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Delhi HC rules marketing intangibles come under transfer pricing regulations
March, 19th 2015

The Delhi high court on Monday brought clarity on application of transfer-pricing rules on marketing intangibles in a long-awaited judgement that will reduce disputes over advertisement, marketing and sales promotion (AMP) expenditure incurred by Indian units of multinational companies.

A bench of justices Sanjiv Khanna and V. Kameswar Rao ruled in favour of the tax department and held that market intangibles are international transactions and hence come under the transfer pricing ambit, but at the same time laid down internationally accepted norms for computation of compensation due to the Indian subsidiary from the global parent for incurring huge advertisement and marketing expenses to promote the global brand in India.

Disposing of appeals and cross-appeals by the assessee and the income tax department in various cases involving companies like Canon India Pvt. Ltd, Daikin Airconditioning India Pvt. Ltd and Sony Ericsson Mobile Communications India Pvt. Ltd, the judges remanded these cases to the Income Tax Appellate Tribunal for fresh consideration based on the guiding principles laid down by the bench.

The Indian subsidiaries of foreign multinational companies selling products in India under the brands of their foreign group companies were battling the tax department over AMP expenses for the past few years. The tax department is of the view that the AMP expenses incurred by the Indian subsidiaries benefit the global brands and should therefore be reimbursed by the global firms.

The primary issue in these cases was whether AMP beyond the so-called bright line is a separate and independent international transaction undertaken by the resident Indian assessee towards brand building for the brand owner—the foreign parent.

A bright line divides AMP expenditure into two—that which is incurred in the normal course of business by comparing two entities in a similar line of business, and that which is incurred for and on behalf of the foreign parent towards creating or maintaining its marketing intangible.

“The court has sought to adopt international best practices,” said Sanjay Tolia, partner, transfer pricing, Price Waterhouse and Co. Llp, an auditing firm.

“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,” said Mukesh Butani, partner, BMR Legal, a law firm representing some of the taxpayers in the cases, including Canon India.

He added that the judgement clarifies that the transfer-pricing law is an anti-avoidance provision and should be used selectively and not result in double taxation.

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