Introduction

The case of MakeMyTrip (India) Pvt. Ltd. vs. DCIT, New Delhi is a significant judicial decision by the Income Tax Appellate Tribunal (ITAT) dated June 22, 2020. This dispute revolves around complex issues of transfer pricing adjustments and the disallowance of advertisement, marketing, and promotion (AMP) expenses under Section 14A of the Income Tax Act, 1961. The appellate matter involved cross appeals from both the assessee, MakeMyTrip India Pvt. Ltd. (MMT India), and the Revenue, challenging the order of the Commissioner of Income Tax (Appeals) regarding the assessment years 2007-08 and 2008-09.

MMT India, a leading e-commerce platform for travel-related services, was scrutinized for its international transactions with associated enterprises (AEs), specifically focusing on the provision and receipt of services across borders. The crux of the dispute lies in whether certain AMP expenses should be classified as revenue or capital expenditure and the correctness of the transfer pricing adjustments made by the tax authorities.

Summary of the Judgment

The ITAT, presided over by Judicial Member R.K. Panda and Accountant Member Kuldip Singh, extensively reviewed the transfer pricing (TP) adjustments and the disallowance of AMP expenses claimed by MMT India. The primary findings of the Tribunal are as follows:

• Transfer Pricing Adjustments: The Tribunal upheld the addition of Rs. 1,47,93,024/- related to AMP services but significantly reduced it to Rs.50,000/- after considering relevant benchmarks and the ownership of the brand.
• Disallowance under Section 14A: Initially, Rs.5,71,124/- was disallowed. The Tribunal recalibrated this figure to Rs.73,910/- based on the nature of mutual fund investments and applicable rules.
• AMP Expenses: The Tribunal concluded that the AMP expenses were wholly and exclusively for business purposes and not capital in nature, thereby allowing these expenses as revenue expenditures.

Ultimately, the ITAT partly allowed the appeals filed by both the assessee and the Revenue, providing clarity on the classification of AMP expenses and the correct application of transfer pricing norms in the context of brand ownership and international transactions.

Analysis

Precedents Cited

The Tribunal referenced several pivotal cases to substantiate its findings:

• CIT v. Virgin Securities and Credits P. Ltd.: Emphasized the admissibility of additional evidence under Rule 46A when crucial for the disposal of an appeal.
• CIT v. Salora International Ltd.: Clarified that advertising expenses, when directly linked to business operations and competitive necessity, are revenue in nature.
• CIT v. Monto Motors Ltd.: Reinforced the view that advertising expenses for profit earning are revenue expenditures.
• LG Electronics India Pvt. Ltd. v. ACIT: Distinguished scenarios where brand ownership affects transfer pricing adjustments.
• CIT v. Kotak Securities Limited: Addressed the implications of TDS on payment gateway charges.

Legal Reasoning

The Tribunal's legal reasoning centered on two primary issues: the classification of AMP expenses and the application of transfer pricing adjustments in light of brand ownership.

• AMP Expenses: The Tribunal aligned with precedents that define advertising and promotion expenditures as revenue in nature, provided they are directly linked to business operations and do not confer durable benefits. By establishing that MMT India owned the MakeMyTrip brand, the Tribunal determined that AMP expenses were not capital in nature but were necessary for maintaining and promoting the brand, thus qualifying them as allowable revenue expenditures.
• Transfer Pricing Adjustments: The Tribunal scrutinized the AO's TP adjustments by evaluating whether excess AMP expenditure constituted an international transaction benefiting the AE, MMT Mauritius. Upon determining that MMT India was the sole proprietor and beneficiary of the brand, the Tribunal concluded that the bright-line test for transfer pricing adjustments was inapplicable. Consequently, the substantial addition proposed by the AO was largely overturned, reducing the addition to Rs.50,000/-.
• Section 14A Disallowance: The Tribunal revisited the disallowance under Section 14A, recalculating the amount based on the nature of mutual fund investments. It affirmed partial disallowance while directing further verification on specific aspects, ensuring compliance with legal standards and precedent.

Impact

This judgment holds significant implications for the e-commerce sector and other businesses engaged in substantial advertising and international transactions:

• Brand Ownership: Clear delineation of brand ownership affects the applicability of transfer pricing norms, particularly concerning AMP expenses. Ownership by the Indian entity exempts such expenses from being treated as international transactions.
• Classification of Expenditures: Businesses can better categorize AMP expenditures as revenue items, provided they meet the criteria of being wholly and exclusively for business purposes.
• Transfer Pricing Compliance: Companies must meticulously assess their international transactions, especially concerning brand promotion and associated expenses, to ensure adherence to transfer pricing regulations.
• Tax Planning: Enhanced clarity on disallowances under Section 14A and the treatment of TDS obligations on payment gateway charges will aid businesses in strategic tax planning and compliance.

Complex Concepts Simplified

Transfer Pricing (TP)

Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. It ensures that transactions between related entities are conducted at "arm's length," meaning the prices are consistent with those charged between independent entities in similar transactions.

Advertisement, Marketing, and Promotion (AMP) Expenses

AMP expenses encompass costs incurred in promoting a company's products or services. These can include advertising campaigns, marketing strategies, brand development, and promotional events. Determining whether these expenses are revenue or capital in nature depends on their direct linkage to business operations and the duration of benefits derived.

Section 14A of the Income Tax Act

Section 14A addresses the disallowance of expenses incurred that are deemed as investments rather than business expenditures. Under this section, expenditures on investments like mutual funds are subject to disallowance to prevent profit shifting and tax evasion.

Tax Deducted at Source (TDS)

TDS is a means of collecting income tax by requiring the payer to deduct tax while making certain payments, such as commissions, interest, or fees, to the payee. The deducted amount is then remitted to the government, ensuring a steady inflow of revenue and reducing tax evasion.

Bright-Line Test

The bright-line test is a clear-cut standard used to determine compliance with tax laws. In the context of transfer pricing, it helps in identifying whether an expense, such as AMP, is excessive and warrants adjustment based on predetermined benchmarks or ratios.

Conclusion