ITAT Mumbai allows TP relief on AMP expenses, rejects Bright Line Test application

The ITAT Mumbai ruled in favor of the assessee regarding TP adjustments on AMP expenses. The TPO had made ALP adjustments claiming the assessee incurred conference, marketing and promotion expenses for the benefit of its AE. The Tribunal found the lower authorities relied on an annual report from a different group entity that had no international transactions with the assessee, making it irrelevant. Crucially, the subvention income received by the assessee exceeded the entire ALP adjustment, providing grounds for relief. The Tribunal also rejected the TPO's application of Bright Line Test, citing the Delhi HC decision in Maruti Suzuki India Ltd. Additionally, regarding disallowance of surgeon/consultant expenses under CBDT Circular No.5/2012 and Section 37(1), the Tribunal followed its own precedent favoring the assessee from AY 2010-11, holding the expenses were incurred wholly and exclusively for business purposes.

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ISSUES:

• Whether advertising, marketing and promotion (AMP) expenses incurred by a low risk distributor constitute an international transaction with the associated enterprise (AE) under Section 92B of the Income Tax Act.
• Whether the AMP expenses incurred by the assessee benefit the AE and require arm's length price (ALP) adjustment.
• Whether subvention income received from AE compensates the assessee for AMP expenses and precludes further ALP adjustment.
• Whether the application of the Bright Line Test (BLT) to AMP expenses for ALP adjustment is valid.
• Whether expenses incurred on surgeons/consultants as part of marketing promotion expenses are allowable deductions under the Income Tax Act, considering CBDT Circular No.5/2012 and the Explanation to Section 37(1) of the Act.

RULINGS / HOLDINGS:

• The court held that the AMP expenses were incurred wholly and exclusively for the assessee's own business to create awareness and educate doctors about its products, and thus did not constitute an international transaction with the AE under Section 92B.
• The court found that even if the AMP expenses were considered as services rendered to the AE constituting an international transaction, the subvention income received by the assessee from the AE fully compensated these expenses, negating the need for any ALP adjustment.
• The court rejected the application of the Bright Line Test for ALP adjustment, noting that it was negatived by a higher court and thus not applicable.
• Regarding expenses on surgeons/consultants, the court allowed the expenditure, holding that such expenses are incurred for business purposes and are not prohibited by law or the Medical Council of India (MCI) regulations, and thus are deductible under the Income Tax Act.

RATIONALE:

• The court applied the provisions of Section 92B of the Income Tax Act and its Explanation, which define "international transaction" to include provision of services to AEs, but emphasized the factual context that the AMP expenses were for the assessee's own distribution business and did not confer benefit on the AE.
• The court relied on the subvention income arrangement under supplementary distribution agreements, whereby the AE compensates the assessee to maintain arm's length margins, concluding that this income effectively covers the AMP expenses, precluding double adjustment.
• The court referred to judicial precedent negating the Bright Line Test in transfer pricing matters, thereby disallowing its use for ALP adjustment in this case.
• For the disallowance of expenses on doctors/surgeons, the court examined the scope of MCI regulations and CBDT Circular No.5/2012, concluding that these apply only to medical practitioners and not to pharmaceutical or medical device companies, and that the expenses were incurred for legitimate business purposes such as training and product awareness.
• The court noted that the Explanation to Section 37(1) prohibits allowance of expenditure incurred for an offence or prohibited by law, which was not established in this case.

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