Facts of the Case

The Revenue filed appeals under Section 260A challenging the ITAT order concerning Assessment Years 2012–13 and 2013–14. The dispute primarily related to:

  • Addition on account of Advertisement, Marketing, and Promotion (AMP) expenditure
  • Disallowance under Section 14A

The Transfer Pricing Officer (TPO):

  • Made protective addition using the Bright Line Test
  • Made substantive addition using the Cost Plus Method
  • Included AMP expenses such as incentives paid to travel agents

The issue had already been decided in favor of the assessee in earlier assessment years (2009–10 to 2011–12).

Issues Involved

  1. Whether AMP expenditure incurred by the assessee constitutes an international transaction under Chapter X.
  2. Whether transfer pricing adjustment on AMP expenses is justified.
  3. Whether disallowance under Section 14A is permissible when no exempt income is earned.

Petitioner’s (Revenue’s) Arguments

  • ITAT erred in deleting AMP adjustment and ignoring applicability of Chapter X.
  • The assessee, being a National Marketing Agent, promoted the brand of its foreign AE.
  • AMP expenditure created marketing intangibles benefiting the foreign AE.
  • Bright Line Test and Cost Plus Method were valid approaches.
  • ITAT wrongly deleted disallowance under Section 14A ignoring CBDT Circular No. 5/2014.

Respondent’s (Assessee’s) Arguments

  • No international transaction existed for AMP expenditure.
  • The issue had already been settled in earlier years in assessee’s favor.
  • Incentives to travel agents constitute selling expenses, not AMP.
  • No exempt income was earned; hence Section 14A disallowance is invalid.

Court Findings / Judgment

1. AMP Expenditure & Transfer Pricing

  • The Court upheld ITAT’s findings that:
    • There was no international transaction between assessee and AE regarding AMP expenditure.
    • Therefore, transfer pricing provisions cannot be invoked.
  • Relied on precedents:
    • Bausch & Lomb Eyecare Pvt. Ltd.
    • Maruti Suzuki vs CIT
  • Bright Line Test cannot be used for determining Arm’s Length Price.

2. Section 14A Disallowance

  • It was admitted that no exempt income was earned.
  • Following Cheminvest Ltd. vs CIT, the Court held:
    • No disallowance under Section 14A can be made without exempt income.
  • CBDT Circular cannot override statutory provisions.

3. Final Order

  • Appeals of the Revenue were dismissed.
  • Issues were already covered by earlier judgments of the Court.
  • Decision subject to outcome of pending SLP before the Supreme Court.

Important Clarifications

  • AMP expenditure does not automatically qualify as an international transaction.
  • Bright Line Test is not a valid method for transfer pricing analysis.
  • Section 14A disallowance requires actual exempt income.
  • CBDT Circular cannot override judicial interpretation or statutory provisions.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/58927102022ITA1742020_152816.pdf

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