual agreement or arrangement between two or more AEs for the allocation, apportionment or any contribution to any cost or expense incurred or liable to be incurred in connection therewith. 17. By virtue of Finance Act 2012, an Explanation came to be inserted in Section 92B, and which now postulates that the expression "international transaction" would include the purchase, sale, transfer, lease or "use" of, amongst others, intangible property also. The Explanation thus brings within the fold of an international transaction the "use" of intangible property and which would necessarily include trademarks, patents, brand names or logos in addition to the words purchase, sale or lease and which formed part of the provision originally. The said Explanation itself came to be inserted by Finance Act, 2012 with retrospective effect from 01 April 2002. 18. In order to appreciate the reasons which weighed upon Parliament to introduce that Explanation, it would be beneficial to refer to the background paper which accompanied Finance Bill, 2012. The relevant extracts from that background paper ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision stood couched as well as a perceived lack of clarity in respect of the scope of intangible property. It thus deemed it necessary to clarify the term "intangible property" to include, amongst others, transactions pertaining to business restructuring or reorganization. However, and in our considered opinion, notwithstanding the insertion of that Explanation with retrospective effect from 01 April 2002, the commencement of a benchmarking analysis would have to necessarily be preceded by the Revenue identifying the existence of a transaction as defined and which undoubtedly constitutes a sine qua non. This clearly flows from the plain text of Section 92B (1), which proceeds to define an "international transaction" as being a "transaction" between two or more AEs. Of equal significance is the phrase ".......and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to". 20. It is thus ex facie manifest that while an international transaction would undoubtedly include the purchase, sale, transfer, lease or use of intangible property, the same would be subject to there being a di ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
