Judgment Update | Non-inclusion of AMP expenses in the assessable value of imported goods
The recent decisions rendered by the CESTAT regarding non-inclusion of Advertising, Marketing and Promotional (‘AMP’) expenses in the assessable value of imported goods.
The bone of contention of department in these cases was whether AMP expenses incurred by the Appellants falls under payment made as condition of sale of imported goods by the buyer to a third party to satisfy obligation of the seller as stipulated under Rule 10(1)(e) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 or not.
In the case of Adidas India Marketing Private Limited v. CC, 2020-VIL-124-CESTAT-DEL-CU (‘Adidas’), the Appellant was importing and selling branded products. It entered into a non-exclusive agreement with foreign supplier for manufacturing. The Appellant also entered into another exclusive agreement for sale and distribution under which it agreed to put its best endeavors to maximize sales. For promotion of sales, it incurred sponsorship and endorsement expenses and made payments to various athletes and players.
In this case, the Tribunal relied on Interpretative Notes to Custom Valuation and also referred ‘Commentary on the GATT Customs valuation code’ by author Saul L. Sherman as per which an activity undertaken by the buyer ‘on his own account’ cannot be considered as an indirect payment to the seller even if it benefits the seller. The agreement clearly mentioned that the Appellant shall make best efforts for maximization of sale and thus the Appellant incurred such expenses on own account. The Tribunal also observed that foreign supplier cannot enforce the Appellant to incur AMP expenses. Basis this, the Tribunal held that AMP expenses are not exigible to customs duty.
Indo Rubber case
In the case of Indo Rubber and Plastic Works v. CC, 2020-VIL-85-CESTAT-DEL-CU (‘Indo Rubber’), the Appellant was distributing sports goods of foreign brand name. The Appellant executed distribution agreement with the foreign supplier for importing and selling their branded sports goods within India. The distribution agreement authorized the Appellant to promote sales within India. It also provided that AMP expenses would be borne by the Appellant on their own. Additionally, the agreement had a stipulation requiring the Appellant to incur AMP expenses after concurring with the foreign company.
In this case, the Tribunal observed that the agreement did not bind the Appellant to incur / spend fixed amount or fixed percentage on AMP activities. The Appellant was not obliged to incur such expenditure. AMP expenses were incurred by Appellant on its own account. Therefore, AMP expenses are not exigible to customs duty.
In nut shell, in both the cases, the Tribunal held that conditions provided in Rule 10(1)(e) were not satisfied and therefore shall not form part of assessable value of imported goods.
NITYA Comments: In both the cases, the Tribunal relied on terms of the agreement between the parties to determine whether AMP expenses are includible in the assessable value of imported goods or not. The taxpayers facing litigation on this issue, can rely on these judgments. The taxpayers can also take due consideration while drafting agreement and be specific about obligations of AMP expenses to avoid any litigation in future. For detailed analysis, you can also watch our webinar on “Emerging Landscape in Customs Valuation”, available at https://youtu.be/psNfRw1u1Y0.