Supreme Court Settles AMP Transfer Pricing Debate: Bright Line Test Finally Laid to Rest

In its recent order dated 22nd Nov 2024 [No. 29270/2016], the Supreme Court of India has dismissed the Revenue's Special Leave Petition (SLP) against the Delhi High Court's judgment (ITA Nos. 610/2014 and 228/2015 ) in the Whirlpool case, bringing conclusive finality to the much debated issue of Advertising, Marketing, and Promotional (AMP) expenditure adjustments in transfer pricing. This dismissal invalidates the Bright Line Test (BLT) methodology adopted by the Revenue to prescribe transfer pricing addition and makes the Delhi?High Court's ruling a binding judgement.

Brief?Facts

Whirlpool of India Ltd. (WOIL), a subsidiary of Whirlpool Corporation, USA, operates in India's home appliance sector. The company manufactures and distributes various products under a Trademark and License Agreement (TLA) with its Associated Enterprise (AE), Whirlpool USA, involving royalty payments for trademark usage.??

During the year under review, WOIL incurred an AMP expenditures of Rs.180.73 crore, constituting a high ratio (11.12%) compared to industry benchmarks (3.78%). The Revenue claimed that the AMP expenses incurred by WOIL benefited the foreign AE by enhancing its brand value and applied?Bright Line Test (BLT), consequently determining excessive AMP [11.12% - 3.78%] spend as an international transaction leading to an adjustment of Rs.129.44 crore.

Impact of Dismissal of SLP

With the dismissal of SLP by the Apex Court, the order of the High Court reaches conclusion, key findings/ observation of the High Court were;

A: Existence of an International Transaction

To constitute an AMP expenditure as international transaction, there has to be some tangible evidence on record to show that two parties have “acted in concert”. Merely showing incidental benefit to the AE does not meet the burden of proof required under Chapter X.

B: Rejection of BLT

The Court rejected the BLT approach, labeling it as "judicial legislation" beyond the scope of Chapter X. Key observations included:

• BLT lacks statutory basis and is not recognized in international tax jurisprudence.
• The BLT approach results in an arbitrary segregation of AMP expenses into routine and non-routine categories without objective benchmarks.

?C: Interaction Between Section 37 and Chapter X??

The Court clarified the independent domains of Section 37 and Chapter X provisions.?Section 37 governs the deductibility of expenses incurred wholly and exclusively for business purposes, whereas?Chapter X focuses on determining ALP for international transactions. The Court observed that the Revenue's attempt to disallow expenses under both provisions will amount to double taxation, which is impermissible.

Key Takeaways

1. Supreme Court's dismissal brings finality to BLT invalidity
2. Until there is explicit agreement, arrangement or action in concert, AMP expenditures cannot be considered as an international transaction
3. Revenue must prove international transaction existence through concrete evidence
4. Incidental benefits to AE do not trigger transfer pricing adjustments
5. Clear distinction maintained between business expenses and transfer pricing considerations