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Transfer Pricing: A Focus on Marketing Intangibles

In an important ruling in the case of Canon India Private Limited (Canon), the Delhi Divisional Bench of the Income Tax Appellate Tribunal (Tribunal) has laid down important principles in relation to transfer pricing adjustments relating to the creation of marketing intangibles.

Taxand India discusses the hot topic of advertisement, marketing and promotion (AMP) expenditure.

For the past few years, Indian Tax Authorities have been alleging that the non-routine marketing efforts of a subsidiary company should be categorised as 'service' rendered to their associated enterprise (AE) and accordingly, should be compensated for the same. Such adjustments have increased tremendously over the years and no jurisprudence existed to deal with this vexed issue. Therefore the Special Bench was constituted in the case of LG India, which dealt with this issue.

Canon India also participated as one of the interveners in addition to several other taxpayers facing similar issue. The Special Bench has ruled in favour of Tax Authorities in relation to the legal concept of marketing intangibles by stating that excessive AMP expenditure constitutes an international transaction. Simultaneously, the Special Bench defined the scope of AMP expenditure by providing specific guidelines to for benchmarking.

In view of this, the Delhi Divisional Bench construed the guidance provided by the Special Bench in the case of LG India and ruled in favour of Canon. They adjudicated that the amount of subsidy (received from AEs), trade discount & volume rebates, commission and cash discount should be reduced from AMP expenditure while computing the bright line. Further, in context of legal issues the Tribunal has ruled in favour of Tax Authorities, thereby acknowledging the concept of marketing intangibles.

Discover more: Transfer pricing - a focus on marketing intangibles

Your Taxand contact for further queries is:
Gokul Chaudhri
T. +91 124 339 5040

Taxand's Take

The controversy around marketing intangibles has entered its second phase. Taxpayers will need to re-evaluate their existing strategies and point of views. While the legal debate will enter the High Court, the quantification of adjustments (in the interim) will be at the Transfer Pricing Officer level.

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