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2015 (12) TMI 1332 - HC - Income TaxTPA - AMP expenses - existence of an international transaction - whether advertising, marketing and promotion expenses ( AMP ) incurred by the Assessee can be said to be incurred not only for the benefit of the Assessee but also by way of rendering the services of promoting the brand of the foreign associated enterprise ( AE ) namely B&L, USA? - Held that - It was not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of a transfer pricing adjustment in terms of Section 92 of the Act. The Assessee here has throughout been contesting the very existence of any international transaction involving AMP expenditure between the Assessee and its AE, i. e., B&L, USA. Further the Revenue has not been able to contest the submissions of Assessee that as far as the Assessee is concerned that it received no subsidy/subvention from its AE, which, however, was not the case of the Assessees in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT ).Therefore, it is not correct to contend that the decision in Sony Ericsson (supra), to the extent it has remanded the cases to the ITAT for a fresh consideration, would apply to the present appeals and that the same directions would have to issue in these appeals.Accordingly Question is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Existence of an international transaction - Held that - In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% 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 to the AE is itself sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. 2015 (12) TMI 634 - DELHI HIGH COURT On the issue of the intra group services, the Assessee is justified in contending that the re-characterization of its transaction involving its AE for the two years which have been fully disclosed in the TP Study on the basis of it not being for commercial expediency of the Assessee is clearly beyond the powers of the TPO and contrary to the legal position explained in EKL Appliances (2012 (4) TMI 346 - DELHI HIGH COURT ). For the aforementioned reasons the Court is satisfied that the Revenue has not been able to show the existence of an international transaction involving AMP expenses between the Assessee and its AE, B&L, USA. Question is accordingly answered in favour of the Assessee and against the Revenue.
Issues Involved:
1. Whether the advertising, marketing, and promotion (AMP) expenses incurred by the Assessee can be considered as an international transaction benefiting the foreign associated enterprise (AE). 2. Whether the Transfer Pricing Officer (TPO) was justified in applying a mark-up to the AMP expenses. 3. Whether the Dispute Resolution Panel (DRP) was correct in upholding the TPO's adjustments. 4. Whether the Income Tax Appellate Tribunal (ITAT) was justified in remanding the matter for fresh consideration. 5. Whether the principles laid down in the case of LG Electronics and Sony Ericsson are applicable to this case. 6. Whether the intra-group support services were correctly benchmarked. 7. Whether the AMP expenses can be categorized as an international transaction under the Income Tax Act. 8. Whether the Bright Line Test (BLT) is a valid method for benchmarking AMP expenses. 9. Whether the TPO is empowered to look into the reasonableness, quantum, and commercial expediency of AMP expenses. 10. Whether the AMP expenses incurred by the Assessee are fully deductible under Section 37(1) of the Act. 11. Whether the re-characterization of AMP expenses as services rendered to the AE is justified. Issue-wise Analysis: 1. AMP Expenses as International Transaction: The central issue was whether the AMP expenses incurred by the Assessee also benefited its foreign AE, Bausch & Lomb (USA). The Assessee argued that its marketing activities were focused on generating domestic sales and that it received no subsidy from its AE. The TPO, however, treated AMP expenses as an international transaction and applied a mark-up. The court found that the Revenue did not discharge its primary onus of showing the existence of an international transaction involving AMP expenses between the Assessee and its AE. 2. TPO's Application of Mark-up: The TPO applied a mark-up of 10% to 15.27% on the AMP expenses, determining the ALP of the AMP expenses and adding it to the Assessee's income. The court held that the TPO's action in marking up the AMP expenses was impermissible in law, as there was no arrangement for cost contribution to the AMP expenses and, therefore, the question of applying a mark-up did not arise. 3. DRP's Decision: The DRP upheld the TPO's adjustments, finding that the Assessee had developed marketing intangibles for its AE by incurring AMP expenses. The court, however, found that the Revenue did not demonstrate the existence of an international transaction involving AMP expenses, thus negating the DRP's findings. 4. ITAT's Remand: The ITAT remanded the matter to the TPO for fresh consideration, directing the TPO to decide the issue afresh in light of the Special Bench decision in LG Electronics. The court disagreed with this approach, noting that the decision in Sony Ericsson rejected the BLT and that the matter should not be remanded based on the LG Electronics case. 5. Applicability of LG Electronics and Sony Ericsson: The court noted that the decision in Sony Ericsson rejected the BLT for determining the existence of an international transaction involving AMP expenses. The court found that the Assessee's case was different from the cases in Sony Ericsson, as the Assessee was involved in both manufacturing and distribution, and received no subsidy from its AE. Thus, the decision in Sony Ericsson did not apply to the present case. 6. Intra-group Support Services: The Assessee argued that the intra-group support services were benchmarked in its TP study and shown to be at ALP. The court found that the re-characterization of the transaction by the TPO was beyond its powers and contrary to the legal position explained in EKL Appliances. 7. Categorization of AMP Expenses: The court held that the AMP expenses incurred by the Assessee could not be categorized as an international transaction under the Act, as there was no evidence of an agreement or understanding obliging the Assessee to spend excessively on AMP to promote the AE's brand. 8. Bright Line Test (BLT): The court rejected the use of the BLT for determining the existence of an international transaction involving AMP expenses, noting that the BLT had been expressly negatived in the Sony Ericsson decision. 9. TPO's Empowerment: The court held that the TPO was not empowered to look into the reasonableness, quantum, and commercial expediency of AMP expenses, as this would require re-characterizing the transaction, which was impermissible. 10. Deductibility under Section 37(1): The court found that the AMP expenses incurred by the Assessee were fully deductible under Section 37(1) of the Act, as they were incurred wholly and exclusively for the purpose of the Assessee's business operations in India. 11. Re-characterization of AMP Expenses: The court held that the re-characterization of AMP expenses as services rendered to the AE was not warranted under the provisions of the Act and the Rules. Conclusion: The court allowed the appeals of the Assessee and dismissed the appeals of the Revenue, holding that the Revenue failed to demonstrate the existence of an international transaction involving AMP expenses between the Assessee and its AE. The court also found that the TPO's application of a mark-up to the AMP expenses was impermissible and that the ITAT's remand based on the LG Electronics case was not justified.
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