The TPO says my advertising and marketing spend built my foreign parent's brand and has added a mark-up. There is no agreement with the parent about it. Can he do that?
No. The Delhi High Court held that before Chapter X can be used at all, the Revenue must show an international transaction exists. For advertising, marketing and promotion spend that means showing an agreement, arrangement or understanding with the associated enterprise obliging the Indian company to spend excessively to promote the foreign brand. It cannot be inferred from shareholding, from the incidental benefit to the brand owner, or from the bright line test, which Sony Ericsson had already rejected. There is no machinery provision to identify or price such a transaction. The assessee's appeals were allowed and the Revenue's dismissed.
Decided by the High Court (High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J)) on 2015-12-23, reported as ITA 643/2014 and connected appeals (Delhi High Court), reserved 22 September 2015, decided 23 December 2015. It bears on section 92B, section 92B(1), section 92C, section 92CA, section 92F, section 92 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the judgment that closed the door Sony Ericsson had left ajar. Sony Ericsson dealt with distributors who had not disputed that an AMP international transaction existed; the Revenue read it as settling the question for everyone. Here the Court held it does not cover an assessee who contests existence from the outset, and it does not cover a company that manufactures as well as distributes. Decided two days after Maruti Suzuki and one day after Whirlpool, and expressly reasoning with them, it puts the burden squarely on the Revenue: show the transaction, then its disclosed price, then whether that price is arm's length. Absent a machinery provision - the B.C. Srinivasa Setty point - an imagined transaction cannot be taxed. It also confirms that a business function is not the same thing as a transaction, and that a TPO must take the international transaction as he finds it rather than re-characterise it.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Bausch & Lomb (India) Pvt Ltd manufactures and trades soft contact lenses, eye care solutions and enzyme tablets, and distributes imported surgical products such as excimer laser systems, cataract machines and intra-ocular lenses. Its immediate parent holds 99.9 per cent of its equity; B&L Opticare Inc, USA holds the rest. The company used the group's trademarks, brand name, logo, processes and technical data without paying royalty, and received the group's global research report free. For assessment year 2006-07 it benchmarked its declared international transactions on a segmental TNMM basis and the transfer pricing study was not disturbed. The Transfer Pricing Officer nevertheless treated its advertising, marketing and promotion spend as a separate international transaction, applied the bright line test, added a 10 per cent mark-up and computed an arm's length price of Rs.19.59 crore, describing the company as a limited risk distributor and relying in part on a press article of 19 November 2004. Similar additions of Rs.25.86 crore, Rs.13.53 crore, Rs.9.90 crore and Rs.6.24 crore followed for assessment years 2007-08 to 2010-11. The Dispute Resolution Panel upheld the approach. Seven appeals came to the High Court for assessment years 2006-07 to 2010-11.
The assessee's appeals were allowed and the Revenue's dismissed. On the first question, Sony Ericsson does not cover these cases: every assessee dealt with there was a pure distributor, none had questioned the existence of an international transaction, and each had received subsidy or subvention, whereas this assessee earned revenue from manufacturing and distribution in roughly a 60:40 ratio, contested existence throughout, and received no subvention. On the second, the Revenue failed to show that any international transaction involving AMP expenditure existed between the assessee and B&L, USA. Clauses (b) and (c) of section 92B(1) cannot be read disjunctively; a transaction needs two parties, so the Revenue had to establish an agreement, arrangement or understanding obliging the assessee to spend excessively on AMP for the foreign brand. Shareholding of 99.9 per cent, and the incidental benefit accruing to the brand owner, do not supply it. There being no machinery provision to identify or price such a transaction, Chapter X could not be invoked. The re-characterisation of intra group services on commercial expediency grounds was also held beyond the TPO's powers. The third question did not arise.
The Court set out the sequence Chapter X requires: first show an international transaction exists; then ascertain its disclosed price; then determine the arm's length price by one of the five methods in section 92C; then substitute. Existence is the threshold, and it cannot be established by working backwards from quantum. Reading section 92B(1), the Court held the "means" limb and the "includes" limb must be read together, so even the residuary words "any other transaction having a bearing on profits" need two parties acting on an agreement, arrangement or understanding. The illustrative list in the Explanation to section 92B does not mention AMP spending. Following Maruti Suzuki, the Court rejected the argument that a benefit conferred is itself a transaction, and rejected section 92F(ii) as a machinery provision, since its reference to price in uncontrolled conditions simply reintroduces the bright line test that Sony Ericsson had discarded. Without machinery, an imagined transaction cannot be brought to tax - the principle of B.C. Srinivasa Setty and PNB Finance. The Court drew the analogy with section 40A(2)(a), which does give an officer an express power to disallow excessive payments to related parties, and observed that Chapter X has no corresponding provision for fixing fair compensation. It accepted the assessee's distinction between a function and a transaction, and held that re-characterising AMP expenditure that neither the assessee nor the statute treats as a transaction runs counter to EKL Appliances, which requires the TPO to examine the international transaction as he actually finds it. Finally, on Sassoon J. David, incidental benefit to another does not convert an assessee's own expenditure into a service rendered.
In the absence of any machinery provision, bringing an imagined transaction to tax is not possible.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that before Chapter X can be used at all, the Revenue must show an international transaction exists. For advertising, marketing and promotion spend that means showing an agreement, arrangement or understanding with the associated enterprise obliging the Indian company to spend excessively to promote the foreign brand. It cannot be inferred from shareholding, from the incidental benefit to the brand owner, or from the bright line test, which Sony Ericsson had already rejected. There is no machinery provision to identify or price such a transaction. The assessee's appeals were allowed and the Revenue's dismissed. This was decided by the High Court (High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J)) and bears on section 92B, section 92B(1), section 92C, section 92CA, section 92F, section 92 of the Income Tax Act 1961. It is reported as ITA 643/2014 and connected appeals (Delhi High Court), reserved 22 September 2015, decided 23 December 2015. This is the judgment that closed the door Sony Ericsson had left ajar. Sony Ericsson dealt with distributors who had not disputed that an AMP international transaction existed; the Revenue read it as settling the question for everyone. Here the Court held it does not cover an assessee who contests existence from the outset, and it does not cover a company that manufactures as well as distributes. Decided two days after Maruti Suzuki and one day after Whirlpool, and expressly reasoning with them, it puts the burden squarely on the Revenue: show the transaction, then its disclosed price, then whether that price is arm's length. Absent a machinery provision - the B.C. Srinivasa Setty point - an imagined transaction cannot be taxed. It also confirms that a business function is not the same thing as a transaction, and that a TPO must take the international transaction as he finds it rather than re-characterise it. If it applies to you, the first step is this: Make the existence of an international transaction the first ground of objection before the TPO and the DRP, and keep contesting it - a client who concedes existence is in Sony Ericsson territory, not this one.
Bausch & Lomb (India) Pvt Ltd manufactures and trades soft contact lenses, eye care solutions and enzyme tablets, and distributes imported surgical products such as excimer laser systems, cataract machines and intra-ocular lenses. Its immediate parent holds 99.9 per cent of its equity; B&L Opticare Inc, USA holds the rest. The company used the group's trademarks, brand name, logo, processes and technical data without paying royalty, and received the group's global research report free. For assessment year 2006-07 it benchmarked its declared international transactions on a segmental TNMM basis and the transfer pricing study was not disturbed. The Transfer Pricing Officer nevertheless treated its advertising, marketing and promotion spend as a separate international transaction, applied the bright line test, added a 10 per cent mark-up and computed an arm's length price of Rs.19.59 crore, describing the company as a limited risk distributor and relying in part on a press article of 19 November 2004. Similar additions of Rs.25.86 crore, Rs.13.53 crore, Rs.9.90 crore and Rs.6.24 crore followed for assessment years 2007-08 to 2010-11. The Dispute Resolution Panel upheld the approach. Seven appeals came to the High Court for assessment years 2006-07 to 2010-11. The matter was decided on 2015-12-23 by the High Court (High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J)). On those facts the High Court held as follows. The assessee's appeals were allowed and the Revenue's dismissed. On the first question, Sony Ericsson does not cover these cases: every assessee dealt with there was a pure distributor, none had questioned the existence of an international transaction, and each had received subsidy or subvention, whereas this assessee earned revenue from manufacturing and distribution in roughly a 60:40 ratio, contested existence throughout, and received no subvention. On the second, the Revenue failed to show that any international transaction involving AMP expenditure existed between the assessee and B&L, USA. Clauses (b) and (c) of section 92B(1) cannot be read disjunctively; a transaction needs two parties, so the Revenue had to establish an agreement, arrangement or understanding obliging the assessee to spend excessively on AMP for the foreign brand. Shareholding of 99.9 per cent, and the incidental benefit accruing to the brand owner, do not supply it. There being no machinery provision to identify or price such a transaction, Chapter X could not be invoked. The re-characterisation of intra group services on commercial expediency grounds was also held beyond the TPO's powers. The third question did not arise.
The Court set out the sequence Chapter X requires: first show an international transaction exists; then ascertain its disclosed price; then determine the arm's length price by one of the five methods in section 92C; then substitute. Existence is the threshold, and it cannot be established by working backwards from quantum. Reading section 92B(1), the Court held the "means" limb and the "includes" limb must be read together, so even the residuary words "any other transaction having a bearing on profits" need two parties acting on an agreement, arrangement or understanding. The illustrative list in the Explanation to section 92B does not mention AMP spending. Following Maruti Suzuki, the Court rejected the argument that a benefit conferred is itself a transaction, and rejected section 92F(ii) as a machinery provision, since its reference to price in uncontrolled conditions simply reintroduces the bright line test that Sony Ericsson had discarded. Without machinery, an imagined transaction cannot be brought to tax - the principle of B.C. Srinivasa Setty and PNB Finance. The Court drew the analogy with section 40A(2)(a), which does give an officer an express power to disallow excessive payments to related parties, and observed that Chapter X has no corresponding provision for fixing fair compensation. It accepted the assessee's distinction between a function and a transaction, and held that re-characterising AMP expenditure that neither the assessee nor the statute treats as a transaction runs counter to EKL Appliances, which requires the TPO to examine the international transaction as he actually finds it. Finally, on Sassoon J. David, incidental benefit to another does not convert an assessee's own expenditure into a service rendered. In the words reproduced by the source cited on this page: "In the absence of any machinery provision, bringing an imagined transaction to tax is not possible."
It was decided by the High Court on 2015-12-23 and is reported as ITA 643/2014 and connected appeals (Delhi High Court), reserved 22 September 2015, decided 23 December 2015. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 92B, section 92B(1), section 92C, section 92CA, section 92F, section 92, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The assessee's appeals were allowed and the Revenue's dismissed. On the first question, Sony Ericsson does not cover these cases: every assessee dealt with there was a pure distributor, none had questioned the existence of an international transaction, and each had received subsidy or subvention, whereas this assessee earned revenue from manufacturing and distribution in roughly a 60:40 ratio, contested existence throughout, and received no subvention. On the second, the Revenue failed to show that any international transaction involving AMP expenditure existed between the assessee and B&L, USA. Clauses (b) and (c) of section 92B(1) cannot be read disjunctively; a transaction needs two parties, so the Revenue had to establish an agreement, arrangement or understanding obliging the assessee to spend excessively on AMP for the foreign brand. Shareholding of 99.9 per cent, and the incidental benefit accruing to the brand owner, do not supply it. There being no machinery provision to identify or price such a transaction, Chapter X could not be invoked. The re-characterisation of intra group services on commercial expediency grounds was also held beyond the TPO's powers. The third question did not arise. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 92B, section 92B(1), section 92C, section 92CA, section 92F, section 92 of the Income Tax Act 1961, and was decided by High Court of Delhi - Justice S. Muralidhar and Justice Vibhu Bakhru (judgment by Dr S. Muralidhar, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put on record that there is no agreement, arrangement or understanding with the associated enterprise on AMP spend, and that no subsidy or subvention was received for it. Where the client manufactures as well as distributes, tabulate the revenue split; the 60:40 split here defeated the Revenue's "limited risk distributor" characterisation. Answer the bright line argument by pointing out that quantum cannot prove existence, and ask the TPO to identify the machinery provision by which the transaction would be priced.
Under appeal, and the appeal has not been decided. This judgment is under a live challenge in the Supreme Court. In Pr CIT, Delhi-1 v M/s Amadeus India Pvt Ltd (Delhi High Court, 18 October 2022) counsel for the Revenue told the Court, and the Court recorded at para 11, that 'the Department has not accepted the judgment in the case of Bausch & Lomb Eyecare Pvt. Ltd. (supra) and a Civil Appeal impugning the said judgment is pending before the Supreme Court, however, he admits there is no stay of the said judgment.' A Civil Appeal means leave has been granted, so the correctness of the AMP reasoning is squarely before the Supreme Court. No Supreme Court decision on it could be found, so the appeal appears still undecided. Meanwhile the judgment is unstayed and binding in Delhi, and the same Bench applied it at para 17, upholding the Tribunal's deletion of the AMP adjustment on the footing that 'In the absence of any machinery provision, bringing an imagined transaction to tax is not possible ... where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise.' The Delhi High Court took the same course in Pr CIT-6 v Moet Hennessy India Pvt Ltd (2 November 2022) and Pr CIT-6 v Matrix Cellular International (22 November 2017). A practitioner may rely on it today, but should advise that the point is before the Supreme Court and check the current status of the Civil Appeal. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested page is clipped in the middle: pages 14 to 26 of 40 are absent. That covers most of the assessee's submissions and, importantly, the three questions the Court framed for itself in these appeals - I have described them from the Court's own answers at paragraphs 47 to 68 rather than from the framing itself. The surviving text carries the background, the TPO and DRP orders, the Revenue's submissions and the whole of the Court's reasoning and conclusion. The batch line dated the case to 2015 and the judgment was delivered on 23 December 2015, so no correction is needed there. The source page carried no reporter citations, so the case numbers are given instead. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessee's appeals were allowed and the Revenue's dismissed. On the first question, Sony Ericsson does not cover these cases: every assessee dealt with there was a pure distributor, none had questioned the existence of an international transaction, and each had received subsidy or subvention, whereas this assessee earned revenue from manufacturing and distribution in roughly a 60:40 ratio, contested existence throughout, and received no subvention. On the second, the Revenue failed to show that any international transaction involving AMP expenditure existed between the assessee and B&L, USA. Clauses (b) and (c) of section 92B(1) cannot be read disjunctively; a transaction needs two parties, so the Revenue had to establish an agreement, arrangement or understanding obliging the assessee to spend excessively on AMP for the foreign brand. Shareholding of 99.9 per cent, and the incidental benefit accruing to the brand owner, do not supply it. There being no machinery provision to identify or price such a transaction, Chapter X could not be invoked. The re-characterisation of intra group services on commercial expediency grounds was also held beyond the TPO's powers. The third question did not arise.
TaxSphere, “Bausch & Lomb Eyecare (India) Pvt Ltd v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/bausch-lomb-eyecare-india-p-ltd-v-acit/ (validity last checked 2026-08-29)
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