The Indian marketing intangibles saga
How the landmark Maruti Suzuki case has affected tax legislation in India
In this era of globalisation, the momentum of growth achieved by India has attracted a multitude of multinationals (MNCs) setting up subsidiaries in the country. To safeguard diminishing tax revenues, a wide range of regulations are being introduced by the Indian Revenue Authorities (IRAs), many of which affect transfer pricing.
Over the past couple of years, MNCs across India have had to deal with a significant number of transfer pricing adjustments regarding marketing intangibles. The dispute in the Maruki Suzuki case arose because the IRAs alleged that the taxpayer had contributed to the brand (legally owned by the parent company) by incurring excessive advertisement, marketing and promotion (AMP) expenses.
The authorities used the bright line test (BLT) method to determine the excessive amount of AMP. By way of background, the BLT compares the AMP expenses incurred by the assessee with AMP expenses incurred by comparable companies. The Indian Revenue Authorities have been making transfer pricing adjustments in respect of “excessive” AMP expenditure incurred by Indian subsidiaries of foreign MNCs based on this BLT method. This approach was largely upheld by a decision in the case of LG Electronics India Pvt Ltd, and has then been applied to many other taxpayers’ cases.
A number of appeals have been made to the Delhi High Court and in March 2015, a ruling in the Sony Ericsson case quashed the practice of using the BLT methodology for determining an arm’s length price. It held that the AMP expenditure should be viewed as a bundled transaction as these expenses are incurred as part of distributional activities. In the Sony Ericsson case, the existence of an international transaction was not challenged. In fact, the ruling provided much needed clarification regarding the position of distributor entities.
The recent landmark ruling by the Delhi High Court in the case of automobile manufacturer Maruti Suzuki India Limited has clarified that, according to Indian transfer pricing regulations, AMP expenditure incurred by manufacturing entities cannot be treated as being incurred in respect of an international transaction and so used in a review of prices charged for cross-border transactions. The court in this case distinguished the verdict laid out in the Sony Ericsson decision and, in particular, stated that:
- the Sony Ericsson decision cannot apply to manufacturing entities,
- BLT was not a legitimate means for determining the pricing of an international transaction.
- AMP expenses do not represent an international transaction merely through the application of BLT.
- transfer pricing adjustments cannot be made merely on the basis of the amount of AMP expenditure incurred by the taxpayer.
This ruling by the Delhi High Court is a welcome one, since it has provided a road map for how to deal with such a contentious issue. Nevertheless, relations between industry and the Government in India have drastically changed over the years following the adoption of various beneficial policies by the Government. This legal clarification safeguards the interests of many multi-national corporations and should also have a positive impact on the investor-friendly environment in India.
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