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Tax Publishers Bacardi India (P) Ltd. v. Asstt. CIT [ITA No. 1970/Del/2017, dt. 26-10-2020] : 2020 TaxPub(DT) 4474 (Del.-Trib.) Sustainability of AMP expenditure under TP provisions *Facts:* Assessee was importing and selling various reputed liquor brands under its group brand name called Bacardi. They had spent substantial Advertising, Marketing and Promotional (AMP) expenditure of which Rs. 48.57 crores were disallowed under TP provisions citing that the assessee was a distributor of foreign liquor brands and was promoting the foreign brand image of Bacardi worldwide in India. Thus applying the so called Bright line test (BLT) whereby the spends were held to be promoting the parent's brand in India more than a dire necessity of the assessee to indulge in promotional expenses for their own business as though a third party would. The additions stood sustained by lower authorities. On higher appeal -- Held in favour of the assessee that the additions cannot be sustained under AMP as the assessee was not merely a distributor. The revenue had failed to manifest as to how they were promoting the foreign brand in India when the promotional expenditure was for their own business. The bright line test is not the single correct reason or universal test to bring AMP disallowances under TP. *Editorial Note:* There are a number of decisions cited in this case with below takeaways emerging out of the same -- (i) AMP spend is an international transaction under TP provisions especially after the amended law. This has been confirmed almost in most cases. Lead case being Sony Ericsson v. CIT (2015) 374 ITR 118 (Del) : 2015 TaxPub(DT) 1653 (Del-HC). (ii) Bright line test is an erroneous approach by the revenue to make additions of AMP under TP provisions. The revenue appeal on this is pending final adjudication before Supreme Court. (iii) The revenue has to manifest as to how the foreign brand was promoted rather than simply saying the spend was to the foreign brand and not relevant for the assessee's brand/business promotion in India. (iv) It is obvious that a global group is bound to promote its products in India using it global brand as though an independent entity might be doing the same to leverage their business/brands. (v) As to simply sustain additions citing this without considering competitive forces, rival brand promotion strategy, trends AMP additions are farcical. (vi) The assessee was not a distributor as in most lead brands like LG, Loreal, Sony, Maruti Suzuki etc. cases as well. (vii) Additions under the act have to follow either Chapter X for AE spends/incomes and for domestic law they have to follow section 37(1) read with 40A(2) for expenses. The rule of generalia specilabus non-derogant would apply. Special provisions will override general provisions. Disallowances of AE spends if not caught under Chapter X will need to be allowed under section 37(1). (viii) It is important for the revenue to prove that there was an excessive AMP spend in the first place before they adopt the Bright line test or any other method to sustain additions. (ix) Quantum of spend and rationale is not a criteria as it has been held time and again that the department under Chapter X simply has powers to assess the ALP and manifest it rather than sit in the arm chair of the businessman. (x) ALP computation and manifestation of it being at ALP is sine qua non even for AMP additions. The Revenue failed to do the same in this case is what the ITAT has held. (xi) Recharacterization of transaction is not permitted except in one of the two circumstances viz -- (i) Where the economic substance of a transaction differs from its form; and (ii) Where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner. (xii) When either of the above point is missing sustaining AMP on logic that it was spend for promoting a foreign brand and not for marketing in India would be incorrect from the revenue. Such a re-reading or recreation of a non-existent transaction is not normally envisaged under Chapter-X except in the circumstances as per above.

Tax Publishers

Bacardi India (P) Ltd. v. Asstt. CIT [ITA No. 1970/Del/2017, dt. 26-10-2020] : 2020 TaxPub(DT) 4474 (Del.-Trib.)

Sustainability of AMP expenditure under TP provisions

Facts:

Assessee was importing and selling various reputed liquor brands under its group brand name called Bacardi. They had spent substantial Advertising, Marketing and Promotional (AMP) expenditure of which Rs. 48.57 crores were disallowed under TP provisions citing that the assessee was a distributor of foreign liquor brands and was promoting the foreign brand image of Bacardi worldwide in India. Thus applying the so called Bright line test (BLT) whereby the spends were held to be promoting the parent's brand in India more than a dire necessity of the assessee to indulge in promotional expenses for their own business as though a third party would. The additions stood sustained by lower authorities. On higher appeal --

Held in favour of the assessee that the additions cannot be sustained under AMP as the assessee was not merely a distributor. The revenue had failed to manifest as to how they were promoting the foreign brand in India when the promotional expenditure was for their own business. The bright line test is not the single correct reason or universal test to bring AMP disallowances under TP.

Editorial Note:

There are a number of decisions cited in this case with below takeaways emerging out of the same --

(i) AMP spend is an international transaction under TP provisions especially after the amended law. This has been confirmed almost in most cases. Lead case being Sony Ericsson v. CIT (2015) 374 ITR 118 (Del) : 2015 TaxPub(DT) 1653 (Del-HC).

(ii) Bright line test is an erroneous approach by the revenue to make additions of AMP under TP provisions. The revenue appeal on this is pending final adjudication before Supreme Court.

(iii) The revenue has to manifest as to how the foreign brand was promoted rather than simply saying the spend was to the foreign brand and not relevant for the assessee's brand/business promotion in India.

(iv) It is obvious that a global group is bound to promote its products in India using it global brand as though an independent entity might be doing the same to leverage their business/brands.

(v) As to simply sustain additions citing this without considering competitive forces, rival brand promotion strategy, trends AMP additions are farcical.

(vi) The assessee was not a distributor as in most lead brands like LG, Loreal, Sony, Maruti Suzuki etc. cases as well.

(vii) Additions under the act have to follow either Chapter X for AE spends/incomes and for domestic law they have to follow section 37(1) read with 40A(2) for expenses. The rule of generalia specilabus non-derogant would apply. Special provisions will override general provisions. Disallowances of AE spends if not caught under Chapter X will need to be allowed under section 37(1).

(viii) It is important for the revenue to prove that there was an excessive AMP spend in the first place before they adopt the Bright line test or any other method to sustain additions.

(ix) Quantum of spend and rationale is not a criteria as it has been held time and again that the department under Chapter X simply has powers to assess the ALP and manifest it rather than sit in the arm chair of the businessman.

(x) ALP computation and manifestation of it being at ALP is sine qua non even for AMP additions. The Revenue failed to do the same in this case is what the ITAT has held.

(xi) Recharacterization of transaction is not permitted except in one of the two circumstances viz --

(i) Where the economic substance of a transaction differs from its form; and

(ii) Where the form and substance of the transaction are the same but the arrangements made in relation to the transaction, viewed in their totality differ from those which would have been adopted by the individual enterprise behaving in a commercially rational manner.

(xii) When either of the above point is missing sustaining AMP on logic that it was spend for promoting a foreign brand and not for marketing in India would be incorrect from the revenue. Such a re-reading or recreation of a non-existent transaction is not normally envisaged under Chapter-X except in the circumstances as per above.