AMP transfer pricing and section 14A disallowance were restricted; inventory provision reversal went back for verification.

AMP expenditure cannot be treated as a separate international transaction absent an explicit arrangement or tangible material showing such transaction with an associated enterprise, and the bright line test was rejected; the transfer pricing adjustment was deleted. Disallowance under section 14A was confined to investments that actually yielded exempt income during the year, because only those investments could enter the average investment computation, and the 2022 Explanation was held prospective; the wider disallowance was restricted. The reversal of inventory provision required fresh verification of whether the underlying provision had already been taxed, so the matter was remanded for examination.

---

---

Issues: (i) Whether the transfer pricing adjustment made on account of advertisement, marketing and promotion expenses was sustainable; (ii) Whether disallowance under section 14A was to be confined to investments that yielded exempt income during the year; (iii) Whether the disallowance of reversal of inventory provision required fresh verification.

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

Analysis: The AMP adjustment was examined in the light of the assessee's own earlier years and the settled position that, in the absence of an explicit arrangement or tangible material showing an international transaction, AMP spend cannot be treated as a separate international transaction merely because the expenditure is higher than that of comparables. The reasoning also rejected the approach of applying the bright line test to infer the existence of such a transaction. Since the facts were identical to the earlier years, the Tribunal followed its prior view.

Conclusion: The AMP transfer pricing adjustment was deleted, in favour of the assessee.

Issue (ii): Whether disallowance under section 14A was to be confined to investments that yielded exempt income during the year.

Analysis: The Tribunal held that only those investments which actually yielded exempt income could be taken for computing the average value of investments for the purpose of disallowance. It also held that the Explanation inserted to section 14A by the Finance Act, 2022 was prospective and could not be applied to the assessment year in question. On that basis, the wider disallowance made by considering the entire investment portfolio was not sustainable.

Conclusion: The section 14A disallowance was restricted to investments yielding exempt income, in favour of the assessee.

Issue (iii): Whether the disallowance of reversal of inventory provision required fresh verification.

Analysis: The claim was that the provision had already suffered tax in the year of creation and that taxing the reversal would result in double taxation. As the factual position regarding prior taxation of the underlying provision needed verification, the matter was sent back for fresh examination by the Assessing Officer.

Conclusion: The issue was remanded for verification, partly in favour of the assessee.

Final Conclusion: The assessee succeeded on the principal transfer pricing and section 14A issues, while the inventory-provision issue was restored for verification, resulting in a partly favourable disposal overall.

Ratio Decidendi: AMP expenditure cannot be treated as a separate international transaction absent tangible material showing an arrangement with the foreign associated enterprise, and section 14A disallowance must be confined to investments that generated exempt income during the relevant year.

---