India’s Delhi High Court rules on transfer pricing aspects relating to development & enhancement of marketing intangibles

India’s Delhi High Court rules on transfer pricing aspects relating to development & enhancement of marketing intangibles

 

This Tax Alert which summarizes a recent ruling of India’s Delhi High Court on transfer pricing aspects relating to development and enhancement of marketing intangibles. The case involved a group of litigants, with the lead case being that of Sony Ericsson Mobile Communications India Pvt. Ltd. (Taxpayer) vs Commissioner of Income-tax.  

 

The transfer pricing issue before the High Court was whether under arm’s length principles an affiliate needs to be compensated for its promotional efforts that allegedly enhanced the value of a trademark or brand name legally owned by another member of the multinational group. The promotional efforts typically result in the marketing affiliate incurring Advertising, Marketing and Promotional (AMP) expenses. The marketing affiliate may be a trademark licensee or a distributor of trademark products, while the legal owner of the trademark is the licensor or the supplier of the trademark products.  

 

In the case of LG Electronics India Private Ltd., which was decided by the Special Bench (SB) of Delhi Income-tax Appellate Tribunal in January 2013, it was held that there was a transaction between the taxpayer and its Associated Enterprise (AE) under which the taxpayer incurred AMP expenses toward promotion of the brand legally owned by the AE. The SB held that the transaction of brand building by the taxpayer for the AE is in the nature of “provision of service” requiring a mark-up. Further, the SB also upheld the use of the “bright line test” in order to determine the transaction value of AMP.

 

The High Court, while holding that the AMP spend may be considered an international transaction, has concluded that the compensation for AMP expenses may be included or subsumed in the purchase price of goods imported from AEs or a lower charge for royalty. The High Court held that the arm’s length nature of the arrangement may be tested by way of an aggregate or bundled analysis with other transactions relating to the distribution activity. If the Tax Authority seeks to unbundle the transactions, the Tax Authority should clarify its reasons for doing so. The High Court also rejected the application of the so called “bright line test” advanced by the Tax Authority for determining whether the Taxpayer needs to be compensated for its promotional efforts. The High Court has restored the matters back to the Appellate Tribunal for a final determination taking into account the principles laid down by the Court.