AMP transfer pricing and block-of-assets depreciation: excess brand spend needs tangible evidence, and depreciation continues despite de-capitalisation.

AMP transfer pricing adjustment was held unsustainable because excess advertisement, marketing and sales promotion spend, by itself, does not establish an international transaction or justify use of the Bright Line Test; tangible evidence of an arrangement for the foreign associated enterprise is required. Depreciation on assets de-capitalised and transferred to stock-in-trade was also held allowable under the block-of-assets regime, since depreciation continues on the written down value so long as the block remains in existence. The remaining tax-credit matter was left for verification, and the substantive relief was in favour of the assessee.

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Issues: (i) Whether the transfer pricing adjustment made on account of advertisement, marketing and sales promotion expenses was sustainable; and (ii) Whether depreciation could be disallowed on capital assets that had been de-capitalised and transferred to stock-in-trade.

Issue (i): Whether the transfer pricing adjustment made on account of advertisement, marketing and sales promotion expenses was sustainable.

Analysis: The adjustment rested on the premise that excess AMP expenditure created marketing intangibles for the associated enterprise and that the excess spend could be benchmarked by applying the Bright Line Test. The binding precedents relied upon held that the Bright Line Test is not a valid method either to infer the existence of an international transaction or to determine its arm's length price. It was also held that the Revenue must first establish, through tangible material, an arrangement or understanding showing that the parties acted in concert for the benefit of the foreign associated enterprise. Mere excess AMP spend, or mere use of the brand or logo, is insufficient to presume an international transaction.

Conclusion: The AMP adjustment was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether depreciation could be disallowed on capital assets that had been de-capitalised and transferred to stock-in-trade.

Analysis: The assets formed part of a block of assets and were later converted into stock-in-trade at a nominal value in accordance with the assessee's consistent accounting practice. Under the block-of-assets regime, depreciation is allowed on the written down value of the block, and the allowance does not cease merely because a particular asset is sold, discarded, written off, or de-capitalised, so long as the block continues to exist. The Revenue's objection did not displace the settled principle applied in the assessee's own case that such treatment does not warrant disallowance of depreciation.

Conclusion: The disallowance of depreciation was unsustainable and relief was allowed in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive transfer pricing and depreciation issues, while the remaining tax-credit matter was left to verification, resulting in an overall disposal in favour of the assessee.

Ratio Decidendi: An AMP adjustment cannot be made without tangible evidence of an international transaction, and the Bright Line Test is not a valid benchmark; depreciation under the block-of-assets system continues despite de-capitalisation of individual assets so long as the block remains in existence.

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