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Ad expenses of Indian arm of MNCs fall under transfer pricing: Delhi High Court
March, 18th 2015

The Delhi High Court has held that money spent by Indian subsidiaries of foreign companies on advertising, marketing and promotion (AMP) of their global brand here are international transactions and fall under the purview of transfer pricing rules.

A bench of justices Sanjiv Khanna and V Kameswar Rao, while ruling in favour of the tax department that expenses on AMP are international transactions, however, refused to accept the method employed by the authorities to calculate tax payable by the subsidiaries.

Instead, the bench laid down a number of guidelines to be adopted by the authority for calculating the tax payable by the subsidiary for expenses incurred on AMP.

The bench also remanded back to the Income Tax Appellate Tribunal (ITAT) the issue of calculation of tax payable by subsidiaries for fresh consideration based on the guidelines laid down by the court.

It directed all the stakeholders to appear before the Tribunal on April 20, on which date ITAT will decide the date for hearing the issue of calculating tax payable by the subsidiaries.

The ruling and guidelines came on the pleas of several Indian subsidiaries of multinational companies including Sony, Daikin, Haier, Reebok, Canon and Casio.

The companies in their pleas had primarily opposed the tax authority's view that AMP beyond the 'bright line' is a separate and independent international transaction undertaken by the Indian subsidiary for promoting the brand of the parent company.

'Bright line', as per tax authorities, is the industry standards of spending on AMP and any expenditure over and above this limit is taxable.

The companies had opposed the same saying such a methodology is inflexible.

While disposing of their pleas, the court held "the bright line method has no statutory mandate and a broad-brush approach is not mandated or prescribed."

The court in its 142 page judgement laid down several guidelines including that,"When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach."

"Transfer pricing is an income-allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation," it also said.

It also held that "to include and treat the direct marketing expenses like trade or volume discount or incentive as brand-building exercise would be contrary to common sense and would be highly exaggerated.

"The expenses, being in the nature of selling expenses, have an immediate connect with price/consideration payable for the goods sold. They are not incurred for publicity or advertisement. Direct marketing and sale-related expenses or discounts/concessions would not form part of the AMP expenses," the court said.

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