In a recent decision in the case of an Indian subsidiary of a globally renowned premium automobile group (the taxpayer), the Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) has distinguished the Special Bench Ruling in the case of LG Electronics (SB Ruling) with regard to the issue of marketing intangibles in context of a distributor. The Tribunal adjudged that if the distributor was sufficiently compensated by the foreign principal through the pricing of products, i.e. through higher gross margins, the same would have catered to extra AMP expenses, if any, spent by the distributor as compared to the comparables. Accordingly, no separate compensation in the form of reimbursement of excess AMP expenses was required from the principal when the taxpayer is already earning premium profits as compared to comparables with similar intensity of functions.
The Tribunal acknowledged that in the absence of a specific provision in the Income-tax Act, Revenue cannot insist that the mode of compensation for AMP expenses by the foreign principal to the Indian taxpayer (who is a distributor) necessarily be direct reimbursement and not pricing adjustment. The said remuneration for extra AMP could well be received through the pricing of imported products, namely through a commensurately higher gross margin.