Existence of International Transaction must be Proven before Applying Transfer Pricing Benchmarking: Delhi HC [Read Order]

In a recent ruling, the Delhi High Court held that the existence of an international transaction must be established before undertaking a transfer pricing benchmarking analysis.

The case involved Beam Global Spirits & Wine (India) Pvt. Ltd., which was engaged in the manufacture, sale, and marketing of Indian Made Foreign Liquor ( IMFL ). The Principal Commissioner of Income Tax (PCIT) had challenged the Income Tax Appellate Tribunal's (ITAT) decision to delete an addition of Rs. 35.09 crore made by the Transfer Pricing Officer (TPO) on account of AMP expenses.

The TPO argued that these expenses benefitted the foreign parent company’s brand and should therefore be considered an international transaction. The Revenue's primary argument was that the AMP expenditure was excessive and served to build the brand of the foreign parent entity, thereby requiring compensation under transfer pricing regulations.

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The TPO applied the Bright Line Test (BLT), comparing the company’s AMP spending with that of comparable independent entities, and proposed a transfer pricing adjustment for the excess expenditure. The Revenue also relied on the ruling in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT, which previously recognized excess AMP expenses as an international transaction.

The assessee countered by arguing that no agreement or arrangement existed with the AE mandating such AMP expenditure and that these expenses were purely for domestic business growth. The Revenue had failed to provide any tangible evidence linking them to an international transaction.

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Citing the Delhi High Court’s judgment in Maruti Suzuki India Ltd. v. CIT, the assessee’s counsel argued that BLT was not a legally accepted method for determining the existence of an international transaction.

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A division bench of Justices Yashwant Varma and Harish Vaidyanathan Shankar observed that advertisement, marketing, and promotion (AMP) expenses alone cannot be treated as an international transaction unless there is tangible evidence or an explicit agreement between the associated enterprises (AEs).

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The court held that the Revenue cannot assume the existence of an international transaction merely based on the quantum of AMP expenditure. The court observed that the burden of proof lies with the tax authorities to establish a transaction under Section 92B of the Income Tax Act.

The court clarified that AMP expenses do not automatically fall within the scope of transfer pricing regulations unless there is clear evidence of an arrangement between the assessee and the foreign AE. The court dismissed the appeal and upheld the ITAT’s decision, ruling in favor of the appellant.

To Read the full text of the Order CLICK HERE

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