2026 (4) TMI 123 - AT - Income Tax

AMP expenditure is not an international transaction without evidence of arrangement; bright line test adjustment was deleted.

AMP expenditure cannot be treated as an international transaction, and the bright line test cannot by itself sustain a transfer pricing adjustment without ... TP Adjustment - addition made on creation of marketing intangible by assessee in favour of his associates enterprise on account of AMP expenses - Bright line test - Business expenditure - Foreign tax credit verification - Additional ground Advertisement, marketing and promotion expenses - International transaction - Bright line test - Transfer pricing adjustment - HELD THAT: - The Tribunal held that, in the assessee's own case for the earlier year [2014 (1) TMI 1529 - ITAT DELHI], the Delhi High Court [2015 (12) TMI 1188 - DELHI HIGH COURT] had already held that AMP expenditure did not constitute an international transaction, and that view had been sustained when the Revenue's appeal was dismissed by the Supreme Court [2024 (11) TMI 1164 - SC ORDER]. The coordinate benches had followed that position for subsequent years as well. Since the Revenue could not show any change in facts or law for the year under appeal, the same view was required to be followed. The Tribunal further noted that application of the bright line test stood rejected in Sony Ericsson Mobile Communication India Pvt. Ltd. [2015 (3) TMI 580 - DELHI HIGH COURT] and once no international transaction existed in relation to AMP expenditure, the protective adjustment based on that test also necessarily failed. [Paras 6, 7, 8] Ground Nos. 2 and 3, along with their sub-grounds, were decided in favour of the assessee and the AMP-related additions were deleted. Ex-gratia payment made to its employee at the time of marriage of their daughter - allowable Business expenditure - Employee welfare expenditure - HELD THAT: - The Tribunal noted that in the assessee's own cases for AY: 2015-16 [2020 (1) TMI 861 - ITAT DELHI] and AY: 2016-17 [2023 (1) TMI 1197 - ITAT DELHI], the coordinate bench had remitted the same issue to the Assessing Officer for allowing the deduction after verification of details, and that in the consequential proceedings relief had been granted. Following the same course, the Tribunal directed that the present year's claim also be dealt with on identical lines. [Paras 10, 11] Ground No. 4 was allowed for statistical purposes with a direction to the Assessing Officer to follow the earlier Tribunal directions and verify the claim. Denial of Foreign tax credit - Verification of certificates - Claim of foreign tax credit was remitted to the Assessing Officer for verification of the supporting certificates. - HELD THAT: - The Tribunal observed that in the assessee's own earlier years the issue of foreign tax credit had been remitted for verification of certificates, and that in the consequential order the credit had been allowed after reconciliation and examination of the documents. On the same reasoning, the claim for the year under appeal required fresh verification by the Assessing Officer. [Paras 12] Ground No. 5 was allowed for statistical purposes and remitted to the Assessing Officer for verification of certificates. Additional ground - Warranty provision - Mercantile system of accounting - HELD THAT: - The Tribunal held that there was no dispute in principle that provision for warranty is deductible as an ascertained liability under section 37(1), applying Rotork Controls India Ltd. [2009 (5) TMI 16 - SUPREME COURT]. It further held that if there was a mismatch between the accounting presentation in the books and the computation in the return, the assessee was entitled to explain that position in assessment proceedings. Since the claim was not a wholly new claim but one involving enhancement of an existing claim, it deserved to be admitted and examined afresh by the Assessing Officer. [Paras 15, 16] The additional ground was admitted and restored to the Assessing Officer for fresh determination after necessary queries; it was allowed for statistical purposes. Final Conclusion: The appeal was allowed. The AMP-related transfer pricing and protective adjustments were deleted, while the claims relating to daughter marriage fund, foreign tax credit and the additional warranty deduction were restored to the Assessing Officer for fresh verification and determination. Issues: (i) whether the transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure, including the protective adjustment based on the bright line test, was sustainable; (ii) whether disallowance of daughter marriage fund expenditure was justified; (iii) whether foreign tax credit was to be allowed or restored for verification; (iv) whether deduction for the warranty-related unwinding of discount expenditure was to be admitted as an additional ground and examined afresh.Issue (i): whether the transfer pricing adjustment on account of advertisement, marketing and sales promotion expenditure, including the protective adjustment based on the bright line test, was sustainable.Analysis: The adjustment was examined in the light of the settled position that AMP expenditure, by itself, does not constitute an international transaction in the absence of a demonstrated arrangement with the associated enterprise. The bright line test was also rejected as a basis for inferring such a transaction. On the facts, no material change was shown to justify a different view from the earlier years in the assessee's own case.Conclusion: The transfer pricing adjustment and the protective adjustment on AMP expenditure were deleted and the issue was decided in favour of the assessee.Issue (ii): whether disallowance of daughter marriage fund expenditure was justified.Analysis: The expenditure was treated as a business-related employee welfare claim, and the matter had earlier been sent back in the assessee's own case for verification of details. The same approach was followed here, with the claim to be examined in accordance with the earlier directions.Conclusion: The disallowance was not finally sustained and the issue was remitted for verification, with relief granted in favour of the assessee for statistical purposes.Issue (iii): whether foreign tax credit was to be allowed or restored for verification.Analysis: The claim was considered to be capable of verification from the certificates and reconciliation statement, and the matter was treated as one requiring factual examination rather than outright rejection.Conclusion: The issue was restored to the Assessing Officer for verification and was decided in favour of the assessee for statistical purposes.Issue (iv): whether deduction for the warranty-related unwinding of discount expenditure was to be admitted as an additional ground and examined afresh.Analysis: The additional claim was treated as arising from the same warranty liability framework and from the assessee's mercantile method of accounting. The liability was regarded as an ascertained business liability, and the claim was not treated as a wholly new issue but as one requiring proper verification and computation.Conclusion: The additional ground was admitted and restored to the Assessing Officer for fresh examination, with the issue sustained in favour of the assessee for statistical purposes.Final Conclusion: The appeal was partly allowed, with the AMP-related transfer pricing addition deleted and the remaining disputed claims either remitted or restored for verification.Ratio Decidendi: AMP expenditure cannot be treated as an international transaction or adjusted by the bright line test without demonstrated material showing an arrangement with the associated enterprise, and deductible business claims requiring factual verification may be restored for fresh examination rather than rejected outright.