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Customer Care No.

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All you need to know about


the marketing intangibles
in Transfer Pricing
www.taxmann.com

Introduction
It is quite common in today's competitive
environment to see multinational enterprises
incurring advertisement expenses to promote the
products and to increase the sales. However Tax
authorities have started looking this as a tool used
by the assessee to benefit its AE in promotion of its
brand by incurring expenditure which the AE should
otherwise incur and thereby paying less tax. Thus
the issue of marketing intangibles has become a
significant part of litigation. This article attempts to
summarize various important judgments passed in
the context of marketing intangibles.

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What is bright line test?
The "bright line test" was propounded by the US Tax Court in the case ofDHL Inc and
Subsidiariesv.Commissioner[TCM 1998-461]. The US Tax Court in that case held that the
Advertisement, Marketing & Sales promotion expenses (AMP) to the extent incurred by
uncontrolled comparable distributors is to be regarded within the 'Bright Line limit' of the routine
expenses and AMP expenses incurred by the assessee beyond such 'Bright Line limit' constituted
non routine expenditure, resulting in creation of economic ownership in the form of market
intangibles which belong to the owner of the brand. The Tax authorities applied Bright line test
by comparing the AMP expenses as a percentage to sales of the taxpayer with the Comparable
entities.
Special Bench ruling in L.G. Electronic case
The Special Bench inL.G. Electronics India (P.) Ltd.v.Asstt. CIT[2013] 29 taxmann.com 300/140
ITD 41 (Delhi Trib.) has held that any excess expenditure beyond the bright line test should be
regarded as a separate international transaction of brand building. The amount of excess AMP
incurred by the assessee along with an appropriate mark up should have got reimbursed from its
AE and, accordingly, the same was proposed as a transfer pricing adjustment.

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Legality of Bright Line Test:The Delhi HC in case ofSony Ericsson Mobile Communications India (P.) Ltd.v.CIT[2015] 55
taxmann.com 240/231 Taxman 113 has held thatapplying 'bright line test' on the basis of
parameters set in L.G. Electronics India (P.) Ltd.(supra)would be amounting to writing words in
the statute and the rules.There is nothing in the Act or the rules to hold that it is obligatory
that the AMP expenses must and necessarily should be subjected to 'bright line test'and that
the non routine AMP expenses along with an appropriate mark up should be analysed as a
separate international transaction. Similar view is taken by Delhi ITAT in case ofBausch &
Lomb India (P.) Ltd.v.Dy. CIT[2015] 59 taxmann.com 448 wherein the ITAT directed the TPO
for benchmarking the AMP functions, keeping in view the decision of the Delhi High Court in
the case ofSony Ericsson Mobile Communications India (P.) Ltd.(supra). However contrary
view has been expressed by Chennai ITAT in case ofHyundai Motor India Ltd.v.Dy. CIT[2016]
69 taxmann.com 295 (Chennai - Trib.) wherein the ITAT has held that bright line test needs to
be applied for determining arm's length price (ALP) on advertisement expenses. It is quite
surprising to note that nor the assessee neither the Chennai ITAT refer the Delhi HC judgment
in case ofSony Ericsson Mobile Communications India (P.) Ltd.(supra) while passing the above
said judgment.
What all expenses do not form part of AMP?
Customer
Care
91-11The Delhi
HCNo.
in case
ofSony Ericsson Mobile Communications India (P.) Ltd. www.taxmann.com
(supra) has held

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AMP as an International Transaction:Till now the judicial focus was on the argument as to how to benchmark the AMP expenses. But
later on new judgements came up questioning as to whether incurring of AMP expense itself is
an International transaction or not. The Delhi HC in case of Bausch & Lomb Eyecare (India) (P.)
Ltd. v. Addl. CIT [2016] 65 taxmann.com 141/237 Taxman 24 has held that the incurring of AMP
expenses is not an international transaction after analysing the definition of international
transaction. The definition is reproduced below for your reference.
An 'international transaction' means
(a) a transaction between two or more AEs, either or both of whom are non-resident
(b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or
provision of service or lending or borrowing money or any other transaction having a bearing on
the profits, incomes or losses of such enterprises, and
(c) shall include a mutual agreement or arrangement between two or more AEs for allocation or
apportionment or contribution to the any cost or expenses incurred or to be incurred in
connection with the benefit, service or facility provided or to be provided to one or more of such
enterprises.
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