The dispute revolved around whether advertising, marketing and promotion (AMP) expenses, IT support services, business support services, and certain seminar and sponsorship expenses incurred by Alcon India could be treated as international transactions benefiting its foreign associated enterprise (AE) and consequently subjected to transfer pricing adjustments.
Alcon Laboratories (India) Pvt. Ltd., a subsidiary of the global Alcon group, is engaged in the distribution of ophthalmic surgical equipment, lenses, spare parts and pharmaceutical products in India, along with providing related maintenance and support services.
For the assessment year 2018–19, Alcon Laboratories (India) Private Limited declared a total income of Rs 44.96 crore, following which the case was selected for scrutiny and, owing to its international transactions with associated enterprises, was referred to the Transfer Pricing Officer (TPO).
During the proceedings, the TPO proposed multiple adjustments, including an addition of Rs 15.44 crore on account of alleged excessive advertising, marketing, and promotion (AMP) expenditure; adjustments relating to IT support services and business support services; and a disallowance of Rs 9.42 crore under Section 37 of the Income Tax Act in respect of expenses incurred towards seminars, conferences, honorarium, training, and sponsorship. Although the Dispute Resolution Panel (DRP) granted partial relief, the final assessment order significantly enhanced Alcon India’s taxable income to over ₹70 crore, leading the company to challenge the assessment before the Income Tax Appellate Tribunal (ITAT).
Alcon India argued that it functioned as a Limited Risk Distributor (LRD) and that the advertising, marketing and promotion (AMP) expenses were incurred wholly for the purposes of its own business operations in India and not on behalf of its foreign associated enterprise (AE).
It contended that there was no agreement, understanding or arrangement requiring it to incur AMP expenditure for the development or promotion of the AE’s brand, and that the Revenue had erroneously applied the Bright Line Test, a methodology that has been consistently rejected by higher judicial forums.
The company further submitted that AMP expenses could not be artificially segregated and treated as a separate international transaction, particularly when its overall profitability under the Transactional Net Margin Method (TNMM) was already demonstrated to be at arm’s length.
Alcon India also challenged the disallowances made under Section 37 of the Income Tax Act, arguing that they were mechanical in nature and failed to consider the factual record as well as directions issued by the Dispute Resolution Panel in earlier years. In support of its case, the company placed strong reliance on prior rulings of the ITAT in its own matters and landmark judgments of the Delhi High Court, including Maruti Suzuki and Sony Ericsson.
The Income Tax Department, on the other hand, maintained that Alcon India had incurred non-routine advertising, marketing and promotion (AMP) expenditure which resulted in the development, enhancement and protection of marketing intangibles owned by its foreign associated enterprise (AE). According to the Revenue, such expenditure constituted a separate international transaction distinct from routine distribution activities and therefore required independent benchmarking and arm’s-length compensation.
The Department further argued that certain distributor commissions, sales promotion expenses, seminar and convention costs, as well as sponsorship expenses, were rightly treated as part of AMP expenditure. It also justified the disallowances made under Section 37 of the Income Tax Act, contending that the expenses were either in violation of medical council regulations or were not incurred wholly and exclusively for the purposes of Alcon India’s business.
After examining the record, the ITAT noted that identical issues on similar facts had already been decided in Alcon India’s favour in earlier years. The Tribunal reiterated settled legal principles and rejected the Revenue’s approach.
The Tribunal categorically observed:
“The fact that the benefit of such AMP expenditure would also ensure to the AE is not sufficient to infer existence of an international transaction.”
Rejecting the Bright Line Test, the ITAT reaffirmed:
“The bright line test has been rejected as a valid method for either determining the existence of an international transaction or for the determination of the arm’s length price of such transaction.”
The Bench also stressed that in the absence of an explicit agreement, AMP expenses cannot be treated as services rendered to the AE.
Allowing the appeal on the AMP issue, the Tribunal held:
“Respectfully following the above decision, we direct the AO/TPO to delete the addition made towards ALP determined for AMP expenses.”
On the overall outcome, the Tribunal concluded:
“In view of the above, the grounds raised by the assessee are allowed.”
To view the official order, click the link below:
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