The Bangalore bench of Income Tax Appellate Tribunal (ITAT) has recently held that Advertising Marketing Price (AMP) expenditure incurred for promoting and marketing the product manufactured by assessee, does not come within purview of international transaction.
Assessee-Herbalife International India Pvt. Ltd’s case, after filing the return of income, was selected for scrutiny.
AO noted that as the transaction exceeded Rs. 15 crores, a reference was made to the TPO under Section 92CA of the Income Tax Act.
During the year under consideration, TPO observed that assessee carried out certain advertising, marketing functions which could benefit the AE who is a legal owner of the intangibles.
The TPO noted that the assessee had not benchmarked the AMP functions separately. He thus proposed to consider expenditures as international transactions by concluding them to be AMP expenses incurred by the assessee, that resulted in benefit to the Associate Enterprises (AEs).
The TPO, while proposing the AMP adjustment estimated the adjustment based on the sale of goods by the assessee thus computing it by applying bright line test. Thereafter, the Transfer Pricing Officer passed an order under Section 92CA of the Income Tax Act.
Then, AO passed the draft assessment order by proposing an addition in the hands of the assessee at Rs. 471,19,33,412/.
Aggrieved by the order, assesee filed an objection before DRP. The DRP confirmed the AMP adjustment made in the hands of assessee.
Aggrieved by the action of DRP, the assessee further filed an appeal before the tribunal.
Percy Pardiwala, counsel for assessee submitted that, all expenses incurred and revenues earned by the assessee in India are entirely on its own account and not on behalf of any of its foreign group companies also assessee is a direct selling entity.
Further argued that the assessee did not rely on marketing or advertising but carried out the same through contracting with potential customers, pressing and demonstrating products, taking of orders, delivery of goods and collection of payments.
Payouts that form part of distributor allowances are sales incentives/commissions paid to its members for the sales undertaken by them. He also submitted that on the payments made and classified under the distributors allowances TDS has been deducted under Section 194H of the Income Tax Act and therefore these expenses are purely in the nature of selling expenses and could not be categorised as AMP as alleged by the revenue authorities, he contended.
There is no agreement between the assessee and the associated enterprises in relation to any AMP expenditure to be incurred by assessee.
Hence such expenditure could not be treated as an independent international transaction, the assessee representative added.
D.K. Mishra, counsel for revenue, supported the decisions of the lower authorities.
Following the decision of the Delhi High Court in Maruti Suzuki India Ltd the tribunal observed that in absence of an express arrangement/agreement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE, AMP expenditure is incurred by making payment to third parties for promoting and marketing the product manufactured by the assessee.
Therefore, the two member bench of Beena Pillai, (Judicial Member) and Padmavathy S, (Accountant Member) determined that
“The expenditure incurred by assessee is to carry out its day to day business activity of distribution and are directly linked with the business carried out by assessee in India”. Thus, the tribunal bench allowed the appeal filed by the assessee.
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