Marketing Intangibles - A Critical analysis of the transfer pricing debate

Marketing Intangibles

A Critical Analysis of the Transfer Pricing Debate

Ajit Kumar Jain

Marketing Intangibles- A Critical Analysis of the Transfer Pricing Debate | Ajit Kumar Jain

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About the Author

Ajit is a Chartered Accountant and Company Secretary from Mumbai. He has done his graduation from

Jai Narayan Vyas University, Jodhpur. He has also been awarded certificates in International Taxation

and Transfer Pricing by the Chartered Institute of Taxation, UK. Ajit is currently working with the

Transfer Pricing practice of Deloitte Haskins & Sells LLP, Mumbai.

Contact Details

Address: 101 Sai Mahal CHS, Nadiyaadwala Colony

Road No.2, S.V. Road, Malad (West)

Mumbai -400064

Phone : Resi: +91 22 28811372

Mobile: +91 9619758917

Email [email protected]

Word Count

Pages 35

Words 9,985

Paragraph 377

Lines 1,475

Including textboxes, footnotes and end note

Disclaimer: The views expressed in this document are not intended to be used as professional advice and

also, represent only the personal views of the author.

mailto:[email protected]


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Table of Contents

1. Introduction………………………………………………………………………… 4

1.1. Background……………………………………………………………………… 4

1.2. Meaning of Marketing Intangibles…………………………………………........ 5

1.3. Ownership of Intangibles………………………………………………………... 6

1.4. The Issue of marketing Intangibles……………………………………………… 8

1.5. The Debatable Issues……………………………………………………………. 10

2. Available Guidance on the Issue………………………………………………….. 12

2.1 OECD’s Guidance………………………………………………………………. 12

2.2 ATO’s Guidance……………………………………………………………….... 13

2.3 Indian Transfer Pricing Regulations…………………………………………….. 14

3. Judicial Precedents on the Issue of Marketing Intangibles……………………... 15

3.1 Glimpse of the Litigation So Far………………………………………………... 15

3.2 Key Judicial Pronouncements…………………………………………………... 15

4. Evaluation of Debatable Questions……………………………………………….. 22

4.1 AMP as an International Transaction…………………………………………… 22

4.2 Economic Ownership…………………………………………………………… 25

4.3 Benchmarking of AMP Expenses………………………………………………. 27

4.4 Application in case of manufacturers…………………………………………… 29

5. Case Studies………………………………………………………………………... 31

5.1 Normal Distributor…………………………………………………………….... 31

5.2 Limited Risk Distributor………………………………………………………... 32

5.3 Licensed Manufacturer…………………………………………………………..33

6. Conclusion and Way forward…………………………………………………….. 33

Bibliography…………………………………………………………………………….35


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1. Introduction

1.1 Background

In the past two decades, with the development of information technologies and efficient

communication system, the countries across the globe became interdependent. As a consequence,

the multinational enterprises established integrated supply chain models. This has led to increase

in the cross-border transactions between affiliate entities located in different jurisdictions. Such

transactions give opportunity to the multinational enterprises to shift profits from one jurisdiction

to another jurisdiction, since profit shifting may be favorable for the entity located in the high tax

jurisdiction.

Any shifting of profit leads to a loss of tax revenue to the country from where profit is shifted. In

last one decade, transfer pricing has gained a lot of importance and many countries introduced

transfer pricing regulations to avoid shifting of profits and to safeguard the tax base or tax

revenue. In India, the transfer pricing regulations were introduced in the year 2001, since then

the authorities have been aggressive in scrutinizing the cross-border affiliated transactions.

The Indian transfer pricing has evolved over the period of years. The initial years of transfer

pricing scrutiny have seen significant focus and litigation relating to comparables for

determining Arm’s Length Price (‘ALP’). There has been a gradual shift in focus of the tax

authorities which is evident from their approach in the recently concluded assessments. The tax

authorities now focusing on more niche transactions such as intangibles, location savings,

business restructuring etc.

Intangible is one of the niche areas wherein tax authorities have been very aggressive in

scrutinizing arrangement to see if there are any transfer of intangibles or development of

intangibles and whether the provisions of the arm’s length principles have been applied on the

same or not. In this paper, the author has dealt with one of the key the transfer pricing disputes in

the area of intangibles viz. issue of marketing intangibles.

The issue of marketing intangibles had originated outside India. In India, the issue of marketing

intangibles became the one of burning transfer pricing issues and involved a significant amount

of transfer pricing adjustments. The issue has now reached at the Supreme Court level. Early this

year, the Delhi High Court has pronounced a landmark ruling and laid down various principles to

deal with this issue. This paper intends to explore the issue of marketing intangibles and to

evaluate the open and debatable questions in light of the available guidance and principles laid

down by the various judicial precedents.


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1.2 Meaning of Marketing Intangibles

Intangibles include intellectual property (‘IP’) such as patents, copyrights, trademarks, service

marks, trade names and trade secrets. IP normally indicates properties since the owner has the

legal rights to exploiting them. However, in today’s commercial world, intangibles could

encompass business models, propriety procedures, processes, know-how, customer relationships,

supplier relationship management systems, marketing systems, information technology and

many other categories of intangibles that bring value to the company.

The Organization of Economic Corporation and Development (‘OECD’) has recently issued its

final Base Erosion and Profit Shifting (‘BEPS’) report on ‘Aligning Transfer Pricing

Outcome with Value Creation’. The report prescribes the definitions1 of intangibles and

marketing intangibles as follows:

Intangibles2

‘Intangible’ is intended to address something which is not a physical asset or a financial asset,

which is capable of being owned or controlled for use in commercial activities, and whose use

or transfer would be compensated had it occurred in a transaction between independent parties

in comparable circumstances.

Marketing Intangibles3

“An intangible (within the meaning of paragraph 6.6) that relates to marketing activities, aids

in the commercial exploitation of a product or service, and/or has an important promotional

value for the product concerned. Depending on the context, marketing intangibles may include,

for example, trademarks, trade names, customer lists, customer relationships, and proprietary

market and customer data that is used or aids in marketing and selling goods or services to

customers.”

The above definition is the new definition of marketing intangibles prescribed by the OECD in

its BEPS report. Here, it would be also important to look at the following earlier definition of the

marketing intangibles as prescribed by the OECD in its Transfer Pricing Guidelines.

1 This are the new definitions as compared to the definition provided in the OECD transfer pricing guidelines [2010] 2 Paragraph 6.6 of the OECD’s report on BEPS 3 Glossary of the OECD’s report on BEPS


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An intangible that is concerned with marketing activities, which aids in the commercial

exploitation of a product or service and/or has an important promotional value for the product

concerned

We can observe that the new definition has widened the scope of ‘marketing intangibles’

since it provides illustrative examples in relation to type of marketing intangibles such as

customer lists, customer relationships, and proprietary market and customer data as

marketing intangibles. The illustrations are critical for ‘Multinational Enterprises’

(‘MNE’) groups operating in developing markets since these markets have very large

consumer bases that may give rise to significant amounts of consumer-related data, which

may be treated by the tax authorities as marketing intangibles.

Thus, marketing intangibles may include any kind of intellectual property which indicates

the origin of the product or service, promotes the marketing, sale or advertising, and adds

value to the business itself. Marketing intangibles are a result of extensive marketing

campaigns and efforts made to promote and sell products or services.

1.3 Ownership of Intangibles

Ownership of intangibles is very crucial, since the returns related to intangibles depend upon the

types of ownerships. Before discussing the issue of marketing intangibles, it would be important

to evaluate and understand the ownership of intangibles.

In the modern global world, the MNEs are not restricting the use their intangible to one region or

country where the intangibles are initially developed. In order to remain in the competition, it is

utmost important for MNEs to grant licenses of their intangibles to its various affiliates in the

different territories of the world for exploitation, enhance and further development of intangibles

to achieve growth and development in business.

In the current scenario, intangibles are being developed by one enterprise (licensor) and the

benefit of the same reaped by various affiliated entities (licensee) across the globe by bearing the

risk and costs related to such intangibles. The licensee also makes efforts in the enhancement and

development of intangibles or creating new intangibles.

In general, there are two types of ownership for intangibles viz. legal ownership and economic

ownership.


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Legal Ownership

The legal owner of intangibles is the recognized owner in law through legal registration. Thus,

legal ownership can be obtained through legal registration of intangibles.

Para 6.37 of the OECD’s BEPS report on ‘Aligning Transfer Pricing Outcome with Value

Creation’ stipulates as under:

Generally, the registered legal owner of such intangibles has the exclusive legal and

commercial right to use the intangible, as well as the right to prevent others from using or

otherwise infringing the intangible. These rights may be granted for a specific geographic area

and/or for a specific period of time.

In view of the above, the legal protection resulting from the legal title is the essential factor

when determining legal ownership. The legal ownership brings prerogatives of control -

legal rights to deter competition through infringement.

Economic Ownership

Economic ownership is based on the business & economic realities and attached to the functions

performed and risk assumed by the entity while development of intangibles. The economic

owner is entitled to the income attributable to the intangibles further developed by it through

additional efforts.

Economic ownership has not specifically defined the OECD’s Transfer Pricing guidelines or

report on BEPS. Economic ownership is subject to the economic conditions surrounding the

intangibles. If any licensee makes considerable investment and assumes related risks this might

create intangibles and the licensee accordingly avails right to exploit the intangibles as an

economic owner.

The United Nation’s Practical Manual on Transfer Pricing discusses the concept in Chapter 54

and states that economic ownership of a product trademark or trade name considering the

marketing intangible can be created based on the subsidiary’s contribution to a strategy to

enhance market share.

4 Para 5.3.2.15 of the Transfer Pricing Manual


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The HM Revenue and Customs (‘HMRC’) 5UK defines economic ownership as under:

“A person who has rights over intellectual property, such that he can exploit and develop and

use it in a way that a legal owner may, but who does not have legal title, enjoys economic

ownership.”

Based on the above, we can conclude that the economic owner is financially responsible

for the development and maintenance of intangibles in its market and is entirely entitled

to the residual profit/loss generated by the exploitation of intangibles.

1.4 The Issue of marketing intangibles

Subsidiaries of foreign MNCs, selling products in India under license to use the trademarks or brands

of the foreign group companies, being the legal owners of such trademarks or brands, are facing

litigation in India. The Indian tax authorities, as a general rule, seek reimbursement for the alleged

excess Advertisement Marketing and Promotion (‘AMP’) expenses on the premise that such

expenses create marketing intangibles, which benefit the legal owner of the brand and not the local

Indian entity.

Such excess is determined with reference to the AMP spend, as a percentage of turnover of the

taxpayer, as compared to comparable companies selected to benchmark the results of the Indian

taxpayer in its dealings with its foreign group entities. The level of AMP expenses incurred by such

comparable companies is termed as the “bright line” and anything in excess is termed as non-routine

expenses, which the Indian tax authorities assert that the same needs to be recovered from the legal

owner of the brand with a mark-up.

The issue of marketing intangibles was originated in the case of DHL Corporation in the United

States wherein the court upheld the transfer pricing adjustment on account of marketing

intangibles by applying the ‘Bright line Test’(‘BLT’). In India, the issue came up for

considerations before the Delhi High Court in case of Maruti Suzuki India Ltd in the year 2010.

The application of BLT is explained by way of following illustration:

5 HMRC, INTM464070- Transfer pricing: Types of transactions, who owns the intangible property?


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Outside India

In India

Facts

- A Inc. is engaged in manufacturing and distribution of consumer products. A Ltd. is the legal

owner of all the IPs of its business. A Ltd. grants license to B Ltd., (a wholly owned Indian

subsidiary of A Ltd.) for distributing finished goods in India.

- B Ltd. has the distribution network in India to distribute the products of A Inc. in India

- B Ltd. incurs AMP expenses in India for the promotion of the products. The AMP expenses

to Sales ratio of B Ltd. is 15%.

- The average AMP to Sales ratio of third party distribution companies is 5%

Application of BLT by the Tax Authorities

- The tax authorities have applied BLT and contended that B Ltd. has incurred a significant

non-routine AMP expenses (comparing with the AMP ratio of B Ltd. with the AMP ratio of

third party companies engaged in similar business/industry)

- The tax authorities contended that B Ltd. has rendered services to A Ltd. by contributing to

the brand promotion of the products owned by A Ltd. Accordingly, B Ltd. should get

compensation from A Ltd. for the excess or non-routine AMP expenses along with a service

mark-up.

A Inc. USA

B Limited


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- The tax authorities applied BLT and made transfer pricing adjustment to the income of the B

Ltd. in following manner (illustration):

Particular Amounts in

INR

Sales revenue of B Ltd. (A) 1,000

AMP expenses incurred by B Ltd. (B) 150

AMP to sales ratio of B Ltd. (C)= B/A 15%

Average AMP to sales ratio of the (D)

comparable companies

5%

Non-routine AMP expenses incurred by B Ltd (E)= C-D 10%

Compensation to be received by B Ltd. from A Ltd. (F)= A*E 100

Service Mark-up @10%6 (G)= F*10% 10

Adjustment to the income of B Ltd F+G 110

Based on the above working, the tax authorities proposed an adjustment of INR 110 to the

income of B Ltd. on account of brand building services rendered by B Ltd.

In applying the BLT, the tax authorities considered the similar comparables selected for

benchmarking routine transactions, i.e. import, export etc. and no separate comparability analysis

performed for benchmarking the AMP expenses.

1.5 The Debatable Issues

The issue of marketing intangibles is based on various presumptions. The issue is one concerning

the fundamentals of economics and is highly factual in nature. Therefore, it requires an in-depth

factual analysis,

The issue has been debated both from legal and factual perspective. On a macro level, there is

one key debatable issue viz. whether the taxpayer has actually rendered any service to its

Associated Enterprise (‘AE’) by incurring AMP expenses in the local market and whether AMP

expenses can be considered as international transaction. However, apart from these, there are

many other issues which also have been largely debated and litigated in India in the last couple

of years. The key debatable issues in the whole litigation of marketing intangibles are as follows:

6 Based on a separate comparability analysis


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Sr.

No.

Debatable Issues Details

1 International

Transaction

- Whether the AMP expenditure is an international transaction

under Indian Transfer Pricing Regulations

2 Ownership of

marketing intangibles

- Whether the concept of economic ownership exist in real

sense

3 Economic analysis - How to perform economic analysis for the AMP transaction

- Whether AMP expenses can be aggregated with other

international transactions

4 Applicability to

manufacturers

Whether the principles of Delhi High Court ruling equally

applicable in case of manufacturers

Before separately evaluating each of the above issues, it is crucial to understand the available

guidance and the outcome of the various judicial precedents in India on this whole debate of

marketing intangibles.


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2. Available guidance on the issue

2.1 OECD’s Guidance

The OECD’s recent BEPS report on ‘Aligning Transfer Pricing Outcome with Value Creation’

stipulates guidance related to the issue of marketing intangibles. The guidance addresses7 issue

of marketing activities undertaken by an enterprise not owning the trademark by responding

the following question:

“Whether a marketer/distributor should be compensated only for providing promotional

and distribution services or the marketer/distributor should also be compensated for

enhancing the value of the trademarks and other marketing intangibles by virtue of its

functions performed, assets used and risk assumed.

The OECD’s BEPS report8 prescribes that the analysis of the marketing issue requires

assessment of following:

(i) The obligations and rights implied by the legal registrations and agreements between the

parties;

(ii) The functions performed, the assets used, and the risks assumed by the parties;

(iii) The intangible value anticipated to be created through the marketer/distributor’s activities;

and

(iv) The compensation provided for the functions performed by the marketer/distributor (taking

into account of the assets used and risks assumed).

Based on the above guidance, obligation, conduct and the characterization of the party are the

key elements which determine whether a separate compensation for AMP expenses shall be

required or not.

If the distributor merely acting as an independent agent there may not be any issue pertaining to

the marketing intangibles, since the distributor is entitled to a compensation for all the AMP

expenditure it has incurred from the owner of the brand.

On the other hand, when the distributor actually bears the cost of marketing activities (i.e., there

is no arrangement for the owner to reimburse the marketing expenditure), the issue is to find out

7 Para 6.76 to 6.78 of the BEPS report 8 Para 6.77 of the BEPS report


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to what extent the distributor is contributing in the brand owned by its parent entity by functions

performed, assets used and risk assumed currently or in future.

In general, the party that is not the legal owner of the trademark or marketing intangible, to

obtain any benefit (compensation for marketing efforts) of marketing intangibles will depend

upon the substance of the rights and obligation of that party. An independent comparable

analysis should also be required to find out whether the distributor is entitled for any

compensation for its marketing efforts.

Further, the OECD’s report on BEPS suggests that any compensation to the distributor

(compensating for its functions, assets, risks, and anticipated value creation) could take the form

of higher distribution profits resulting from:

- A decrease in the purchase price of the product); or

- A reduction in royalty rate ; or

- A share of the profits associated with the enhanced value of the trademark; or

- Other marketing intangibles

The OECD’s guidance brings clarity on various aspects (i.e. need for compensation,

methodology for compensating distributor for the marketing efforts, etc.) for dealing with

the issue of marketing intangibles. The key question that needs to be raised and answered

in the context of marketing intangibles is whether the licensee of the brand had incurred

the AMP expenses in the capacity of a service provider or on its own account as an

entrepreneur. For analyzing the whole issue, the OECD has given emphasis on assessing the

rights, obligations and conduct of parties by performing a detailed Functions, Assets and

Risk (‘FAR’) analysis.

2.2 ATO’s Guidance

The Guidelines issued by the Australian Tax Office (ATO) on marketing intangibles discuss the

issue of marketing spend in the context of a distributor and not a manufacturer. The ATO’s

guidance is in line with the principles laid down by the OECD.

The ATO guidelines referred various examples which have given emphasis on the following

required elements for the arm’s length treatment of the AMP expenses:

- The contractual arrangements between the owner of the trade name and the market;


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- Whether the level of marketing activities performed by the marketer exceeds that performed

by comparable independent enterprises;

- The extent to which the marketing activities would be expected to benefit the owner of the

trade name and/or the marketer; and

- Whether the marketer is properly compensated for its marketing activities by a ‘normal’

return on those activities or should share in an additional return on the trade name.

2.3 Indian Transfer Pricing Regulations

Although the issue marketing intangibles is the most contentious transfer pricing issue in India,

the Indian Transfer Pricing regulations do not specifically provide any guidance to deal with this

issue.

Here, it is worthwhile to mention that various Indian judicial precedents have dealt with this

issue in detailed and provided guidance. The author has discussed the same in Section 3 below.


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3. Judicial Precedents on the Issue of Marketing Intangibles

3.1 Glimpse of Litigation So Far

In India, the issue of marketing intangibles came up for consideration before the Delhi High

Court in the year 2010 in case of Maruti Suzuki India Limited. Thereafter, the issue has been

largely debated and litigated at various Tax Tribunals and also at High Court in India. It would

be worthwhile to have a glimpse of the litigation in India on marketing intangibles in a timeline

frame as given in the below diagram:

The facts and the outcome of the key rulings are mentioned in the table below:

3.2 Key Judicial Pronouncements

The issue of marketing intangibles was initially dealt in the case of Maruti Suzuki in the year

2010, however, the detailed guidance on this issue has been provided by Special Bench (‘SB’)

ruling in case of LG Electronics in the year 2013. This ruling was not favorable to the taxpayers,

however, it has touched upon each and every aspect of the whole litigation. Early this year, the

Delhi High Court (‘HC’) has pronounced a landmark judgment in the case of Sony Ericsson

Mobile Communication India Private Limited and various other taxpayers (engaged in

distribution business) on the issue of marketing intangibles.

The Delhi HC ruling was the major relief for the taxpayer since the HC has ruled out the

applicability of BLT for computing the ALP of AMP expenses and provided detailed guidance


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for computing the ALP of AMP expenses as per the provisions of the Indian Transfer Pricing

regulations.

The brief facts and outcome of the key judicial pronouncements are mentioned in the table

below:

Name of Ruling Brief Facts Key Outcomes

US Tax Court

Case – DHL Inc.

- DHL Corporation (DHL) and its

foreign affiliates were involved in

the worldwide package delivery

business

- DHL licensed the trademark to

DHLI, Hong Kong

- During the year under

consideration, a Japanese

company agreed to purchase the

DHLI, Hong Kong stock

- While adjudicated on the

consideration for this deal, the tax

court coined BLT in determining

the presence of any marketing

intangibles created by DHLI,

Hong Kong

- The issue arose on account of the

1968 US Regulations, which

promoted the theory related to

“developer-assister rules”. Under

those rules, the developer – being

the licensee incurring the AMP

expense was treated as an

economic owner of the brand,

and the assister – being the legal

owner of the brand.

- Propounded the ‘Bright Line Test’ for

distinguishing between the routine and

non-routine expenditure

- AMP expenses to the extent incurred

by the uncontrolled comparable

distributors is to be regarded with the

‘Bright Line Limit’

- It was held that beyond this limit, the

expenses constituted non- routine

expenditure and resulted in the creation

of economic ownership


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Delhi High

Court- Maruti

Suzuki India

Limited

- The taxpayer manufactures cars

as well as trades spares &

components

- The taxpayer entered into a

license agreement with Suzuki

Motor Corporation for use of

technology and trademark

- The taxpayer has used ‘S’ logo

(‘Suzuki’) on the front of the

cars, though it continues to use

trademark ‘Maruti-Suzuki’ on the

rear side of vehicles.

- The tax authorities have raised

the issue of marketing intangibles

by contending that the taxpayer

have incurred excessive AMP

expenses.

- If AMP spend is more than incurred by

comparable enterprise, owner of the IP

needs to compensate licensee

- AMP spend may have benefited Indian

company because it had the continued

use of the “Suzuki” brand name. Benefit

to Suzuki may be incidental

- Return for AMP activities can also in

the form of higher turnover

- Following this observation of the case,

the Supreme Court directed the transfer

pricing officer to reexamine the matter

in accordance with law, without being

influenced by the observations or

directions given by the High Court

Delhi Tribunal –

[Special Bench]-

LG Electronics

India Private

Limited

- The taxpayer is a wholly owned

subsidiary of LG Electronics

Inc., Korea

- As per the royalty agreement

between the taxpayer and LG

Inc., Taxpayer was given the

right to use the technology

owned by LG Inc. for

manufacturing LG’s products in

India

- The taxpayer is characterized as

a licensed manufacturer in India

- AMP is an international transaction

(provision of service) between the

taxpayer and the AE since the taxpayer

has incurred AMP expenses for the

brand promotion of AE

- Legal ownership is relevant under the

Income Tax Law; economic ownership

exist only in a commercial sense

- BLT is a valid method in order to

determine the transaction value of

AMP

- The SB has laid down certain factors/

principles (14 questions) which are

said to have considerable bearing on

the question of determination of

cost/value of the international

transaction of brand promotion through

AMP expenses incurred by the Indian

company for its AE


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The questions are mainly pertaining to

characterization of taxpayer & AE,

royalty payment, details of the brand in

India (newly launched or established),

termination clause in agreement, any

existing arrangement between the

taxpayer and AE in relation to

compensation for non-routine AMP

expenses etc.

- Selling and distribution expenses

(discounts, commission, sample

expenses, trade incentives, etc.) do not

form a part of the AMP expenses and

hence, these expenses cannot be

considered while computing the bright

line test

- Limited discussions in the ruling on

the characterization of the taxpayer

Delhi Tribunal-

BMW India

Private Limited

- The taxpayer is a distributor of

motor vehicles in India

- Imports vehicles from AE and

sales in India

- The taxpayer entered into

‘importation agreement with its

parent company

- In the transfer pricing

documentation, the taxpayer

characterized itself as a

distributor

- If Taxpayer has incurred “non-routine”

AMP expenses, then it is appropriate to

re-characterize the transaction to

separate transaction of brand building

of the foreign AE

- The taxpayer performed more

functions than a normal distributor

- AMP activities of the taxpayer

contributed in the brand development

of the AE

- Brand building by AE is an

international transaction and bright line

is an accepted method for calculating

no-routine AMP expenses

- No compensation required from AE as

the same has been received by way of


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premium profits

- The premium profits earned by

distributor are adequate compensation

for excess AMP

Delhi High

Court Ruling-

Sony Ericsson

Mobile

Communication

India Private

Limited other

taxpayers9

The Delhi HC in a landmark

judgment in the case of Sony

Ericsson Mobile Communication

India Private Limited vs. CIT and

various other taxpayers (engaged in

distribution business), pronounced

its ruling on the issue of marketing

intangibles.

It was a landmark ruling since it has

provided detailed guidance to deal

with the issue.

- The HC held that the declared price of

international transactions included the

remuneration for their AMP function

and accordingly upheld view of the SB

in LG case and held that AMP

expenditure amount to an international

transaction

- In a situation where multiple

transactions are so interlinked that they

cannot be evaluated on a separate

basis, aggregation of transaction is

both desirable.

- The HC held that the fundamental part

of the analysis is to find out the

characterization of the entity which has

incurred a non-routine or excessive

AMP expenses.

- It has held that once the Transfer

Pricing Officer accepts and adopts the

Transactional Net Margin Method

(‘TNMM’) and then chooses to treat a

particular expenditure like an AMP as

a separate international transaction

without bifurcation/segregation, it

would lead to unusual and incongruous

results

- The HC has upheld that the economic

owner must be adequately

compensated for its economic

9 There were 17 connected matters related to several taxpayers including appeals and cross appeals filed by the taxpayers and by tax authorities


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ownership in event of alienation of

intangibles. Economic ownership when

pleaded can be accepted if it is proved

by the taxpayer

- The HC held that there was nothing in

the Act or Rules to hold that it was

obligatory for the AMP expenses to be

subject to ‘Bright Line Test’ and the

non-routine AMP expenses as separate

as a separate international transaction.

- The Court has granted relief to the

taxpayers by holding that if aggregated

transaction is concluded to be at ALP

by applying TNMM or RPM, there is

no need to bifurcate and treat AMP

expense as a separate international

transaction

- The HC has held that direct marketing

and sales related expenses are not

directly linked to brand building, but

have a direct and immediate connect

with increased sales

Delhi Tribunal -

Perfetti Van

Melle India

Private Limited

- The taxpayer is engaged in the

manufacturing of confectionery

products at various factories in

India

- The tax authorities held that the

taxpayer has incurred excessive

AMP expenditure without

charging any compensation for

rendering the brand/trademarks

promotion service

- The key question was whether

the ratio of the Delhi HC ruling

shall equally apply to

manufactures as well

- The Tribunal held that that relevant

parts of the HC judgment will be

applicable to both manufacturers and

distributors

- It further clarified that in case of a

manufacturer, the international

transactions concerned with the

manufacturing activity cannot be

aggregated with the AMP activities,

as both are separate and distinct

- The case would also be applicable to

a service provider that uses the

brand/trademark/trade name owned


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by a foreign related party while

rendering services to third parties

The Delhi HC ruling was a welcome ruling for the taxpayers, since it has cleared various

ambiguities of the whole issue by providing detailed guidance on the transfer pricing

treatment of the non-routine AMP expenses.

However, there are still few open questions on which further debate is possible, e.g. (i)

Whether AMP expenses can be considered as international transaction in every scenario in

which licensor and licensee operate (ii) whether the guidance or ratio of the HC ruling is

equally applicable in case of licensed manufactures. In the next Section of this Paper, the

author has evaluated the key debatable points pertaining to the whole issue of marketing

intangibles.


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4. Evaluation of Debatable Questions

4.1 AMP as an International Transaction

The taxpayer contended that, there was an absence of any understanding, whether oral or written,

between the taxpayer and its AE, hence was no transaction of creating marketing intangibles.

The taxpayer also contended that all of the AMP expenditure incurred was for its own business

purposes.

In this regard, it is important to evaluate the relevant provisions of the Indian Transfer Pricing

regulations.

The meaning of ‘International transactions’ and ‘Transaction’ is provided in Section 92B of the

Income Tax Act, 1961 (‘the Act’). The text of the provision is under:

Section 92B: Meaning of International transaction

(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international

transaction" means a transaction between two or more associated enterprises, either or

both of whom are non-residents, in the nature of purchase, sale or lease of tangible or

intangible property, or provision of services, or lending or borrowing money, or any other

transaction having a bearing on the profits, income, losses or assets of such enterprises,

and shall include a mutual agreement or arrangement between two or more associated

enterprises for the allocation or apportionment of, or any contribution to, any cost or

expense incurred or to be incurred in connection with a benefit, service or facility provided

or to be provided to any one or more of such enterprises. (2)

…………………………………….

Section 92F: Meaning of transaction

(v) “transaction” includes an arrangement, understanding or action in concert,—

(A) whether or not such arrangement, understanding or action is formal or in writing; or

(B) whether or not such arrangement, understanding or action is intended to be enforceable

by legal proceeding

From the conjoint reading of the provisions of clause (v) of section 92F and sub-section (1) of

section 92B of the Act it could be inferred that transfer pricing regulation would be applicable to

any “transaction”, being an arrangement, understanding or action in concert, inter alia, in the

nature of purchase, sale or lease of tangible or intangible property or any other transaction having

bearing on profits, income, losses or assets of such enterprises. Therefore, in order to be

characterized as an ‘international transaction’, it would have to be demonstrated that the same

arises pursuant to an arrangement, understanding or action in concert.


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Further, up to 2012, the definition of an international transaction did not expressly refers to

transactions in respect of brand development or brand building services. However, the term

“international transaction” includes a transaction in respect of the provision of services between

two or more AEs.

In 2012, the Indian Govt. has expanded the definition of “international transaction” with

retroactive effect from 1 April 2002 to include a transaction in respect of the provision of market

research, market development and marketing management services. In addition, with regard to a

transaction in respect of the sale, purchase or lease of intangible property, the term “intangible

property” has been defined to include: marketing related intangible assets, such as trademarks,

trade names, brand names and logos.

The issue of marketing intangibles is not about incurring AMP expenses, it is about incurring

non-routine or excessive AMP expenses by the taxpayer vis-à-vis the AMP expenses incurred by

independent comparable companies. The tax authorities contended that the AMP expenses

incurred by the taxpayer are in the nature of ‘provision of service’ since there is an arrangement,

understanding or action in concert between the taxpayer and its AE for incurring such expenses

which resulted into market development of AE.

For AMP expenses to qualify as an international transaction, it would first need to be a “service”

per se. This, as per OECD Transfer Pricing Guidelines (Para 7.6), can be determined by

considering whether an independent enterprise under comparable circumstances would have

been willing to pay for the activity if performed for it by an independent enterprise.

Here, it would also be important to see the key outcome of the SB ruling and the Delhi HC

ruling on this issue. The details of the same are as under:

Special Bench Ruling HC Ruling

The SB held that an agreement between the

AEs can be formal or in writing or informal

or oral. The critical test would be the

conduct of the parties to the transaction. If

the taxpayer has advertised the brand of the

AE, then it can be inferred that there is an

understanding between the taxpayer and its

AE to this effect. Further, the excessive

AMP expenses incurred by the taxpayer vis-

à-vis independent comparable companies,

gives further weights to this inference.

The HC held that the taxpayers have asserted

that the declared price of the international

transaction involving the importation of goods

from a foreign AE which included an element

or function of AMP expense, for which they

stand duly compensated in their margins or the

arm’ s length price as computed. Accordingly,

the argument that it is not international

transaction is incorrect.


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Both the SB ruling and the HC ruling held that incurring AMP expense is an international

transactions under the Indian transfer pricing regulations.

For considering AMP as an international transaction, the fundamental question needs to be

answered is:

Whether in all the scenarios, the AMP expenses incurred by the AE (licensee) should be

considered as international transactions in the nature of ‘provision of service’ between two

AEs; and whether incurring of such expenses can be characterised as a transaction as a

result of implied understanding or arrangement between the AEs.

If the taxpayer believes that it has not incurred excess or non-routine AMP expenses for the

benefit of its AE, e.g. The taxpayer operates as a licensed manufacturer(entrepreneur) and it has

incurred excessive AMP expenses (vis-à-vis comparable companies) for its own business only.

Further, the licensed manufacturer (entrepreneur) carries out the entire manufacturing of finished

goods on its own account and risk, and consequently entitled to the residual or entrepreneurial

profits, inter-alia relating to economic ownership / exploitation of the intangibles. In that scenario,

the AMP expenses may not be considered as international transaction.

However, in any scenario, the routine AMP expenses incurred by the taxpayer should not be

considered as international transaction. If there is any provision of service, it can only through

the non-routine or excessive part of the total AMP expenditure.

The taxpayer is required to identify the international transaction at the time of annual transfer

pricing compliance. In relation to the AMP expenses, it would not be very straightforward to

analyse and conclude whether the AMP expense is resulted into any provision of service to its

AE or not. The ideal course of action would have been to first judge whether a market or brand

development service per se exists – this can be judged from the contractual relationship and the

conduct of the parties, and more importantly the risk-reward aspect (i.e., whether the contractual

relationship or the transfer pricing policy in place, adequately rewards the functions of the Indian

entity).

Further, if the taxpayer is characterised as an entrepreneur, an appropriate benchmarking

methodology should be followed for supporting its entrepreneurial functions i.e. the AEs should

be selected as tested parties to benchmark the routine transactions.


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4.2 Economic Ownership

Ownership of intangibles is an important determinant while analysing the issue of marketing

intangibles. In a scenario, where the Indian licensee characterised as an economic owner, (i.e. it

performs functions, assumes risk and bears the cost related to development of intangibles and

also entirely entitled to the residual profit/loss generated by exploitation of intangibles), its

marketing efforts may not result into ‘provision of any service’ to its foreign parent company.

Here, it is not denied that marketing efforts made by Indian licensee shall not benefit its foreign

parent company. The foreign parent company may avail incident benefits from the marketing

efforts of its licensee. However, since the licensee is the economic owner of the intangibles

created in India i.e. assumes all the risks related to the development or creation of intangibles,

the Indian entity may not to be separately remunerated for its marketing efforts.

Para 6.76 to Para 6.78 of the OECD’s BEPS report implicitly discussed in relation to marketing

activities performed by an enterprise that does not own the trademarks or trade names. The

question is how the marketer should be compensated as a service provider or if in any case

whether it should be entitled to an additional return based on economic ownership.

To the extent the significant people functions with respect to framing strategies around AMP, are

carried out by the taxpayer in the capacity of licensee of the brand, the entity becomes the

economic owner of such marketing intangibles.

If in the event of a transfer of the legal rights in the brand, the licensed exploited by a licensee is

not terminated, then the licensee should not ideally be entitled to a compensation for such

transfer. Also, in such circumstances, the price payable by the buyer of the brand to the seller

might be on the lower side, in case a significant value stands associated with the economic

ownership thereof in the hands of the licensee.

On the other hand, if during the transfer of the legal rights in the brand, the license enjoyed by

the distributor is terminated, then the licensee might seek compensation from the legal owner of

the brand. This would depend on the terms of the contract, level of investment made by the

distributor under the assumption of long-term rights in the license, practice/ custom followed in

the relevant country, etc.

Incidentally, this is the key aspect of ‘‘exit charge’’, which tax authorities across the world

scrutinizing in the context of business restructuring transactions. This principle has also been

upheld by the Authority for Advance Rulings of India while deciding on the taxability of income


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arising from the sale of brand, trademark and brewing intellectual property by Fosters Australia

Limited to SAB Miller in India.

The SB ruling and the Delhi HC ruling dealt with the concept of economic ownership and the

outcome of the same is as follows:

Special Bench Ruling HC Ruling

As per the SB ruling in case of LG

Electronics, economic ownership of a brand

exists only in a commercial sense, and in the

context of the Indian Income-tax Act, 1961,

it is only the legal ownership which is

recognized.

The Delhi HC decision has given importance

to the concept of economic ownership in case

of distributors. The Delhi HC has upheld that

the economic owner must be adequately

compensated for its economic ownership in

event of alienation of intangibles.

Ownership of intangibles and the returns attributable to the same, are the heart of the whole

debate of marketing intangibles. The Delhi HC ruling as rejected the contention of the SB ruling

and blessed the concept of economic ownership while analysing the issue of marketing

intangibles. The Delhi HC has further given emphasis to the detailed FAR analysis while

performing comparability analysis for the purpose of computing the ALP of AMP expenses.

The concept of economic ownership was recognised by the Indian Government in its

Administrative Circular No.6 of 2013 [Circular on conditions relevant to identify

development centres engaged in contract R&D services with insignificant risk].The Circular

refers to ‘economic ownership’ while laying down guidelines for identifying Contract R&D

Centres. The Circular states:

“Indian Development Centre has no ownership right (legal or economic) on the outcome of

the research which vests with the foreign principal and that this is evident from the contract as

well as from the conduct of the parties”

The burden to prove the economic ownership lies with the taxpayer. It is utmost important that

the taxpayer should perform a detailed analysis regarding its characterisation and document the

same appropriately in the transfer pricing documentation and the inter-company agreements. The

taxpayer should also maintain documents which evidence its roles and responsibilities as an

economic owner.


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4.3 Benchmarking of AMP Expenses

From the above discussion, one of the outcomes is that one cannot completely disregard the issue

of marketing intangibles. However, it is challenging for the taxpayer to justify that it has incurred

only routine nature of AMP expenditure or it has not incurred any excessive or non-routine

expenditure, since the whole exercise is very factual and quantification of the benefits is not very

straightforward.

Before the ruling of the Delhi HC, the tax authorities had considered the tool of BLT for

benchmarking the alleged AMP expenses and the taxpayer have not been using the tool due to

the prima facie contention that the AMP expenditure is not an international transaction hence the

ALP principles do not apply to the same. The Delhi HC has disregarded the BLT concept and

held that computation of the ALP for any excessive AMP shall be computed as per the methods

prescribed under the Act.

AMP expenses is a payment made by the taxpayer to third party media agencies and it is not in

the nature of direct transaction with the AE. Non-routine or excess AMP expenses may be

considered as a transaction in the nature of ‘provision of service’ and benchmarking of the same

may be required to compute the ALP of non-routine AMP expenses. This section evaluates the

guidance provided by the HC ruling for benchmarking the AMP expenses.

The benchmarking of AMP expenses may pose challenge for the taxpayer since business realities

of the each company is different. The product for AMP expenditure is incurred could have a

different market, different customers, different life cycle and different strategies than the

products of the third party comparable companies.

There could differences between the products, markets and the AMP strategies followed by the

taxpayer and the products, markets and AMP strategies followed by the independent third party

companies, however, there is no such mechanism available to perform comparability adjustment

in order to mitigate those differences for the purpose of arm’s length computation.

The HC has provided a detailed guidance for benchmarking the AMP expenses. Key principles

of the same are as follows:

Aggregation of Transactions

The Delhi HC has held that in a situation where multiple transactions are so interlinked that they

cannot be evaluated on separate basis, aggregation of transaction is desirable.


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The HC has concluded that the compensation for AMP expenses may be subsumed in the

purchase price of goods imported from AEs or a lower charge for royalty. The HC held that the

arm’s length nature of the arrangement may be tested by way of an aggregate or bundled analysis

with other transactions relating to the distribution activity. If the tax authority seeks to unbundle

the transactions, the tax authority should clarify its reasons for doing so. This was the very

important principle laid down by the Delhi HC whereby the doors were opened to benchmark the

AMP expenses as per the methods prescribed under the Act.

The HC held that the tax authorities should conduct a detailed FAR analysis to examine whether

the AMP transaction are inter-related with the other routine transactions of the taxpayer.

Method to compute ALP

The Delhi HC held that there was nothing in the Income Tax Act, 1961 or the Income Tax Rules,

1962 to hold that it was obligatory for the AMP expenses to be subject to ‘Bright Line Test’ and

the non-routine AMP expenses as a separate international transaction. Accordingly, the taxpayer

is required to compute the ALP of the ruling as per the methods prescribed under the Indian

Transfer Pricing regulations.

The Delhi HC has granted relief to the taxpayers by holding that if aggregated transaction is

concluded to be at ALP by applying TNMM or RPM, there is no need to bifurcate and treat

AMP expense as a separate international transaction. If the margin of the taxpayer (for the

aggregated transaction, including AMP expenses) is higher than the margins earned by

comparable companies, the taxpayer is not required to receive any separate remuneration from its

AE on account of AMP expenses.

In a scenario, where the aggregation of transaction is not possible, e.g. where the taxpayer has

considered Comparable Uncontrolled Price (‘CUP’) method for benchmarking its routine

transactions other than AMP. The Delhi HC has not provided clear guidance to deal with this

scenario. In such case, the taxpayer can perform a secondary benchmarking analysis by

aggregating the routine transaction with AMP transaction and compute the net level profitability

on an aggregated basis based on TNMM method.

Comparability analysis

The distributor’s contribution towards brand building should be assessed based on what an

independent distributor would receive in comparable circumstances. The distributor’s efforts

may be contributing the value of its own intangibles, as an economic owner. An independent

distributor in such cases would not typically require additional remuneration from the owner of


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the trademark or other intangibles. Even in situations where separate remuneration may be

necessary, such remuneration may take the form of higher distribution profits or a reduction in

royalty rate.

A detailed comparability analysis should be required to find out appropriate comparables for

benchmarking the AMP expenses. In case of aggregated approach, e.g. in case of distributor, the

import transaction is aggregated with AMP functions, the taxpayer should performed detailed

FAR analysis of independent companies for find out appropriate comparable distributors having

FAR profile similar to the taxpayer.

The Delhi HC ruling has given emphasis on the selection of the right comparables after

completion of a detailed FAR analysis. The Delhi HC has given emphasis on the relevance of the

intensity of the AMP function in the choice of potential comparables. However, the Delhi HC

has not provided specific guidance to quantity the intensity of functions while selecting

comparables.

Benchmarking of AMP expenses is not straightforward since before the benchmarking the

taxpayer needs to evaluate whether the AMP expenses is in the nature of service per se. In this

regard one should keep in mind certain factors i.e., the level and composition of AMP would be a

function of several factors such as lifecycle of the brand, product launch, useful life of the AMP,

management intent and vision, industry specific nuances, etc.

In case the AMP expenses is considered to be service rendered to the AE, the next challenge is to

benchmark the transaction either with aggregation approach as upheld by the Delhi HC ruling or

to benchmark separately.

The whole analysis and exercise is very factual in nature. The taxpayer should perform a detailed

FAR and assess its business realities vis-à-vis the independent companies before finalizing the

approach. The approach should be aligned with the business and economic realities.

4.4 Application in case of Manufacturers

The Delhi HC has commented on the economic ownership concept in case of distributors. The

HC has not specifically mentioned whether the ratio of the ruling shall equally applicable in case

of manufacturers also.

The concept of economic ownership does not distinguish between manufacturer and distributor,

since both have the capabilities to become the economic owners by alienation of intangibles.

Further, in both the models, the respective entities are responsible for the development,


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maintenance & enhancement of intangibles, though its efforts and accordingly responsible for

the entire residual profit/losses after arm’s length payment to its AE towards finished goods, raw

material, royalty etc. Accordingly, the key question is to be answered is whether the licensed

manufactured incurring AMP expenses for its own business or for the benefit of the AE. In a

normal business scenario, a licensed manufacturer operates as an entrepreneur since it undertakes

heavy business investment and assumes related risks for manufacturing and selling goods based

on the technology/trademark licensed received from its AE. For a licensed manufacturer

(entrepreneur) the whole issue of marketing intangibles is misnomer since the AMP expenses

shall not result into any services rendered to its AE.

In a scenario where the tax authorities contend that the taxpayer (manufacturer) has benefited its

foreign AE by incurring excessive AMP expenditure, the question arises whether the

benchmarking ratio provided by the Delhi HC can be equally applied in case of manufacturer

whose international transactions are raw material, payment of royalty etc.

Delhi Tribunal ruling in case of Perfetti Van Melle India Private Limited has held that in case of

a manufacturer, the international transactions concerned with the manufacturing activity cannot

be aggregated with the AMP activities, as both are separate and distinct.

Here, one need to further analyse, if the AMP expenses can be aggregated with the distribution

functions (import and re-sale), what are the factors which are restricting the AMP expenses for

aggregating it with manufacturing operations. One may take an argument that payment of

trademark royalty is linked with the use of the brand and AMP expenses may also be connected

with the brand of the product for which the expenses are incurred. Accordingly, the AMP

expenses can be aggregated with the international transactions of a manufacturer and the ratio of

the Delhi HC can also be applied in arriving at the ALP of excessive AMP transaction.

In view of the above, a detailed FAR analysis of the manufacturing entity shall be required to:

(i) Identify if the licensed manufacturer is the economic owner and accordingly issue of

marketing intangibles is not relevant ; or

(ii) Evaluate whether the AMP transaction can be aggregated with the international transaction

pertaining to the manufacturing segment for the purpose of benchmarking.


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5. Case Studies

5.1 Normal Distributor

Outside India India

- A Inc. is the legal owner of the product/brand ‘X’. A Ltd. has licensed B Ltd. to distribute the

product ‘X’ in India

- B Ltd. imports Products ‘X’ from A Inc. at mutually agreed price and sales to third party

customers in India

- B Ltd. is characterized as a normal distributor and A Ltd. is a principal manufacturer. Any

risk relating to marketing efforts borne by B Ltd.

- The AMP to sales ratio of B Ltd is 15%. The AMP to sales ratio of independent comparable

companies is 5%

- B Ltd. has selected TNMM method for benchmarking its import transaction

- The operating margin of B Ltd. is 9%. The average operating margin of comparable

companies is 4%.

Since B Ltd. has incurred excessive AMP expenditure as compared to the AMP expenses

incurred by its comparable companies, the excessive AMP expenses may be considered as

international transaction. However, the taxpayer may aggregate the AMP transaction with

distribution operation by applying the principle of aggregation and perform benchmarking on an

aggregated basis. Since, the aggregated operating margin of B Ltd. is at ALP, no separate

remuneration warranted for the excessive AMP expenses.

A Inc.

B Limited


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In a scenario, where the B Ltd.’s operating margin is lower than the margins earned by

comparable companies, the B Ltd. may be required to be compensated for the excessive AMP

spend by a reduction in purchase price or direct compensation by A Inc. to B Ltd.

Further, there could also be a scenario where B Ltd. operates as a full-fledged distributor and

incurs AMP expenses as part of its own business functions. Any risk relating to marketing and

advertising activity is directly borne by B Ltd and B Ltd. is directly benefiting from the

marketing functions in the form of increased sales and market turnover.

As per the OECD Transfer Pricing Guidelines10, the term of distribution arrangement is an

important factor in determining whether the distributor is entitled to a return on AMP

expenditure. As per the guidelines, if the distribution arrangement is long term and if the

distributor, i.e. entity B Ltd, is the sole distributor of goods, then the distributor is the sole

beneficiary of the marketing and promotion activity and there is, therefore, no need for additional

remuneration to be paid by entity A Inc.

5.2 Limited Risk Distributor

- Referring the illustration of earlier case study, B Ltd. operates as a Limited Risk Distributor

(‘LRD’)

- B’ Ltd. is entitled to a study returns for its distribution functions in India and undertakes limited

functions and risk.

- The principal manufacturer (viz. A Inc.) would typically give a low, but steady remuneration in

the form of a guaranteed return on sales (‘ROS’) to the distributor, which can be achieved either

through adjustment of pricing of products or reimbursement of expenses.

- Further, B Ltd. incurs AMP expenditure on the directions and control of A Inc. and is

compensated for incurring such expenditure in the form of reimbursements.

- B Ltd. is not entitled to receive any additional compensation for the development of intangibles

since B Ltd. only performs co-ordination functions related to marketing activities at the behest

and based upon the strategies of behalf of A Inc.

- B Ltd. does not control the functions and risks associated with the development of intangibles.

The funding for the Indian market is provided and the key risks are borne by A Inc. only.

10 Para 6.75 of the Guidelines


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In case of an LRD, the issue of marketing intangibles may not be relevant since the LRD is

remunerated with the steady margin after considering all sorts of direct and indirect expenses

including the routine AMP expenses.

In a scenario, where the LRD incurs non-routine AMP expenses in India on behalf of the foreign

principle manufacturer, the LRD should be separately compensated for those expenses by way of

higher return on sales or adjustment in the purchase price of goods.

5.3 Licensed Manufacturer

- Referring the illustration of case study as per Para 5.1, instead of normal distributor B Ltd.

operates as an licensed entrepreneur

- Procure raw materials either locally and/or from the A Inc., manufacture final products using

AE’s technology and selling under AE’s brand

- Bear all operational risks, viz., market risks, price risk, product liability risk, credit risk, foreign

exchange risk, capacity utilization risk, inventory risk, manpower risk, etc.

- B Ltd. pays royalty to A Inc. “use” of the technology and brand, and has nothing to do with

creation or not of marketing intangible.

Since the B Ltd. is an entrepreneur, it cannot be benchmarked selecting B Ltd as the tested party, and

thus the AMP spend cannot be challenged as being in “excess” – as there exists no comparable for an

entrepreneur. Further, as discussed above, the benefit of AMP vests entirely with the B Ltd. For both

these reasons, there may not be question of excess AMP being incurred for the benefit of the A Inc.,

and accordingly, the issue of marketing intangibles becomes irrelevant.


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6. Conclusion & Way Forward

The tax authorities across the globe are very aggressive in scrutinizing the cross-border

transaction involving development or enhancement of marketing intangibles. Such increased

focus can be evident from the recent OECD’s final BEPS report on ‘aligning transfer pricing

outcome with value creations’ wherein the definition of ‘marketing intangibles’ is widened vis-à-

vis the earlier definition as per the OECD transfer pricing guidelines. Further, the OECD has also

provided a detailed guidance in relation to arm’s length treatment of AMP expenses in various

scenarios.

In India, the issue of marketing intangibles has evolved in the last couple of years. The HC ruling

was landmark ruling which sets essential principles of law to be applied while dealing with this

issue. The HC ruling brought in the fundamentals of transfer pricing while determining the ALP

of AMP expenses. These fundamentals should be relied upon by the taxpayer while analyzing

the arm’s length treatment of AMP expenses.

Characterization of entity pays a vital role in determining whether a separate remuneration on

account of AMP is required or not. It is utmost important for the taxpayer to document detailed

FAR analysis and contractual obligations which support its actual characterization in line with

the business and economic realities. Where the taxpayer operates as an entrepreneur and incurs

AMP expenses as an economic owner, its marketing efforts may not be considered as a service

rendered to its AE.

Every taxpayer (licensee) should attempt to answer the fundamental questions viz. whether the

taxpayer has performed any service to its AE (licensor) by incurring any AMP expenses.

While application of BLT is rejected by the Delhi HC, the HC granted relief by holding that if

bundled transactions are concluded to be at arm’ s length by applying the TNMM or RPM, then

there is no need to bifurcate and treat AMP activities as a separate transaction. This is a great

relief for the taxpayers those who have earned a good amount of margins and still faced

significant transfer pricing adjustments on account of AMP expenses.

The principle laid down by the HC ruling will go a long way in guiding both the taxpayer and tax

authorities for dealing with this issue. The taxpayer should stick to the fundamental of the

transfer pricing and consider the business and economic realities while applying the arm’s length

principle to the AMP expenses.


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Bibliography

1. OECD (2010), Transfer Pricing Guidelines for Multinational Enterprises and Tax

Administrations, ISBN 978-92-64-09018-7

2. OECD/G20 Base Erosion and Profit Shifting Project- Aligning Transfer Pricing Outcome with

Value Creation, Action 8-10 Final Report, ISBN 978-92-64-24123-7

3. ATO Guidelines on Marketing Intangibles

www.transferpricing.com/pdf/Australia_marketing_intangibles.pdf

4. Income Tax Act, 1961

5. United Nations (2013), Practical Manual on Transfer Pricing for Developing Countries, United

Nations Department of Economic & Social Affairs

http://www.un.org/esa/ffd/documents/UN_Manual_TransferPricing.pdf

6. The HM Revenue and Customs, UK- Transfer Pricing Manual

http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/manuals/intmanual/intm46

4070.htm

7. The definition, ownership and transfer issues around intangible property under the OECD

Transfer Pricing guidelines, Marielle van Gorp Thesis supervisor: P.J.J.M. Peeters

http://arno.uvt.nl/show.cgi?fid=122166

8. CBDT Circular 6, 2013

9. Foster's Australia Limited vs Commissioner A.A.R. No. 736 of 2006

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11. Maruti Suzuki Vs CIT [Delhi High Court W.P.No. 6876/2008 dated 01.07.2010]

12. LG Electronics India Pvt Ltd v. ACIT [2013] 29 taxmann.com 300 (Delhi-Tribunal)(SB)

13. BMW India Private Limited v. ACIT [2014] 146 ITD 165 (DEL)

14. Sony Ericsson Mobile Communications India Pvt. Ltd.1 (Taxpayer) vs Commissioner of Income-

tax

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Marketing Intangibles - A Critical analysis of the transfer pricing debate

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