Consistent distributor expense arrangement cannot be disallowed by a blanket percentage benchmark where declared profit remains reasonable.

A consistent commercial arrangement for sales promotion and distribution expenses could not be disturbed merely by substituting a lower percentage benchmark on a broad market-limit basis. The Tribunal noted that the assessee's method had been consistently followed, examined the past years' figures and the overall profit margin after credit notes, and found no basis to treat the declared profit as unreasonable on the facts. The disallowance was therefore not sustained, and the addition made by restricting the expenditure was deleted.

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Issues: Whether the disallowance of sales promotion or distribution expenses paid to Welable Pharma, by restricting such expenditure from 13.5% to 5% of sales, was sustainable.

Analysis: The assessee's compensation arrangement with the distributor was examined in the light of the past years' figures and the overall profit margin reflected after credit notes. The Tribunal found the method consistently followed by the assessee and saw no basis to disturb the declared profit on the facts presented.

Conclusion: The disallowance was not sustained and the assessee succeeded on the issue.

Final Conclusion: The appeal was allowed and the addition made by restricting the sales promotion or distribution was deleted.

Ratio Decidendi: Where the assessee follows a consistent commercial arrangement and the declared profit is not shown to be unreasonable, the expenditure cannot be disallowed merely by substituting a different percentage on a broad market-limit basis.

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