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2025 (3) TMI 468 - HC - Income TaxTP Adjustment - international transaction - Advertisement Marketing and Promotion AMP expenditure incurred would constitute an international transaction as contemplated u/s 92B r.w.s. 92F or not? - ITAT justification in deleting addition on account of expenses incurred by the assessee for advertisement marketing and promotion AMP for brand-building for brand owned by the associated enterprise HELD THAT - 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. 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. 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. 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 2015 (12) TMI 634 - DELHI HIGH COURT 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. 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. Decided against revenue.
1. ISSUES PRESENTED and CONSIDERED
The primary issues considered in this judgment were:
2. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework revolves around Section 92B and Section 92F of the Income Tax Act, which define "international transaction" and "transaction," respectively. The judgment also considers the retrospective Explanation inserted in Section 92B by the Finance Act, 2012, which includes AMP expenses within the ambit of international transactions. Key precedents include the decisions in Maruti Suzuki India Ltd. v. Commissioner of Income Tax and Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT, which discuss the applicability of the Bright Line Test (BLT) and the necessity of proving an international transaction. Court's Interpretation and Reasoning The Court emphasized that the existence of an international transaction is a prerequisite for invoking transfer pricing provisions. It noted that the mere incurrence of AMP expenses does not automatically imply an international transaction unless there is a discernible transaction between the associated enterprises. The Court also highlighted that the Revenue must establish the existence of a transaction through tangible evidence rather than assumptions or inferences based on excessive AMP expenditure. Key Evidence and Findings The TPO's orders for the relevant assessment years were based on the premise that the AMP expenses incurred by the assessee were significantly higher than those of comparable entities, suggesting a benefit to the AE. However, the Tribunal found that the Revenue failed to demonstrate any agreement or arrangement constituting an international transaction. The Tribunal relied on precedents that rejected the BLT as a legitimate means of determining the arm's length price of an international transaction involving AMP expenses. Application of Law to Facts The Court applied the principles from Maruti Suzuki and Sony Ericsson, emphasizing that the Revenue must first establish the existence of an international transaction before proceeding with a benchmarking analysis. The Court found that the TPO's reliance on the BLT and the assumption of excessive AMP expenses as indicative of an international transaction was unfounded without tangible evidence of an agreement or understanding between the assessee and its AE. Treatment of Competing Arguments The Revenue argued that the high level of AMP expenses indicated a service provided to the AE, thus constituting an international transaction. However, the Court rejected this argument, reiterating that the existence of an international transaction cannot be presumed merely from the quantum of expenditure. The Court emphasized that the Revenue's approach, which presumed every instance of AMP spend by an Indian entity using a foreign brand as an international transaction, was untenable. Conclusions The Court concluded that the Tribunal was correct in setting aside the TPO's orders due to the lack of evidence demonstrating an international transaction. It affirmed that the Revenue must establish the existence of such a transaction through tangible evidence before undertaking a benchmarking analysis. 3. SIGNIFICANT HOLDINGS Verbatim Quotes of Crucial Legal Reasoning "The existence of an international transaction cannot rest or be founded upon a mere surmise or conjecture." "The Revenue clearly does not stand absolved of proving or establishing the existence of a transaction itself in the first instance." Core Principles Established
Final Determinations on Each Issue
The Court dismissed the appeals, affirming the Tribunal's decision and holding that the Revenue's approach was contrary to established legal principles.
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