Wholesalers cannot claim tax benefit of expenses related to free samples: ITAT

Mumbai: The Bangalore Income Tax Appellate Tribunal has ruled that wholesalers cannot claim tax benefit for expenses incurred pertaining to new product samples.

ITAT said that the burden to incur expenditure of new product samples is that of a manufacturer of a product. And that the related party wholesaler cannot claim the tax benefit on such expenses.

As per the details of the case a US based company, that has invested in India through a Netherlands based entity, is importing and selling footwear, apparel and sports equipment through an Indian company.

The US entity had introduced new products and sent samples to the Indian arm for giving them to distributors in India. These distributors were required to display these products in their shops. The American company had charged the Indian arm the cost of these samples.

The ITAT held that the claim of expenditure was against the trade practice and the Indian arm appeared to have borne the expense only on the basis that the same was charged to the taxpayer by the US entity. ITAT ruled that the burden to incur the expenditure was that of the US entity and was not related to the business activities of the Indian arm and disallowed the tax deduction.

“Whether a particular expenditure has been incurred for the purposes of business of the taxpayer is a question of fact and has been subject to litigation,” a Deloitte Tax research said. “This ruling has held that, in case the manufacturer and the wholesale trader are related parties, then the burden to incur expenditure of new product samples (to be given to the third party distributors for display at their premises) is that of the manufacturer and accordingly, is not related to the business of the wholesale trader. Taxpayers with similar supply-chain arrangements amongst group companies may want to consider the impact of this ruling to the facts of their case” the Deloitte research added.