This document provides a detailed analysis of the Income Tax Appellate Tribunal’s decision in the case between Adidas India Marketing Pvt. Ltd. and the National E-Assessment Centre, examining the pivotal issues of transfer pricing adjustments related to Advertisement, Marketing, and Promotion (AMP) expenses and royalty payments. The case explores the complexities of international transactions, AMP expenditures, and the arm’s length nature of royalty payments to associated enterprises (AEs).
Adidas India filed its return for A.Y. 2016-17 declaring a significant income while being scrutinized for its international transactions with AEs. The focus was on substantial AMP expenses and royalty payments made to Adidas AG. The Transfer Pricing Officer (TPO) proposed adjustments suggesting that these expenditures were not at arm’s length, leading to an escalated taxable income in the draft assessment.
The Tribunal examined several aspects, notably whether the AMP expenses constituted an international transaction requiring compensation from AEs. The analysis included comparing the AMP expenditures with those of similar companies and applying the Bright Line Test (BLT), despite its contentious acceptance in legal precedents. The Tribunal also scrutinized the royalty payments, comparing them with similar transactions to determine if they met the arm’s length standard. Ultimately, the Tribunal decided in favor of Adidas on several grounds, leading to a reduction in the proposed taxable income adjustments.
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