Safiya Malik

The Delhi High Court, Division Bench comprising Justice Yashwant Varma and Justice Harish Vaidyanathan Shankar, has delivered a significant judgment on transfer pricing adjustments concerning advertisement, marketing, and promotion (AMP) expenditures. The judgement, reserved on March 3, 2025, and pronounced on March 7, 2025, concerns the appeals filed by the Principal Commissioner of Income Tax (PCIT-1), New Delhi, against Beam Global Spirits & Wine (India) Pvt. Ltd.

The appeals pertain to Assessment Years 2009-10 and 2012-13 and primarily address whether AMP expenditures incurred by the respondent-assessee qualify as an "international transaction" under Section 92B read with Section 92F of the Income Tax Act, 1961.

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The case revolves around Beam Global Spirits & Wine (India) Pvt. Ltd., a constituent of the Beam Global Group engaged in the manufacture, sale, marketing, and trading of Indian Made Foreign Liquor (IMFL). The products were marketed using brands owned by and licensed to it by the global entity Fortune Brands, its ultimate holding company.

During a transfer pricing study, the Transfer Pricing Officer (TPO) classified the AMP expenses as "international transactions" on the grounds that the expenditure was substantially higher than that of comparable entities. The TPO contended that the excessive AMP spending resulted in brand-building for the foreign associated enterprise (AE), thereby necessitating an arm’s length price (ALP) adjustment. The Transfer Pricing Officer concluded that the AMP expenditure was not commensurate with the company’s standalone benefits and indicated an implicit arrangement between the assessee and its foreign AE for brand-building.

The assessee disputed this classification, arguing that its AMP spending was part of its business strategy and essential for sustaining competition in the Indian market. It contended that the TPO’s reliance on a "bright line" test, which assumes that AMP expenses beyond a certain threshold benefit the foreign AE, was not statutorily backed. Furthermore, the assessee asserted that there was no agreement, understanding, or arrangement mandating it to undertake AMP expenses for the AE’s benefit.

The Dispute Resolution Panel (DRP) upheld the TPO’s findings, leading to the final assessment orders. The assessee challenged these orders before the Income Tax Appellate Tribunal (ITAT), which stated in its favor, stating that AMP expenses alone do not constitute an international transaction in the absence of a tangible agreement or arrangement between the parties. The ITAT stated that a mere expenditure pattern, even if higher than comparable companies, does not automatically imply an international transaction in the absence of substantive evidence.

The Delhi High Court examined whether the Revenue had successfully established the existence of an international transaction before undertaking an ALP analysis. The court referred to its earlier judgements, including Maruti Suzuki India Ltd. v. Commissioner of Income Tax (2015 SCC OnLine Del 13940), which held that a mere inference from high AMP expenses cannot be the basis for transfer pricing adjustments.

The court observed:

“The existence of an international transaction cannot be presumed merely because the quantum of expenditure incurred exceeds the spend under that head by comparable entities. 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.’”

The judgment also noted that under Section 92B of the Income Tax Act, an international transaction must be demonstrable through an agreement, understanding, or action in concert between two associated enterprises. The tribunal had rightly concluded that no such agreement existed between the assessee and its AE, and thus, the AMP expenses could not be arbitrarily categorized as international transactions.

The court further considered the Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT (374 ITR 118) judgement, which had previously addressed the applicability of transfer pricing provisions to AMP expenses. The court distinguished the present case, noting that in Sony Ericsson, the existence of an international transaction was not in dispute, whereas, in the present case, the fundamental question was whether such a transaction existed at all.

Additionally, the court analysed global practices on transfer pricing and AMP expenditures. It referred to OECD Transfer Pricing Guidelines, which suggest that marketing intangibles require compensation if they directly benefit a foreign associated enterprise. However, the court clarified that mere incidental benefits to an AE do not justify an ALP adjustment unless an agreement explicitly mandates such expenditures.

The Revenue had also cited the Australian Tax Office’s approach, which uses a "bright line" test to determine excessive marketing expenses. The court, however, noted that Indian tax law does not recognize the bright line test as a legitimate method for transfer pricing adjustments. The reliance on foreign jurisprudence without statutory backing was found to be unsustainable in the Indian context.

Furthermore, the court referred to Bausch and Lomb Eyecare (India) Pvt. Ltd. v. Additional CIT (2015 SCC OnLine SC 14382), reaffirming that the burden of proof to establish an international transaction lies with the Revenue. The absence of documentary evidence proving a contractual obligation on the assessee to incur AMP expenses for the AE meant that the Revenue's contention could not be sustained.

The Delhi High Court, after reviewing the findings of the ITAT, ruled in favor of Beam Global Spirits & Wine (India) Pvt. Ltd. and upheld the deletion of the addition of Rs. 35,09,33,103 attributed to AMP expenses. The court categorically held:

“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 mere relationship between parties does not suffice to presume an international transaction.”

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The court further directed that:

• The Revenue must establish, through tangible evidence, that an explicit agreement, arrangement, or understanding existed between the assessee and its associated enterprise regarding AMP expenses before considering them as an international transaction.

• The mere comparison of AMP expenditure with that of comparable entities, without demonstrating a direct benefit to the associated enterprise, cannot form the basis for a transfer pricing adjustment.

• The ‘bright line’ test, as used by the TPO to assess the quantum of AMP spending, is not recognized under Indian transfer pricing regulations and cannot be the basis for determining whether an international transaction exists.

• Transfer pricing adjustments must be based on statutory provisions and judicially accepted methodologies, rather than foreign tax jurisprudence or inferred arrangements.

In light of these findings, the court dismissed the Revenue’s appeals, stating that assumptions and surmises cannot replace substantive evidence in transfer pricing matters.

Advocates Representing the Parties

For Appellant: Gaurav Gupta, Senior Standing Counsel, and Shivendra Singh, Advocate.

For Respondent:Deepak Chopra, Harpreet Singh Ajmani, and Ashmita, Advocates.

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

Neutral Citation:2025: DHC:1487-DB

Case Numbers: ITA 155/2022 & ITA 156/2022

Bench: Justice Yashwant Varma, Justice Harish Vaidyanathan Shankar

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