Tribunal to reassess transfer price cases, using new norms
The Delhi High Court has given a major relief to domestic arms of multinational companies by circumscribing the Indian tax department’s freedom to treat their advertising, marketing and sales promotion (AMP) expenses in the country as those for brand building for parents abroad and attribute extra taxable income.
Ruling in a clutch of cases filed by companies in consumer goods, automobiles and other industries challenging Income Tax Appellate Tribunal (ITAT) orders, the court said the “bright line test” adopted by the department in determining whether the AMP expenses here led to a boost to the brand value of the foreign parent lacked statutory backing. The court also remanded the cases to the ITAT for re-examination, in the light of its findings.
The ruling would immediately benefit Sony India, Canon India, LG Electronics, Haier Appliances, Reebok India and Casio India, among others, but the computation principles enunciated in the order will have a bearing in all related cases, present and future, as well.
While the court upheld that the taxman’s jurisdiction to adjustments in transfer pricing between Indian firms and their foreign associates on account of AMP expenses and said such spending could be termed “international transaction”, it added that the ITAT was right in excluding rebates and commissions to the dealers from AMP expenses.
The landmark decision, experts said, will lead to re-computation of tax demands on these and other MNC subsidiaries in India. The department argued that above-industry-average AMP expense leads to the creation of a part of the intangible (brand value) in India, which helps in enhancing the worldwide demand for the parents’ products, giving the Indian associate a right over the proceeds of the brand.
“While 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,” said Mukesh Butani, partner, BMR Legal.
The decision came on appeals filed by companies like Sony India, Canon India Haier Appliances, Reebok India, Casio India and Discovery Communications for transfer pricing adjustments from 2007-08 onwards. “The ‘bright line test’ has no statutory mandate and a broad-brush approach is not mandated or prescribed,” said the court.
The development is significant considering the fact that more than a third of the Rs 47,000-crore income suppression demand that the department made in the 2014-15 audit stem from AMP expenses. “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,” said Butani. 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, he said.
For the purpose of clarity, the court issued guidelines to tax officials on the issue. It said that to assert that brand building as equivalent or substantial attribute of advertisement and sale promotion would be largely incorrect. It also held that the ITAT was right in distinguishing and directing that selling expenses in the nature of trade and volume discounts, rebates and commission paid to retailers cannot be included in AMP expenses. “It would be incongruous to accept the comparables and determine of accept the transfer price and still segregate AMP expenses as an international transaction,”the court said. “We disagree with the revenue and do not accept the overbearing and orotund submission that the exercise to separate routine and non-routine AMP or brand building exercise by applying bright line test of non-comparables should be sanctioned in all cases, costs or compensation paid for AMP expenses would be nil, or at the best would mean the amount or compensation expressly paid for AMP expenses.”
Amit Maheshwari, partner, Ashok Maheshwary & Associates, said one of the important takeaways from this case is that transfer pricing cannot result in double taxation and it is only meant as an anti-avoidance measure to plug shifting of profits. “The HC order lays down the fundamental principles of marketing intangibles and overturns aspects of the ITAT special bench decision on LG Electronics dispute, especially on economic ownership,” said Rahul Mitra, KPMG’s national leader for litigation and disputes resolution for transfer pricing and corporate taxation.