Tribunal rules AMP expenses not international transactions, rejects Bright Line Test

The Tribunal concluded that Advertising, Marketing, and Promotion (AMP) expenses incurred by the assessee were not international transactions. The Tribunal rejected the application of the Bright Line Test for benchmarking AMP expenses and directed reconsideration following a bundled approach. The Tribunal allowed the appeals of the assessee, dismissing the revenue's appeal. The issue of depreciation on non-compete fees was not adjudicated as it was not remanded for fresh consideration.

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Issues Involved:
1. Whether the Advertising, Marketing, and Promotion (AMP) expenses incurred by the assessee are considered international transactions.
2. The application of the Bright Line Test (BLT) for benchmarking AMP expenses.
3. The approach for benchmarking AMP expenses as a bundled transaction.
4. The assessee's entitlement to depreciation on non-compete fees.

Issue-wise Detailed Analysis:

1. Whether AMP Expenses are International Transactions:
The core issue revolves around whether the AMP expenses incurred by the assessee should be treated as international transactions. The Tribunal observed that the assessee, a part of Medtronic Inc., USA, engaged in marketing and distributing proprietary products, had no explicit arrangement with its Associated Enterprises (AEs) for sharing AMP expenses. The Tribunal relied on its earlier decisions in the assessee's own case for A.Y. 2010-11 and A.Y. 2008-09, where it was held that in the absence of an agreement for sharing AMP expenses, such expenses could not be treated as international transactions. The Tribunal reiterated that even if the AMP expenses indirectly benefited the AEs, it could not be inferred that there was an agreement for sharing such expenses.

2. Application of the Bright Line Test (BLT):
The Tribunal noted that the BLT was not a proper method for benchmarking AMP expenses. The decision of the Hon’ble High Court of Delhi in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. vs. CIT had rejected the BLT for benchmarking AMP transactions. The Tribunal directed the Transfer Pricing Officer (TPO) to reconsider the benchmarking of AMP transactions without applying BLT, following the principles laid down by the Hon’ble High Court of Delhi in the case of Maruti Suzuki India Ltd. vs. CIT.

3. Benchmarking AMP Expenses as a Bundled Transaction:
The Tribunal emphasized that the AMP expenses should be benchmarked using a bundled approach, considering the overall transactions between the assessee and its AEs. The TPO had accepted the comparables adopted by the assessee for its core international transactions but had separately benchmarked the AMP expenditure, which the Tribunal found unjustified. The Tribunal remanded the matter to the TPO for fresh adjudication, considering the rejection of BLT and applying the bundled approach for benchmarking AMP expenses.

4. Depreciation on Non-Compete Fees:
The assessee contended that it was entitled to depreciation on non-compete fees, which was held to be a capital expenditure in A.Y. 2002-03. However, the Tribunal observed that this issue was not remanded by the Tribunal in the first round of appeal and, following the directions of the Hon’ble High Court, refrained from adjudicating this claim.

Conclusion:
The Tribunal concluded that AMP expenses incurred by the assessee were not international transactions and deleted the TP adjustment made by the A.O. The Tribunal allowed the appeals of the assessee and dismissed the appeal filed by the revenue. The issue of depreciation on non-compete fees was not adjudicated as it was not remanded for fresh consideration. The Tribunal’s order was pronounced in the open court on 24.07.2019.

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