Transfer pricing comparability and business loss principles drive deletion of adjustments, while office lease brokerage is deductible on incurrence.
AMP expenditure was not sustained as an international transaction merely by applying the Bright Line Test; the matter was restored for fresh action in line with the final Supreme Court position. Transfer pricing adjustment for information technology support services was deleted because the assessee's actual function was limited IT help desk and support work, and comparables from a software development profile were functionally mismatched. Advances written off were treated as business losses arising in the ordinary course of business, so the disallowance was deleted. Brokerage for office lease was allowed in the year incurred because the expenditure crystallised on payment, notwithstanding the fixed lease term.
Issues: (i) whether the adjustment made on account of advertisement, marketing and promotion expenses as an international transaction was sustainable; (ii) whether the arm's length price adjustment in respect of information technology support services was valid where the assessee was treated as a software development service provider instead of an ITES provider; (iii) whether the disallowance of advances written off was justified; and (iv) whether stamp duty and brokerage paid for office lease were allowable in the year of incurrence.
Issue (i): whether the adjustment made on account of advertisement, marketing and promotion expenses as an international transaction was sustainable.
Analysis: The adjustment was made by treating AMP expenditure as an international transaction under section 92B and by applying the Bright Line Test. The issue was already covered by the assessee's own earlier year decision, where it was held that the alleged excess AMP expenditure does not, on the existing legal position, fall within the category of an international transaction. At the same time, the matter was restored to the Assessing Officer to await the binding outcome of the pending Supreme Court proceedings.
Conclusion: The AMP adjustment was not sustained and the matter was restored to the Assessing Officer for fresh action in accordance with the final position to be declared by the Supreme Court.
Issue (ii): whether the arm's length price adjustment in respect of information technology support services was valid where the assessee was treated as a software development service provider instead of an ITES provider.
Analysis: The assessee's actual activity was limited IT help desk and support services in the ITES segment, as reflected even in the TPO's own order under section 92CA(3). Re-characterising the assessee as a software development service provider and selecting comparables from that segment was held to be functionally flawed, since the comparables were not similar to the assessee's actual service profile.
Conclusion: The transfer pricing adjustment on this issue was deleted.
Issue (iii): whether the disallowance of advances written off was justified.
Analysis: The amounts represented trade advances arising in the course of business and had become irrecoverable after the lapse of time. The Assessing Officer's approach of treating the claim as one falling under section 36(2) was held to be incorrect, because the write-off was in substance a business loss incurred in the ordinary course of business.
Conclusion: The disallowance was deleted and the assessee's claim was upheld.
Issue (iv): whether stamp duty and brokerage paid for office lease were allowable in the year of incurrence.
Analysis: The brokerage expenditure was actually incurred in the year under consideration. The fact that the office lease was for a fixed period did not justify spreading the brokerage over the lease term, because the expenditure had already crystallised in the year of payment.
Conclusion: The deduction was allowed in the year of incurrence.
Final Conclusion: The assessee succeeded on the information technology support services issue, the advances written off issue, and the office lease expenditure issue, while the AMP issue was restored for fresh consideration in line with the governing legal position; the Revenue's AMP grounds did not survive independently.
Ratio Decidendi: An AMP adjustment cannot be sustained merely by applying the Bright Line Test; comparability for transfer pricing must follow the assessee's actual functional profile, and business advances written off in the ordinary course may be allowed as business loss when irrecoverable.
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