Whirlpool of India Ltd vs. DCIT (ITAT Delhi)

Transfer Pricing: After TPO determines the AMP expenditure incurred for benefit of AE, balance is deemed to be incurred for assessee’s business & is automatically allowable u/s 37(1)

The TPO determined the qualifying amount spent on creation of marketing intangible at Rs.180.73 crore. By applying 12.5% mark-up, he worked out the TP adjustment of Rs.203 crore. The AO made the adjustment but also held that without prejudice to the TPO’s AMP adjustment, the principal amount of Rs.180.73 crore was not allowable u/s 37(1). Since the TPO had already proposed adjustment of Rs.203 crore, which the AO made in the final order, he did not specifically make the separate addition of Rs.180.73 crore. On appeal by the assessee, the AMP adjustment was remanded to the TPO to apply the principles laid down in L.G. Electronics 140 ITD 41 (SB). As regards the alternative s. 37(1) disallowance HELD by the Tribunal:

(i) The general proposition that if an expenditure is deductible u/s 37(1) as having being incurred wholly and exclusively for business purpose, the same has to be allowed in entirety notwithstanding the fact that some third party (being the foreign AE in the present case) also got some advantage by such expenditure, undergoes change because of the operation of Chapter X of the Act, which requires the computation of income from international transactions having regard to arm’s length price. When there is an international transaction, the TP provisions prevail over other regular provisions governing the deductibility or taxability of an amount from such transaction. The exercise of separating the amount spent by the assessee in relation to an international transaction of building brand for its foreign AE for distinctly processing as per s. 92 cannot be considered as a case of disallowance of AMP expenses u/s 37(1). Both sections i.e. 37(1) and s. 92 operate in different fields. As held in L.G Electronics, the overall amount of AMP expenses should be processed to find out the amount spent on the brand building for the foreign AE and then disallowance should be made for such amount with the appropriate mark-up by way of TP adjustment. The remaining amount has to be considered as incurred by the assessee for its own business purpose eligible for deduction subject to the regular provisions of the Act;

(ii) The avowed object of the TP adjustment on account of AMP expenses is to first find out and attribute the amount spent by the assessee towards promotion of its foreign AE’s brand/logo etc and then make addition for such amount with appropriate mark-up. By this exercise, the total AMP expenses get segregated into two classes, viz., one benefiting the assessee’s business and two, benefiting the foreign AE by way of promotion of the brand. Whereas the first amount is deductible in full subject to the regular provisions, the second amount is added to the total income with suitable mark-up by way of the TP adjustment. Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee’s business, there can be no scope for again reverting to s. 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred `wholly and exclusively’ for the purposes of assessee’s business. If the amount of AMP expenses is disallowed by processing under both the sections, that is 37 and 92, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up.