Delhi High Court
Pcit-1, New Delhi vs Beam Global Spirits & Wine … on 7 March, 2025
Author: Yashwant Varma
Bench: Yashwant Varma
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: March 03, 2025
Judgment pronounced on March 07, 2025
+ ITA 155/2022
PCIT-1, NEW DELHI .....Appellant
Through: Mr. Gaurav Gupta, SSC, Mr.
Shivendra Singh, Adv.
Versus
BEAM GLOBAL SPIRITS & WINE (INDIA)
PVT.LTD. .....Respondent
Through: Mr. Deepak Chopra and Mr.
Harpreet Singh Ajmani, Ms.
Ashmita, Advs.
+ ITA 156/2022
PCIT-1, NEW DELHI .....Appellant
Through: Mr. Gaurav Gupta, SSC, Mr.
Shivendra Singh, Adv.
Versus
BEAM GLOBAL SPIRITS & WINE (INDIA)
PVT. LTD. .....Respondent
Through: Mr. Deepak Chopra and Mr.
Harpreet Singh Ajmani, Ms.
Ashmita, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE HARISH VAIDYANATHAN
SHANKAR
JUDGMENT
YASHWANT VARMA, J.
1. These two appeals pertain to Assessment Years1 2009-10 and
2012-13 and raise the question of whether the Advertisement,
1
AYs
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By:KAMLESH KUMAR
Signing Date:07.03.2025
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Marketing and Promotion2 expenditure incurred by the respondent-
assessee would constitute an “international transaction” as
contemplated under Section 92B read along with Section 92F of the
Income Tax Act, 19613.
2. The appeals were originally admitted by us in terms of an order
dated 12 March 2024. We had on that date after hearing learned
counsels for respective sides framed the following two questions which,
according to us, arose for our consideration: –
“(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
business of manufacture, sale, marketing and trading of Indian
Made Foreign Liquor. The IMFL was sold under brands owned
and licensed to the Beam Global Group of which Fortune Brands
is stated to be the ultimate holding company. Fortune Brands was
the parent entity of Beam India Holding.
3. In the course of undertaking a Transfer Pricing Study, the
Transfer Pricing Officer took note of the following international2
AMP
3
Act
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transactions which are stated to have been entered into by the
respondents. The said international transactions are noted in
paragraph 6 of the order of the Income Tax Appellate Tribunal
and which reads thus: –
“6. The international transactions entered into by the assessee
during the year are as under:
S.No. Nature of transaction Value ofMAM
International
transaction
Purchase of compound 159120097 TNMM
1
Alcoholic Preparation
Distribution of Imported 17280852 RPM
2
Liquor
Provision of Marketing 10782778 TNMM
3
Support services
Re-imbursement of 19067033 No
4
Expenses
No bench
5 Recovery of expenses 721078
marking
4. The Tribunal records that although the TPO did not
interfere with the benchmarking in respect of transactions listed at
S. No. 1, 4 and 5, it came to the conclusion that the assessee had
incurred “an extremely high level of advertising and market
promotion expenditure [AMP]”. It thus proceeded to come to the
conclusion that the aforesaid would be liable to be treated as an
international transaction and, consequently, an Arm’s Length
Pricing study being commenced.
5. The Tribunal has, however, faulted the procedure as
adopted by the TPO by observing as follows: –
“29. In our understanding of the facts and law,
mere agreement or arrangement for allowing use of their
brand name by the AE on products does not lead to an
inference that there is an “action in concert” or the parties
were acting together to incur higher expenditure on AMP
in order to render a service of brand building. Such
inference would be in the realm of assumption/surmise.
In our considered opinion, for assumption of jurisdiction
u/s 92 of the Act, the condition precedent is an
international transaction has to exist in the first place.
The TPO is not permitted to embark upon the bench
marking analysis of allocating AMP expenses as
attributed to the AE without there being an ‘agreement’ or
‘arrangement’ for incurring such AMP expenses.
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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 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,
bearing in mind a failure on the part of the Department to have
alluded or referred to any arrangement which may have qualified
as a “transaction” as defined in the Act. It is in the aforesaid
context that the Tribunal has observed that it was impermissible
for the TPO to have embarked upon a benchmarking analysis
pertaining to Advertising, Marketing and Promotion expenses
in the absence of an agreement or arrangement for incurring of
AMP having been found to exist.
7. We note that Section 92B of the Income Tax Act, 1961
speaks of a transaction between two or more Associated
Enterprises in the nature of purchase, sale or lease of tangible or
intangible property or provision of services, lending or borrowing
of money or any other transaction having a bearing on the profits
income, losses or assets of such enterprises. The expression
“transaction”, which appears in the principal part of Section 92B
(1) would have to draw colour from its definition comprised in
Section 92F(v) and which reads thus: –
“92F. In sections 92, 92A, 92B, 92C, 92D and 92E,
unless the context otherwise requires,–
(i) “accountant” shall have the same meaning as in the
Explanation below sub-section (2) of section 288;
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(ii) “arm’s length price” means a price which is applied
or proposed to be applied in a transaction between
persons other than associated enterprises, in uncontrolled
conditions;
(iii) “enterprise” means a person (including a
permanent establishment of such person) who is, or has
been, or is proposed to be, engaged in any activity,
relating to the production, storage, supply, distribution,
acquisition or control of articles or goods, or know-how,
patents, copyrights, trade-marks, licences, franchises or
any other business or commercial rights of similar
nature, or any data, documentation, drawing or
specification relating to any patent, invention, model,
design, secret formula or process, of which the other
enterprise is the owner or in respect of which the other
enterprise has exclusive rights, or the provision of
services of any kind, [or in carrying out any work in
pursuance of a contract,] or in investment, or providing
loan or in the business 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 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
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of Finance Act, 2012 with retrospective effect from 01 April 2002
and in terms of which AMP came to be included in the ambit of an
international transaction, the question which would still survive for
consideration and merit an answer would be whether absent an
agreement or arrangement for incurring AMP expenses, an
international transaction could be said to have come into existence
so as to trigger the further process of ALP analysis in accordance
with Section 92C of the Act.
9. We also bear in consideration the following pertinent
observations that came to be rendered by the Court in Maruti
Suzuki India Ltd. v. Commissioner of Income Tax:-
“44. However, in the present appeals, the very existence
of an international transaction is in issue. The specific
case of MSIL is that the Revenue has failed to show the
existence of any agreement, understanding or
arrangement between MSIL and SMC regarding the
AMP spend of MSIL. It is pointed out that the bright line
test 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 arm’s length price 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 bright line test as a
legitimate means of determining the arm’s length price of
an international transaction involving AMP expenses, the
very basis of the Revenue’s case is negated.
45. Since none of the above issues that arise in the
present appeals were contested by the assessees who
appeals were decided in the Sony Ericsson case, it cannot
be said that the decision in Sony Ericsson, to the extent it
affirms the existence of an international transaction on
account of the incurring of the AMP expenses, decided
that issue in the appeals of MSIL as well. In this context,
para 52 of the decision in Sony Ericsson has to be read as
a whole. It reads as under (page 157 of 374 ITR):
“The contention that AMP expenses are not
international transactions has to be rejected. There
seems to be an incongruity in the submission of 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,
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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 an international
transaction as a result of the AMP expenses incurred by
MSIL. Although the Revenue seems to contend that the
bright line test was used only to arrive at the quantum of
the transfer pricing adjustment, the order of the Transfer
Pricing Officer in the present case proceeds on the basis
that an international transaction can be inferred only
because the AMP expenses incurred were significantly
higher that what was being spent by comparable entities
and it was also used for quantifying the amount of the
transfer price adjustment. Consequently, the court does
not agree with the submission of the learned Special
counsel for the Revenue that dehors the bright line test,
which has been rejected in the Sony Ericsson judgment,
the existence of an international transaction on account
of the incurring of the AMP expenses can be established.
48. The submission also proceeds on the basis that since
MSIL pays royalty to the foreign associated enterprise
and makes payment in respect of the use of copyright
and patent, the benefit emanating from the AMP function
cannot be said to be enjoyed by MSIL alone. It also
proceeds on the basis that the benefits to the associated
enterprise from AMP function would be same as in the
case of a distributor namely increase in sale of raw
material, increase in royalty, and increase in copyright
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and patent payments, etc. The court finds that these
submissions are not based on any empirical data and
proceeds more on the basis of surmises. Royalty
payments have been separately assessed for transfer
pricing purposes. Likewise, payments for copyrights and
patents have also been separately treated.
49. As far as the benefit to the associated enterprise, i.e.,
SMC, is concerned, the Revenue has been unable to
counter the submission on behalf of the MSIL that by the
time SMC acquired a controlling interest in MSIL in
2002, the Maruti brand had already built a huge
reputation. A significant amount of AMP expenses had
already been incurred by MSIL on its products. These
products carried the co-branded mark “Maruti-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 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
Revenue that in a particular situation of independent
distributors/licensed manufacturers matters relating to
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promotion of a brand of a foreign associated enterprise
would necessarily be a matter of negotiation between the
parties and not necessarily be reduced to writing as part
of an agreement between them.
58. It is necessary at this juncture to discuss the reasons
for enactment of Chapter X in the Act with the whole
new scheme of provisions concerning transfer pricing in
the form of sections 92B to 92F.
59. Nevertheless, there is no specific mention of AMP
expenses as one of the items of expenditure which can be
deemed to be an international transaction. For this
purpose, section 92B(1) read with section 92(1) becomes
significant. Under section 92B(1) an “international
transaction” means:–
“(a) a transaction between two or more associated
enterprises, either or both of whom are non-resident
(b) the transaction is in the nature of purchase, sale
or lease of tangible or intangible property or provision
of service or lending or borrowing money or any other
transaction having a bearing on the profits, incomes or
losses of such enterprises, and
(c) shall include a mutual agreement or arrangement
between two or more associated enterprises for
allocation or apportionment or
contribution to the any cost or expenses incurred or
to be incurred in connection with the benefit, service or
facility provided or to be provided to one or more of
such enterprises.”
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 associated enterprise 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 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
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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 “arrangement” or “action in
concert” between MSIL and SMC as regards 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.
Step wise analysis of statutory provisions
62. If a step by step analysis is undertaken of sections
92B to 92F, the sine qua non for commencing the
transfer pricing 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 arm’s length price by applying one of the
five price discovery methods specified in section 92C.
The fourth step would be to compare the price of the
transaction that is shown to exist with the arm’s length
price and make the transfer pricing adjustment by
substituting the arm’s length price for the contract price.
63. A reading of the heading of section 92 of Chapter X
(“Special provisions relating to avoidance of tax”) and
section 92(1) which states that any income arising from
an international transaction shall be computed having
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regard to the arm’s length price, section 92C(1) which
sets out the different methods of determining the arm’s
length price, makes it clear that the transfer pricing
adjustment is made by substituting the arm’s length price
for the price of the transaction. To begin with there has
to be an international transaction with a certain disclosed
price. The transfer pricing adjustment envisages the
substitution of the price of such international transaction
with the arm’s length price.
64. The transfer pricing 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 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
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 for this activity. It is urged that
merely because MSIL and SMC do not have an explicit
arrangement/agreement on this aspect cannot lead to the
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inference that there is no such arrangement or the entire
AMP activity of the Indian entity is unilateral and only
for its own benefit. According to the Revenue, “the only
credible test in the context of transfer pricing provisions
to determine whether the Indian subsidiary is incurring
AMP expenses unilaterally on its own or at the instance
of the associated enterprise is to find out whether an
independent party would have also done the same.” It is
asserted: “An independent party with a short-term
agreement with the multi-national company will not
incur costs which give long-term benefits of brand and
market development to the other entity. An independent
party will, in such circumstances, carry out the function
of development of markets only when it is adequately
remunerated for the same”.
67. Reference is made by Mr. Srivastava to some sample
agreements between Reebok (UK) and Reebok (South
Africa) and IC Issacs and Co and BHPC Marketing to
urge that the level of AMP spend is a matter of
negotiation between the parties together with the rate of
royalty. It is further suggested that it might be necessary
to examine whether in other jurisdictions the foreign
associated enterprise, i.e., SMC is engaged in AMP/
brand promotion through independent entities or their
subsidiaries without any compensation to them either
directly or through an adjustment of royalty payments.
Absence of a machinery provision
68. 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 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
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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’s length price so determined. The second
proviso to section 92C(2) provides a “gateway” by
stipulating that if the variation between the arm’s length
price and the transaction price does not exceed the
specified percentage, 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 international
transaction. Next, to ascertain the disclosed “price” of
such transaction and thereafter ask whether it is an arm’s
length price. If the answer to that is in the negative the
transfer pricing adjustment should follow. The objective
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of Chapter X is to make adjustments to the price of an
international transaction which the associated enterprises
involved may seek to shift from one jurisdiction to
another. An “assumed” price cannot form the reason for
making an arm’s length 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 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 such expenses as
revenue expense in terms of section 37 of the Act. It is
not for the Revenue to dictate to an entity how much it
should spend on AMP. That would be a business
decision of such entity 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
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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 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 ?
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
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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
which provides the necessary checks against arbitrariness
while at the same time addressing the apprehension of
tax avoidance.
76. As explained by the Supreme Court in CIT v. B. 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.”
10. As is manifest from a reading of the aforesaid passages
appearing in Maruti Suzuki, the existence of an international
transaction cannot be presumed to have been consummated merely
because the quantum of expenditure incurred exceeds the spend
under that head by comparable entities. It was this which
constrained our Court to observe that it would be wholly
impermissible to decide the issue of an international transaction on
mere inference and the fact that the expenditure incurred was
“significantly higher”. Of equal import are the conclusions of the
Court of no matter how wide the expanse of the word transaction
may be assumed to be, it would still be incumbent upon the
respondents to establish that there was in fact in existence an
understanding, arrangement or steps taken by AEs‟ which would
satisfy the test of acting in concert.
11. More importantly and prima facie, the appellants clearly
appear to ignore the note of caution which was struck in Maruti
Suzuki and when the Court observed “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 presumed to involve an
international transaction. and this, notwithstanding that this is not
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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 Liquor4. 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 Officer5 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 there is a possibility that the objective of the heightened level
of AMP expenditure is to expand the reach of the AE’s brand in
India. The AE is the legal owner of the brand. Therefore the
beneficiary of the efforts of the assessee is the AE as the brand value4 IMFL
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increases significantly given the efforts of the assessee. The assessee
is thereby creating marketing intangible in favour of the AE. The
OECD has made an attempt to differentiate between “marketing
intangibles” such as trademarks, trade names, customer lists and
distribution channels from “trade intangible” such as
manufacturing know-how and trade secrets. For the sake of
convenience Para 6.3 and 6.4 of OECD’s “Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations”
edition 2010 is reproduced as under:…….”
xxxx xxxx xxxx
5.2 It is a well-accepted principle that investment in “marketing
intangibles” is derived from amongst other company’s level of
advertisement and marketing and promotion (in short AMP)
expenditure particularly those that transcend from routine cost. It is
also an accepted principle that agent should be reimbursed or
compensated for this additional AMP expenditure along with service
charges. This view gets support from OECD guidelines in Para 6.36
to 6.38….
xxxx xxxx xxxx
5.6 The Australian Tax office (ATO)’s reaction to the “marketing
intangible” is more well developed. Although the OECD’s work on
this has been limited, the ATO issued on its website, on Jan 25,2006
new guidelines and clarification “international transfer pricing”
“marketing intangible” examples to show how the tax office will
determine an approx reward for marketing activities performed by
an enterprise using trademarks. The ATO has further explained
“bright line” test. It has been 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 meetSignature Not Verified
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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 the parent AE
and corresponding adjustment should be made. The Hon’ble High
Court in the case of Sony Mobile Communication [India] Pvt Ltd.
has rejected the contention of revenue on the applicability of bright
line test and corresponding calculations. The Department has filed
an appeal against the order of the Hon’ble High Court and contested
the judgment before the Hon’ble Supreme Court. Accordingly, the
primary contention of this office remains the same as in earlier
years.
1.3 The ratio of AMP/Sales in the case of the tested party has been
computed as under:
Expenditure on AMP 1119028161
Value a/Gross Sales 3135762021
35.69%
xxxx xxxx xxxx
1.5 In view of the discussions in the foregoing paragraphs I am of
the considered view that the expenditure incurred on AMP by the
taxpayer and thereby promoting the brand/trade name owned by the
AEs, is an international transaction and the same has neither been
reported in Form 3CEB nor has been benchmarked in transfer
pricing study. I am of the considered view that the onus which was
on the taxpayer to benchmark the international transaction relating to
the expenditure incurred on AMP has not been discharged. I
therefore propose to benchmark the transactions relating to “AMP”.
xxxx xxxx xxxx
1.8 In order to benchmark the transactions, I propose to compare
AMP expenditure of the tested party with AMP expenditure of other
comparables engaged in similar business using Advertisement and
Marketing and Promotional expenditure (including trade discount
and volume rebate) to the sales ratio for comparability analysis. For
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the purpose of comparability, I propose to use the current year’s data
(March, 2012).”
7. Consequent to the objections taken by the respondent-assessee
coming to be rejected by the Dispute Resolution Panel6 and orders of
assessment being framed, appeals came to be instituted before the
Income Tax Appellate Tribunal7. 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
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 third party as this is a also incurred to
meet the aspirational needs of a consumer to own a globally branded
product.”
8. Upon considering the rival submissions which were addressed, it
has thereafter come to render the following findings: –
6 DRP
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“23. In our considered opinion, while dealing with the issue of bench
marking of AMP expenses, the Revenue needs to establish the
existence of international transaction before undertaking bench
marking of AMP expenses and such transactions cannot be inferred
merely on the basis of BLT. For this proposition, we draw support
from the judgment of the Hon’ble Delhi High Court in the case of
Maruti Suzuki India Ltd 381 ITR 117.
“13. In this case, the Hon’ble High Court held that
existence of an international transaction needs to be
established de hors the Bright Line Test. The relevant
finding of the Hon‟ble High Court reads as under:
“43. Secondly, the cases which were disposed of by
the judgment, i.e. of the three Assessees Canon,
Reebok and Sony Ericsson were all of distributors of
products manufactured by foreign AEs. The said
Assessees were themselves not manufacturers. In any
event, none of them appeared to have questioned the
existence of an international transaction involving the
concerned foreign AE. It was also not disputed that
the said international transaction of incurring of AMP
expenses could be made subject matter of transfer
pricing adjustment in terms of Section 92 of the Act.
44. However, in the present appeals, the very
existence of an international transaction is in issue.
The specific case of MSIL is that the Revenue has
failed to show the existence of any agreement,
understanding or arrangement between MSIL and
SMC 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
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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 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 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’, itSignature Not Verified
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is still incumbent on the Revenue to show the
existence of an ‘understanding’ or an ‘arrangement’ or
‘action in concert’ between MSIL and SMC as regards
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 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 agreement or
arrangement for allowing use of their brand name by the AE on
products does not lead to an inference that there is an “action in
concert” or the parties were acting together to incur higher
expenditure on AMP in order to render a service of brand building.
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Such inference would be in the realm of assumption/surmise. In our
considered opinion, for assumption of jurisdiction u/s 92 of the Act,
the condition precedent is an international transaction has to exist in
the first place. The TPO is not permitted to embark upon the bench
marking analysis of allocating AMP expenses as attributed to the AE
without there 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 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 Enterprise8 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
8
AE
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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 Tax9 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 contention of the Revenue that the mere
rendering of service by one party to another would constitute a
transaction irrespective of whether the same was based on a mutual
agreement or an arrangement and which would qualify the prescriptions
provided in Section 92F of the Act. It was further pertinently observed
that the mere opinion of the TPO that the AMP expenditure was
excessive when compared with the expenditure incurred by comparable
entities would not justify the commencement of a benchmarking
analysis.
11. The Court in Maruti Suzuki had further observed that the
Revenue‟s approach of seeking to benchmark every AMP expenditure
incurred by an entity which happens to use a brand owned by a foreign
9
2015 SCC OnLine Del 13940
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AE and is licensed for use as leading to a presumption of an existence
of an international transaction was wholly untenable. It was thus
categorically held that unless the expenditure pertained to a transaction
as defined by Section 92F and the same meeting the thresholds
prescribed therein, it would be wholly impermissible for an
international transaction being presumed to exist and a benchmarking
analysis being undertaken.
12. It becomes pertinent to note that the principles enunciated by the
Court in Maruti Suzuki have been consistently followed and reiterated
by various judgments as would be evident from the discussion which
ensues. In Commissioner of Income Tax (LTU) vs. Whirlpool India
Ltd.10 our Court observed as under: –
“38. The clauses of the trade name licence agreement 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 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 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.
10 2015 SCC OnLine SC 14314 Signature Not Verified Digitally Signed ITA 155/2022 & 156/2022 Page 26 of 38 By:KAMLESH KUMAR Signing Date:07.03.2025 15:09:32 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 Tax11, the position in law as noticed above came to be
reiterated in the following words: –
“54. Under sections 92B to 92F, the pre-requisite for commencing
the transfer pricing 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 arm’s
length price by applying one of the five price discovery methods
specified in section 92C. The fourth step would be to compare the
price of the transaction that is shown to exist with that of the arm’s
length price and make the transfer pricing adjustment by substituting
the arm’s length price for the contract price.
xxxx xxxx xxxx
60. The transfer pricing 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 that an international transaction exists and then
proceeding to make the adjustment of the difference in order to
determine the value of such AMP expenditure incurred for the
associated enterprise. In any event, after the decision in Sony
Ericsson (supra), the question of applying the bright line test to
determine the existence of an international transaction involving
AMP expenditure does not arise.
xxxx xxxx xxxx
62. In the present case, the mere fact that B&L, USA, through B&L,
South Asia, Inc. holds 99.9 per cent. of the share of the assessee will
not ipso facto lead to the conclusion that the mere increasing 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 to11 2015 SCC OnLine SC 14382
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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 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 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 international transaction. Next, to ascertain the disclosed
‘price’ of such transaction and thereafter ask whether it is an
arm’s length price. If the answer to that is in the negative the
transfer pricing adjustment should follow. The objective of
Chapter X is to make adjustments to the price of an
international transaction which the associated enterprises
involved may seek to shift from one jurisdiction to another.
An ‘assumed’ price cannot form the reason for making an
arm’s length price adjustment.
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 aSignature Not Verified
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quantitative adjustment by first determining whether the
AMP spend of 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 pricing exercise in the present case.. ..
The problem with the Revenue’s approach is that it
wants every instance of an AMP spend by an Indian entity
which happens to use the brand of a foreign associated
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.12 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 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 given12
2022 SCC OnLine Del 3977
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the efforts of the assessee. The assessee is thereby creating
marketing intangible in favour of the associated enterprises.
. .”
(emphasis supplied)
It is evident from the aforesaid that the Transfer Pricing Officer has
determined the existence of an international transaction on a matter
of a presumption, which runs counter to the decision of this court in
Maruti Suzuki (supra).
9. The Income-tax Appellate Tribunal while allowing the assessee’s
appeal for the assessment year 2009-10 has after considering the
material on record held that there was no international transaction
between the assessee and its associated enterprises. The relevant
findings of the Income-tax Appellate Tribunal are as under (page
369 of 67 ITR (Trib) :
“On a careful consideration of all these factors, including
the inconsistency in the approach of the Assessing
Officer/Transfer Pricing Officer with respect to the
advertising, marketing and promotion expenditure being in
the nature of an international transaction as expenditure
incurred on behalf of the assessee, including the quantum
and nature of expenditure and including lack of any material
to suggest that there was ‘an arrangement, understanding or
action in concert’ with respect of the expenditure incurred
by the assessee and including the fact that, in our considered
view, the expenditure incurred by the assessee was in the
nature of bona fide business expenditure in furtherance of
its legitimate business interests, we are of the considered
view that there is no legally sustainable basis for the
Transfer Pricing Officer 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
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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 Income-tax Appellate Tribunal as regards
the absence of any international transaction.”
15. In order to appreciate the submissions which were addressed by
Mr. Gupta, learned counsel appearing for the appellant, we deem it
appropriate to extract the provisions of Section 92B and 92F as they
exist today on the statute book hereinbelow: –
“92B. Meaning of International Transaction.–(1) For the
purposes of this section and Sections 92, 92C, 92D and 92E,
“international 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 any
contribution to, any cost or expense incurred or to be incurred in
connection with a benefit, service or facility provided or to be
provided to any one or more of such enterprises.
(2) A transaction entered into by an enterprise with a person other
than an associated enterprise shall, for the purposes of sub-section
(1), be deemed to be an international transaction entered into
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in relation to the 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 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, technical documentation such
as laboratory notebooks, technical know-how;
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(c) artistic related intangible assets, such as, literary works
and copyrights, musical compositions, copyrights, maps,
engravings;
(d) data processing related intangible assets, such as,
proprietary computer software, software copyrights,
automated databases, and integrated circuit masks and
masters;
(e) engineering related intangible assets, such as, industrial
design, product patents, trade secrets, engineering drawing
and schematics, blueprints, proprietary documentation;
(f) customer related intangible assets, such as, customer
lists, customer contracts, customer relationship, open
purchase orders;
(g) contract related intangible assets, such as, favourable
supplier, contracts, licence agreements, franchise
agreements, non-compete agreements;
(h) human capital related intangible assets, such as, trained
and organised work force, employment agreements, union
contracts;
(i) location related intangible assets, such as, leasehold
interest, mineral exploitation rights, easements, air rights,
water rights;
(j) goodwill related intangible assets, such as, institutional
goodwill, professional practice goodwill, personal goodwill
of professional, celebrity goodwill, general business going
concern value;
(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
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(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 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 are reproduced
hereinbelow: –
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“II. Section 92B of the Act, provides an exclusive definition of
International Transaction. Although, the definition is worded
broadly, the current definition of International Transaction leaves
scope for its misinterpretation.
The definition by its concise nature does not mention all the
nature and details of transactions, taking benefit of which large
number of International Transactions are not being reported by
taxpayers in transfer pricing audit report. In the definition, the term
“intangible property” is included. Still, due to lack of clarity in
respect of scope of intangible property, the taxpayer have not
reported several such transactions.
Certain judicial authorities have taken a view that in cases of
transactions of business restructuring etc. where even if there is an
international transaction Transfer Pricing provisions would not be
applicable if it does not have bearing on profits or loss of current
year or impact on profit and loss account is not determinable under
normal computation provisions other than transfer pricing
regulations. The present scheme of Transfer pricing provisions does
not require that international transaction should have bearing on
profits or 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
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,
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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
discernible and identified transaction between two or more AEs and
who may have mutually agreed or entered into an arrangement for the
allocation or apportionment of expenses proposed to be incurred. This
clearly flows from a reading of Section 92F itself and which defines a
transaction to include an arrangement, understanding or an action in
concert, irrespective of whether such arrangement be formally reduced
in writing or not, and notwithstanding such an arrangement,
understanding or action not being enforceable in law.
21. However, and as Maruti Suzuki correctly emphasised, the
existence of such a transaction, arrangement and understanding would
have to be found to exist before a benchmarking analysis is
commenced. It thus constitutes an indelible precondition and which
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would apply notwithstanding the insertion of the Explanation in Section
92B of the Act. In our considered opinion, the insertion of the
Explanation was merely aimed at lending clarity to the use of intangible
property and thus sought to allay all doubts that may have existed on
account of conflicting judicial interpretation. However, and
notwithstanding the insertion of the said Explanation, the Revenue
clearly does not stand absolved of proving or establishing the existence
of a transaction itself in the first instance.
22. As is manifest from the line adopted by the TPO and which came
to be affirmed by the DRP, the Revenue had abjectly failed to analyse
or examine the issue in the aforesaid light. The benchmarking analysis
was commenced solely on the basis of a perceived excessive
expenditure incurred by the respondent assessee with respect to AMP
and the consequential invocation of the Bright Line Test. It is this
procedure which had fallen for adverse comment of the Court in Maruti
Suzuki.
23. Regard must also be had to the fact that the deeming fiction
which came to be introduced in Section 92B(2) would undisputedly
have no impact or implication since sub-section (2) also speaks of the
existence of a prior agreement in relation to the relevant transaction.
This quite apart from the fact that the said amendment came to be
introduced by virtue of Finance (No. 2) Act, 2014 and with effect from
01 April 2015. The said amendment would thus have no application to
the AYs‟ with which we are concerned in these two appeals.
24. We are thus of the firm opinion that the Tribunal was justified in
setting aside the orders of assessment for reasons assigned therein and
consequently merits no interference.
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25. We would accordingly answer both the questions as posed in the
affirmative and against the appellant/Revenue. The appeals,
consequently, fail and shall stand dismissed.
YASHWANT VARMA, J.
HARISH VAIDYANATHAN SHANKAR, J.
MARCH 07, 2025/neha
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