Transfer pricing and marketing intangibles

By Ranjeet Mahtani and Darshi Shah, Economic Laws Practice
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Substantial transfer pricing adjustments made by India’s Tax Department in the recent past have led to litigation concerning advertising, marketing and sales promotion (AMP) expenses and the creation of marketing intangibles for foreign associated enterprises (AEs). Appeals by assessees and the Tax Department on this contentious subject are presently pending before Delhi High Court.

The department contends that by promoting the brand in India, the Indian assessee is providing services to the AE and that the foreign AE must compensate for AMP expenditure exceeding the average AMP expenses incurred by comparable companies in India, disregarding spending by foreign brand companies in India.

Ranjeet Mahtani
Ranjeet Mahtani

The special bench of the Income Tax Appellate Tribunal, in the LG Electronics case, held that transfer pricing adjustment is permissible in relation to AMP expenses incurred by the assessee for creating/improving marketing intangibles for and on behalf of an AE. In a subsequent case involving BMW India, a division bench of the tribunal held that applying the LG ratio depended on the facts of a case. Since BMW India earned premium profits, the tribunal was convinced that compensation for its non-routine brand-building services was incorporated in the pricing of imported goods so no separate compensation was required from its AE. The tribunal also ruled that in the absence of specific provisions in the Income-tax Act, 1961 (ITA), tax authorities cannot adopt the mode of compensation for AMP expenses, whether by direct reimbursement or pricing adjustment.

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Ranjeet Mahtani is an associate partner and Darshi Shah is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.

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