In a landmark ruling, the Delhi High Court has held that advertising and marketing expenses incurred by Maruti Suzuki India cannot be treated as an "international transaction" for income tax purposes and would not therefore attract transfer pricing provisions of income tax law.
The Delhi High Court has therefore set aside the Income Tax Appellate Tribunal Orders in relation to transfer pricing adjustments of Rs 151 crore (Assessment Year 2005-06) and Rs 158 crore (Assessment year 2006-07) on account of AMP expenses.
Tax authorities had contended that Maruti Suzuki India had incurred excessive spend on advertising, marketing and promotion (AMP) in India, leading to benefits for its overseas parent on the intangibles (brand, trademark) owned in India by the Japanese auto major.
The income tax department had therefore sought to make adjustments (under transfer pricing provisions) on the AMP spend so as bring them to tax.
There have been several instances in the past where income tax department had asked MNCs to fork out tax on AMP expenses incurred over and above industry average.
Reacting to this Delhi High Court ruling, Rakesh Nangia, Managing Partner, Nangia & Co, a firm of chartered accountants, said this was a welcome ruling for multinational companies as it "uncluttered the obscurity " around taxation of excessive AMP spend.
"This ruling is in one step ahead of the Mumbai High Court Ruling in the case of Sony Ericsson in terms of not considering the AMP expenses as an international transaction and making a clear distinction between the AMP spend of distributor with that of a manufacturer", Nangia said.
Aseem Chawla, Partner, MPC Legal, said that the latest Delhi High Court decision and the recent trend in resolving transfer pricing matters in constructive manner is a welcome relief.
Although the huge pendency of transfer pricing disputes may take a while to settle, decisions like Suzuki are good reference points for the future, he said.
Hopefully, the revenue department will decide not to contest the Delhi High Court decision in the Maruti Suzuki matter, Chawla added.
Amit Agarwal, Partner, Nangia & Co, said that the Delhi High Court judgment delves into the fundamentals of transfer pricing regulations, and makes no mistakes in stating that the existence of an international transaction has to be proved within the contours of the existing law, and not merely on surmises and conjectures.
Agarwal also felt there was a high possibility of the revenue preferring an appeal on this ruling before the Supreme Court.
Amit Maheswari, Partner, Ashok Maheshwary & Associates, a CA firm, said this Delhi High Court ruling is very important in the context of marketing intangibles.
In a detailed order, the High Court has distinguished between the Sony Ericsson ruling which was delivered in the context of distributors unlike Maruti which is a manufacturer, he said.
Being a full fledged 'manufacturer' entrepreneur, the benefits derived from excess AMP expense can best be attributed to Maruti rather than the foreign Associated Enterprise, Maheshwari added.