Significant Ruling by Chandigarh Bench of the Tribunal on marketing intangibles

 

In an important ruling in the case of Glaxo SmithKline Consumer Healthcare (“GSK India”), the Chandigarh Bench of the Income Tax Appellate Tribunal (‘Tribunal’) has laid out important principles in relation to transfer pricing adjustments on marketing intangibles following the guidelines laid down by the SB in the case of LG India.

Brief background

Indian Revenue Authorities have been alleging Advertisement, Marketing and Promotion (‘AMP') expenses incurred by the Indian subsidiaries of MNC’s to be services rendered to their associated enterprises (‘AE’). The Revenue Authorities have held that the Indian subsidiary be compensated for such services in relation to creation of marketing intangibles. The Special Bench of the Income Tax Appellate Tribunal (‘SB’) was constituted in the case of LG Electronics India Pvt. Ltd., (‘LG India’) and had delivered its decision on the vexed issue of Transfer Pricing (‘TP’) of marketing intangibles.

The SB held, on the facts of LG India’s case, that AMP expenditure incurred by the Indian subsidiary resulted in creation or improvement of marketing intangibles of the foreign brands, which constituted an ‘international transaction’ and, accordingly, the TP adjustments were permissible. The SB also held that such compensation should not only be at cost but with a mark-up. However, the SB has restored the matter to the Transfer Pricing Officer (‘TPO’). The SB, has, provided relief to the taxpayers while holding that the amount of subsidy received from its AE should be reduced for computing ALP and expenditure inextricably linked to sales, such as trade discount, dealer commission, etc. should not be considered for determining the cost/ value of international transaction. There were several interveners before the SB, including, GSK India.

Brief facts of GSK India

· GSK India was incorporated under the laws of India and was owned 40% by Horlicks Ltd, UK, which is part of GSK Group.

· GSK India, inter alia, was engaged in manufacturing and selling of nutritional products i.e. malted milk food products and drinks under the brands ‘Horlicks’, ‘Boost’, ‘Maltova’ and ‘Viva’. In addition, GSK India also provided certain administrative support services such as marketing, sales inputs, IT support, training and accounting, etc. to its group companies.

· GSK India had benchmarked its international transactions by adopting transactional net margin method (‘TNMM’) with operating profit/ total cost ratio as profit level indicator for AY 2007-08.

· The TPO made an adjustment on account of AMP expenditure incurred by GSK India. The TPO took the view that GSK India had created marketing intangibles for the benefit of its AE by incurring excessive AMP expenditure and, accordingly, should have been compensated at arm’s length by the AE. The TPO, further, added a mark-up of 13.04% to the excess AMP Expenditure incurred by GSK India.

· The TP Adjustment was confirmed by the DRP but directed the Assessing Officer to allow expenditure incurred on R&D by GSK India as the same did not form part of the AMP expenditure.

· Aggrieved GSK India filed an appeal with the Tribunal.

Taxpayer’s contentions

· There was no international transaction as per Section 92B of the Act.

· AMP Expenditure was neither incurred at the instance or direction of the AE and nor the AE is expected to benefit from such expenditure.

· In line with the ratio laid down by the SB, AMP Expenditure needs to be re-looked by the TPO after giving an opportunity to GSK India.

· AMP Expenditure incurred by GSK India also included certain expenses not in the nature of advertising and marketing expenses such as

i) service charges paid to the selling agent,

ii) sales promotion,

iii) discount on sales,

iv) market research expenses and

v) selling and distribution expenses.

· Such expenses were in the nature of selling expenses and not brand promotion and, accordingly, the same ought to be excluded from AMP Expenditure.

· Expenses incurred for the promotion of Indian brands such as Viva, Maltova and Boost, should be excluded.

Revenue’s contentions

· The issue of TP Adjustments made on account of AMP expenditure stands covered against GSK India by the decision of SB in LG India. In view of the directions of the SB, the matter has to be restored to the file of the TPO for computation/ benchmarking purposes.

Decision of the Tribunal

· Following the SB ruling, the Tribunal held that excessive AMP expenditure incurred by GSK India does constitute an international transaction.

· In view of the directions of the SB, the matter has been restored to the TPO for computation/ benchmarking the AMP expenditure, after affording a reasonable opportunity. GSK India will have the liberty to furnish fresh set of comparables for benchmarking and computing the ALP.

· The Tribunal has also directed the TPO to consider the relative spends made on foreign brands and domestic brands while determining the ALP.

· Placing reliance on the SB ruling, the expenses inextricably incurred in connection with sales and not related to brand promotion were excluded from AMP Expenditure.

· Further, the amounts attributable to the promotion of domestic brands owned by GSK India were also excluded.