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TMI Blog2025 (3) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 international transactions which are stated to have been entered into by the respondents. The said international transactions are noted in paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussion 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 unilat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts 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 Officer [TPO] 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 value 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 betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... routine AMP expenditure and such sale promotion expenditure would not be incurred by a third party as this is also incurred to meet 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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: - "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 AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking 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 Tax 2015 SCC OnLine Del 13940 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 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n should be ascertained, it cannot be left entirely to surmises and conjectures of the Transfer Pricing Officer. 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 Tax 2015 SCC OnLine SC 14382, 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 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 ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 given 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 inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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: - "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 notwithstandin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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