by Ashish Goel
India’s Delhi High Court on December 11 delivered a key ruling on the application of the country’s transfer pricing rules to advertisement, marketing, and sales promotion (AMP) expenses incurred by companies for and on behalf of related parties.
The ruling, Maruti Suzuki India Limited (MSIL) v. Commissioner of Income Tax, stemmed from a transfer pricing adjustment made by the tax authority in respect of the AMP expenditure incurred by MSIL.
The tax authority argued that the expenditure created brand value and marketing intangibles in respect of the brands/trademarks belonging to MSIL’s related party in Japan, namely, Suzuki Motor Corporation (SMC) and imputed a notional arm’s length compensation towards the AMP expenses incurred by the company for SMC.
Despite the absence of any agreement between the company and SMC regarding the AMP expenditure, the tax authority inferred an “international transaction” on the ground that the AMP expenses incurred by the company were higher than what was being spent by comparable entities.
MSIL challenged that assertion, and, in a decision that will bring relief to several Indian companies engaged in similar disputes, the Court ruled that the tax authority was not justified in holding that MSIL should have earned a mark-up from SMC in respect of the AMP incurred for and on behalf of SMC.
The Court pointed out that there is no specific mention of AMP expenses as one of the items of expenditure that can be deemed to be an “international transaction” for the purpose of Section 92B(1) of the Income Tax Act. The Court said that for the purpose of that section, the tax authority must show the existence of a transaction pursuant to which MSIL was obliged to incur AMP expenses to a certain level to promote SMC’s brand.
“The transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by MSIL and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for SMC,” the Court observed.
The Court accepted MSIL’s contention that the only transfer pricing adjustment authorized and permitted under the Indian transfer pricing rules is the substitution of the arm’s length price for the transaction price or the contract price. The Court ruled: “What is clear is that it is the ‘price’ of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since is not an arm’s length price, an ‘adjustment’ has to be made.”
The Court also agreed with MSIL that such adjustments involved in respect of AMP expenses may be contemplated in the taxing statues of the US, Australia, and New Zealand, but not under the Indian transfer pricing regime.