ZIMMER INDIA PVT. LTD.,GURUGRAM vs. ACIT, GURGAON

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘I’: NEW DELHI BEFORE SHRI SATBEERE SINGH GODARA, JUDICAL MEMBER & SHRI MANISH AGARWAL, ACCOUNTANT MEMBER

ITA No. 1368/Del/2017 [Assessment Year: 2012-13] Zimmer India Private Limited Asstt. Commissioner of Income 6th Floor, Emkay Tower B& B1, Tax, Circle 4(1), Vanijya Nikunj, Udyog Vihar Vs Income Tax Department, Phase V, Gurgaon, Gurgaon, Haryana-122001 Harayan-122016. PAN: AAECS7432H APPELLANT RESPONDENT Appellant by Shri Vishal Kalra, Adv. & Shri Ankit Sahni, Adv. Respondent by Shri Mahesh Kumar, CIT DR Date of Hearing 01.06.2026 Date of Pronouncement 19.08.2026 ORDER PER MANISH AGARWAL, AM:

This appeal is filed by the assessee against the assessment order passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (“the Act”) dated 25.01.2017 for A.Y. 2012-13.

2 ITA No.1368/Del/2017 order on 28.01.2016 u/s 92CA(3) of the Act, making following adjustments: A. Advertising, marketing and promotion (AMP) expenses by applying Cost Plus method ₹ 4,38,32,839/- (substantive basis) B. AMP expenses by applying bright line test (BLT) ₹ 10,38,02,465/- (protective basis) 3. Thereafter, the AO passed the draft assessment order dt. 11.02.2016 wherein total adjustments of ₹ 4,38,32,839/- as proposed by TPO were incorporated and total income was proposed to be assessed at INR 11,83,38,040/-. Against such order, assessee filed objections before learned DRP who vide its order dated 29.11.2016 rejected the objections raised by appellant. The Assessing Officer thereafter, passed the final assessment order u/s 143(3) r.w.s. 144C(13) of the Act, dated 25.01.2017 wherein total income of the assessee was assessed at ₹ 11,83,38,040/- by making addition on account of transfer pricing adjustments of ₹ 4,38,32,839/-.

Grounds of appeal Nos. 1 & 2 are general in nature, 5. needs no adjudication.

3 ITA No.1368/Del/2017 international transaction and further holding that the AMP expenses are incurred for brand building services for the benefit of its Associated Enterprises (“AEs”) by applying Cost plus method. Further addition of ₹ 10,38,02,465/- was made on protective basis by applying bright line test (“BLT”).

4 ITA No.1368/Del/2017 sponsorship cannot be termed as AMP. Ld. AR submits that However, the AO/ TPO, without appreciating these facts has held that the AMP expenditure incurred by assessee towards third parties in India, accounts for brand building activities for its AEs in India, and that the assessee should be remunerated for carrying out such brand building activities for its AEs. The TPO /AO thus, proceeded on the premise that the expenditure incurred by the assessee is excessive, thus, it is an international transaction. The TPO has further placed reliance on the distribution agreement between Zimmer India and its AE to simply allege the existence of an agreement to incur 'excessive AMP' expenditure on behalf of AE, which as per assessee simply pertains to purchase and sale of Zimmer products in India and there was no understanding, what so ever in the agreement to depict that assessee is under obligation to incur 'excessive AMP' spend owing to any written arrangement between the assessee and its AE with the intention to promote the brand of foreign AE in India.

5 ITA No.1368/Del/2017 account. It is thus submitted that the assessee has incurred expenditure on AMP to cater to local market needs which were never incurred at the instance of its AE for brand promotion nor was there any mutual agreement or understanding or arrangement as to the allocation or contribution by the AE towards reimbursement of expenses incurred by the domestic company for its business. Therefore, it is prayed that the action of the AO/TPO in holding the AMP expenses as international transactions is contrary to the facts of the case and the adjustment made be deleted.

6 ITA No.1368/Del/2017 - Honda Siel Power Products: [2016] 283 CTR 322 (Delhi) - Bausch & Lomb Eyecare (India)(P) Ltd vs ACIT: [2016] 381 ITR 227 (Delhi) - MSD Pharmaceuticals (P) Ltd. vs DCIT: ITA No. 1423/Del/2015 - Pepsico India Holdings Pvt vs Addl. CIT: 2511/DEL /2013 - Moet Hennessy India Pvt Ltd vs ACIT: [2018] 173 ITD 55 (Delhi - Trib. - Sennheiser Electronics India (P.) Ltd vs ACIT: [2019] 101 taxmann.com 326 (Delhi - Trib.) - Goodyear India Ltd vs DCIT: ITA No. 5650/Del/2011 - Honda Siel Power Prodcts vs DCIT: ITA 1579 / DEL / 2017 - L'Oreal India Pvt Ltd vs DCIT: [2016] 49 ITR(T) 473 (Mumbai - Trib.) - Heinz India Pvt Ltd vs Addl. CIT: ITA No. 7732 / MUM / 2010 - Thomas Cook (India) Ltd vs DCIT: ITA No. 1261 & 1238/Mum/2015

7 ITA No.1368/Del/2017 39. “It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. 40. Mr. Srivastava submitted that Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions" could be construed as a machinery provision. But then that provision refers to ‘price’ and to ‘uncontrolled conditions’. It implicitly brings into play the BLT. 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 ALP. BLT as a determinative tool has been expressly invalidated by the Court in Sony Ericsson (supra).Therefore, it is not possible to view this as a machinery provision. The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. 41. Recently this Court has in its decision dated 11th December 2014 in ITA No. 110 of 2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) while interpreting the provisions of Chapter X of the Act observed: "the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour” rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is

8 ITA No.1368/Del/2017 envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP." 42. Again in Maruti Suzuki India Ltd. (supra) the Court held: "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 ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next step is to ascertain the disclosed 'price' of such a transaction and thereafter ask whether it is at ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 43. As regards allowing the entire expenditure under Section 37 of the Act, there is an obvious contradiction which was attributed to be resolved by the ITAT in the impugned order by asking the TPO to rework the AMP expenses into that which was incurred for building the brand of the foreign AE and that which was incurred wholly or exclusively for the benefit of the WOIL. In Sony Ericsson (supra) this was sought to be explained by stating that Section 37 and Chapter X operate in different domains and merely because an expense was incurred wholly or exclusively for the Indian entity it would not mean that it is also not incurred for the foreign AE. The question then is to what extent the Indian entity should be compensated for the expenses incurred by it on behalf of the foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian entity must be compensated. 44. Further in Maruti Suzuki India Ltd. (supra) this Court observed: "As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity Page | 8

9 ITA No.1368/Del/2017 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." 45. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 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 benefitted 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”. Conclusion 47. For the aforementioned reasons, the Court is of the view 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. 48. Question (i) in the Assessee's appeal viz., "Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read Page | 9

10 ITA No.1368/Del/2017 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 Rs. 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. 49. The impugned order of the ITAT and the corresponding orders of the DRP and the TPO, on the above issues are hereby set aside. The appeal of the Assessee, ITA No. 228 of 2015 is allowed and the appeal of the Revenue, ITA No. 610 of 2014 is dismissed in the above terms, but in the circumstances with no orders as to costs.”

11 ITA No.1368/Del/2017 case of Sony Ericsson Mobile Communications India Pvt Ltd vs CIT 374 ITR 118 = 2015- TII-06-HC-DEL-TP has discarded the BLT. The Hon’ble High Court, at para 120 held as under: "120. Notwithstanding the above position, the argument of the Revenue goes beyond adequate and fair compensation and the ratio of the majority decision mandates that in each case where an Indian subsidiary of a foreign AE incurs AMP expenditure should be subjected to the bright line test on the basis of comparables mentioned in paragraph 17.4. Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation. During the course of arguments, it was accepted by the Revenue that the TPOs/Assessing Officers have universally applied bright line test to decipher and compute value of international transaction and thereafter applied Cost Plus Method or Cost Method to compute the arm’s length price. The said approach is not mandated and stipulated in the Act or the Rules. The list of parameters for ascertaining the comparables for applying bright line test in paragraph 17.4 and, thereafter, the assertion in paragraph 17.6 that comparison can be only made by choosing comparable of domestic cases not using any foreign brand, is contrary to the Rules. It amounts to writing and prescribing a mandatory procedure or test which is not stipulated in the Act or the Rules. This is beyond what the statute in Chapter X postulates. Rules also do not so stipulate." 13. Thus 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 ascertaining, if there exists an international transaction of brand promotion services between the assessee and the AE. Accordingly, ground number 4 of the appeal of the assessee is allowed as the learned transfer-pricing officer has failed to demonstrate that there exist an international transaction between the assessee and its associated enterprises with respect to any AMP expenditure incurred by the assessee

12 ITA No.1368/Del/2017 14. In view of the above discussion and by respectfully following the judgment of Hon’ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd. vs CIT (supra), Sony Ericson Communications India Pvt. Ltd. vs CIT (supra), CIT vs Whirlpool of India Ltd. (supra) and of various decision of the coordinate benches of the Tribunal including in assessee’s own case, we hold that AMP expenditure are not international transaction and consequent adjustments under BLT method on protective and on substantive basis under Cost plus method are not in accordance with provisions of law and therefore, the same are hereby deleted. Grounds of appeal Nos. 3 to 16 of the assessee are allowed.

Sd/- Sd/-

[SATBEER SINGH GODARA] [MANISH AGARWAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 19.08.2026 *Amit Kumar, Sr.P.S.*

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