AMP Spend Not Separate International Transaction: ITAT Grants Relief to Pharma Major

Alcon Laboratories (India) Private Limited filed its return for AY 2020-21, declaring taxable income of Rs. 44.44 crore. The case was selected for scrutiny and referred to the Transfer Pricing Officer (TPO) due to international transactions with associated enterprises. The TPO proposed a substantial transfer pricing adjustment by treating Advertisement, Marketing and Promotion (AMP) expenditure as a separate international transaction. An adjustment of over Rs. 92 crore was proposed on this account, along with a further adjustment for interest on delayed receivables from associated enterprises.

The Assessing Officer disallowed seminar and convention expenses under Section 37(1), relying on the Supreme Court’s decision in Apex Laboratories Ltd., and also made a disallowance under Section 40(a)(ia) for alleged short deduction of tax at source. The Dispute Resolution Panel upheld the proposed adjustments, prompting the assessee to approach the ITAT.

Issues Before Tribunal: Whether AMP expenditure constituted a separate international transaction warranting transfer pricing adjustment, whether interest was imputable on delayed receivables from associated enterprises, and whether seminar and convention expenses were liable to disallowance under Section 37(1).

Tribunal’s Ruling: The ITAT held that the AMP issue was mainly covered in favour of the assessee by consistent decisions in its own case from AY 2012-13 onwards.  The Tribunal followed judicial discipline and deleted the AMP adjustment in full.

The Tribunal upheld that overdue receivables constituted a separate international transaction but restricted the arm’s length interest rate to LIBOR plus 200 basis points instead of LIBOR plus 400 basis points. This ground was partly allowed.

The Tribunal noted that the DRP had confirmed the disallowance without examining the remand report or verifying individual expenses. The issue was remanded to the Assessing Officer for fresh examination in light of Apex Laboratories Ltd., with a direction to allow expenses not found to be violative.

The issue of alleged double disallowance of gratuity provision under Section 43B was also restored to the Assessing Officer for verification. Grounds relating to levy of interest and the initiation of penalty proceedings were dismissed. Overall, the appeal was partly allowed.

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