Transfer pricing on AMP spend and comparables turns on proof of international transaction and true functional profile.

In the absence of a proved arrangement or agreement showing an international transaction, advertisement, marketing and promotion expenditure incurred with third parties could not be benchmarked under transfer pricing, and the Bright Line Test was not accepted as a valid basis for arm's length pricing. The Tribunal also held that comparables must match the actual functional profile of the assessee: where the assessee rendered IT support services and did not develop software or own related intellectual property, software development companies were not appropriate comparables. On both issues, the transfer pricing adjustments were deleted, and the assessee's position was accepted.

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Issues: (i) Whether the transfer pricing adjustment made on account of advertisement, marketing and promotion expenses could be sustained in the absence of an arrangement or agreement showing an international transaction. (ii) Whether the comparables chosen for the IT support services transaction were when the assessee was engaged in IT support services and not software development services.

Issue (i): Whether the transfer pricing adjustment made on account of advertisement, marketing and promotion expenses could be sustained in the absence of an arrangement or agreement showing an international transaction.

Analysis: The adjustment was made by following earlier years' orders and on the premise that AMP spend promoted the brand of the associated enterprise. The record did not show any proved agreement or arrangement under which the assessee incurred AMP expenditure for the AE. The Tribunal followed its own consistent view in the assessee's earlier years that, in the absence of such arrangement, AMP expenditure incurred with third parties does not itself become an international transaction within the meaning of chapter X. It also reiterated that the Bright Line Test is not a valid basis for determining arm's length price in such circumstances.

Conclusion: The AMP adjustment was rightly deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the comparables chosen for the IT support services transaction were when the assessee was engaged in IT support services and not software development services.

Analysis: The nature of the assessee's activity was accepted as IT support services. Once that functional profile was accepted, selection of comparables from software development companies was not appropriate. The Tribunal approved the finding that the assessee was not developing software, did not own intellectual property for that activity, and had correctly relied on IT-enabled service or BPO comparables. On that basis, the transfer pricing adjustment for the IT support services transaction could not survive.

Conclusion: The adjustment on IT support services was correctly deleted and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on merits and the assessee's cross-objections did not survive after the appeal was rejected.

Ratio Decidendi: In the absence of a proved arrangement showing an international transaction, AMP expenditure incurred for the assessee's own business cannot be benchmarked under transfer pricing, and functional comparability must be tested on the actual nature of services rendered.

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