2025 (4) TMI 1442 - AT - Income Tax

Commission to local distributors excluded from AMP expenses for transfer pricing, CSR donations allowed under Section 80G despite Section 37 restrictions

Amway India Enterprises Private Limited Versus AO-NFAC, National

ITAT Delhi held that commission paid to local distributors cannot be included in AMP expenses for transfer pricing adjustments, following consistency ... TP Adjustment - challenge to inclusion of commission paid to local distributors in AMP expenses for working out the adjustment on account of AMP adjustments and not followed the settled history of the assessee of preceding assessment years - HELD THAT:- Commission paid was not AMP expenses and further looking to the past history of the assessee and by following the principle of the consistency and by respectfully following the aforesaid judgements of various Courts on this principle, we hold that AMP expenses including the amount of commission paid to distributors are not international transaction. Accordingly, we set aside the order of TPO/AO/DRP and delete the addition made made by TPO/AO toward AMP adjustment. The Ground of appeal No.1 of the assessee is allowed. Deduction u/s 80G when the said sum was not allowed being part of CSR expenses - whether the same can be allowed as deduction u/s 80G when it is part of CSR expenses? - HELD THAT:- Explanation 2 inserted in Section 37 to deny the deduction for CSR expenses incurred by companies as normal business expenditure and the same applies only to the extent of computing business income under Chapter IV-D. The said Explanation cannot be extended or imported to CSR contributions which are otherwise eligible for deduction under any other provision or Chapter, to say donations made by a charitable trust registered u/s 80G and if the same denied merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature. Accordingly, we allow the deduction as claimed by the assessee u/s 80G of the Act. This ground of appeal of the assessee is allowed. Disallowance of deduction claimed u/s 80G - AO has disallowed the claim of the assessee for the sole reason that assessee has field to produce the receipts of the donation - AR requested that the matter may be sent back to the AO for submission of the receipts which was misplaced earlier and now is available - HELD THAT:- We are remitting this issue back to the file of AO for making verification of the fact whether the conditions necessary to claim deduction under section 80G of the Act are fulfilled or not after obtaining the receipt of donation from the assessee. Assessee is directed to file all requisite details in order to substantiate its claim before AO who is directed to grant deduction to the extent of eligibility. The core legal questions considered in this appeal include:1. Whether the commission paid to local distributors can be included as Advertisement, Marketing and Promotion (AMP) expenses for transfer pricing adjustment purposes under the Income Tax Act, 1961, and whether such inclusion is consistent with settled transfer pricing principles and the assessee's past assessment history.2. Whether the deduction claimed under section 80G of the Act for donations amounting to Rs. 37,50,000/- can be disallowed on the ground that the donation forms part of mandatory Corporate Social Responsibility (CSR) expenses, which are disallowed under section 37(1) Explanation 2.3. Whether the disallowance of deduction under section 80G of Rs. 12,50,000/- on account of non-production of donation receipts is justified, and if the matter requires remand for verification.Issue 1: Inclusion of Commission Paid to Local Distributors as AMP Expenses for Transfer Pricing AdjustmentThe legal framework revolves around the provisions of the Income Tax Act, particularly sections 92CA(3) related to Transfer Pricing Officer (TPO) adjustments, and established principles governing international transactions and arm's length pricing. The AMP adjustment is premised on the intensity test, which compares AMP expenses as a percentage of sales or turnover with comparable entities.The assessee operates as a wholly owned subsidiary engaged in manufacturing and direct selling of consumer products through a Multi-Level Marketing (MLM) model. The commission paid to local distributors (Rs. 439.08 crores out of total AMP expenses of Rs. 503.68 crores) was included by the TPO as AMP expenses for transfer pricing adjustment, leading to an addition of Rs. 1,31,72,21,192/-.The assessee contended that the commission paid to direct sellers/distributors is a remuneration for sales efforts and network building, not for brand building or promotional activities, and thus cannot be treated as AMP expenses. The business model is unique, involving independent direct sellers who earn commissions based on sales achieved, differing from traditional retail models.Crucially, the assessee relied on its consistent past treatment across assessment years 2009-10 to 2019-20, where either no AMP adjustment was made or the commission paid to distributors was excluded from AMP expenses for transfer pricing purposes. The sole exception was AY 2015-16, where the TPO made AMP adjustments including commission, but the Dispute Resolution Panel (DRP) deleted such additions after detailed analysis, and the TPO gave effect to the DRP's order by deleting the adjustment.The assessee invoked the principle of consistency, supported by judicial precedents including the Supreme Court's decision in Radhasoami Satsang v. CIT, which held that while res judicata strictly does not apply to income tax proceedings, a fundamental aspect consistently decided and allowed to be sustained should not be reopened without material change. Other precedents emphasized the binding nature of consistent views across assessment years absent any change in facts or law.The Revenue's contention was that the commission paid enhances brand image and thus qualifies as AMP expense, supporting the TPO and DRP's inclusion of commission in AMP expenses.The Tribunal examined the historical treatment of AMP expenses by the TPO and DRP, noting that except for AY 2015-16, commission paid to distributors was not treated as AMP expense. The DRP's order for AY 2015-16 explicitly excluded commission paid to distributors from AMP expenses, reasoning that commissions paid to distributors for sales and network building cannot be equated to AMP expenses, which relate to brand promotion and marketing activities.The Tribunal also observed that the MLM business model involves payment of commission solely linked to sales performance and network expansion, which is distinct from promotional expenditures aimed at brand building.Regarding the bright line test, although no addition was made on this basis, the Tribunal noted that the Delhi High Court has held the bright line test is not a valid method for determining international transactions or arm's length price, thus rejecting its applicability.Applying the principle of consistency, the Tribunal relied on the coordinate bench's earlier decision for AY 2016-17, which deleted AMP adjustments on similar grounds, reinforcing the settled position that commission paid to distributors is not AMP expense.Accordingly, the Tribunal concluded that the commission paid to distributors is not an international transaction and does not form part of AMP expenses for transfer pricing adjustment. The addition of Rs. 1,31,72,21,192/- was set aside, allowing the assessee's ground of appeal No. 1.Issue 2: Disallowance of Deduction under Section 80G for Donations Forming Part of CSR ExpensesThis issue concerns the interplay between section 80G, which allows deduction for donations made to specified funds and institutions, and section 37(1) Explanation 2, which disallows CSR expenses as business expenditure.The assessee claimed deduction under section 80G for donations amounting to Rs. 37,50,000/-, which the AO disallowed on the ground that these donations formed part of CSR expenses, which are mandatory and non-deductible under section 37(1) Explanation 2.The assessee argued that section 80G and section 37(1) operate in different fields: section 37(1) relates to business income computation, while section 80G relates to total income computation under Chapter VIA. The Explanation 2 to section 37(1) disallows CSR expenses as business expenditure but does not explicitly deny deduction under section 80G for donations forming part of CSR. The assessee contended that denying deduction under section 80G for CSR donations would amount to double taxation.The Revenue contended that CSR expenses are mandatory and not voluntary donations; allowing deduction under section 80G would defeat the purpose of excluding CSR expenses under section 37(1).The Tribunal analyzed the statutory provisions, noting that section 80G(2)(a)(iiihk) and (iiihl) specifically exclude deduction for contributions to Swachh Bharat Kosh and Clean Ganga Fund if claimed as CSR expenses, but no such blanket exclusion exists for other donations forming part of CSR.The Tribunal relied on the coordinate bench's decision in First American (India) Pvt. Ltd. v. ACIT, which held that since CSR expenses are disallowed under section 37(1) Explanation 2 for business income computation, the same payments can still qualify for deduction under section 80G at the total income computation stage, provided the donations meet the conditions of section 80G. Denial of such deduction would lead to double disallowance, which is not intended by the legislature.Similar views were expressed in other coordinate bench decisions cited by the Tribunal.Accordingly, the Tribunal held that the Explanation 2 to section 37(1) cannot be extended to deny deduction under section 80G for eligible donations forming part of CSR, and allowed the deduction of Rs. 37.50 lakhs under section 80G, allowing ground of appeal No. 2.Issue 3: Disallowance of Deduction under Section 80G for Rs. 12,50,000/- on Account of Non-Production of Donation ReceiptsThe AO disallowed the deduction claimed under section 80G for Rs. 12,50,000/- on the sole ground that the assessee failed to produce receipts of the donation made to Prayas Society, Hamirpur.The assessee requested remand to the AO for submission of the receipts which were misplaced earlier but now available.The Tribunal remitted the issue to the AO for verification of the conditions necessary to claim deduction under section 80G after obtaining the donation receipts from the assessee. The AO was directed to grant deduction to the extent eligible.This ground of appeal was partly allowed as per the directions.Significant HoldingsOn the AMP adjustment issue, the Tribunal held:'In view of the fact that the commission paid was not AMP expenses and further looking to the past history of the assessee and by following the principle of the consistency and by respectfully following the aforesaid judgements of various Courts on this principle, we hold that AMP expenses including the amount of commission paid to distributors at Rs. 439.08 crores are not international transaction. Accordingly, we set aside the order of TPO/AO/DRP and delete the addition made at Rs. 131,72,21,192/- made by TPO/AO toward AMP adjustment.'On the deduction under section 80G for CSR donations, the Tribunal observed:'Explanation 2 inserted in Section 37 to deny the deduction for CSR expenses incurred by companies as normal business expenditure and the same applies only to the extent of computing business income under Chapter IV-D. The said Explanation cannot be extended or imported to CSR contributions which are otherwise eligible for deduction under any other provision or Chapter, to say donations made by a charitable trust registered under Section 80G and if the same denied merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature. Accordingly, we allow the deduction of Rs. 37.50 lacs as claimed by the assessee u/s 80G of the Act.'On the disallowance for non-production of receipts, the Tribunal directed verification and allowed the assessee to substantiate the claim.