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Income Tax Appellate Tribunal, DELHI BENCHES : H : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI ANUBHAV SHARMA
This appeal is preferred by the assessee against the final assessment order dated 18.02.2022 passed u/s 143(3) r.w.s. 254 r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the National Faceless Assessment Centre, Delhi (hereinafter referred to as the Ld. AO).
The facts in brief are that Fujitsu India Private Limited (‘Fujitsu India’/ the ‘Company’/ the ‘Assessee’) is a wholly owned subsidiary of Fujitsu Technology Solutions, Holding, B.V, Netherlands ('Fujitsu Netherlands’), incorporated in 1997. Fujitsu India is engaged in trading of IT products and provision of IT solutions and services in India. Portfolio of Fujitsu India includes servers, storage systems, workstations, notebooks, desktops & displays. Fujitsu India is also engaged in IT product, Maintenance and Support services. The International transactions undertaken by the Assessee during AY 2013-14 are : • Purchase of goods for trading • Purchase of spares • Provision of IT services • Receipt of IT services • Receipt of maintenance support services • Provision of business support services Purchase of fixed assets • Reimbursement/recovery of expenses 2.1 During the course of TP Assessment proceedings, the Ld. TPO, considered TNMM as the most appropriate method against RPM applied by the Assessee in the distribution segment. While doing the above, the Ld. TPO concluded the characterization of the Assessee. Further, the Ld. TPO did not allow the working capital adjustment to the operating profit margins of the comparables. Thus the Ld. TPO, vide order dated October 21, 2016, enhanced the income of the Assessee by INR 44,94,92,709 on account of change in most appropriate method for benchmarking the international transactions of the Assessee. The Dispute Resolution Panel (‘DRP’) upheld the approach followed by the Ld. AO/TPO, however allowed working capital adjustment to the Assessee in its the directions dated September 21, 2017. Additionally, the DRP also directed the Ld. TPO/AO to compute adjustment on account of non-receipt of the reimbursement for “allegedly excessive” AMP expenses by considering gross profit earned by the Assessee in its trading segment as an appropriate mark-up. The case of assessee is that DRP had not provided any opportunity to the Assessee in this respect. Pursuant to the DRP direction, the Ld. TPO computed an adjustment on account of AMP expenses incurred by the Assessee. Hence, on conclusion of the assessment proceedings i.e. receipt of the final assessment order, two adjustments were made - one on account of the margin earned in the distribution segment with change in the most appropriate method and second was in relation to the alleged excess AMP spend. The assessee approached this Tribunal and a co-ordinate bench ruled in favour of the Assessee for the adjustment made in the distribution segment, granting a relief of INR 41,74,29,552 by considering RPM as the MAM against the use of TNMM by the Ld.TPO. Then for the adjustment made in relation to alleged excessive spend on AMP, the bench remitted the matter back to the file of Ld. TPO for fresh adjudication, since the DRP did not provide any opportunity of being heard to the Assessee during the relevant course of proceedings, thereby setting aside the adjustment of INR 42,33,63,864 (refer page 153 to 155 of the appeal set).
2.2 Then Ld. TPO had via an initial notice sought certain information from the Assessee, post which a show cause notice ("SCN”) was issued wherein both a protective adjustment (using bright line test) and a substantive adjustment (using cost plus method), on account of alleged excessive spend on AMP had been proposed. Later on, another show cause notice was issued by the Ld. TPO proposing a different methodology for the purpose of said adjustment. In the said show cause notice the Ld. TPO changed the approach of benchmarking the alleged international transaction of AMP spend using profit split method. The Assessee vide submissions dated December 29, 2020 and December 17, 2020 contested / contended that the analysis carried but by the Ld. TPO was completely misplaced and any conclusions drawn there from were fallacious. The Ld. TPO rejected the contentions against the said reply and passed the order with the following approaches: (1) Adjustment on Substantive Basis 2.3 The Ld. TPO proposed an adjustment amounting to INR 4,13,09,280 on a substantive basis by applying Residual Profit Split Method (“RPSM”) which is extension of BLT for the purpose of benchmarking, the AMP expense incurred by the Assessee to determine the reimbursement of alleged non-routine AMP expenditure to be recovered from AE.
(2) Adjustment proposed on Protective basis The Ld. TPO proposed an adjustment amounting to INR 8,58,91,766 by applying bright line test to determine the amount of excessive AMP expenditure (or cost) incurred by Assessee. 2.4 Aggrieved with the draft assessment order, the Assessee filed its objections before the DRP which rejected the contentions of the Assessee and accordingly order giving effect to directions of the Hon’ble DRP was passed by the Ld. TPO dated February 16, 2022. Further final assessment order dated February 18, 2022 was passed by the Ld. AO. Aggrieved by the same, the Assessee filed this appeal before us raising following grounds:- “
1. That on the facts and circumstances of the case and in law, the draft assessment order/Transfer pricing (TP) order passed by the Learned Assessing Officer ("Ld. AO") /Learned Transfer pricing Officer ("Ld. TPO") is bad in law on account of adjustment made on Substantive basis and Protective basis.
2. That the Ld. TPO/Ld. AO erred on facts and in law by enhancing the income of the Appellant by INR 4,13,09,280 substantive basis, by holding that the Appellant should have been compensated by the AE (legal owner) for the alleged non-routine AMP expenses and in doing so have grossly erred in: 2.1. not appreciating that incurring of AMP expenditure by the Appellant for its own business and benefit does not constitute an "International Transaction' in terms of the Section 92B of the Act, thereby violating the principles laid down by the jurisdictional High Court in various cases, 2.2 misconceiving the facts by holding that the Appellant was promoting the Fujitsu brand and creating marketing intangibles for the legal owner, instead of appreciating that the Appellant was only carrying out its business and AMP functions were carried out on its own account in the normal course of business and had long term and exclusive distribution rights of products of the Fujitsu brand; 2.3. assuming jurisdiction in respect of AMP expense when such expenditure did not satisfy the requisites of being an international transaction under Section 92B read with Section 92F(v) of the Act 2.4. applying residual profit split method ("RPSM) to the alleged international transaction of AMP without appreciating that the said method s applied in circumstances totally different to that of the Appellant, 2.5. applying the said method in a manner which is highly inconsistent with what is prescribed under the provisions of the Act as well international guidance available; 2.6. erroneous computation of the operating margins on sales for the presumed comparable companies while performing the comparability analysis; 2.7. considering selling and distribution expenses as AMP spend for computing the AMP spend ratio; 2.8. not appreciating that the Hon'ble Income Tax Appellate Tribunal ("ITAT"), in the first round of proceedings held Resale Price Method ("RMP") as the most appropriate method ("MAM") for the trading segment. Using RPSM as the MAM for the alleged AMP expenses in the trading segment does not conform to the adjudication by the Hon'ble ITAT in the first round of proceedings (ITA No. 7088/Del/2017); and 2.9 without prejudice, not allowing the benefit of proportionate adjustment in relation to the AMP expenditure that was incurred for the overall business instead of only for the trading segment.
3. That the Ld. AO/Ld. TPO erred on facts and in law in proposing the adjustment to the income of the Appellant by INR 8,56,94,502 on protective basis by holding that the Appellant should have received reimbursement along with mark-up for the excess AMP expenses from its AEs using the "bright line test", spent allegedly towards brand building for the AEs and in doing so grossly erred in: 3.1. making an adjustment on protective basis which has no legal existence as per the provisions of the Act and accordingly the said adjustment is bad in law and void-ab-initio; 3.2. ignoring the fact that no legal provisions exist on AMP being an international transaction, no machinery provisions are applicable on transfer pricing adjustment on account of AMP expenses and misconceiving the facts and circumstances of the case as already detailed in grounds 2.1 to 2.7, with the intent of making an adjustment, and 3.3. Incorrectly holding that the AMP expense incurred by the Appellant to be "excessive" on the basis of a "bright line test” and not following the binding judicial principles as pronounced by higher courts, with the intent of making an adjustment.
4. On the facts and circumstances of the case and in law, the Ld. AO has grossly erred in adding the amount of protective adjustment (INR 8,58,91,766) over and above the substantive adjustment (INR 4,13,09,280) while computing the total income of the Appellant and the tax demand thereof.
5. On the facts and circumstances of the case, and in law the Ld. AO has grossly erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act. The above grounds and sub-grounds are without prejudice to each other. The Appellant craves leave to add, alter, amend, modify or withdraw all or any of the aforesaid grounds of appeal as may be considered necessary at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
3. Heard and perused the record. Ld. AR has stated on record that on instructions of assessee the additional grounds are not pressed. Then it was submitted that ground no. 1 is general.
4. As with regard to the ground no 2 read with sub grounds 2.1 to 2.8 with regard to the allegation of Ld. TPO that the Assessee should have been compensated by the AE (legal owner) for the alleged non-routine AMP expenses, the ld. AR has primarily contended that AMP is not an international transaction. It was submitted that the cost of AMP expenditure incurred is highly interlinked and interconnected activity/ function performed in connection to the main business activity of the Assessee. AMP expenditure was neither incurred at the instance of overseas AEs, nor was there any mutual agreement or understanding or arrangement as to allocation or contribution by the AE towards reimbursement of any part of AMP expenditure incurred by the domestic enterprise (the Assessee) for the purpose of its business. His stress was on that in absence of any understanding, arrangement, etc., no ‘transaction’ or ‘international transaction’ could be said to be involved with respect to such AMP expenditure incurred by the domestic enterprise, which may be covered within the ken of TP regulations. It was submitted that nowhere in the order, the Ld. TPO has demonstrated that there was any action in concert or any understanding between the Assessee and the AE that such AMP expense has to be carried out. In absence of such arrangement / understanding, there is no case of AMP being an international transaction. This same ratio has been upheld by courts in various cases. Reliance was placed on various judicial pronouncements in Maruti Suzuki India Limited [[2015] 282 CTR 1 (Delhi)] (‘Maruti High Court Ruling’);Sony Ericsson Mobile Communications India Pvt. Ltd. [TS- 543-HC-2016(DEL); Gillette India Ltd. vs ACIT (ITA Nos. 01/JP/2013 and 02/JP/2015) TP]; Whirlpool of India Ltd. {[2016] 381 ITR 154 (Delhi); Honda Siel Power Products Limited ([2016] 283 CTR 322 (Delhi))
Ld. AR has also submitted that there is no machinery provisions in chapter X of the Act which are applicable to the TP adjustment on account of AMP expenses. Treating alleged excessive AMP as an “international transaction" i.e. a “Service” can only be through a deeming fiction as it is not explicit from any statutory provisions in Indian tax legislation. It was also submitted that AMP expenditure cannot be considered to be equivalent to brand building. The entire expenditure incurred towards advertisement is towards sale of goods. The advertisement agencies do not charge different rates for advertisements for products alone vs. advertisements for products also bearing brand name. The cost or the expenditure / basis of charge would therefore remain the same. It is submitted that the cost or expenditure, if any, is purely incidental because there is no cost outlay specific or traceable to the brand and the cost or expenditure in a measurable yardstick can only be found as to what is paid to the advertisement agencies and there is no specific cost or expenditure attribution for brand.
5.2 Ld. AR also submitted that Brand development is different from Brand exploitation. It was submitted that the Ld. TPO has misinterpreted the use of brand in the form of trademark i.e. brand exploitation as brand development. Reliance has been placed on the Delhi High Court judgement of Sony Ericsson Mobile Communications India Private Limited and various other taxpayers [TS-96-HC- 2015(DEL)] to contend that it was held that expenditure incurred for promoting product(s) with a trademark was for exploitation of the trademark rather than for development of value of the trademark.
5.3 As with regard to the facts of case it was submitted that AMP incurred by the Assessee is primarily towards selling products under “Fujitsu” brand and not towards promotion of the corporate logo. It was pointed out that infact the Assessee’s sales are made typically on a B2B basis and not directly to end customers. Therefore, the alleged excessive AMP expenses incurred by the Assessee cannot be surmised as rendering of a brand enhancement services to its AEs. Thus it was submitted that the AMP expenses incurred by Fujitsu India are for its own business and cannot be treated as standalone brand building activities on behalf of the AEs. It was also submitted that the Functions relating to AMP performed by Fujitsu India are on its own account. The Company incurred AMP expenses on its own account and entirely for selling its products in India. The Assessee is responsible for sale and full utilization of the market potential for selling of products in India. AMP activities undertaken by the Assessee are only one of the ‘Functions’ undertaken by the Assessee and the same is certainly relevant in the overall ‘Functions, Assets, Risks’ (‘FAR’) analysis of the Assessee and further the Ld. TPO has erred in considering AMP expenses Incurred by the Assessee as a “transaction” undertaken by the Assessee.
Ld. DR has relied the orders of the ld. tax authorities below and it was contended on the basis of the TP Study Report that the assessee has itself mentioned in the functional analysis that it is responsible for identification of 10 customers in India for its AE. It was submitted that as the assessee is engaged in import of products from an AE and market them in India, therefore, the overall quality control being of the AE, the AMP expenses ultimately benefit the brand of AE.
As this ground no 2 read with sub grounds 2.1 to 2.8, goes to the root of other grounds on merits we determine it first and we find that assessee had not reported any international transaction related to this disputed AMP expenses. No benchmarking has been carried out in this regard on the force of claim that is a cost reimbursement and does not call for bench marking. After going thoroughly with the ld. TPO order as sustained by DRP, we find that not a word is discussed on the basis of any fact or evidences in the form of any agreement between the assessee or its AE, no document in the form of any invoice or work order, nothing from the financials of the assessee or AE, the business module or customer base targeted, segmental sales etc. forms basis of discussion as to what is the nature of products and services in which assessee is trading so as to question if AMP expenses were to be compensated by the AE.
It is pertinent to mention that assessee is not in trading of any consumer or house hold product but is engaged in trading of IT products and provision of IT solutions and services in India. Which is a niche area and restricted cutomer base. Therefore that all the more needed to put on record on the basis of some material that AMP expenses were integral part of assessee’s business functions 11 to create some marketing intangibles benefiting the AE. However, no such exercise is done by TPO and the DRP merely relied the order of TPO, on first principles as to in which cases AMP as separate transaction should be examined for its ALP. Specially in a case where assessee has claimed to be not catering directly to end customers but sales are on B2B basis. We are of considered view that the AMP expenses cannot be alleged to be excessive or for creating any brand for AE or adding to its worth on the basis of theoretical principles without establishing on the basis of material and evidences that expenditure does not commensurate to the functions carried out and risk assumed by the assessee to its distribution business.
The ld. Tax authorities should establish on facts that the gross margin remuneration is adjusted to AMP expenses to benefit the AE. The AMP expenditure is not unilateral and out of some arrangement which is reflected in concert action between the assessee and AE. Nothing on that account is available in impugned orders. The very fact that Bright Line Test method is used for protective adjustment and Residual Profit Split Method for substantive adjustments, show that the ld. TPO has not found anything from the transactions between the assessee and AE or specific heads of expenditures incurred by the assessee, which will establish as evidence of necessity of some compensation from the AE. The revenue from operations from sale of products at Rs.87,92,28,859/- and sales of services at Rs.54,03,80,663/- establish that the revenue from sale of products is as good as sale of services, therefore, the AMP expenditure cannot on its face be held to be excessive qua the traded goods so as to entitle the assessee any compensation from the AE.
Indeed the assessee imports a range of Fujitsu products for the purpose of resale to various customers in India. However, the identification of customers in India is at the discretion of the assessee. Thus, it is assessee’s marketing and sales team which is executing the policy of the assessee company with regard to identification of customers, medium of advertisement and promotional activities, discounts and the same is independent and without any understanding or an arrangement with the AE.
Thus we find substance in the contention of ld. AR that in the absence of any ‘understanding’, ‘arrangement’ or ‘action in concert’, the AMP expense cannot be held as an international transaction as per Section 92B read with Section 92F(v) of the Act. Reliance in this regard is rightly placed by him on the decision of Hon’ble Delhi High Court in the case of Maruti Suzuki (supra), wherein the Hon’ble Delhi High Court held that even if the word ‘transaction’ is given its widest connotation, it is still incumbent on the Revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ as regards AMP spend for brand promotion. The relevant extract is provided below for ready reference.
“59. Nevertheless, there is no specific mention of AMP expenses as one of the items of expenditure which can be deemed to be an international transaction. For this purpose, Section 92B(i) read with Section 92(1) becomes significant. Under Section 92B(1) an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the benefit, service or facility provided or to be provided to one or more of such enterprises. …… 61. The submission of the Revenue 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.”
11.1 Thereafter, the Hon’ble High Court went on to hold that in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provisions of Chapter X of the Act are applicable to the transfer pricing exercise. Thus, the inevitable conclusion is that Chapter X as a whole does not permit such an adjustment. The relevant extract is reproduced below:- “76. As explained by the Supreme Court in CIT v. B.C Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd vs. 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 there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise.”
Further, the reliance placed by the Ld. TPO on the judgment of Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT ([2015] 55 taxmann.com 240 (Delhi) while benchmarking the AMP expenses as a separate international transaction seems erroneous. As in a subsequent judgment of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra), the existence of an international transaction was discussed in light of judgement of Sony Ericsson (supra) wherein it was held as under:- “47. As regards the submission regarding the BLT having been rejected in the decision in Sony Ericsson is concerned, the Court notes that the decision in Sony Ericsson Mobile Communications India (P.) Ltd. (supra) expressly negatived the use of the BLT both as forming the base and determining if there is an international transaction and secondly for the purpose of determining the ALP. Once BLT 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 BLT was used only to arrive at the quantum of the TP adjustment, the order of the TPO 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 comparable entities and it was also used for quantifying the amount of the TP adjustment. Consequently, the Court does not agree with the submission of the learned Special counsel for the Revenue that de hors the BLT, which has been rejected in the Sony Ericsson Mobile Communications India(P.) Ltd. (supra) judgment, the existence of an international transaction on account of the incurring of the AMP expenses can be established. ……….
The result of the above discussion 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 Mobile Communications India(P.) Ltd. case (supra) 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.”
Further, the reliance of ld. AR on the decision of Hon’ble Delhi High Court’s in the case of Bausch & Lomb Eyecare (India) Pvt. Ltd. (ITA 643/2014) is also relevant wherein the Hon’ble High Court distinguished between a ‘function’ and a ‘transaction’ and held that AMP expenditure is not an international transaction. The relevant extracts are reproduced below for ready reference:- “61. There is merit in the contention of the Appellant that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Appellant or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the ‘international transaction’ as he actually finds the same.” 64. In the absence of any machinery provision, bringing an imagined transaction to tax is not possible. 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 this position explicit. Therefore, where the existence of an international transaction involving AMP expense with an ascertainable 16
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.”
It is also pertinent to add that subsequent to the decision in the case of Maruti Suzuki India Ltd. (supra) which is a manufacturer, the Hon’ble jurisdictional High Court has passed judgment specific to Distributor as well. Reliance in this regard is placed on the decision of Moet Hennessy India (P.) Ltd. (2023) 146 taxmann.com 551 (Delhi) wherein it was held as under:- “13. We are also unable to agree with submission of the learned counsel for the Revenue that in the judgment of Maruti Suzuki India Ltd. (supra) and Bausch & Lomb Eyecare (India) (P.) Ltd. (supra), the findings of this Court with respect to absence of international transaction emanated from the fact that the assessee therein were a manufacturer in addition to being a seller. 14. The issue with respect to deletion of transfer pricing adjustment on account of AMP expenses, determined on BLT method, by the ITAT is squarely covered by the decisions of this Court in the case of Maruti Suzuki (supra) and Bausch & Lomb Eyecare (India) (P.) Ltd. (supra). We are, therefore, not inclined to frame any substantial question of law on this issue. The facts and law have been correctly assessed by the ITAT and we therefore, do not find any merits in the appeal and the accordingly, the same are dismissed”
Then Hon’ble Supreme Court has dismissed the Revenue's SLP finding no international transaction involving AMP expenses in case of Whirlpool India. The issue there in also have in its background the claim of Revenue department that excess AMP expenses incurred by an Indian associated enterprise lead to creation of “marketing intangibles”, adds to the brand value and expands brand identity and image for the foreign associated enterprise so the same amounts to a transaction where a service is being performed by the Whirlpool India for its AE. Hence Revenue claimed that Indian AE should then be compensated for this on an arm’s-length basis, given that such expenses come under the ambit of “international transactions” subject to transfer pricing. However, Whirlpool India argued that such costs are incurred wholly to build the business in India and part of its independent functions so shouldn’t be subject to transfer pricing. The decision of the Hon’ble Supreme Court in Whirlpool India Case (SLP(C) 29270/2016 order dated 20/11/2024 has recognised the cardinal principles covering this issue that there should be concrete evidence to establish international transactions. The Hon'ble Delhi High Court in case of Whirlpool of India Ltd vs DCIT 381 ITR 154 has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. In our considered opinion, in the absence of such demonstration, there is no question of undertaking any benchmarking of AMP expenses. The relevant findings of the Hon'ble High Court in the case of Whirlpool of India Ltd [supra] read as under:- "32. Under Sections 92B to 92F, the pre-requisite for commencing the TP 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 ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. XXX XXX XXX 34. The TP adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee 18 and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE.
It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have "acted in concert". XXX XXX XXX 37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. XXX XXX XXX 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. XXX XXX XXX 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."
We also appreciate the contention of ld. AR that AMP necessarily does not result in brand building. The Hon’ble High Court in the Sony Ericsson Mobile Communications India (P.) Ltd. case (supra), vide para 106 has held that advertisement may not be the only tool for brand building. Hence, it cannot be held that AMP necessarily leads to brand building. The relevant part is reproduced below: “106. Therefore, to assert and profess that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It represents a coordinated synergetic impact created by assortment largely representing reputation and quality. 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. Brand building or creation is a vexed and complexed issue, surely not just related to advertisement. Advertisements may be the quickest and effective way to tell a brand story to a large audience, but just that is not enough to create or build a brand. Market value of a brand would depend upon how many customers you have, which has reference to brand goodwill, compared to a baseline of an unknown brand. It is in this manner that value of the brand or brand equity is calculated. Such calculations would be relevant when there is an attempt to sell or transfer the brand name. 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. It is not the case of the Revenue that the foreign AEs are in the business of sale/transfer of brands.”
We are of the considered view that on the basis of AMP expenditure quantum alone assessee cannot be said to have benefitted the AEs’ brand. Brands are not product or services centric, but, more of customer centric. In exercise of brand building or enhancement, it is essential to establish as to how the AMP expenses generated awareness of the brand which was more useful to the foreign AE than to help the assessee in procuring its share of market. The AO was, thus, required to establish that the AMP expenses were not for tearing into the local market alone, but, were made at the instance of foreign AE for enhancement and creating a brand value beyond the local market. In the absence of any such facts coming out of a concerted action of the assessee with its foreign AE, or in absence of independent inquiry on the basis of nature of product, services or retail brands catered by the assessee the AO cannot draw any presumption on the basis of AMP expenses quantum or sales that the expenses must have resulted into any benefit to the AE. Therefore, we are inclined to accept the case of assessee that in the given facts and circumstances, the ld. Tax authorities were unable to demonstrate that AMP expenses incurred by the assessee were in any way beneficial to the foreign AE requiring TP adjustment.
Consequently we sustain this ground no. 2 with its sub-grounds. The other grounds, thus, become academic and require no further adjudication. As a sequel to above the appeal of the assessee is allowed. Order pronounced in the open court on 24.01.2025. Sd/- Sd/- (S. RIFAUR RAHMAN) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 24th January, 2025. dk