Transfer pricing on AMP spend requires proof of an international transaction; restored depreciation rules permit set-off of unabsorbed depreciation.

Transfer pricing adjustment on advertisement, marketing and sales promotion expenditure depends first on proof of an international transaction; where the assessee incurs AMP spend with third parties in India for its own products and no agreement or understanding obliges it to promote the associated enterprise's brand, the spend cannot be re-characterised as a deemed transaction, so the mark-up adjustment fails. The restored depreciation regime under section 32(2) allows carry forward and set-off of unabsorbed depreciation without the earlier restriction period, so brought forward depreciation remains available against business income. On that basis, the AMP addition was deleted and the depreciation set-off was allowed.

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Issues: (i) Whether advertisement, marketing and sales promotion expenditure could be treated as an international transaction so as to justify transfer pricing adjustment including mark-up. (ii) Whether brought forward unabsorbed depreciation was allowable to be set off.

Issue (i): Whether advertisement, marketing and sales promotion expenditure could be treated as an international transaction so as to justify transfer pricing adjustment including mark-up.

Analysis: The transfer pricing provisions require the existence of an international transaction before any arm's length price adjustment can be made. In the absence of any agreement, arrangement, or understanding obliging the assessee to incur AMP expenditure for the benefit of its associated enterprise, and where the payments were made to third parties in India for promoting the assessee's own products, the expenditure could not be re-characterised as a deemed international transaction merely because the foreign brand owner may have received incidental benefit. The bright line approach and the alternative profit split approach could not cure the foundational defect of proving the transaction itself.

Conclusion: The AMP expenditure was not an international transaction and the transfer pricing adjustment, including the mark-up, was not sustainable; the issue was decided in favour of the assessee.

Issue (ii): Whether brought forward unabsorbed depreciation was allowable to be set off.

Analysis: The scheme of section 32(2) as restored by the later amendment permits carry forward and set off of unabsorbed depreciation without the earlier restriction period applicable under the substituted version. The assessee's brought forward unabsorbed depreciation therefore remained available for adjustment against business income.

Conclusion: The set off of brought forward unabsorbed depreciation was allowable and the disallowance was deleted; the issue was decided in favour of the assessee.

Final Conclusion: The additions made on account of AMP adjustment were deleted and the assessee was held entitled to the depreciation set off, resulting in allowance of the assessee's appeals and dismissal of the Revenue's appeals on the contested issues.

Ratio Decidendi: A transfer pricing adjustment cannot be made unless the Revenue first establishes the existence of an international transaction with an ascertainable price, and unabsorbed depreciation is to be allowed in accordance with the restored section 32(2) regime.

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