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