Bangalore ITAT: Product Marketing Expenditures by Assessee Not International Transactions

In a recent ruling, the Bangalore branch of the Income Tax Appellate Tribunal (ITAT) has made it clear that marketing and advertising expenses made for the assessee, Herbalife International India Pvt. Ltd’s manufactured products do not fall under the purview of foreign transactions.

Following the submission of the income tax return, the case of the assessee was sent for examination. As the transaction is more than Rs. 15 crore, the AO observed that the TPO was referred to in accordance with Section 92CA of the Income Tax Act.

During the relevant year, the TPO noted that the assessee engaged in certain advertising and marketing activities that could benefit the associated enterprise (AE), which is the legal owner of the intangibles.

The TPO observed that the AMP function was not benchmarked by the assessee separately and then he intended to regard the expenses as international transactions, considering them as AMP expenses incurred by the assessee that resulted in a benefit to the AE.

While suggesting the AMP adjustment, the TPO estimated the adjustment on account of the sale of goods by the assessee, therefore, evaluating it by applying a bright line test. Subsequently, an order was passed by the Transfer Pricing Officer under Section 92CA of the Income Tax Act.

Following that, the Assessing Officer (AO) issued a draft assessment order, proposing an addition of Rs. 471,19,33,412 in the hands of the assessee.

Displeased with the directive, the assessee filed an objection before the Dispute Resolution Panel (DRP). The DRP upheld the AMP adjustment made by the authorities in the hands of the assessee.

Challenging the decision of the DRP, the assessee filed an appeal before the tribunal.

Read also: Paying Foreign Currency Using International Credit Card Attracts 20% TCS

During the appeal, Percy Pardiwala, the counsel for the assessee, argued that all expenses and revenues incurred by the assessee in India were solely on its own account and not on behalf of any foreign group companies.

The counsel further contended that the assessee, being a direct selling entity, did not rely on marketing or advertising in the traditional sense, but instead engaged in activities such as contracting with potential customers, product demonstrations, order processing, goods delivery, and payment collection.

The council emphasised that the payouts categorised as distributor allowances were sales incentives and commissions paid to members for their sales activities. It was also noted that tax deducted at source (TDS) was applied to these payments under Section 194H of the IT Act. Therefore, the expenses were considered selling expenses and could not be categorised as AMP expenses as asserted by the revenue authorities.

Furthermore, there was no agreement between the assessee and the associated enterprises regarding the incurrence of AMP expenditure to be made by the assessee.

Hence such expenditure could not be treated as an independent international transaction, the assessee representative added.

The counsel for the revenue, D.K. Mishra, upheld the decisions of the lower authorities.

Considering the decision of the Delhi High Court in Maruti Suzuki India Ltd, the tribunal observed that in the absence of an express arrangement or agreement between the assessee and the AE regarding the incurrence of AMP expenditure to promote the AE’s brand, the AMP expenses incurred by making payments to third parties for promoting and marketing the assessee’s manufactured products.

Read also: How Income Tax Rules Are Affecting TDS, You Pay on Services

Based on this reasoning, the two-member bench comprising Beena Pillai (Judicial Member) and Padmavathy S (Accountant Member) concluded that the expenditure incurred by the assessee was necessary for its day-to-day business operations and directly linked to the business activities conducted in India. Concluding that,, the tribunal accepted the appeal filed by the assessee.