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Significant Ruling on Multinationals' AMP Expenditure

In an important ruling in the case of Glaxo SmithKline Consumer Healthcare (GSK India), the Income Tax Appellate Tribunal has laid out important principles in relation to transfer pricing adjustments on marketing intangibles. Taxand India discovers the facts behind the case.

GSK India was engaged in manufacturing and selling of nutritional products however also provided certain administrative support services such as marketing, sales inputs etc. to its group companies. GSK India had benchmarked its international transactions by adopting transactional net margin method (TNMM) for AY 2007-08. The TPO made an adjustment on account of Advertisement Marketing and Promotion (AMP) expenditure, taking the view that GSK India had created marketing intangibles for the benefit of its associated enterprises (AE). The TPO believed the company had incurred excessive AMP expenditure and, accordingly, should have been compensated at arm's length by the AE. Further, the TPO added a mark-up of 13.04%. Aggrieved GSK India filed an appeal with the Tribunal.

GSK stated that there was no international transaction as per Section 92B of the Act. AMP expenditure was neither incurred at the instance or direction of the AE and the AE was not expected to benefit from such expenditure. The Revenue contended that the matter had to be restored to the file of the TPO for computation/ benchmarking purposes.

The Tribunal held that excessive AMP expenditure incurred by GSK India does constitute an international transaction. However following the Special Bench (SB) decision in the case of LG Electronics, the Tribunal agreed with the contention of the Revenue and the matter has been restored to the TPO for computation/ benchmarking of the AMP expenditure, after affording a reasonable opportunity. GSK India will have the liberty to furnish fresh set of comparables for benchmarking and computing the ALP.

Discover more: Important principles for TP adjustments on marketing intangibles

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

Taxand's Take

The Tribunal decision reaffirms the principles laid down by the majority view of the SB in the case of LG India. While reiterating the principles articulated by the SB, the Tribunal has unequivocally held that TP adjustments in relation to AMP expenditure incurred by the taxpayer for creating/ improving the marketing intangible for and on behalf of the foreign AE is permissible.

Taxand's Take Author

Mukesh Butani
Taxand Board member