The Income Tax Appellate Tribunal (ITAT), Bangalore Bench ruled that the burden of expenditure for new product samples is on the manufacturer, so the wholesaler can not claim the tax benefit.
The assessee, M/s. Nike India Private Limited is engaged in carrying on wholesale business in footwear, apparel and support equipment of Nike Brand in India. The assessee is a wholly owned subsidiary of Nike holding BV, Netherlands, which in turn is held by M/s. Nike Inc., USA.
The issue urged by the assessee relates to T.P adjustment in respect of reimbursement of expenses in respect of trade samples.
In respect of “Purchase of samples”, the AO noticed that the assessee has purchased samples from its AE and also incurred freight charges relating to samples. The TPO took the view that the samples supplied to the retailers would benefit the AE only. Accordingly, he determined the ALP of samples (including the freight charges) as NIL.
The expenses relating to freight and insurance were related to the import of trade samples purchased from its AE. The TPO held that these are not related to the business activities of the assessee. Accordingly, he determined the ALP of this expense as NIL.
The assessee contended that expenditure was incurred on samples for commercial considerations and hence the same should be allowed.
The coram consists of Beena Pillai and B.R. Baskaran opined that when the transaction is between related parties, the Act places more burden on the shoulders of the assessee to prove that the expenditure is related to the business of the assessee. Further, in trade circles also, it is a known fact that the expenditure on samples is borne by the manufacturers only.
The ITAT stated that the claim of expenditure is against the trade practice and the assessee appears to have borne the expenses only on the reasoning that the same was charged upon it by its parent company. Hence, ITAT held that the AO was justified in holding that the burden to incur this expenditure is that of the parent company and is not related to the business activities of the assessee. Accordingly, confirmed the disallowance made by the AO.
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