2025 (2) TMI 324 - AT - Income Tax

TP adjustment on account of advertisement marketing and promotion (AMP) expenses - constitute an international transaction under Section 92B or not? HELD THAT - This recurring issue raised in this appeal has been decided in favour of the assessee wherein it was held that there was no arrangement between the assessee and the AE pertaining to AMP expenses. Tribunal in the earlier years has held that the onus of proof lies on the Revenue to prove that there was an international transaction in existence. The proposition laid down in the case of Maruti Suzuki India Ltd. 2010 (7) TMI 84 - DELHI HIGH COURT is that the absence of a machinery provision qua AMP expenses the A.O. is not at liberty to levy tax on an imagined transaction. In such case the provisions of Chapter X cannot be invoked for making a TP adjustment. Tribunal has also relied on the decision of Bausch and Lomb (India) Pvt. Ltd. 2015 (12) TMI 1332 - DELHI HIGH COURT and held that the impugned transaction is not an international transaction for which the TPO was not entitled to invoke the provision of Chapter X of the Act. This issue is no longer resintegra and has been decided by the Tribunal in its earlier decision in favour of the assessee by holding that the impugned transaction is not an international transaction as per the provisions of the law - Decided in favour of assessee. Excess claim of refund - AR has fairly conceded that the issue has already been decided against it as in the case of DCIT vs Total Oil India P. Ltd 2023 (4) TMI 988 - ITAT MUMBAI (SB) has decided the issue in favour of the Revenue holding that DTAA does not get triggered at all when a domestic company pays DDT u/s 115-O of the Act. Thus the above grounds stand dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment revolve around the transfer pricing adjustments related to Advertisement, Marketing, and Promotion (AMP) expenses. The primary questions include:

Whether the AMP expenses incurred by the assessee constitute an international transaction under Section 92B of the Income Tax Act.
Whether the AMP expenses should be adjusted for arm's length pricing under Section 92CA(3) of the Act.
Whether the assessee's activities can be re-characterized as providing brand promotion services to its Associated Enterprises (AEs).
Whether the Bright Line Test (BLT) is an appropriate method for determining the arm's length price of AMP expenses.
Whether the assessee is entitled to a refund of excess Dividend Distribution Tax (DDT) paid, as per the India-France Double Taxation Avoidance Agreement.
Whether the initiation of penalty proceedings under Section 270A is justified.

ISSUE-WISE DETAILED ANALYSIS

1. AMP Expenses as International Transaction

Legal Framework and Precedents: The determination of whether AMP expenses are international transactions is governed by Section 92B of the Income Tax Act. The Tribunal considered precedents from earlier years and similar cases, including decisions from the Hon'ble Delhi High Court.
Court's Interpretation and Reasoning: The Tribunal found no explicit arrangement between the assessee and its AEs for incurring AMP expenses for brand promotion. The Tribunal relied on previous decisions where it was held that without a clear arrangement, AMP expenses do not constitute an international transaction.
Key Evidence and Findings: The Tribunal noted the absence of any agreement obligating the assessee to incur AMP expenses for the AEs' benefit. The Tribunal also observed that the assessee had consistently argued that these expenses were for its own business purposes in India.
Application of Law to Facts: The Tribunal applied the principles from previous judgments, concluding that the AMP expenses were not international transactions under Section 92B.
Conclusions: The Tribunal concluded that the AMP expenses do not qualify as international transactions and thus should not be subject to transfer pricing adjustments.

2. Arm's Length Price Adjustment

Legal Framework and Precedents: Section 92CA(3) of the Act provides for adjustments to the arm's length price of international transactions.
Court's Interpretation and Reasoning: The Tribunal rejected the TPO's use of the Bright Line Test (BLT) as an appropriate method for determining the arm's length price of AMP expenses, citing a lack of functional comparability.
Key Evidence and Findings: The Tribunal noted the TPO's selection of comparable companies was not aligned with the assessee's functional profile.
Application of Law to Facts: The Tribunal found that the BLT was not suitable for the assessee's case, as it did not account for the functional and risk profile differences.
Conclusions: The Tribunal directed the deletion of the transfer pricing adjustment related to AMP expenses.

3. Re-characterization of Entrepreneurial Activities

Legal Framework and Precedents: The Tribunal considered the economic organization of the L'Or'eal Group and the assessee's role as an entrepreneur licensee.
Court's Interpretation and Reasoning: The Tribunal agreed with the assessee's characterization as an entrepreneur in the Indian market, entitled to retain residual profits.
Key Evidence and Findings: The Tribunal observed that the assessee's activities were consistent with its entrepreneurial role and not merely brand promotion for AEs.
Conclusions: The Tribunal concluded that the AMP expenses were incurred for the assessee's entrepreneurial activities and not as a service to AEs.

4. Excess DDT Paid and Refund Claim

Legal Framework and Precedents: The claim involved the application of Article 11 of the India-France Double Taxation Avoidance Agreement and Section 115-O of the Act.
Court's Interpretation and Reasoning: The Tribunal referred to the decision in DCIT vs Total Oil India P. Ltd, holding that the DTAA does not apply to DDT.
Conclusions: The Tribunal dismissed the grounds related to the excess DDT refund claim.

5. Penalty Proceedings under Section 270A

Legal Framework and Precedents: The initiation of penalty proceedings is governed by Section 270A of the Act.
Court's Interpretation and Reasoning: The Tribunal deemed the initiation of penalty proceedings as premature and did not require adjudication.
Conclusions: The Tribunal did not address the penalty proceedings in detail, considering them premature.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal reinforced the principle that AMP expenses, without explicit arrangements, do not constitute international transactions. It emphasized the need for functional comparability in transfer pricing adjustments.
Final Determinations on Each Issue: The Tribunal allowed the appeal regarding AMP expenses, concluding they were not international transactions. It dismissed the excess DDT refund claim and did not address the penalty proceedings.
Verbatim Quote: "The Tribunal in its earlier years have decided this issue in favour of the assessee by holding that the same does not amount to international transaction and that there was no arrangement between the assessee and its AE pertaining to the AMP expenses."

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