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2015 (12) TMI 1188 - HC - Income TaxTransfer pricing adjustment - Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act? - Held that - As far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP. Question put as there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee s appeal is not required to be answered. Further, the only question framed in the Revenue s Appeal viz., Whether the ITAT erred in deleting the addition of ₹ 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act? is answered in the negative, i.e. in favour of the Assessee and against the Revenue.
Issues Involved:
1. Transfer pricing adjustment related to Advertisement, Marketing, and Sales Promotion (AMP) expenses. 2. Determination of the existence of an international transaction involving AMP expenses. 3. Application of the Bright Line Test (BLT) for AMP expenses. 4. Jurisdiction and correctness of Transfer Pricing Officer (TPO) adjustments. 5. Allowability of AMP expenses under Section 37(1) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment Related to AMP Expenses: The primary issue was whether the AMP expenses incurred by the Indian entity (the Assessee) for marketing and promoting the brand of its foreign associated enterprise (AE) should be considered for transfer pricing adjustments. The Revenue argued that the Assessee should be compensated or reimbursed by the foreign AE for the AMP expenses that benefited the AE's brand. The ITAT had earlier followed the decision in LG Electronics, which allowed TP adjustments for AMP expenses and adopted the Bright Line Test (BLT) to determine the arm's length price (ALP). 2. Determination of the Existence of an International Transaction Involving AMP Expenses: The court examined whether AMP expenses incurred by the Assessee could be categorized as an international transaction under Section 92B of the Income Tax Act. It was noted that there must be tangible evidence of a mutual agreement or arrangement between the Assessee and the AE for sharing AMP expenses. The court emphasized that the initial burden is on the Revenue to demonstrate the existence of such an international transaction. 3. Application of the Bright Line Test (BLT) for AMP Expenses: The court reiterated its stance from the Sony Ericsson case, rejecting the BLT as a valid method for determining the existence of an international transaction or its ALP. The court clarified that BLT is not recognized in international tax jurisprudence and cannot be used for bifurcating routine and non-routine expenses. 4. Jurisdiction and Correctness of Transfer Pricing Officer (TPO) Adjustments: The court scrutinized the TPO's methodology and jurisdiction in making TP adjustments for AMP expenses. It was highlighted that the TPO must first establish the existence of an international transaction before determining its ALP. The court found that the TPO's approach of presuming an international transaction based on excessive AMP expenditure was flawed and lacked statutory backing. 5. Allowability of AMP Expenses Under Section 37(1) of the Income Tax Act, 1961: The court addressed whether AMP expenses incurred by the Assessee were deductible under Section 37(1) of the Act. It was noted that expenses incurred wholly and exclusively for business purposes are allowable, even if they incidentally benefit a third party. The court concluded that the Assessee's AMP expenses were for its own business purposes and the incidental benefit to the AE did not warrant disallowance under Section 37(1). Conclusion: The court concluded that the Revenue failed to demonstrate the existence of an international transaction involving AMP expenses between the Assessee and its AE. Consequently, the question of determining the ALP of such a transaction did not arise. The court set aside the orders of the ITAT, DRP, and TPO on the issue of AMP expenses, allowing the Assessee's appeal and dismissing the Revenue's appeal.
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