Advertisement, Marketing and Promotion  expenditure incurred not constitute an “international transaction” u/s 92F of Income Tax Act: Delhi HC [Read Order]

The Delhi High Court in a recent case held that advertising, marketing, and Promotion expenditure incurred not constitute an “international transaction” under section 92F of the Income Tax Act, 1961.

The appellant, raised the question of whether the Advertisement, Marketing and Promotion  expenditure incurred by the respondentassessee would constitute an “international transaction” as contemplated under Section 92B read along with Section 92F of the Income Tax Act, 1961 .

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The respondent-assessee, Beam Global Spirits & Wine (India) Pvt.Ltd is stated to be one of the companies under the Beam Global Group and was engaged in the business of manufacture, sale, marketing and trading of Indian Made Foreign Liquor. The IMFL was sold under brands owned and licensed to the Beam Global Group of which Fortune Brands is stated to be the ultimate holding company. Fortune Brands was the parent entity of Beam India Holding. 

In the course of undertaking a Transfer Pricing Study, the  Transfer Pricing Officer took note of the following international  transactions which are stated to have been entered into by the respondents.

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The Tribunal records that although the TPO did not interfere with the benchmarking in respect of transactions listed at S. No. 1, 4 and 5, it came to the conclusion that the assessee had incurred “an extremely high level of advertising and market promotion expenditure [AMP]”. It thus proceeded to come to the conclusion that the aforesaid would be liable to be treated as an international transaction and, consequently, an Arm’s Length Pricing study being commenced.

The fundamental question which stands posited is in respect of the AMP expenditure incurred and whether it would constitute an international transaction. On facts, there does not appear to be a serious dispute with respect to the relationship between the respondent-assessee and Fortune Brands, which was the ultimate holding company. Beam India Holding, the respondent-assessee, is stated to be a constituent of the Beam Global Group engaged in the business of manufacture, sale, marketing and trading of Indian Made Foreign Liquor. These products are marketed using brands owned by and licensed to it by the global entity.

In order to holistically examine the question which stands raised as well as to appreciate the contentions which were addressed, we deem it appropriate to take note of the following observations which appear in the order of the Transfer Pricing Officer  dated 24 January 2013 and pertaining to AY 2009-10.

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The bench observed that Section 92B of the Income Tax Act, 1961 speaks of a transaction between two or more Associated Enterprises in the nature of purchase, sale or lease of tangible or intangible property or provision of services, lending or borrowing of money or any other transaction having a bearing on the profits income, losses or assets of such enterprises.

Although the appellants also seek to draw sustenance from the Explanation which came to be inserted in Section 92B by virtue of Finance Act, 2012 with retrospective effect from 01 April 2002 and in terms of which AMP came to be included in the ambit of an international transaction, the question which would still survive for consideration and merit an answer would be whether absent an agreement or arrangement for incurring AMP expenses, an international transaction could be said to have come into existence so as to trigger the further process of ALP analysis in accordance with Section 92C of the Act.

A division bench of Justice Yashwant Varma and Justice Harish Vaidyanathan Shankar observed that the existence of an international transaction cannot be presumed to have been consummated merely because the quantum of expenditure incurred exceeds the spend under that head by comparable entities. It was this which constrained our Court to observe that it would be wholly impermissible to decide the issue of an international transaction on mere inference and the fact that the expenditure incurred was “significantly higher”.

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While an international transaction would undoubtedly include the purchase, sale, transfer, lease or use of intangible property, the same would be subject to there being a discernible and identified transaction between two or more AEs and who may have mutually agreed or entered into an arrangement for the allocation or apportionment of expenses proposed to be incurred.

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.

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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.

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The deeming fiction which came to be introduced in Section 92B(2) would undisputedly have no impact or implication since sub-section (2) also speaks of the existence of a prior agreement in relation to the relevant transaction. This quite apart from the fact that the said amendment came to be introduced by virtue of Finance (No. 2) Act, 2014 and with effect from 01 April 2015. The said amendment would thus have no application to the AYs‟ with which we are concerned in these two appeals.  

The bench held  that the Tribunal was justified in setting aside the orders of assessment for reasons assigned therein and consequently merits no interference. 

To Read the full text of the Order CLICK HERE

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