16 March 2015: Delhi High Court rules on applicability of transfer pricing on Marketing Intangibles. The ruling will bring in clarity on the aspect of Marketing Intangibles and would reduce litigation on the expenditure incurred on advertisement, marketing and promotion by the multinational companies. We present to you a snapshot of 142 pager decision given by the high court highlighting important principles around the issue and our views on the same. Trust you will find it useful. Happy reading !!!

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Marketing Intangibles- Delhi HC Decision
Advertising, Marketing & Promoting ‘Brand India’

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In the recent past the concept and litigation around ‘Marketing Intangibles’ in case
of LG and other interveners would have been the second most debated and talked
about topic just behind the Vodafone saga in the international tax fraternity
including the MNE group, professionals and the revenue authorities.
The concept of marketing intangibles and adjustment following the ‘bright line
test’ could be considered as one of the favorites in the Indian transfer pricing
litigation over past few year.
The controversy was put to rest by the hon. Delhi high court (HC) by delivering a
landmark ruling setting out important principles to the concept of marketing
intangibles.
The next few paras summarize such ruling along with a brief introduction to the history of this litigation.
Hon. Delhi ITAT (Special Bench) ruled that in case of a subsidiary distributor that incurred advertisement,
marketing and promotion (‘AMP’) expenses in excess of expenses incurred by comparable companies as a
percentage of turnover needs to be considered as a non-routine expenditure. Such a non-routine expenditure
is then subject to a reimbursement from the legal owner of the brand plus a markup for promoting brand in
India.
The concept of arriving at proportion of AMP expenses as a ratio to the turnover was termed as ‘bright line’. In
short any expenditure exceeding such ratio would command a cost plus markup as marketing service provision
towards brands development.
With ITAT (SB) backing up revenue contentions, Indian business houses was looking at the decision of Delhi high
court with a ray of hope on the guidance on the legal front on the applicability and interpretation of such concept
in the statute.
On 16th
March 2015, the high court lived up to the expectation of the India business houses by delivering a
favorable ruling for the aggrieved taxpayers.
Following are the important principles that were laid by the high court in the decision:
 Clarification that Transfer Pricing Officer can evaluate and assess any transaction that comes to his notice
during course of audit. Section 92CA(2B) explained including its retrospective effect.
 Holds that marketing intangibles is an international transaction. However concluding such transaction as
international transaction does not provide for upholding the ‘bright line’ concept.
 Transfer pricing provisions under chapter X deals with arriving a true and fair price of a transaction. Whereas
section 37(1), determines if the expenditure was made for business purpose. Both the intent of the sections
are different and mutually exclusive.
 Transfer pricing is not an exact science, but a method of legitimate quantification that requires judgement
analysis. One should be focused on reasonableness of result of determination of ALP.
Akshay Kenkre
Managing Partner -
TransPrice

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 It is incorrect to treat brand building as a counterpart or to commensurate to advertising.
 It is permitted to group various class of transaction if the transactions cannot be analyzed separately and
meets the common portfolio and package parameters.
 Once comparables passes the quantitative and qualitative functional tests under TNM Method and are
accepted, a transaction cannot be broken down in to different classes of distribution or AMP expenses.
 Use of ‘bright line test’ is unwarranted. Bright line as a concept finds no place in Indian tax statute and using
the same would tantamount to rewriting of law.
 It is important to analysis the functions performed by the distributor and one should ensure that the return
to the distributor should commensurate to the level of activity undertaken by such distributor.
 Such an adequate remuneration could be received through pricing of products by the principle (higher
gross margin) and not necessary through reimbursement of expenses by legal owner of the brand.
 The above principle was also highlighted by OECD and Australian tax office.
 Therefore the taxpayer need not be separately remunerated if the taxpayer is well compensated through
product pricing.
 If a separate reimbursement is insisted, it would lead to double taxation.
 Further, the high court recognized the concept of economic ownership along with legal ownership of
brand. The principles of economic ownership of brand could be upheld to the extent of significant functions
undertaken by the distributor including creation of distribution network, framing marketing strategies etc.
by the licensee of the brand.
 The reliance on foreign ruling in case of DHL & Glaxo were rejected.
The case was concluded holding the SB decision as erroneous and unacceptable on comparability principle.
Such a favorable decision by the high court will go a long way in restoring confidence in brand India and bring
certainty in ever dynamic subject of transfer pricing.
An important take away from the decision is a clear indication on the importance of FAR analysis in evaluating
even a simple function like distributor. It has to be understood that every business and business situation is
unique and a standardized solution in the form of FAR may not be an answer to transfer pricing
documentation. The documentation should reflect reality and substance of the transaction rather than a
standard piece of paper.