Transfer pricing adjustment on advertisement and marketing expenditure denied; appeal allowed with no ALP adjustment applied

Transfer pricing dispute concerning whether an arm's length price adjustment could be made to advertising and marketing expenditure. The reasoning relied on the conclusion that the marketing and advertisement costs did not warrant an ALP adjustment, following earlier coordinate-bench findings in the taxpayer's own matter; consequently, no TP adjustment was applied to those expenditures and the taxpayer's appeal was allowed, resulting in disallowance of any upward TP adjustment on the challenged marketing and advertising outlays.

---

---

Issues: Whether advertisement, marketing and sales promotion (AMP) expenses incurred by the assessee and paid to third parties constitute an "international transaction" with associated enterprises such that an arm's length price adjustment under Chapter X of the Income-tax Act, 1961 is permissible, and whether the upward TP adjustment of Rs. 211.70 crores on account of alleged brand-building activities is sustainable.

Analysis: The legal framework involves Chapter X of the Income-tax Act, 1961 (including sections 92B, 92C, 92CA, 92CB and section 92F(ii)) and the rules for determination of arm's length price (rules 10B, 10C, 10AB). Chapter X permits substitution of a disclosed transaction price with an arm's length price and requires establishment of an international transaction with an ascertainable price before a transfer pricing adjustment can be made. In the absence of a machinery provision enabling a quantitative substitution for AMP expenses, and having regard to the principles that incidental benefits to an associated enterprise do not automatically convert domestic AMP spend into an international transaction, AMP spend must be shown to constitute an international transaction with an ascertainable price. The Tribunal relied on a co-ordinate bench decision in the assessee's earlier year, which held that AMP payments to third parties incurred for the assessee's own business do not, merely by benefiting the foreign associated enterprise incidentally, amount to an international transaction permitting Chapter X adjustments. The facts of the earlier year were found to be similar and the earlier reasoning on the inapplicability of Chapter X to such AMP adjustments was applied.

Conclusion: The AMP expenditure does not constitute an international transaction with associated enterprises for the purposes of Chapter X and no arm's length price adjustment on account of AMP expenses is permissible; the appeal is allowed in favour of the assessee.

---