AMP expenditure cannot be mechanically benchmarked as brand promotion, and the same spend cannot be doubly disallowed under transfer pricing and section 37.

AMP expenditure should not be mechanically treated as brand-building for an associated enterprise where the comparables do not support that inference and the taxpayer's AMP-to-sales ratio is lower on recomputation; only selling expenses were required to be excluded for reworking the arm's length price. The same expenditure, once examined under Chapter X transfer pricing provisions, could not also be disallowed alternatively under section 37(1) on the same basis. The effect was that the transfer pricing adjustment survived only to the limited extent of recomputation after excluding selling expenses, while the separate section 37(1) disallowance was rejected.

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Issues: (i) Whether the Advertising, Marketing and Promotion expenses could be subjected to transfer pricing adjustment on the footing that they created marketing intangibles for the associated enterprise; (ii) whether the same expenditure could alternatively be disallowed under section 37(1) of the Income-tax Act, 1961.

Issue (i): Whether the Advertising, Marketing and Promotion expenses could be subjected to transfer pricing adjustment on the footing that they created marketing intangibles for the associated enterprise

Analysis: The taxpayer's AMP to sales ratio was found to be lower than that of the comparables on fresh search and recomputation by the first appellate authority. The Tribunal also relied on its earlier order in the taxpayer's own case and the principle that only those selling expenses which do not lead to brand promotion can be excluded from the AMP base. On the facts, the Revenue could not show any material change in the business model or facts to justify a different view.

Conclusion: The transfer pricing adjustment on AMP expenses was not sustainable in full, and only selling expenses were directed to be excluded for recomputation of the arm's length price.

Issue (ii): whether the same expenditure could alternatively be disallowed under section 37(1) of the Income-tax Act, 1961

Analysis: Once the expenditure had been examined under Chapter X for transfer pricing purposes, the same amount could not again be brought to tax by making an alternative disallowance under section 37(1). The first appellate authority had relied on binding precedent to hold that the same item of expenditure could not be simultaneously subjected to both exercises.

Conclusion: The alternative disallowance under section 37(1) was not permissible.

Final Conclusion: The appeal succeeded only to the limited extent that the Assessing Officer was directed to exclude selling expenses and recompute the arm's length price, while the alternative disallowance under section 37(1) did not survive.

Ratio Decidendi: AMP expenditure cannot be mechanically benchmarked as brand-building for the associated enterprise where comparables do not support such inference, and the same expenditure, once examined under transfer pricing provisions, cannot be alternatively disallowed under section 37(1) for the same reason.

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