Delhi High Court rejects tax department’s approach to marketing intangibles

Delhi High Court in a March 16 decision said it disagreed with the Indian tax department’s method of analyzing the transfer pricing aspects of payments made by Indian subsidiaries for advertisement, marketing, and sale promotion (AMP). The Court also concluded that AMP transactions are “international transactions” that are subject to transfer pricing rules.

The opinion addressed the combined appeals of several Indian subsidiaries of MNEs, including subsidiaries of Sony, Canon, LG Electronics, Haier Appliances, Reebok, and Casio.

The tax department contended that payments made by the subsidiaries in excess of a permissible range, or “bright line,” should be deemed to be for the separate international transaction of brand building, benefiting the foreign owner of the brand. Such non-routine payments must be reimbursed by the owners of the marketing intangibles along with an arm’s length mark-up as payment for the service, the tax department maintained.

In its 142-page opinion, the High Court said it disagreed with the tax department’s approach.

There is no “statutory mandate” for a bright line test to separate non-routine payments of AMP from routine payments, so the bright line test should not be applied by the tax department with such a “broad-brush,” the court said.

“The [tax officials] can segregate AMP expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off,” the court concluded.

In reaching its conclusions, the court also confirmed that AMP expenditures are international transactions subject to transfer pricing rules.

Mukesh Butani, managing partner of BMR Legal said the decision is a landmark ruling that is “generally welcome” by taxpayers.

“This issue has impacted a large number of multinationals operating in India across various industries such as consumer durables, automobiles, media, and entertainment,” he said.

Butani noted that the marketing intangibles issue was adjudicated previously by the Delhi Income Tax Appellate Tribunal in LG Electronics. “The High Court did not agree with the economic principles laid down by the tax tribunal,” he said.

See:

• Sony Ericsson Mobile Communications India Pvt. Ltd. et al. v. Deputy Commissioner of Income Tax