New Delhi : The Delhi High Court has laid down principles governing taxation of advertising and marketing spends by multinational firms, a ruling that could bring significant relief to these companies facing thousands of crores in tax demands and potentially make doing business in India easier.
The dispute was over the applicability of transfer pricing rules —which governs transactions between multinational companies and their Indian arms —- to spending on advertising marketing and sales promotion (AMP) by MNCs, including Sony, Canon, Daikin Airconditioning, Haier Appliances, Reebok and Casio. The income tax authorities had ordered MNCs to pay taxes if the spending on AMP exceeded industry benchmarks set by the tax authorities.
The tax authorities have been issuing demands using the logic that if spending exceeded the industry benchmark then it promoted the brand, owned by the foreign parent, and thus was covered by transfer pricing.
The concept of pegging AMP spend to a industry benchmark is known as the ‘bright -line method’ and had been disputed by industry on the ground that it is extremely inflexible because some products may need to be advertised more heavily than others . The court’s 142 page ruling is complex, accepting some of arguments put forward by revenue but siding with the MNCs in other areas.
The court has ruled that advertising and marketing promotion transactions are ineed international transaction that fall within the ambit of transfer pricing but has not accepted aggressive computational methodologies employed by tax authorities. An earlier special bench ruling of the Income Tax Appellate Tribunal arising out of a tax demand on LG Electronics which was in favour of tax authorities had queered the pitch for MNCs operating in the country.
“The Delhi HC verdict is welcome as it clarifies several important principles which did not feature in the LG special bench ruling from ITAT (Income Tax Appellate Tribunal),” said Mukesh Butani, partner, BMR Legal, which represented Canon.
“Whereas the primary question–whether marketing intangible transactions is an international transaction–has been answered in revenue’s favour, all other aspects have been addressed in favour of the taxpayer (the MNCs),” Butani said.
“This judgment brings the flavor of international best practices,” said Vijay Iyer, partner & transfer pricing leader, EY.
“The High Court has appreciated the business realities that many transactions are bunched together in business and benchmarking them also needs to be done jointly keeping in mind business realities. The clarifications provided by the High Court will go along way in settling a large number of cases and would provide clarity to taxpayers as well as tax authorities. This will reduce litigation substantially,” said S P Singh, Senior Director, Deloitte Haskins & Sells.
The high court has also for recognised the economic ownership of intangibles as part of current business reality that needs to be accepted. “Hopefully, the principles laid down by the bench will serve as a guidance to the field officers, firstly in situation where marketing intangibles principles should be involved albeit selectively.
And secondly, on the computation aspects of carrying out adjustment,” added Mukesh Butani, partner, BMR Legal who assisted Ajay Vohra in representing some of the taxpayers including Canon India and Daikin.
The court has rejected both the “Bright Line Method” as well as another methodology for determining allowable expenses on advertising and marketing spends. These methodologies were being used by tax authorities to make aggressive tax claims.
