The core issue was whether Beam Global Spirits & Wine’s Advertisement, Marketing, and Promotion expenses for brand promotion constituted an “international transaction” under Section 92B of the Income Tax Act, thereby warranting a transfer pricing adjustment. The tax authorities had applied the Bright Line Test to determine that the AMP expenditure was excessive compared to comparable companies, inferring from this a presumed international transaction with the foreign associated enterprise and making an arm’s length price adjustment. On appeal, the Income Tax Appealante Tribunal overturned the tax authorities adjustment, holding that the existence of an international transaction must be established by tangible evidence—such as an agreement or arrangement—and not by inference from advertisement, marketing, and promotion spending alone. An appeal was then filed by the tax authorities with the High Court. Judgment The High Court dismissed the appeals and upheld the ITAT’s view, reiterating principles from previous rulings, especially Maruti Suzuki and Sony Ericsson. The Court emphasized that: A transfer pricing analysis under Chapter X of the Act can only be initiated if there is a demonstrable international transaction. The mere use of a foreign brand or incurrence of high advertisement, marketing, and promotion expenses does not, by itself, imply a transaction exists. The Bright Line Test is not a valid legal tool for inferring the existence of an international transaction or for computing arm’s length pricing. The retrospective clarification to Section 92B (via the 2012 Explanation) does not override the need for proving an actual agreement, understanding, or concerted action between associated enterprises. There is no statutory machinery in the Indian transfer pricing regime to permit quantitative adjustments based solely on advertisement, marketing, and promotion expenditure. Accordingly, the Court found no basis for the tax authorities benchmarking and transfer pricing adjustment in the absence of a proven international transaction, and dismissed the Revenue’s appeals. Click here for other translation ...

Sony India Private Limited is a wholly owned subsidiary of Sony Corporation, Japan. During the years under consideration, 2010-11, Sony India was engaged primarily in import and distribution of Sony products in the Indian market. Following an audit, an assessment was issued by the tax authorities where the taxable income of Sony India was adjusted upwards. The tax authorities considered and benchmarked the distribution activities and found that the margin declared by the Sony India was below the average margin of 27,8% determined by applying the TNMM. They further proceeded to benchmark advertising, markeing and promotion (APM) expenses separately by adopting bright line test. An appeal was filed by Sony India Private Limited with the Income Tax Appellate Tribunal. Judgment of the Income Tax Appellate Tribunal The Tribunal ruled mostly in favor of Sony India. Excerpt “24. Next coming to the issue of benchmarking the ALP relating to software division of the assessee, we heard both sides and considered each of the submissions made by both parties, we observe that the issue under consideration is, the assessee has selected its own comparables to make the TP analysis, however, the TPO rejected the same by adopting certain common filters and selected 16 comparables to benchmark the ALP at 25.34%. Before us, the assessee filed a chart with the prayer to exclude comparables selected by the TPO, they are E-Infochips, Infinite Data systems, Infosys Ltd, Persistent systems and Thirdware Solutions. Further prayed to include Quintegra Solutions. However, at the time of hearing, Ld AR submitted that the assessee do not want to press the ground on inclusion of Quitegra Solutions. Accordingly, it is not adjudicated. 25. After considering the submissions of both sides, we observe that the coordinate bench has already considered the above issues in assessee’s group concern Sony Mobile Communications International. When the bench asked for the similarities in the functions and activities of the both the group concerns, the assessee has filed comparative chart before us, the same is reproduced in this order elsewhere, we have convinced that both the concerns having similar activities and functions, we are inclined to follow the decision of coordinate bench in selecting the comparables. Accordingly, we direct the AO/TPO to follow the same and relevant decisions of the coordinate bench are reproduced below: 26. In the result, we direct the AO/TPO to exclude the 5 comparables as per the findings of coordinate bench as discussed in the above paragraph. Accordingly, the relevant grounds raised by the assessee are allowed.” Click here for other translation ...

Samsung India, a subsidiary of Samsung Korea, manufactures and sells mobile phones in India and overseas. Under a technology licence agreement Samsung India paid royalties of 8% to Samsung Korea. Following an audit, the tax authorities determined that Samsung India was a contract manufacturer and therefore the payment of royalties on its sales to group companies was not considered to be at arm’s length. Deductions for the royalty payments were disallowed and an assessment of additional taxable income was issued. Samsung India appealed to the Income Tax Appellate Tribunal, which overturned the assessment, finding that the royalty payments were at arm’s length as Samsung India was not acting as a contract manufacturer but rather as a full-fledged licensed manufacturer. The tax authorities then appealed to the High Court. Judgment The Delhi High Court upheld the ITAT’s decision and ruled in favour of Samsung India. The court found that the royalty payments were at arm’s length as the subsidiary was acting as a full-fledged licensed manufacturer rather than a contract manufacturer. It undertook the manufacturing activities on its own. Samsung Korea did not determine the volume of production or the terms of sale, and no assurances were given to Samsung India that its production would be purchased ...