AMP expenditure incurred by assessee cannot come within purview of international transaction
Case Law Citation: –
Joint Commissioner of Income Tax Vs. General Mills India Pvt. Ltd.; ITA No. 126/Mum./2018; Asst. Year 2013-14; Jul 14, 2020.
Case Summary: –
Facts of the case:
- The assessee, a company incorporated in India, is engaged in the business of atta, semiya (vermicelli), pizza kits, dry cake mix and Indian frozen breads viz. rotis, parathas & nans and trading in canned corn niblets, cream style sweet corn and asparagus spears which are sold under the brand name “green giant”.
- The assessee also provides software development service, business process service and procurement support service to its Associated Enterprises (AEs).
- It is also evident that the assessee is a 100% subsidiary of General Mills Mauritius Inc.
- In the course of proceedings, the Transfer Pricing Officer noticed that the assessee had incurred certain expenses for promotion and marketing of the products.
- The assessee objected to the proposed adjustment by submitting that such expenses were incurred on promotion and marketing of certain new products marketed by the assessee, such as, natural valley granule bar, haagen daz ice cream, corn niblets, sweet corn soup, asparagus, spears, etc.
- However, the Transfer Pricing Officer was not convinced with such submissions of the assessee. Ultimately, he concluded that by incurring such expenses, the assessee has helped in building the brand of the AE.
- The Transfer Pricing Officer proceeded to determine the arm’s length price by applying Bright Line Test (BLT) and made an adjustment of Rs. 2,53,48,648.
- In tune with the adjustment made by the Transfer Pricing Officer, the Assessing Officer made the addition while framing the assessment order. The assessee challenged the aforesaid addition before learned Commissioner (Appeals).
- After considering the submissions of the assessee in the context of the facts and material on record, learned Commissioner (Appeals) found that identical issue had been decided by the first appellate authority in favour of the assessee in assessment year 2011-12 and 2012-13.
- Facts being identical, following the earlier order passed by him, he deleted the addition made on account of transfer pricing adjustment. Against the aforesaid decision of the first appellate authority, the Revenue was in appeal before the Tribunal.
- The effective grounds raised by the Revenue relate to the sole issue of deletion of adjustment made on account of advertisement, marketing and promotion (AMP) expenses.
- The assessee being a distributor, the AMP expenses incurred by him for building the brand of AEs comes within the definition of international transaction.
- Further, he submitted that since the Revenue has filed a Special Leave Petition before the Hon’ble Supreme Court challenging some of the decisions of the Hon’ble High Courts holding that the AMP expense is not international transaction and the Hon’ble Supreme Court’s decision on such SLP is yet to come, the matter may be restored back to the Assessing Officer with a direction to decide the issue after the decision of the Hon’ble Supreme Court.
- The facts on the basis of which similar adjustment to AMP expenses incurred by the assessee in assessment years 2011-12 and 2012-13 were made by the Transfer Pricing Officer are identical to the facts involved in the impugned assessment year.
- In fact, learned Commissioner (Appeals) having found the factual position to be identical has followed his earlier orders while deleting the addition made on account of transfer pricing adjustment to AMP expenses.
- Notably, while deciding Revenue’s appeals against the decision of the learned Commissioner (Appeals) in assessment year 2011-12, in the order referred to above, the Tribunal has upheld the decision of learned Commissioner (Appeals) observing as under: –
- On a careful perusal of the order passed by the Transfer Pricing Officer, we have not found any factual finding by him that there is any arrangement/agreement between the assessee and its AEs for incurring AMP expenditure to promote the brand of AEs.
- As revealed from the facts on record, the assessee has imported certain products from the AEs for reselling to third parties in India. It is also not disputed that the entire AMP expenditure has been incurred in India by making payment to unrelated parties.
- It is the claim of the assessee that the products imported by the assessee for re-sale in India is comparatively new products in their initial lifecycle and for promoting such products, the assessee had to adopt aggressive marketing strategy to penetrate the targeted market segment, hence, has to incur huge expenditure.
- It is the claim of the assessee that it is the sole beneficiary of the entire AMP expenditure incurred by it and if there is any benefit to AEs, it is only incidental. It is also the claim of the assessee that the entire purpose of incurring expenditure is to increase the sale and not to create any marketing intangible of the AEs.
- Further, it is evident, the assessee has also explained the nature of expenditure incurred by furnishing supporting evidences.
- On a perusal of the facts on record, it is noticed that the AMP expenditure was incurred for giving incentives, free samples, etc. Thus, from the aforesaid facts, it is very much clear that the AMP expenditure was incurred for penetrating the market and increasing the sales.
- Thus, keeping in perspective the aforesaid factual position, we have to hold that the AMP expenditure incurred by the assessee cannot come within the purview of international transaction.
- Further, it is evident, the Transfer Pricing Officer has treated the AMP expenditure as part of international transaction following the Special Bench decision of the Tribunal in LG Electronics India Pvt. Ltd. (supra) and has also applied BLT method for computing arm’s length price. It is relevant to observe, the aforesaid Special Bench decision of the Tribunal in LG Electronics India Pvt. Ltd. (supra) has been disapproved by the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. (supra). The Hon’ble High Court has held that the BLT method is invalid as it is not prescribed in the statute. Various Benches of the Tribunal following the decision of the Hon’ble Delhi High Court in Maruti Suzuki India Ltd. (supra), have consistently held that AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction.
- In this context, we may refer to the decisions cited by the learned Authorized Representative. In fact, the Co-ordinate Bench in Kellogg India Pvt. Ltd. (supra) while deciding identical issue has held as under: –
- It is now necessary to deal with the contention of the learned Departmental Representative to restore the issue to the Assessing Officer for keeping it pending till the issue is settled by the Hon’ble Supreme Court.
- In our view, the aforesaid contention of the learned Departmental Representative is not acceptable. As per the prevailing legal position, the AMP expenditure incurred by the assessee in India cannot come within the purview of international transaction. That being the case, the adjustment made by the Transfer Pricing Officer cannot survive. Therefore, we do not find any necessity to restore the issue to the Assessing Officer.
- There being no material difference in facts in the impugned assessment year, respectfully following the aforesaid decision of the Tribunal in assessee’s own case, we uphold the order of learned Commissioner (Appeals) on the disputed issue by dismissing the grounds raised.