M/S. BOSE CORPORATION INDIA PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

“6.1. Further in view of the ratio of the Special Bench order in L.G. Electronics, we dismiss the ground/arguments raised by the assessee challenging the issue of jurisdiction of the TPO and uphold the same. We further hold the transaction to be an international transaction. Similarly the applicability of the bright line as a methodology for calculating the AMP is also decided in Revenue’s favour and the action is upheld and the issue is covered against the assessee. However as far as calculation of “bright line” is concerned we direct the TPO to correctly calculate the “bright line” keeping in mind that a fresh search of comparables be done following the directions of the Special Bench. Thus the TPO needs to carry out a fresh search for selecting the comparables after a proper FAR analysis making such adjustments which are warranted on facts, keeping the 14 parameters set out in para 17.4 of the order of the Special Bench. 6.2. We further direct the TPO to correctly calculate the AMP expenses by excluding the selling expenses as they do not from part of AMP basket of expenses as has been hold by a catena of decisions following the decision of L.G. Electronics (Special Bench). 6.3. The TPO shall also decide the application of mark-up by way of a speaking order in accordance with law following the precedent laid down in L.G. Electronics case where principally the issue of mark up has been upheld. 6.4. Accordingly in terms of the above directions the issues are restored back to the TPO with the direction to decide the same in accordance with law by way of a speaking order after giving the assessee a reasonable opportunity of being heard.” 2.2 Thereafter, the Revenue approached the Hon’ble Delhi High Court who were pleased to dispose of the matter vide order dated 23.08.2016 [ITA 462/2016 and ITA 635/2016] as under: -

“The revenue claims to be aggrieved by the orders of the Income Tax Appellate Tribunal (ITAT) and urges two questions of law. The first pertains to the AMP expenditure – for which the ITAT has remitted the matter for fresh consideration in the light of its previous Special Bench judgment in L.G. Electronics India Pvt. Ltd. v. ACIT 2013 (152) TTJ (Del) (SB) 273. Since L.G. Electronics (supra) itself has been partially reversed and the matter has been remitted to be reconsidered in light of the directions in Sony Ericsson Mobile Communications India Private Limited v. CIT 374 ITR 118, no question of law arises while considering the matter afresh. It goes 3 without saying that the directions in Sony (supra) will be kept in mind and duly applied. The second question urged is with respect to the service charges agreed but not shown during the year under consideration. On this, we notice that the principle of consistency was applied. Furthermore, this Court had in a previous order refused to frame a question of law (in Commissioner of Income Tax-I v. Bose Corporation India Pvt. Ltd. ITA 304/2013, (decided on 12.07.2013). No question of law arises. The appeals are accordingly dismissed as unmerited along with the pending application. S. RAVINDRA BHAT, J DEEPA SHARMA, J AUGUST 23, 2016 2.3 In the mean time it is seen that prior to the Hon’ble Delhi High Court’s order in the case, on 29.01.2016 the Ld.TPOpassed the order ostensibly in line with the directions given by the ITAT, while remanding the matter back. The Ld.TPO proposed the following adjustments: - i) Substantive adjustment: The TPO benchmarked the AMP expenses and made a substantive adjustment of Rs.7,91,74,731/- by adding a gross margin of 50.08% on the entire AMP expenditure incurred by the assessee; and ii) Protective adjustment: The TPO proposed a protective adjustment amounting to Rs.6,47,75,236/- by determining Bright Line (BLT) of 0.22% against the assessee’s AMP/sales of 10.32%. The TPO also applied a markup of 12.60% on the allegedly excessive AMP expenses incurred by the appellant.

While computing the substantive adjustment, the Ld. TPO applied the Cost – Plus Method. The Ld. TPO excluded the cost of neon signs and 4 event sponsorship from the scope of AMP expenses with regard to the substantive adjustment.

2.4 The assessee is seen to have approached the DRP where, through order dated 28.11.2016, it was held that the issue of the AMP expenses, being an International Transaction, was already settled by the order of the ITAT (in the first round). Thereafter, the DRP followed the Tribunal’s order and applied the BLT to arrive at allegedly excessive AMP expenses for the assessee. The Ld.DRP justified the computation of the adjustment made protectively on the basis of the BLT Method and retained this on a substantive basis. The Ld. DRP also directed the TPO to apply the gross profit margin of the assessee as provided markup on the adjustment computed on the basis of the BLT Method. In compliance to the directions of the Ld. DRP the Ld.AO/TPO worked out a final adjustment of Rs.8,67,50,494/- as under: - Value of Gross Sales 56,98,37,043 AMP/Sales of the comparables 0.22% Amount that represent the Bright Line 12,53,641 Expenditure on AMP by the assessee 5,87,80,494 Expenditure in excess by Bright Line 5,75,26,853 PLI 50.08% Mark-up 2,92,23,641 Cumulative Addition 8,67,50,494 It is important to note at this point that the Hon’ble Delhi High Court’s order (supra) was dated 23.08.2016 which was before the order of Ld.

DRP dated 20.11.2016. The order of the Hon’ble Delhi High Court was definitely not considered by the Ld. DRP as is visible from a plain reading of their order.

2.5 It is seen that during the course of hearing before the ITAT an interlocutory order was passed on 21.02.2020. Through this order a direction was given for filing a remand report by the Ld. DRP for determining two broad issues as under: - i) Whether AMP expenses incurred by the assessee constituted an International Transaction; and ii) In case the AMP constituted an International Transaction then it was directed to determine the amount of adjustment in light of the ruling of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Private Limited reported in 374 ITR 118 (Del). It was observed through this interlocutory order the ITAT had considered the fact that in the Sony Ericsson case (supra) it was directed to principally follow the “aggregate” approach for computing the AMP expenses adjustments, along with the distribution function. It was also directed that in case this is not feasible then only the “segregated” approach would need to be followed. It was observed by the ITAT that for computing the adjustment as per the directions of the Hon’ble High Court (supra),complete financial data of the comparables and the tested party would be required as it was not readily available at that stage.

2.6 In response to the interlocutory order of the ITAT, two remand reports are available before us. One remand report is by the DRP dated 09.11.2021 and the second is by the TPO, which is annexed to this remand report. In these remand reports for AYs 2007-08 & 2008-09 the authorities below have presumed that the issue of AMP expenses being International Transaction stood concluded against the assessee in the first round (supra). However, without prejudice to this proposition submissions have been made regarding the issue which may be summarized briefly for the sake of record: - i) the Hon’ble Delhi High Court in the Sony Ericsson case (supra) have held that AMP expenses constitute International Transaction within the meaning of section 92B of the Act; ii) Attempts to verify the existence of any agreement, arrangement or understanding between the assessee and the AE were not successful as the Ld. TPO is seen to have asked for information regarding the global/regional/local policy of the Bose group and the assessee company with regard to AMP and admittedly the same could not be provided to the extent desire by the Ld. TPO. The Ld. TPO concluded that a perusal of the TP report provided by the assessee gave substantial indication that such policies existed and were certainly utilized in the professional or commercial interaction between the assessee and its AE. The Ld. TPO concluded that there was a global policy/strategy of the group under which the assessee was incurring AMP expenses. iii) The Ld. TPO has mentioned that the assessee was asked to provide necessary agreements for purchase of goods and usage of trademark, but it appears that on this issue also sufficient documentation was not provided to the Ld. TPO, leading him to conclude that the AMP expenditure was part of an overall understanding and arrangement with the AE for the usage of the trademark. It has been mentioned by the Ld.

TPO that following the directions of the ITAT through the interlocutory order he was required to peruse all correspondence between the AE and the assessee in respect of the AMP expenses. It is mentioned that such details were not provided and therefore it was concluded that the assessee was being directed in entirety, by the AE with regard to the AMP expenses. iv) It is also recorded in the Ld. TPO’s order that the assessee was asked to submit the budget for expenses, including for AMP, and also communication between the assessee and the AE in this regard. The Ld.

TPO also asked for minutes of meetings of the Board of Directors and shareholders for the relevant financial years. It is seen from the Ld.

TPO’s order that here also the assessee apparently could not supply details to the extent desired by the Ld. TPO.

All these factors prompted the Ld. TPO to give a finding that there was an arrangement and understanding between the assessee and the AE regarding the quantum of AMP expenses and the way in which such expenses needed to be incurred. It is also a finding that the AE had total control over these expenses. This led to the conclusion that AMP was an International Transaction within the meaning of Section 92B r.w.s. 92F(v) of the Act. Thereafter, the Ld. TPO proceeded ahead with working out the AMP expenses and the amount of adjustment thereon. To illustrate the stand of Revenue the following picture emerges from the remand report:

TABLE A S. No. Nature of Expenses 2007-08 2008-09 Amounts Amounts 1. Expenses admitted by Assessee as 4,75,83,987 6,87,46,178 AMP 2. Expenses declared by Assessee as 51,71,029 22,59,718 “Selling & Distribution Expenses” 3. Expenses declared by Assessee as 60,25,476 72,93,513 “Neon Signs & Event Sponsorship” Total 5,87,80,492 7,82,99,409 Based on this working the Revenue has proposed the following conclusion: - TABLE B

AY 2007-08 AY 2008-09 AMP Expenses 5,87,80,494 7,82,99,410 Net Sales 56,98,37,043 89,38,53,149 % AMP Expenses/Turnover 10.32% 8.76% Comparables % AMP/Turnover 0.22% 2.43% 2.7 Thus, as a result of the exercise leading to the remand reports, the Revenue has proposed that the issue of the AMP Expenses is in the nature of International Transactions following the categorical finding in the first round of ITAT Orders, also following the judgment in the case of Sony Ericsson (supra) and also the inability of the assessee to supply relevant data and documents before the Ld. TPO during the course of remand proceedings. Both the Ld. AR and the Ld. DR were heard on the remand reports and on the issues before us.

3.1 The Ld. AR elaborated on these two things and argued that the Ld.

TPO/DRP could not prove the existence of any arrangement or agreement or even action in concert as per the provisions of section 92F(v) of the Act, to bring the impugned expenses within the ambit of “International Transactions”. It was stated that the assessee operates as a normal distributor and all profits or losses arising from Indian operations belong to him. It was taken pains to point out that the gross profit margin of Bose India was much more than the profit margin of comparables. The Ld. AR mentioned the following figures: -

Particulars AY 2007-08 AY 2008-09 Comparables 19.34% 13.02% 10 Bose India 50.08% 51.70% In this regard it was submitted that high gross profit margins of the assessee incorporated the reward for AMP Expenses incurred by the assessee. The Ld. AR relied on the case of Maruti Suzuki India Limited reported in 381 ITR 117 (Del), to canvass the point that the burden was on the Revenue to prove the existence of an International Transaction by presenting any agreement, understanding or arrangement regarding the AMP spent. It was argued that since there was no such arrangement or agreement existing between the assessee and the ALP hence, it could not be inferred that an International Transaction was in place. The Ld. AR attempted to distinguish the Sony Ericsson case (supra) by stating that in that case it was always presumed that an International Transaction existed regarding the AMP Expenses. It was averred that the substantial gross margin of M/s Bose India adequately demonstrated the fact that there could be no presumption that any kind of benefit has arisen to the AE with regard to the AMP Expenses incurred by the assessee. It was also submitted that even if the AMP Expenses incurred are held to be an International Transaction, there is no mechanism available under the TP regulation to enable any determination of the compensation entitled to an Indian entity. For this point the Ld. AR again referred to the case of Maruti Suzuki case (supra) that the approach used by the Revenue was based entirely on summarizes and conjectures.

3.2 The Ld. AR argued the point that the assessee operated at its own behest and performing all functions on its own account. The Ld. AR took us through the details of activities of the assessee in India through various notings in the paper books filed before us and attempted to demonstrate that M/s Bose India was its own master in terms of its commercial activities within India and was entitled to derive the benefit of any profit or loss arising thereon. It was the further submission that the AE was sufficiently careful in terms of protecting the value of its brand name and was deciding the overall policy regarding a market strategy which ensured healthy sales of its products in India. It was the submission that as a result of such a strategy, much higher gross margin as compared to the comparables used by the TPO were there to see (attention was drawn to the table in para 3.1 above).

3.3 The Ld. AR averred that AMP expenses need not always be directly related to any brand building exercise. The Ld. AR drew our attention to para 106 of the Sony Ericsson case (supra) in this regard. It was the further submission that following the Sony Ericsson case (supra) (paras 165 and 166 thereon) once an International Transaction was bench- marked using Resale Price Method (RPM) as the most appropriate method, then there would be no need to benchmark the AMP expenses separately. It was averred that if the adjusted gross margin of the assessee was higher than that of the comparables, as demonstrated, then it would prove that such gross margin already subsumed any alleged excess AMP expenses and also resulted in a substantial reward for incurring the AMP expenses, leading to the conclusion that the overall distribution arrangement is at arm’s length.

3.4 It was reiterated by the Ld. AR that the Ld. TPO had disregarded the Ld. DRP’s direction to exclude selling expenses and had included the same for working out the impugned adjustment. It was pointed out that this was in direct contravention of para 176 of the Sony Ericsson case (supra).

3.5 The Ld. AR argued from another angle also and stated that the BLT as a tool for benchmarking ALP transactions, which have been used by the Ld. TPO for working out adjustments on a protective basis and the Ld. DRP for directing that such protective adjustments should be converted to substantive once after following the BLT, was not permitted. It was the submission that in the Sony Ericsson case (supra), in para 121 the use of BLT has not been approved. The Ld. AR quoted from several judgments as under: i) Sony Ericsson case (supra): Though the clauses of the agreement in extenso go to show that WC was protective of its brand but it is not discernible from the clauses of the said agreement that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of WC. The revenue has been unable to explain why there should be a presumption that as a result of the agreement, there must have been an understanding between WC and WOIL that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might ensure to the brand of WC, a proportion of the AMP expenses incurred must be attributed to it. [Para 38]

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 expenses 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 expenses, 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. [Para 39] Revenue 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 emphasizes that wherethe price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would bethe ALP. BLT as a determinative tool has been expressly invalidated by the Court in Sony Ericsson Mobile Communication India (P.)Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 fDelhil. Therefore, it is not possible to view this as a machineryprovision. The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act whichindicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure isconcerned. [Para 40]” ii) Bausch & Lomb Eye Care (India) (P) Ltd. reported in 381 ITR 227: “60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by the assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise.” iii) The case of Whirlpool of India Limited reported in 381 ITR 154 (Del) “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.” It was pointed out that in the assessee’s own case for a subsequent assessment year (AY 2009-10) the Hon’ble Delhi High Court has stated that BLT could not be used following several judicial precedents. The Ld. AR thus, assailed the action of both TPO & DRP in terms of using the BLT to determine the ALP regarding AMP expenses. The Ld. AR also relied on several cases of Coordinate Benches of ITAT and the case of Honda Siel Power reported in 283 CTR 322 (Del). It was the submission that this fact alone would render the impugned order defective in the eyes of law.

i) The assessee is appointed as a non-exclusive distributor. This meant that the AE could appoint other whole sellers or distributors in India. ii) While the AE sells through the assessee but it also directly engages with some categories of large customers and sells its products directly.

In such circumstances, the assessee provides support services on such direct sales. In all such cases the marketing process remains the same and the pricing of the product and remuneration to the assessee are decided on a case-to-case basis. All such cases imply bundled services, where there is no segregation between cost of equipment and service expenses. The assessee has not segregated such expenses/costs but has aggregated the same for the purposes of determining ALP on its own. iii) The Ld. DR pointed out that the direct sales as a percentage of total sales for AY 2007-08 was 61.63% of the total and for AY 2008-09 it was 66.25% of the total sales. It was reiterated that the direct sales of the AE to Indian customers was significant in comparison to the sales made by the AE to the assessee. iv) A perusal of the agreement between the assessee and the AE shows that it was the responsibility of the assessee to market the products in India through all manner of marketing and advertising strategies even when the sales, marketing and cost plan of the assessee is approved annually by the AE. v) Thereafter the Ld. DR distinguished the case of the assessee from the facts of the case of Maruti Suzuki (supra) and Whirlpool (supra) by saying that in these two cases the assessees were manufacturers of products whereas here the assessee is merely a distributor. The Ld. DR stated that a combined reading of the facts of the case and several clauses of the agreement between the assessee and the AE revealed that both are acting in concert with each other from planning the budget to the eventual execution of the sales strategies. This point itself would prove that the AMP is an International Transaction in the case of the assessee. vi) The Ld. DR relied on the case of Sony Ericsson (supra) as the assessee is a non-exclusive distributor and hence the benefit of AMP expenses accrues directly to the AE. The Ld. DR relied on a Coordinate Bench decision in the case of Olympus Medical Systems India Pvt. Ltd. [ITA No.838/Del/2021] to canvass the point that an International Transaction is duly proved in this case.

4.1 The Ld. DR also drew our attention to various portions of the remand report of the TPO submitted in response to interlocutory order of the ITAT. It was pointed out that the ITAT had specifically directed the TPO to determine whether an International Transaction existed in the case or not with respect to AMP expenses. The Ld. DR pointed out that during the course of such remand proceedings the assessee was asked to supply a number of documents which could have helped in understanding the exact nature of the commercial relations between the assessee and the AE. However, very few documents were supplied to the Ld. TPO and thus, he was constrained to hold that the AMP expenses constituted International Transaction after observing that the quantum as compared to the comparables (second round proceedings) was 0.22% as compared to 9.42% of the assessee for AY 2007-08. It was further pointed out that a somewhat similar situation prevailed for AY 2008-09 also (AMP/Sales comparables – 2.43%; AMP/Sales of the assessee – 8.76%). It was also pointed out that while a top line growth in sales was visible from AY 2007-08 to 2008-09 but the gross profit margin was seen to be declining from 15.84% in AY 2007-08; 14.79% in AY 2008-09 and 10.78% in AY 2009-

The Ld. DR supported the conclusion of both the DRP and the TPO, through the remand reports, that there was an International Transaction concerning AMP expenses and thus, at least for this reason, the action of Ld. TPO was justified.

It is probably with this intention that interlocutory order (supra) referred earlier was directed at the Ld. DRP for giving a finding whether there was an International Transaction in the case or not. The Ld. TPO is seen to have relied on the fact that the assessee expressed inability to supply a number of documents requested for by the Ld. TPO and it was held that on the basis of documents available and the fact that the AE was totally in control of budgetary spends, both qualitatively and quantitatively, on AMP, was sufficient evidence to show that the AE was considerably benefitted from such expenses and hence, the assessee needed to be compensated thereon. At this stage it needs to be recapitulated that the Ld. TPO had worked out allegedly excessive expenses on AMP on a protective basis and had applied the BLT in doing so. At the level of Ld.

DRP the BLT has been accepted and the expenses worked out on protective basis were directed to be taken as substantive. Importantly in doing so the order of the Hon’ble Delhi High Court [dated 23.08.2016 (supra)] was not considered, whereby it was specifically directed that the directions in the case of Sony Ericsson (supra) needed to be duly applied.

It is also a point that the Ld. DRP had directed the TPO to examine and exclude selling expenses, but apparently this was not done by the Ld.

TPO and since that was not done hence it would not be fruitful to venture into any assessment of the AMP/Sales figure in case such expenses are excluded. At this stage we cannot also overlook a significant working regarding the gross profit margin comparison of the assessee and comparables. Even at the expense of repetition it needs to be mentioned that for AY 2007-08 the assessee’s gross profit margin was 50.08% as compared to the comparables’ margin of 10.90%. Similarly for AY 2008-09 the assessee’s gross profit margin is seen at 51.70% as compared to the comparables margin of 17.90%. Thus, to begin with we need to see whether the BLT can at all be used in the case of the assessee. We find that the answer has to be in the negative considering the following cases: i) Sony Ericsson case (supra); it has been held that while AMP expenses can be treated as International Transaction but the Bright Line Test is invalid. In fact in this case it has been held that the BLT has no statutory mandate and it is not necessary to subject AMP expenses to this test and consider non-routine AMP as a separate transaction. ii) Maruti Suzuki India Limited (supra); in this case the Hon’ble Delhi High Court held that it was on the Revenue to prove that AMP expenses incurred by an assessee constituted an International Transaction. It was further held that in the absence of any agreement, arrangement or understanding between the assessee and AE where such expenditure was for the AE’s benefit then an inference cannot be drawn that it is actually the situation even in the absence of an agreement. In fact in this case it has been held that when the Revenue resorted to a quantitative adjustment by initially determining whether the AMP expenses of the assessee on application of BLT were excessive and once the so called excessiveness was determined then using that to hold that the AMP expenses constituted an International Transaction. This particular line of reasoning was not approved. iii) Moet HennessyIndia PrivateLimited [450 ITR 555 (Del)]; in this case it has been explicitly held that the BLT lacks statutory backing and cannot be relied on as a valid method for determining either the existence or even the ALP of an International Transaction involving AMP expenses. In this case a somewhat similar condition prevailed, as compared to the present case, whereby in the absence of any material to suggest that there was an arrangement, understanding or any action in concert with respect to AMP expenses by the assessee and its AE then an International Transaction on the basis of BLT deserved to be negated.

A further review of judicial literature on the subject also shows that the issue of whether AMP expenses constitutes an International Transaction or not is still vide open as a number of cases mentioned in the body of this order are pending before the Hon’ble Apex Court, where SLP has been granted. Thus, this fact itself lends a degree of caution in the exercise to determine whether in this particular case the AMP constituted an International Transaction because by applying the BLT certain alleged excessive expenses under the head have been worked out.

5.1 After considering the judgments relied upon by both the sides and also after considering the specific directions given in the assessee’s own case by the Hon’ble Delhi High Court [order dated 23.08.2016 – (supra)], we need to confine ourselves to considering the issue in light of the case laws discussed above and especially the case of Sony Ericsson (supra).

The first broad issue pertains to whether AMP expenses constitute International Transaction and the consequential issue would be whether the BLT could be used for determining so called “excessive” AMP expenses. The question of AMP expenses, in principle, being International Transactions, has to be considered in the affirmative considering the observations in paras 52 and 53 of the Sony Ericsson case (supra), as under:

“52. The contention that AMP expenses are not international transactions has to be rejected. There seems to be an incongruity in the submission of the assessee on the said aspect for the simple reason that in most cases the assessed have submitted that the international transactions between them and the AE, resident abroad included the cost/value of the AMP expenses, which the assessee had incurred in India. In other words, when the assessed raise the aforesaid argument, they accept that the declared price of the international transaction included the said element or function of AMP expenses, for which they stand duly compensated in their margins or the arm's length price as computed.

The reasoning given for this is also contained in the said paragraphs, whereby the Hon’ble Court has mentioned that the assessees have admitted that the International Transactions between them and the AEs, resident abroad included the value of the AMP expenses, which the assessee has incurred in India. In the present case, there is an extract from the Ld. TPO’s report in the Remand Report (para 14.5 at page 26) stating that: “Para 4.2.20 of the TP Report of the assessee… states that, For the marketing function, the Indian entity gets support from Bose US.

The store design and structure lay-out remains broadly in line with the global concept. The content for the advertisement is also globally arrived at, with some customization done to suit the Indian market conditions. However, product positioning and broad parameters for advertising remain in line with the global standard….It further mentions that, Event participation primarily involves supporting large-scale events to promote the Bose brand…” A perusal of the documents before us does not reveal any dispute on this finding of the Ld. TPO. Furthermore, while some documents requisitioned by the Ld. TPO during the preparation of the Remand Report appear to be superfluous for deciding the issue at hand, but it is also not understood as to why certain documents like correspondences between the assessee and the AE regarding AMP could not be provided by the assessee. Also, when there is near total control by the AE, over the budget and the way in which AMP expenses are to be spent by the assessee, then it was all the more reason why the assessee should have been more forthcoming with documentation relevant for the assessment years under consideration. In this regard we do take cognizance of the argument of the Ld. AR that there is no specific document or contract between the assessee and the AE determining AMP expenditure, but following the Sony Ericsson case (supra), the relevant items of expenses needed to be tested for determining if the assessee and the AE were “acting in concert” or not. It deserves to be observed that this is not a case where the Ld. TPO has not attempted to investigate or examine this issue.Thus we need to refrain from proposing any decision about the applicability of the tests contained in the Sony Ericsson case (supra) to determine the presence, or absence of any “international transaction” in the present case, and rather concentrate whether any upward TP adjustment is possible in this case.

5.2 We observe that the situation is different regarding the application of the BLT for the purposes of working out “excessive” AMP expenses since not only in the Sony Ericsson case (supra), but even in the case of Maruti Suzuki India Ltd. (supra) and host of other cases following the judgment in the Sony Ericsson case (supra) the BLT has not been approved. To further underscore this point the paragraph 121 of the Sony Ericsson case (supra) deserves to be extracted as under: -

“Applying ‘bright line test’ on the basis of parameters prescribed in paragraphs 17.4 and 17.6 would be adding and writing words in the statute and the rules and introducing a new concept which has not been recognized and accepted in any of the international commentaries or as per the general principles of international 24 taxation accepted and applied universally. There is nothing in the Act or the rules to hold that it is obligatory that the AMP expenses must and necessarily should be subjected to ‘bright line test’ and the non-routine AMP expenses as a separate transaction to be computed in the manner as stipulated. [Para 121].” Thus, for the purposes of the present adjudication there is no hesitation in holding that the applying of BLT for the sake of protective or substantive TP Adjustment cannot be approved under any circumstances.

Thus, the very foundation for making the impugned TP adjustment in the first place is not made on any sound legal footing.

5.3 The next issue that deserves to be elaborated is whether in the present case the arrangement between the AE and the assessee was such that the assessee was inherently contributing, at its own expense, the brand building of the AE. In this regard, we need to refer again to the interlocutory order of the ITAT through which the Ld. DRP/TPO were expected to provide clarity on this aspect and other issues. It is noted from the Ld. TPO’s remand report that there is no written agreement or any contractual obligation on the part of the assessee to show that there was an inherent responsibility vested in the assessee to promote the AE,s brand name, notwithstanding the fact that the AE was in the driver’s seat in terms of determining the quantum of the budget and also the way in which expenditure would be incurred towards AMP. In this respect an illuminating extract from the case of Whirlpool of India limited (supra) may be mentioned:

“Though the clauses of the agreement in extenso go to show that WC was protective of its brand but it is not discernible from the clauses of the said agreement that WOIL was under any obligation to incur an extent of AMP expense for building the brand or mark of WC. The revenue has been unable to explain why there should be a presumption that as a result of the agreement, there must have been an understanding between WC and WOIL that WOIL will spend 'excessively' on AMP in order to promote the 'Whirlpool' brand in India. In other words, it is not clear why a presumption should be drawn that since an incidental benefit might ensure to the brand of WC, a proportion of the AMP expenses incurred must be attributed to it. [Para 38] 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 expenses 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 expenses, 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 anc conjectures of the TPO. [Para 39] Revenue 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 the provision refers to 'price' and to 'uncontrolled conditions'. It implicitly brings into play the BLT. In other words, it emphasizes that when 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 Mobile Communication India (P.) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi) 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. [Para 40]” It is clear that a prestigious foreign brand would be extremely conscious about its image and would not leave anything to chance when it came to ensuring that its brand implied a certain high value in the minds of the customers. To that extent if they are directing the amounts to be spent for AMP then it cannot be labeled as an exercise in building the brand at the expense of the assessee. Sustenance is also drawn from the case of Beam Global Spirits & Wine (India) (P.) Ltd. reported in 475 ITR 664 (Del), where discussing the issue of determining whether a high level of expenditure on AMP would lead to a presumption that an International Transaction had come into existence, the issue has been clarified through this case law, from which certain relevant extracts deserve to be recorded for reference:

“Upon considering the rival submissions which were addressed, the Tribunal has thereafter come to render findings that while dealing with the issue of bench marking of AMP expenses, the revenue needs to establish the existence of international transactions before undertaking bench marking of AMP expenses and such transaction cannot be inferred merely on the basis of BLT. [Para 8] The Tribunal has essentially intervened and set aside the orders of assessment in light of the revenue having failed to demonstrate on the basis of any tangible material that an international transaction between the assessee and its Associated Enterprise had come into existence. It has, thus, held that the existence of an international transaction cannot rest on a mere inference or surmise. In the context of these appeals it essentially held that it would be wholly erroneous to assume that the expenditure was incurred for the benefit of the AE merely because it was conceived or estimated to be excessive. The Tribunal has also, and it is opined, correctly held that the mere relationship between parties would not be sufficient to presume that an international transaction had come into being or that there was an arrangement in place to undertake AMP for the benefit of the brand owner. It was thus observed that before undertaking a benchmarking of AMP expenses, it was incumbent upon the TPO to have found that an international transaction had, in fact, occurred. [Para 9] The view that has been taken by the Tribunal, in essence, follows what the Court had enunciated in Maruti Suzuki India Ltd. vs. CIT [2015] 64 taxmann.com 150/237 Taxman 256/381 ITR 117 (Delhi). As is manifest from a reading of the passages from Maruti Suzuki (supra) extracted in that order, it is observed 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 (supra), the 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. 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 would not justify the commencement of a benchmarking analysis.. [Para 10] The Court in Maruti Suzuki {supra) had further observed that the revenue’s approach of seeking to benchmark every AMP expenditure incurred by an entity which happens to use a brand owned by a foreign AE and is licensed for use as leading to a presumption of an existence of an international transaction was wholly untenable. It was thus categorically held that unless the expenditure pertained to a transaction as defined by section 92F and the same meeting the thresholds prescribed therein, it would be wholly impermissible for an international transaction being presumed to exist and a benchmarking analysis being undertaken [Para 11].” • However, and as Maruti Suzuki case {SUPRA) correctly emphasized, the existence of such a transaction, arrangement an< understanding would have to be found to exist before a benchmarking analysis is commenced. It thus constitutes an indelible precondition and which would apply notwithstanding the insertion of the Explanation in section 92B. 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. [Par 21] • 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 analyze 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 (SUPRA) [Para 22] • 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, 201 and with effect from 1-4-2015. The said amendment would thus have no application to the relevant assessment year. [Para 23] • In the light of the aforesaid finding of the High Court, before embarking upon a benchmarking analysis, the revenue needs to demonstrate on the basis of tangible material or evidence that there exists an international transaction between the assessee and the AE. Needless to mention, that the existence of such a transaction cannot be a matter of inference. Thus, the Tribunal was justified in setting aside the orders of assessment for reasons assigned therein and consequently merits no interference. [Para 24]” The discussion and observation regarding the issue of Brand building, etc has also been dealt with in the Sony Ericsson case (supra) as under:

'Brand' has reference to a name, trademark or trade name. A brand like 'goodwill', therefore, is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. [Para 104] ■ There is a line of demarcation between development and exploitation. Development of a trademark or goodwill takes place over a passage of time and is a slow ongoing process. In cases of well recognized or known trademarks, the said trademark is already recognized. Expenditures incurred for promoting product(s) with a trademark is for exploitation of the trademark rather than development of its value.[Para 105] ■ There are a good number of examples where brands have been built without incurring substantial advertisement or promotion expenses and also cases where in spite of extensive and large scale advertisements, brand values have not been created. Therefore, it would be erroneous and fallacious to treat brand building as counterpart or to commensurate brand with advertisement expenses. Reputed brands do not go in for advertisement with the intention to increase the brand value, but to increase the sales and thereby earn larger and greater profits.[Para 106] ■ Branded products and brand image is a result of consumerism and a commercial reality, as branded products own and have a reputation of intrinsic believability and acceptance which results in higher price and margins. But a new brand/trade-mark/trade-name would be relatively unknown. The said position has been referred not to make a comparison between different brands but to highlight that these are relevant factors and could affect the function undertaken which must be duly taken into consideration in selection of the comparables or when making subjective adjustment, and thus, for computing the arm's length price. [Para 112] ■ Routine or day-to-day marketing or sale promotion expenses even, when excessive and exorbitant, would not amount per se to brand building expenses. Promotion of products go hand in hand and at most of the times brand is distinguishable from products as only by display of products in a particular manner or emphasis on a particular feature of the product, the consumer is given the message of what to expect from a given product. Hence, it is difficult to compartmentalize promotion of product or promotion of brand expenses and record them as separate from each other. It would be incorrect to treat advertisement as equivalent or synonymous with brand building for the latter in commercial sense refers to several facets and components. The primary being the quality and reputation of the product or name, which is acquired gradually and silently over a passage of time…… [Para 117] ■ While determining the arm's length price, the Indian assessee also benefits from the increased sales which results in higher profits and more taxable 29 income in India. AMP, i.e. advertisements, marketing and sale promotions, therefore, benefit both the Indian AE, i.e. the assessee and the foreign AE resident abroad. Same is true and correct position even in case of a distribution company, though in the said case sales would increase and there would not be any element of AMP. [Para 119] What is visible from the TPO’s remand report is that a number of documents were asked to be provided to him and the assessee could not submit the desired level of documentation either on the ground that such documents did not exist or on the other hand, were not available with the assessee. This action of the assessee has been construed to imply that there was an unwillingness to submit details which presumably were in possession of the assessee or its principal, whose wholly owned subsidiary the assessee was. Thus, what is visible from the documents before us is that there is no explicit understanding between the assessee and its AE regarding AMP expenditure earmarked for building the brand of the AE. This fact and the analysis in light of the case law cited (supra),would have been enough to negative the action of the authorities below but there is another angle to this issue which deserves to be discussed.

5.4 There is some precedent in the shape of the Sony Ericsson (supra) case and even in a later case of Sony India (P.) Ltd. reported in 469 ITR 495 (Del), that if the assessee has been adequately compensated for high AMP expenditure as compared to the comparables then also no upward adjustment was required to be made.Before mentioning the factual aspect of this issue once again, certain portions from the Sony Ericsson case (supra) deserve to be extracted as under:

“165. An external comparable should perform similar AMP functions. Similarly the comparable should not be the legal owner of the brand name, trade mark etc. In case a comparable does not perform AMP functions in the marketing operations, a function which is performed by the tested party, the comparable may have to be discarded. Comparable analysis of the tested party and the comparable would include reference to AMP expenses. In case of a mismatch, adjustment could be made when the result would be reliable and accurate. Otherwise, RP Method should not b adopted. If on comparable analysis, including AMP expenses, gross profit margins match or are within the specified range, no transfer pricing adjustment is required. In such cases, the gross profit margin would include the margin c compensation for the AMP expenses incurred. Routine or non-routine AMP expenses would not materially and substantially affect the gross profit margins when the tested party and the comparable undertake similar AMP functions.” Similarly, in the case of Sony India (supra) the following extracts are relevant for the present adjudication:

“15. Having heard the Ld. Counsel for the parties, and examined the record, the only issue, as noted at the outset, which arises for consideration, is whether the respondent/assessee was adequately compensated for expenses incurred for AMP activities carried out in India.” “17. Given the aforesaid facts, what emerges is that, in the period in issue, the respondent/assessee was only in the business of import and distribution of Sony products. The amount spent on AMP activities by the respondent/assessee in the relevant FY was Rs.119,54,43,600/-. 17.1 The compensation for this expense was, according to the Tribunal, received by the respondent/assessee in terms of higher profitability for the product sold. 17.2 Furthermore, even according to the TPO, the AMP expenditure incurred by the respondent/assessee resulted in increased sales in India for products, albeit developed by the AE but sold by the respondent/assessee.

persuade us to hold that no upward adjustment concerning AMP expenses ought to have been made.” The gross margin of the assessee and the comparables for AY 2007-08 to 2008-09 are reiterated as under: -

Particulars AY 2007-08 AY 2008-09 Comparables 19.34% 13.02% Bose India 50.08% 51.70% Even after working out the adjusted gross margin of the assessee and the comparables, the following picture emerges: -

Particulars AY 2007-08 AY 2008-09 Comparables 19.12% 10.59% Bose India 40.66% 43.10% A close look at both the set of tables reveal that the gross margins of the assessee are substantially in excess of the comparables, whichever way you look at it. Thus, even on the ground of adequacy of the margins, no upward adjustment is possible in the present case. It is another matter for consideration that while the Ld. DRP had specifically directed the Ld.

TPO for excluding the selling expenses while computing the AMP expenses, the Ld. TPO has omitted to do so. Presumably the Ld. DRP had ostensibly directed as such in line with a plethora of Coordinate Bench decisions and even the Sony Ericsson case (supra). Had this exercise being done then the figure of AMP/Sales of the assessee as well as the comparables would have presented marginally a different picture. Thus it deserves to be held thatsince it has been determined that the disclosed gross margins and the adjusted gross margins of the assessee are richer in comparison to the comparables, the fact of not giving benefit of selling expenses would not really matter for the present adjudication.

5.5 Considering the discussion on various issues pertaining to the adjustment made by the Ld. TPO, it is held that the BLT needs to be rejected as a tool for calculating ALP.Also, the generous gross margins visible to us would show that the assessee is adequately compensated for AMP expenses, excessive or otherwise. For all these reasons the action of the DRP/TPO cannot be supported in terms of any adjustment and the upward adjustment done in the case of the assessee deserves to be struck down.

Order pronounced in the open court on 23.01.2026

Sd/- Sd/- (VIKAS AWASTHY) (SANJAY AWASTHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 23.01.2026 *Kavita Arora, Sr. P.S.