Transfer Pricing | Existence Of International Transaction Must Be Determined Before Benchmarking Analysis Is Commenced: Delhi HC

A division bench of Justices Yashwant Varma and Harish Vaidyanathan Shankar, while dealing with the case of an Indian entity producing liquor for brands like Jim Beam, observed, “the commencement of a benchmarking analysis would have to necessarily be preceded by the Revenue identifying the existence of a transaction as defined and which undoubtedly constitutes a sine qua non. This clearly flows from the plain text of Section 92B(1), which proceeds to define an “international transaction” as being a “transaction” between two or more AEs.”

The issue before the Court was whether the Advertisement Marketing and Promotion (AMP) expenditure incurred by the assessee for a brand owned by the associated enterprise (AE) would constitute an “international transaction”.

Section 92B of the Income Tax Act, 1961 defines 'International Transaction'. Section 92F defined certain terms relevant to computation of arm's length price, etc.

The Transfer Pricing Officer had found that the assessee had incurred an extremely high level of AMP expenditure, indicating the objective to expand the reach of the AE's brand in India. “The AE is the legal owner of the brand. Therefore the beneficiary of the efforts of the assessee is the AE,” it had said.

Thus, assessment orders came to be framed, leading to appeals before the Income Tax Appellate Tribunal.

The ITAT ruled in favour of the assessee, stating that Revenue failed to demonstrate on the basis of any tangible material that an international transaction between the assessee and its AE had come into existence.

It had held that the existence of an international transaction cannot rest on a mere inference or surmise and 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.

Dealing with the Revenue's appeal, the High Court agreed with the Tribunal 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.

“…before undertaking a benchmarking of AMP expenses, it was incumbent upon the TPO to have found that an international transaction had, in fact, occurred,” the Court remarked.

It referred to Maruti Suzuki India Ltd. vs. Commissioner of Income Tax (2015) where the High Court had 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 of the Act.

It was further held therein 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.

The Court in Maruti Suzuki 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.

“We have no hesitation in observing that the existence of an international transaction cannot rest or be founded upon a mere surmise or conjecture,” the Court thus held and dismissed Revenue's appeal.

Appearance: Mr. Gaurav Gupta, SSC, Mr. Shivendra Singh, Adv for Appellant; Mr. Deepak Chopra and Mr. Harpreet Singh Ajmani, Ms. Ashmita, Advs. for Respondent

Case title: PCIT-1, New Delhi v. Beam Global Spirits & Wine (India) Pvt.Ltd.

Citation: 2025 LiveLaw (Del) 298

Case no.: ITA 155/2022

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