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Marketing Intangibles: Divided Verdict By Delhi HC!

Published on Mon, Mar 16,2015 | 21:52, Updated at Mon, Mar 16 at 22:19Source : CNBC-TV18 |   Watch Video :

LG, Sony, Daikin, Haier, Reebok, Canon and many such MNCs lost an important tax case in the Delhi High Court today. It’s transfer pricing dispute about the money spent by the subsidiaries of these MNCs in India in promoting and maintaining the international brand. Payaswini Upadhyay reports on this landmark judgment.  

At the heart of the dispute is this – foreign multinationals often provide their Indian subsidiaries technical assistance and allow them to use their trademarks and brand name. Indian subsidiaries often spend large amounts on advertising, marketing and promotion to boost domestic sales. The tax department has been arguing that some of this spend helps promote the foreign brand. And so the Indian subsidiary should be compensated for this promotion service and the compensation brought to tax. In 2013, a Special Tax Tribunal Bench ruled in favor of the tax department on this issue. All these companies appealed the Tribunal’s order in the Delhi High Court.

Today, the Delhi High Court ruled in favor of the tax department. It said that advertising, marketing and promotion transactions are an “international transaction”…and hence subject to transfer pricing regulations.  

But the court ruled in favor of the tax payers when it came to the issue of how much of that spend should be taxed tax and how the tax ought to be calculated. On this 2nd issue the matter has now been sent back to the Tribunal for fresh consideration.  

We spoke to Senior Advocate Ajay Vohra who represented Daikin, Haier, Rebook and Canon at the Delhi HC. He says - “It’s a landmark judgment which was much awaited on the issue of AMP expenses. Although the HC has upheld the majority view of the Special Bench in the case of LG Electronics that incurring of AMP expenditure may amount to international transaction, the HC has laid down several important principles for benchmarking such transactions. First; brand promotion is not synonymous with advertising and marketing. The brand is represented by many years of product acceptability and quality service etc. Two, AMP is an integral part of the distribution function and where it is so, it is not possible to segregate the AMP spend and benchmark it individually. If the Tribunal apples the principles laid down by the Delhi HC, then there should be no adjustment that will be sustained in majority of the cases.”

Now, the ball is back in the Tribunal’s court and the MNCs are hopeful of getting a reprieve there.   

Mukesh Butani, Partner, BMR Legal (Represented Canon India and Daikin at the Delhi HC)
“Delhi High Court today pronounced a landmark ruling in the case of Canon India in relation to transfer pricing aspects of marketing intangibles. The dispute was whether the substantial portion of the amounts spent by multinational companies in India on advertisement and marketing expenses, should be borne by the Indian subsidiaries or the parent companies outside India. This issue has impacted a large number of multinationals operating in India across various industries such as consumer durables, automobiles, media & entertainment etc. The ruling was pronounced in the open court today afternoon and while the court has bestowed powers to the Indian Revenue to make disallowances, it strongly held that the manner in which such adjustments were made were blatantly incorrect.  This issue was earlier adjudicated by the Delhi Income Tax Appellate Tribunal some time back (in the matter of LG Electronics) but the High Court did not agree with the economic principles laid down by the Tax Tribunal. This decision will have a far reaching impact on the ongoing disputes on this issue and generally has been welcomed by most tax professionals and taxpayers. The Delhi HC verdict is welcome as it clarifies several important principles which did not feature in LG Special Bench ruling from ITAT. Whereas the primary question whether marketing intangible transactions is an international transaction has been answered in Revenue's favour, all other aspects have been addressed in favour of taxpayer. The most important principle laid down by Justice Khanna is in his obiter wherein he clarifies that TP law is an anti-avoidance provision; it should be involved selectively and should not result in double taxation. Hopefully, the principles laid down by the bench will serve as a guidance to the field officers, firstly in situation where marketing intangibles principles should be involved albeit selectively. And secondly, on the computation aspects of carrying out adjustment.”  

Rohan Phatarphekar, Partner & Head - Transfer Pricing, KPMG India
“The Delhi High Court ruling in case of marketing intangibles is a landmark ruling on vexed issues related to Advertisement, Marketing and promotional expenses (AMP) incurred by the tax payer in India. In important aspects there have been a significant departure from several findings and ratios decided in the earlier Special Bench ruling in the case of L G Electronics.   While the Court affirmed the Revenue’s stand of characterizing such AMP transactions as an international transactions and that it is within the jurisdiction of the Transfer Pricing officer to examine the AMP expenses, it shunned the Revenue’s approach of analyzing the AMP activities on a stand-alone basis.  The Court ruled that distribution and marketing are intertwined functions and can be analysed together as bundled transactions. Based thereon, the compensation for AMP need not be benchmarked separately. The compensation for AMP functions can get subsumed in low purchase price or low royalty rates. The Court rejected the Tribunal’s standard approach of applying of the bright line approach and remanding all such matters back to the TPO.  The High Court rather emphasized that cases need to be dealt on a fact-specific manner. The aspect that the AMP expenses cannot be examined on a standalone basis or in a standard manner and has to be analysed based on facts of the tax payer is in line with the international norms which will be of great help to taxpayers.” 

SP Singh, Senior Director, Deloitte Haskins & Sells.  
“Delhi High Court today delivered judgment on the issue of advertisement, marketing and promotion (AMP) expenses. This is a long awaited decision, which seeks to provide clarity to taxpayers and authorities on this issue. As the decision is a long one, it will take some time to go into detail to appreciate the  finer points. However on a high level, one may observe as follows: The High Court has decided in favour of revenue authorities that AMP transactions are “international transaction”. Meaning, it is a matter of transfer pricing regulations. However, on the issue of “Bright Line Method” for determining allowable expenses on AMP and whether transaction-by-transaction method is right or  aggregated approach is right, the decision has been in favour of taxpayers. One of the major issue of the case was that authorities have been using profit indicator using “Bright Line method” to determine quantum of allowable amount of AMP expenses and making adjustment.  High Court has rejected this approach holding that the Bright Line method is not prescribed under law. Further, burden is on revenue to segregate transaction where they allege that AMP is a separate transaction and should be benchmarked separately. The High Court has appreciated the business realities that many transactions are bunched together in business and benchmarking them also needs to be done jointly keeping in mind business realities. The clarifications provided by the High Court will go a long way in settling a large number of cases and would provide clarity to taxpayers as well as tax authorities. This will reduce litigation substantially.”

Watch ‘The Firm’ this week for a detailed coverage of the Delhi High Court ruling.


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