AMP transfer pricing: dealer incentives excluded from the base, remand ordered on unresolved components, and section 37 disallowance deleted.

The AMP transfer pricing framework was applied to hold that the Transfer Pricing Officer could examine advertisement, marketing and promotion expenses, but amounts shown as pricing adjustment or extra trade discount, being dealer incentives and not true AMP spend, had to be excluded from the AMP base. The component said to represent salaries to demonstrators required fresh verification, along with comparable selection, and was remitted for reconsideration. The alternative disallowance under section 37(1) was deleted because the same AMP expenditure could not be again disallowed as not wholly and exclusively for business once it had been examined under transfer pricing rules. The appeal was thus partly allowed.

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Issues: (i) whether the Transfer Pricing Officer had jurisdiction to make a transfer pricing adjustment on account of advertisement, marketing and promotion expenses; (ii) whether the amount described as pricing adjustment or extra trade discount was to be excluded from the total advertisement, marketing and promotion expenses for arm's length price determination; (iii) whether the component of Rs. 6 crore claimed to represent salaries paid to demonstrators and the selection of comparables required fresh examination; and (iv) whether the alternative disallowance under section 37(1) of the Income-tax Act, 1961 was sustainable.

Issue (i): whether the Transfer Pricing Officer had jurisdiction to make a transfer pricing adjustment on account of advertisement, marketing and promotion expenses.

Analysis: The Special Bench decision in LG Electronics had already upheld the Transfer Pricing Officer's jurisdiction in similar circumstances. The assessee kept the issue alive, but no different legal basis was shown to depart from that binding view.

Conclusion: The jurisdiction of the Transfer Pricing Officer to make a transfer pricing adjustment on account of advertisement, marketing and promotion expenses was upheld, against the assessee.

Issue (ii): whether the amount described as pricing adjustment or extra trade discount was to be excluded from the total advertisement, marketing and promotion expenses for arm's length price determination.

Analysis: The amount was accepted as a discount or incentive passed on to dealers and distributors in the nature of a reduction in sale price. Applying the principle that expenditure not truly in the nature of advertising, marketing or promotion cannot enter the AMP base, the amount could not be treated as part of qualifying AMP expenditure merely because it was said to assist brand loyalty.

Conclusion: The pricing adjustment amount was directed to be excluded from the total advertisement, marketing and promotion expenses, in favour of the assessee.

Issue (iii): whether the component of Rs. 6 crore claimed to represent salaries paid to demonstrators and the selection of comparables required fresh examination.

Analysis: The true nature of the Rs. 6 crore component was not established on the record, and the material was insufficient to determine whether it formed part of AMP expenditure. The selection of comparables was also required to be aligned with the methodology indicated by the Special Bench for AMP benchmarking. Fresh adjudication was therefore necessary on both aspects.

Conclusion: The matter concerning the Rs. 6 crore component and the comparable selection was remanded to the Assessing Officer and the Transfer Pricing Officer for fresh decision.

Issue (iv): whether the alternative disallowance under section 37(1) of the Income-tax Act, 1961 was sustainable.

Analysis: Once the AMP expenditure is processed under the transfer pricing regime for attribution of brand-building benefit to the foreign associated enterprise, the same amount cannot again be disallowed under section 37(1) on the premise that it was not wholly and exclusively for business. The transfer pricing adjustment and the ordinary deduction provision operate in different fields, and invoking both would cause double addition.

Conclusion: The alternative disallowance under section 37(1) was vacated, in favour of the assessee.

Final Conclusion: The appeal was partly allowed. The transfer pricing approach on AMP expenses was upheld in principle, the pricing adjustment amount was excluded from AMP, the unresolved AMP components were remitted for fresh consideration, and no separate disallowance under section 37(1) survived.

Ratio Decidendi: Expenditure that is in the nature of discount or incentive and not truly advertising, marketing or promotion cannot form part of the AMP base for transfer pricing purposes, and once AMP expenditure is adjusted under Chapter X, the same amount cannot again be disallowed under section 37(1) on the ground of lack of exclusive business purpose.

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