Unilateral action on the part of one party with absence of mutual agreement cannot result into an international transaction

Brief of the case:

• The Hon’ble Delhi HC in the case of WHIRLPOOL OF INDIA LTD. held that in the absence of ‘mutual agreement’ or ‘arrangement’ or ‘action in concert’ for the allocation or apportionment of or contribution to the cost or expenses incurred by the Assessee in connection with benefit, service or facility provided to the AE , there cannot be an international transaction.
• As such the unilateral action on the part of one party not binding other cannot be termed as international transaction and in the absence of international transaction the entire TP exercise is futile.

Facts of the case:

• Whirlpool of India Ltd (WOIL), is a subsidiary of Whirlpool Corporation, USA (Whirlpool USA) and is engaged in production, sales and distribution of whirlpool appliances. There was a technical assistance and transfer agreement entered into between WOIL and Whirlpool USA on 12thMay 2005/13th December 2005 and a trade mark and trade name license agreement (‘TLA’) on 1st April 2005/13th December 2005.
• WOIL has been allowed to use the trademarks owned by the AE i.e. Whirlpool USA. WOIL pays brand assistance fees/royalty to the AE for grant of licenses to use trademarks belonging to it.
• AO observed that assessee had incurred “extremely high level” of AMP expenses, a reference was made by the AO to the TPO under Section 92CA (1) of the Act for determination of the ALP of the international transactions undertaken by WOIL.
• TPO concluded that by achieving this increased level of sales, WOIL has promoted the brand of its AE which is a case of creation of marketing intangible for AE. The creation of this marketing intangible is an international transaction which calls for benchmarking. WIOL should have received compensation for the same. This compensation should at least be the amount spent by it towards the creation of that marketing intangible.
• The order of TPO was confirmed by DRP and as a result an adjustment of 2,033,224,615/- by way of addition on account of difference b/w AMP expenses. incurred and ALP of AMP expenses.
• On appeal before ITAT, it held that total AMP expenses had to be processed to find out what portion of it was spent on brand building for the foreign AE and then disallowance should be made for such amount with the proper mark-up by way of TP adjustment. The remaining amount had to be considered as incurred by the assessee for its own business purposes liable for deduction subject to relevant provisions of the Act. The matter was accordingly remitted to the AO/TPO for re-working the TP adjustment on account of the AMP expenses.
• Aggrieved by the order of ITAT, assessee and revenue both have filed cross appeals.

Contention of the Assessee

• The learned counsel for the assessee submitted following arguments :

i) For making TP adjustment there must be an international transaction for which there should be ‘mutual agreement’ or ‘arrangement’ or ‘action in concert’ for the allocation or apportionment of or contribution to the cost or expenses incurred by the Assessee in connection with benefit, service or facility provided to the AE.

ii) In order to benchmark an expense under Chapter X of the Act, having regard to the ALP, the prerequisite is that the expense should arise under an international transaction with a foreign AE. Chapter X does not envisage the benchmarking of transactions between the Indian entity and third parties in India where there is no income arising to an Indian enterprise from the foreign AE.

iii)WIOL and Whirlpool USA are independent entities and the AMP expenses incurred by WOIL was wholly and exclusively for its own business. The benefit to Whirlpool USA was only incidental.

Contention of the Revenue:

• It was submitted by the revenue that the assessee is not an independent manufacturer but is manufacturing “for the benefit of the group entities” and its status is same as that of a contract manufacturer. Therefore the AMP activity is not for the sole benefit of the Assessee but for the group as a whole.
• It was also submitted that primary objective in entering into Trademark Licensing Agreement was protection and enhancement of its uniquely valuable marks and name. Therefore, it could not be said that “AE is not concerned with what the appellant does or benefit is not intended or not arising to the AE.
• This all indicates that there was mutual agreement and both parties acted in concert giving rise to an international transaction.

Issue before High Court:

• Whether the Advertising, Marketing and Promotion Exps. (AMP) incurred by assessee would fall within the definition of international transaction as defined u/s 92B of the Act?
• Whether ITAT justified in remanding the matter to the AO/TPO for segregating the AMP expenses incurred into the extent attributable to promote the brand of the AE, and that that was wholly and exclusively for the business purposes of the Assessee, allowable under Section 37 of the Act?
  

Held by Hon’ble High Court:

• Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the Arm Length Price (ALP). Thus, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. To check whether a transaction is international transaction we need to check Sec 92B.
• As per 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert. But there has to be some tangible evidence on record to show that two parties have “acted in concert”.
• Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. Further, revenue failed to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses.
• Revenue without any logic has presumed that as a result of Trademark Licensing Agreement (TLA) WOIL would spend ‘excessively’ on AMP in order to promote the ‘Whirlpool’ brand in India.
• It is because an assumed price cannot form the reason for making an ALP adjustment. The burden is on the revenue to first show the existence of an international transaction and then ascertain the disclosed ‘price’ of such a transaction to examine whether it is at ALP.
• As regards, the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act the HC held that the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under if the expenditure is otherwise allowable satisfying the tests laid down in that sec.
• In result both the questions were answered in favour of assessee.