In the transfer pricing landscape, the AMP expenditure is highly litigative and the courts are taking different views depending on the facts with the taxpayers.
Recently, the Delhi Tax Tribunal, in the case of Perfetti Van Melle India Pvt Ltd1, analysed whether “Advertisement, Marketing and Promotion” (AMP) expenditure incurred by the taxpayer can be considered as an international transaction within the meaning of section 92B of the Income-tax Act, 1961 (IT Act).
Facts of the case
The taxpayer is a subsidiary of PVM, Netherlands and started its operations in 1994 in India. It is engaged in the business of manufacturing and selling of a variety of confectionary products which include Big Babool, Alpenliebe, Centre Fresh, Centre Fruit, Chloromint, Fruitella, Cofitos, Happydent white, Mentos, etc. These brands are owned by the Associated Enterprise (AE) of the taxpayer and have been licensed to it. The taxpayer had incurred AMP expenses in respect of these products and had also paid royalty to its AE at varying rates depending on the product.
Transfer Pricing Officer (TPO) passed the order under section 92CA(3) of the IT Act proposing TP adjustment for AMP expenditure for promoting the brand/tradename which was owned by the AE and hence the same constituted an international transaction. The ratio laid down by TPO was upheld by Dispute Resolution Panel (DRP) and final assessment order is passed in this regard.
Aggrieved by the same the taxpayer has preferred an appeal before the Tax Tribunal on various grounds.
Tax Tribunal Ruling
Remand back of matter to Tax Officer for re-examination
- The issue of making transfer pricing adjustments in relation to AMP expenditure is a legacy issue and has been facing additions on this count since fiscal year 2007-08 to fiscal year 2015-16 (year under consideration).
- Appeals of the taxpayer for the earlier years have been repeatedly restored to the file of the Assessing Officer/ TPO for re-examination of the issue in light of the available judicial precedence available at that point of time.
- Therefore, the ground was raised in the interest of justice and to bring finality to the issue, the appeal should be decided on the merits of the matter rather than simply remanding the matter back to the TPO for fresh consideration in light of the available judicial precedence on the subject matter.
Primary reliance was placed upon the decision of the Delhi High Court in the case of PepsiCo India Holding Pvt. Wherein it was held that the Tax Tribunal itself should consider the matter as to the applicability or otherwise of the rule enunciated in other judicial precedents and render its decision on merits after applying the correct test as to whether the expenses in the present case should be subjected to adjustments.
- Reliance on various other decisions2 was placed and the matter reached finality without referring it back to TPO/Tax Officer for re-consideration.
Adjudication on whether AMP expenditure would be considered as international transaction
- The Tribunal held that from the conjoint reading of sections 92F(v) and 92B(1) of the IT Act, in order to be characterised as an ‘international transaction’, it would have to be demonstrated that the transaction arose pursuant to an arrangement, understanding or action in concert.
- A ‘transaction’, per se involves a bilateral arrangement or contract between the parties. Unilateral action by one of the parties, without any binding obligation, in the absence of mutual understanding or contract, could not be termed as a ‘transaction’.
- Further, the entire AMP expenditure was only to cater to the needs of the customers in the local market of India who are third parties. It was neither incurred at the instance or behest of overseas AE, nor was there any mutual agreement or understanding or arrangement to the allocation or contribution by the AE towards remuneration of any part of AMP expenditure incurred by the taxpayer for the purpose of its business in India.
- The Tribunal relied on the jurisdictional HC ruling in Maruti Suzuki to clarify that onus is on Revenue to prove that there existed an arrangement between the taxpayer and its AE wherein the taxpayer was obliged to incur an excess amount of AMP expenses and to promote the brands owned by AE.
- Merely because the Foreign AE was approving and reviewing the label materials, packaging materials and advertisement materials, it cannot be said that the transaction has taken place between two AE’s one or both of whom are non-residents.
- Monitoring and reviewing the advertisement content is merely for the alignment to ensure applicable “brand guardrails” are being followed by all the AEs across the world. Looking at the nature of the confectionary products, the marketing for such impulse products, the same has to be done as per the local ethos, culture, taste and aspiration of the local population and it cannot be governed by the AE sitting outside India.
- The taxpayer has a full-fledged marketing team to manage marketing and advertisement across the country. The entire AMP expenditure has been incurred by the taxpayer company to promote the sale of its product in India as a full-fledged risk bearing manufacturer and solely responsible for its functions or activities and related returns.
- There are instances where the reputed brand does not go for advertisement with the intention to increase the brand value but to only increase the sale and thereby earning greater profits. The reputation of a brand only enhances the sale and profitability and here in this case is only benefitting the taxpayer company when marketing its products using the trade-mark and the brand of AE. Hence, a transfer pricing adjustment, simply on the ground that the taxpayer has spent advertisement, marketing expenditure to benefit the AE which is the legal owner of the brand is not correct.
This is a welcome judgement, wherein the tribunal relied on principles laid in the Maruti Suzuki case to emphasise that the onus is on the Revenue to prove the existence of an international transaction and PepsiCo India for rendering the decision on merits without referring it back to Tax Officer/TPO.
The Tribunal has made a positive observation that unilateral action by one of the parties, without any binding obligation, would not result in an agreement or transaction between the parties. It is observed that AMP expenditure is benefiting the taxpayer as it caters to the needs of local customers, thereby, resulting in higher profits.
Besides, MNCs are looking forward for the verdict of the Supreme Court in the case of Sony Ericsson, Maruti Suzuki, Daikin Air Conditioning and various other companies to have the finality on this complex TP aspect for tax certainty.
2f Daikin Air Conditioning India Pvt Ltd vs. ACIT : (2016) (96 CCH 0486), Le passage to India Tour and Travel (P) Ltd vs. DCIT (98 CCH 0009), Sony Pictures Networks India Pvt Ltd vs. ITAT (W.P. 3508 of 2018), Coca -Cola India Private Ltd (2014) (90 CCH 0080)