Marketing Intangibles controversy – Hyundai adds another view?

May 11,2017
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Bhavik Timbadia (Partner, BMR & Associates LLP)

Shweta Kashyap (Associate Director, BMR & Associates LLP)

Transfer pricing (“TP”) aspects of marketing intangibles have been a focus area of Indian tax administration for quite some time now. The litigation on the subject paced up in around 2010, when Indian revenue authorities (“IRA”) alleged that, excessive advertisement, marketing and promotion (“AMP”) expenditure incurred by Indian subsidiaries of multinational enterprises (“MNEs”), enhances the value of brand owned by their associated enterprises (“AE”). IRAs heavily piggy-banked on the concept of “bright line test” (“BLT”) to propose adjustments to Indian subsidiaries (both manufacturers and distributors) by comparing AMP to sales ratio of companies vis- -vis comparable companies. In 2013, special bench of Income Tax Appellate Tribunal (“ITAT or Tribunal”) in the case of LG Electronics[1] approved the said approach of IRA.

While the controversy for use of BLT was put to rest by need-of-the-hour verdict of Delhi High Court (“HC”) in the case of Sony Ericsson[2] (distributor), the question in relation to existence of international transaction on account of brand promotion, was held in favor of IRA. Contrary to this, Delhi HC soon passed another ruling in the case of Maruti Suzuki[3] (manufacturer), holding that AMP cannot be held to be an international transaction, in the absence of written/oral arrangement between the Company and AE and in absence of machinery provisions, to prove the existence of international transaction dehors BLT.

Since then, taxpayers, have witnessed a mixed bag of judgements, wherein, in some cases, AMP adjustments have been deleted, in some cases upheld and in most cases being remanded. Probably because of impending Apex Court verdict, a conservative approach is being adopted by Tribunals. The Courts are primarily relying on earlier HC rulings, to the extent possible.

Amidst this ongoing combat, Chennai ITAT has recently taken a bold move in favor of the taxpayer by deleting TP adjustments of over INR 350 Crores (cumulative for three years in appeal) in the case of Hyundai Motor India Limited[4] (“HMIL” or “the taxpayer”), by ruling out marketing intangibles from the scope and definition of international transaction as laid down under of Section 92B of the Income tax Act, 1961 (“the Act”).

While the outcome in both the cases of these automobile giants (Maruti Suzuki and HMIL) is same, the difference is that in former’s case, IRAs could not prove existence of international transaction dehors BLT, as opposed to the latter’s case, where the definition of Section 92B has been analyzed to rule out the existence of international transaction.

HMIL, operating as a subsidiary of Hyundai Motor Company Korea (“Hyundai Motor Korea”), in the business of manufacturing and selling of cars in India, was burdened with high value adjustments on the ground that HMIL’s marketing efforts have led to creation of an intangible for the AE in India.


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