Delhi HC : AMP an international transaction, rejects bright-line; LG ruling erroneous on comparability principles

Delhi HC says AMP expense is an international transaction - legal question answered in Revenue's favour; However, on comparability principles, HC says ITAT SB ruling in LG erroneous and unacceptable and hence remands matter back; HC rules that "Bright line test has no statutory mandate; Identification of potential comparables is the key and the method selected should reflect AMP transaction; Branding and marketing are inter-twined functions, bunching is permitted subject to conditions; However, the proposition that 'brand building = advertisement' is incorrect; Brand creation depends on relevant facts and reflects on reputation of the company & brand value depends on quality control; HC disagrees with Revenue on 'routine vs non-routine expense' argument, stating a broad-brush approach cannot be applied; HC also says that in specific cases, zero attribution is possible and disagrees with majority view in ITAT SB ruling in LG; HC holds that TP adjustment should not result in double taxation; HC observes that its judgment should not be seen as a finding that reflects "talismanic precision" to such a complex topic

35 key observations of Delhi HC in the marketing intangibles case...

10 points you need to know about the Marketing Intangibles case


A growing number of multinational enterprises (MNEs) have been tapping the Indian market by offering their products through local affiliates. Due to strong market competition, they have substantially increased their advertising expenditure. This has brought to fore a key transfer pricing (“TP”) issue in intra-group transactions, related to the creation of marketing intangibles by the Indian affiliates and the taxability of the associated income. The issue has been taken up aggressively by the tax authorities resulting in large TP adjustments on the basis of Advertisement, Marketing and Promotion (“AMP”) expenditurebeing asserted to be outside a permissible arm’s length (“ALP”) range. The tax authorities have been contending that such non-routine marketing efforts of a subsidiary of the MNEs should be categorized as “ service “ rendered to their AE and accordingly, should be compensated for the same. This non-routine expenditure is presumed to create marketing intangibles, which benefit the legal owners of the brand and not the local Indian affiliates...

Delhi HC to deliver AMP judgment on Monday

Delhi HC to deliver judgment in marketing intangibles case on Monday, Mar 16; HC to rule whether AMP expenses incurred by the assessee in India can be treated and categorized as an 'international transaction'; HC to also rule on whether marketing expenditure incurred by Indian company on promotion of brands, is required to be re-imbursed by foreign AE and separately benchmarked; Gamut of senior advocates argued the case in High Court

Delhi HC judgment on Marketing Intangibles - 5 points to watch out for

By Sudhir Nayak (Partner, M/s Sudit K. Parekh & Co.)

Both taxpayers and tax authorities are waiting with baited breath for the ruling which is expected soon. The Delhi Special Bench (SB) ruling in the case of LG Electronics was shot in the arm of tax authorities as it upholds the marketing intangible adjustments proposed by the lower tax authorities. Since the precedent was set by SB, the tax authorities have followed the same and proposed huge adjustments in case of various multinationals without analysing facts of the case. 

Analysis of Union Budget 2012 Amendments

Considering the increasing litigation on the issue of ‘Marketing Intangibles’ in India, the Finance Act, 2012 sought to bring some clarity to the definition of ‘international transaction’ in the context of ‘intangibles’. An Explanation to Sec 92B, which defines ‘an international transaction’, was added with retrospective effect from June 2002. The Explanation seeks to introduce a rather elaborate and inclusive definition of ‘intangibles’ widening the scope to also include marketing, technology, artistic, data processing, engineering, human capital, contracts, location, goodwill related intangibles and others.

Post ITAT Special Bench - The Interpretation Conflict

The challenge before Delhi HC now lies in core interpretation and applicability of transfer pricing provisions to the AMP transaction after a thorough analysis of facts for each case. With co-ordinate benches of Delhi Tribunal in BMW and Casio’s case, interpreting SB ratio in a different manner, it is left to see which way Delhi HC swings in deciding the crucial marketing intangibles debate.

ITAT Special Bench in LG - Shot in the arm for Revenue

The Special Bench in the case of LG Electronics case held that if a licensee of a brand incurred AMP expenses (as % of turnover) in excess of comparable companies, then the licensor of the brand, being the foreign company, would need to reimburse the Indian licensee of the brand for such excess, along with a mark up, for alleged provision of services in developing the brand of the foreign company in India.

Arguments before Delhi HC - Blow by Blow

The much-awaited hearing in the marketing intangibles case begain in Delhi High Court on 30th September, 2014 in a batch of appeals involving several MNCs. Not surprisingly, a battery of senior lawyers were on stand-by to present their arguments before the Bench. Among them were Senior Advocates S. Ganesh, N. Venkat, Ajay Vohra and Advocate Mukesh Butani. Special Counsel and Advocate G.C. Srivastava (former D.G. International Tax - IT Department) who succesfully argued the case for IRS before ITAT Special Bench, once again shouldered the responsibility. 

The arguments, especially on first principles surely make for an interesting reading.

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