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All you need to know about the marketing intangibles in Transfer Pricing

2. 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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3. What is bright line test
What is bright line test? The "bright line test" was propounded by the US Tax Court in the case of DHL Inc and Subsidiaries v. Commissioner [TCM ]. 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 in L.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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4. Legality of Bright Line Test:- The Delhi HC in case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113 has held that applying '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 of Bausch & 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 of Sony Ericsson Mobile Communications India (P.) Ltd. (supra). However contrary view has been expressed by Chennai ITAT in case of Hyundai 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 of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) while passing the above said judgment. What all expenses do not form part of AMP? The Delhi HC in case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) has held that direct marketing expenses like trade discount, volume discounts etc are not in the nature of brand building exercise. These expenses are incurred to increase the turnover of the Company.
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5. 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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