2022 (11) TMI 626 - HC - Income Tax

Disallowance of AMP expenditure u/s 37(1) - Revenue expenditure or capital expenditure - advertising and promotion of liquor in India - HELD THAT - We are not persuaded by the contention of the learned counsel for the Revenue that the AMP expenditure incurred by the Assessee is capital in nature, the said contention is vague and unsubstantiated from the record. Revenue itself has treated the AMP expenditure incurred by the Assessee in the previous assessment years as a revenue expenditure. ITAT while adjudicating the appeals of the Assessee for AY 2009-10 and 2010-11 has held that the AMP expenditure incurred by the Assesee was in the nature of bonafide business expenditure in furtherance of its legitimate business interests. Revenue has not assailed the said findings of ITAT in the appeals filed for the said assessment years. It is therefore, evident that Revenue s contention that the AMP expenditure should be treated as capital expenditure is without any legal basis.

Summary

Issues:
1. Transfer pricing adjustment on account of AMP expenditure.
2. Disallowance of AMP expenditure under Section 37(1) of the Income Tax Act.

Transfer Pricing Adjustment on Account of AMP Expenditure:
The Appellant, Revenue, challenged the order of the Income Tax Appellate Tribunal (ITAT) regarding the common order dated 13th December, 2019, for the Assessment Year 2011-12. The case involved international transactions with Associated Enterprises (AEs) and the determination of Arms's Length Price (ALP) under Section 92CA(3) of the Act. The Transfer Pricing Officer (TPO) made an adjustment of Rs. 7,10,04,420/- on account of Advertising, Marketing, and Promotion (AMP) expenditure incurred by the Assessee. However, the Dispute Resolution Panel (DRP) allowed the Assessee's objection, deleting the ALP adjustment based on the Bright Line Test method. The ITAT upheld the decision, emphasizing that the expenditure was revenue in nature, not capital, and dismissed the appeal of the Revenue.

Disallowance of AMP Expenditure under Section 37(1) of the Act:
The DRP disallowed AMP expenditure of Rs. 6,64,24,161/- under Section 37(1) of the Act, citing violations of advertising and promotion regulations in India. The ITAT found the DRP's direction for further enquiry impermissible under Section 144C of the Act. It also noted that there was no concrete evidence of violations of advertising standards by the Assessee. The ITAT ruled that the expenditure was revenue in nature and not capital, based on the commercial expediency of enhancing sales and profits. The ITAT dismissed the Revenue's appeal, stating that the AMP expenditure was legitimate business expenditure in the Assessee's best interests.

In conclusion, the High Court dismissed the appeal by the Revenue, affirming the ITAT's decision. The Court held that the AMP expenditure was revenue in nature, rejecting the Revenue's claim that it was capital expenditure. The Court found no substantial question of law in the case and upheld the ITAT's assessment of the facts and law, leading to the dismissal of the appeal.