Case offers clarification on marketing intangibles issue

By Pranay Bhatia and Darshi Shah, Economic Laws Practice

BMW India imports completely built units (CBUs) of BMW motor vehicles, related spare parts and accessories from its associated enterprises (AEs) and resells these in the Indian market. The company also assembles completely knocked down car kits (CKDs) for resale in India.

Pranay Bhatia
Pranay Bhatia

Under an agreement between the company and one of its AEs, BMW India was appointed as an importer and distributor of CBUs, CKDs and original automobile parts accessories in India as well as to advertise, promote sales and create a well-ordered distribution network in India.

The transfer pricing officer (TPO), seeing advertising, marketing and promotion (AMP) expenses as an international transaction, held that by incurring AMP expenses over and above the “bright line test”, the taxpayer provided brand promotion services to its AE, leading to an adjustment.

The company disputed the adjustment before a dispute resolution panel (DRP). The DRP substantially confirmed the TPO’s findings, only excluding after-sales support costs and salesperson’s bonus from the AMP calculation.

Tribunal’s findings

In an appeal by the company before the Delhi bench of the Income Tax Appellate Tribunal (BMW India Private Limited v ACIT), the tribunal rejected the tax department’s contentions and ruled in favour of the taxpayer. The tribunal held that the company is not a licensed manufacturer, but a normal distributor with a greater intensity of functions, and that the ruling of the Delhi special bench in LG Electronics India Private Limited v ACIT, earlier in 2013, applies only to the extent the facts of the case permit.

The tribunal confirmed that the brand-building activity carried out by the taxpayer for the AE was an international transaction and that the bright line test is an accepted method for calculating the non-routine AMP expenses. Observing that the company earned premium profits at both the gross and the net level, the tribunal was convinced that the compensation for non-routine brand building services by the taxpayer was incorporated in the pricing of the imported goods and therefore no separate compensation was required from the AE.

The tribunal found that in the absence of specific provisions in the Income Tax Act, 1961, the tax department cannot suggest the mode of compensation of the AMP expenses, i.e. via direct reimbursement and not pricing adjustment.

Darshi Shah
Darshi Shah

The tribunal further clarified that where there is no conflict with Indian income tax law, there is no bar on referring to and relying on the OECD transfer pricing guidelines and the international tax practices jurisprudence. The tribunal also mentioned that the TPO is required to follow and comply with the directions of the DRP.

In light of the above and after referring to the terms of the agreement between the taxpayer and its AE, the tribunal decided that no further reimbursement of AMP expenses was required as the expenses had already been factored into the pricing agreement. Thus the adjustment stands deleted.


After a wave of negative decisions on the issue of marketing intangibles, this is the first favourable ruling on the issue at the tribunal level. It further mentions that the scope and authority of a precedent should not be expanded beyond the needs of the given situation.

The tribunal confirmed that brand building for an AE is an international transaction and that the bright line test is an accepted method for calculating non-routine AMP expenditure. However, in the instant case, the tribunal noted an important difference on the AMP issue between a distributor and a licensed manufacturer. In the first ruling of its kind, the tribunal held that no separate compensation was needed for excessive AMP expenses when the distributor receives sufficient profits or rewards as part of the pricing of the goods imported from its AE.

The tribunal highlighted the difference in the facts relating to the taxpayers in the BMW and LG cases and has thereby provided a commendable clarification on how the typical AMP issue is to be examined for distributors.

Further, the tribunal acknowledged that transfer pricing litigation and adjudication is a fact-intensive exercise which requires consideration of the terms of the contract with the AE, business model and detailed analysis to characterize the transactions. The tribunal noted that there can be no strait-jacket formula to decide a transfer pricing matter.

The tribunal’s rulings, as highlighted in this case, reflect the growing maturity of India’s judiciary. This case shows that although a landmark judgment on the issue of marketing intangibles plays a role of paramount importance in adjudications, each case stands on its own facts and merits.

Considering the prima facie contradictions in the rulings on the BMW and LG cases, it will be interesting to see how the coordinate benches of the tribunal will reconcile.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune, Ahmedabad, Bengaluru and Chennai. Pranay Bhatia is a partner at the firm and Darshi Shah is an associate.


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