The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition against Mondelez India Foods towards the transfer pricing adjustment on account of Advertisement, Marketing and Promotion (AMP) expenditure holding that the AMP expenditure could not be treated as international expenditure.
The assessee Mondelez India Foods Private Ltd (formerly known as Cadbury India Limited) was a subsidiary of Cadbury Overseas Ltd UK which holds 58.63% and Cadbury Mauritius Ltd which holds 38.97% of the equity shareholding while the balance 2.41% equity shareholding was held by Indian public company comprising of various shareholders. The assessee was incorporated in the year 1948 as Cadbury Fry (India) Private Limited. The assessee was in the business of manufacturing and marketing of malted food drinks, cake, powder chocolates, toffees, drinking chocolate and sugar confectionery.
For the assessment year 2011-12, the assessee filed the return of income on 30/11/2011 declaring a total income and later on revised the return on 11/10/2012 without any change in the amount of returned income. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions with its Associated Enterprises, a reference was made to the Transfer Pricing Officer (TPO) to determine the arm’s length price of the international transaction of the assessee with its Associated Enterprises (AE). The TPO,vide order dated 27/01/2015 proposed a total adjustment. The Assessing Officer passed the draft assessment order incorporating the TP adjustment.
The Assessing Officer passed a draft assessment order against which the assessee raised objections before the Dispute Resolution Panel (DRP). The DRP gave marginal relief to the assessee with respect of depreciation claimed on marketing know-how and sustained the TP adjustment as well as the other additions / disallowance made by the Assessing Officer.
The TPO noticed that the assessee was incurring huge expenses on advertisement, marketing and promotion on Cadbury brand in India. The TPO was of the view that since the assessee was not the legal owner of the brand in India, the AMP expenses incurred by the assessee had translated into development of AEs brand and, therefore, the assessee needed to be compensated. The assessee filed objection before the DRP. The DRP rejected the various objections raised by the assessee and confirmed the TP adjustment towards the AMP expenses
J.D. Mistri, who appeared on behalf of the assessee submitted that during the course of hearing submitted that the issue was covered by the decisions of the co-ordinate bench in assessee’s own case for A.Y. 2005-06,2006-07 and 2009-10 and Uodol Raj Singh, who appeared on behalf of the revenue relied on the orders of the lower authorities.
The two-member bench of Vikas Awasthy (Judicial Member) and Padmavathy S. (Accountant Member) observed the decisions of Maruti Suzuki, Whirlpool India, Bausch & Lomb Eyecare (India) Pvt.Ltd in which the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP had been analysed thread bare.
Under Sections 92B to 92F of the Income Tax Act, the prerequisite for commencing the TP exercise was to show the existence of an international transaction, under Section 92B(1) of the Income Tax Act an ‘international transaction’ means-
(a) a transaction between two or more AEs, either or both of whom are non-resident
(b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and
(c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection with the – benefit, service or facility provided or to be provided to one or more of such enterprises.
The Bench allowed this ground of appeal filed by the assessee, holding that the AMP expenditure was not an International Taxation and transfer pricing adjustment on account of AMP expenditure. As already mentioned, merely because there was an incidental benefit to the foreign AE, it could ot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE.
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