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26 February 2018 Indian tribunal holds AMP expenses part of transaction value declared for customs purposes Transfer pricing aspects of Advertisement, Marketing and Promotion (AMP) expenditures incurred by Indian entities for the sale and marketing of goods using trademarks or brand names owned by a foreign Associated Enterprise (AE) has been a controversial issue with the Indian tax authorities. The Indian tax authorities have often declared that such expenditures incurred by the Indian affiliate is for the benefit of the foreign AE and is therefore a provision of an intra-group service, which needs to be compensated under arm's-length principles, separate from the operating profit earned by the Indian affiliate from the sale of goods. In the recent case of an athletic footwear and apparel company, the Delhi Customs Excise & Service Tax Appellate Tribunal (CESTAT) upheld the addition of AMP expenses to the transaction value declared for customs purposes. At the time of the case, the appellant was a subsidiary of an English multinational company and imported goods from the latter on a regular basis. The appellant entered into a distribution agreement with its English parent under which it had an obligation to incur advertisement and promotion expenditures of not less than 6% of the total invoice value. The appellant was required to submit a marketing and business plan, advertising budget, and as reported in the CESTAT order, was required to provide a draft of any endorsement or promotion contract exceeding the value of "US dollar 25 per cent year," vetted by its Principal. CESTAT observed that the parent, i.e., the English company controlled every aspect of the advertisement expenditure and therefore, the expenditure was incurred not only for the promotion of the specific goods imported by the appellant but also for the group's brand as a whole. From an indirect tax perspective, i.e., as per Rule 10(1)(e) of the Custom Valuation Rules (CVR), 2007, the transaction value of goods imported by the buyer from the seller shall include any payment made or to be made as a precondition of sales by the buyer to the seller or by the buyer to any other third party to discharge any obligation of the seller to the extent such payment has not been included in the transaction value of the imported goods. Further, the Interpretative Note of Rule 3(2)(b) of the CVR, 2007 states that if any expense such as advertising, marketing or promotion is undertaken by the buyer of imported goods on its own account even though by an agreement with the seller, such expenses shall not be included in the transaction value of imported goods. CESTAT categorically stated that it was evident from the facts of the case that the expense was not incurred by the buyer on its own account but to discharge the obligation of the seller. Hence, interpretive Note of Rule 3(2)(b) of the CVR, 2007 was not considered to be applicable in this case. The case of Samsonite [2015 (327) ELT 528 Tribunal-Mumbai] was distinguished by CESTAT stating that in the aforementioned case, expenses were charged to the account of M/s Samsonite by their principal as a share of the global expenditure. However, the instant case was considered to have a different fact pattern and reliance on this judgment was rejected. Therefore, the tribunal concluded that the advertising and promotion expenses were incurred as a condition of sale and on behalf of the seller and accordingly considered as satisfying the obligation of the seller. The ruling highlights the importance of interplay between transfer pricing and customs law on the controversial issue of treatment of AMP expenses. While the definition of "transaction value" under customs law and of "international transaction" under transfer pricing law operate on a different plane, it may be noted that the interpretation of the same could lead to positions which could place a taxpayer in double jeopardy. While the CESTAT ruling was rendered in the context of the specific facts of the case considering the terms of the Distribution Agreement, taxpayers should review the impact of this ruling on their transfer pricing positions as well as evaluate the implications the same could have on valuation under customs law. Taxpayers should consider the terms of their intercompany agreements and evaluate the implications of the same on their tax and customs positions. Document ID: 2018-5340 |
