What is the pain point – Marketing intangible or AMP expenses?

February 07,2018
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Rahul K Mitra (National Head Transfer Pricing, KPMG India)

  • As the matter relating to transfer pricing (TP) adjustments on account of advertisement, marketing and sales promotion (AMP) expenses, is pending adjudication before the Supreme Court, Tax Tribunals of the country, while deciding such cases, face a dilema of providing authorative rulings on merits; and are generally preferring to restore the cases to the lower authorities for readjudication in light of rulings of the Delhi High Court in the cases of Sony Ericsson and Maruti Suzuki, without providing definitive directions.
  • It is submitted that in case both taxpayers and Revenue Authorities proactively wish to take correct and pragmatic approaches on matters relating to AMP expenses, then the cases can be easily adjudicated by Tax Tribunals; and also resolved in bilateral advance pricing agreements (APAs) and mutual agreement procedures (MAPs), without either party having the need to fall back upon the state of the litigation, which has reached the Supreme Court. A detailed discussion is made in this regard :
    • The main reasoning or modus operandi of the TP adjustments made by the Revenue Officers thus far, has been that if the percentage of AMP expenses to turnover of the Indian licensee of a brand owned by its foreign associated enterprise, being the licensor, exceeded the average of those of comparable companies selected to benchmark the Indian licensee or taxpayer under the touchstone of TP, then to the extent of such excess, the taxpayer would be said to have been rendering a service for promotion of brand in favour of the licensor, for which a separate reimbursement for the excessive AMP expense was receivable by the Indian licensee, along with a mark-up, from the foreign licensor, thus resulting into a TP adjustment.
    • The Revenue Officers had applied the above rationale across the board for all licensees, irrespective of their cast or creed, which in the parlance of TP, is referred to as characterisation, namely – (a) distributor, whether or not normal or limited risk; (b) licensed manufacturer, whether or not entrepreneural or limited risk under a non-integrated principal structure; or (c) entreprenurial buy-sell compnay.
    • The Revenue Officers have alleged the presence of an “international transaction”, being the sacred sceptre for triggering TP, as generally understood in India by most constituents, in all such cases, where the percentage of AMP expenses to turnover of the Indian licensee had exceeded the average of those of comparable companies, being in the nature of rendition of services; and proceeded to make TP adjustments.
    • Taxpayers had been contesting such TP adjustments made by Revenue Officers in appellate forums; and have successfully defended their cases upto the level of High Courts. The Delhi High Court, in two landmark rulings, delivered in the cases of Sony Ericsson and Maruti Suzuki, has decided the cases in favour of taxpayers, both in the context of distributors and licensed manufacturers respectively. Both the rulings have been of the highest standard and class; and in the process, have placed the Indian judiciary at the helm of global jurisprudence in TP.
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