Delhi High Court: Licence to manufacture and advertise?

Delhi High Court delivered a landmark decision on the transfer pricing implications of advertisement, marketing and sales promotion (AMP) expenses for licensed manufacturers in December 2015, in the case of Maruti Suzuki, holding that AMP expenditure does not constitute an “international transaction” and cannot be subject to transfer pricing adjustments.

The court observed that even in a case where an AMP expense is seen as an international transaction, there is no statutory machinery provision to enable the tax department to determine the compensation due to an Indian entity. Further, as neither the substantive nor the machinery provisions of Chapter X of the Income-tax Act, 1961, were applicable to AMP, the inevitable conclusion was that Chapter X of the act did not permit an adjustment in respect of AMP. The court fittingly observed that the value of a brand may be impacted by a number of factors and imponderables.

Relying on its decision in Sony Ericsson Mobile Communications, of March 2015, which held that India’s transfer pricing provisions do not mandate the use of the “Bright Line Test” (BLT), the court held that the BLT cannot be applied even to ascertain whether there is an international transaction, particularly as there is no machinery provision for this purpose. Considering the statutory provisions on transfer pricing, the court held that existence of an international transaction has to be proved within the contours of the statutory framework, and not by surmises and conjectures.