AMP transfer pricing needs proper comparables analysis; bright line test rejected, while warranty provision claim was remanded.

AMP transfer pricing requires a comparability-based arm's length analysis; the bright line test cannot replace examination of the assessee's AMP functions against suitable comparables, so the adjustment was remanded for fresh determination. The claim for advances written off as irrecoverable special additional duty on obsolete goods was disallowed because the goods remained closing stock and the amount continued to form part of purchase cost, so the disallowance was sustained. The warranty provision claim was not examined on the existing record and required factual verification based on past experience and rational estimation, so it was restored for fresh adjudication.

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Issues: (i) Whether the transfer pricing adjustment made in respect of advertising, marketing and promotion expenses could stand when the TPO applied the bright line test without examining the AMP functions performed by the assessee and comparables; (ii) whether the disallowance of advances written off, claimed as irrecoverable special additional duty on obsolete goods, was justified; (iii) whether the claim for deduction on account of warranty provision should be allowed or restored for fresh consideration.

Issue (i): Whether the transfer pricing adjustment made in respect of advertising, marketing and promotion expenses could stand when the TPO applied the bright line test without examining the AMP functions performed by the assessee and comparables.

Analysis: The AMP spend was treated as an international transaction and the determination of its arm's length price had to be made in accordance with the transfer pricing framework and the jurisdictional High Court's ruling. The bright line test was impermissible. The analysis required comparison of AMP functions performed by the assessee with those performed by comparable entities, with aggregation with distribution activity where appropriate and, if suitable comparables were unavailable or adjustments were not feasible, separate benchmarking by a proper method.

Conclusion: The adjustment could not be sustained on the existing record and the matter was remanded to the TPO/AO for fresh determination in accordance with law, in favour of the assessee.

Issue (ii): Whether the disallowance of advances written off, claimed as irrecoverable special additional duty on obsolete goods, was justified.

Analysis: The amount represented special additional duty paid on imported goods which later became obsolete. Since the goods were still treated as closing stock in the relevant year, the amount had not ceased to form part of the purchase cost in a manner permitting a separate deduction in that year.

Conclusion: The disallowance was upheld, against the assessee.

Issue (iii): Whether the claim for deduction on account of warranty provision should be allowed or restored for fresh consideration.

Analysis: The deduction was not examined in the assessment order, and the facts necessary to test the claim on the basis of past experience and rational estimation were not available on record. The claim therefore required fresh examination after giving an opportunity of hearing.

Conclusion: The issue was restored to the AO for fresh adjudication, in favour of the assessee.

Final Conclusion: The appeal succeeded only to the extent that two issues were remitted for reconsideration, while the disallowance of advances written off was sustained.

Ratio Decidendi: In determining the arm's length price of AMP transactions, the assessee's AMP functions must be compared with those of suitable comparables, and the bright line test cannot be applied as a substitute for the statutory comparability analysis.

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