TP relief for MNCs from Delhi High Court - 16th March 2015 judgement.

Sony Ericsson Mobile Communication Pvt. Ltd. & Ors Vs CIT & Ors judgement delivered by Hon'ble Delhi High Court on 16th March, 2015.

Most of you would have read by now reports on the Delhi High Court judgement regarding TP adjustments by tax authorities on multinational companies (MNC) on account of Advertisement, Marketing and Promotion (AMP).

In a 148 pages judgment which is likely to be cited and relied upon frequently in TP cases, the Honble Court has apparently resolved the prickly TP issue. Hopefully, based on the recent assurances we hear from the FM and PM, that the Government is keen to adopt a non-adversarial position on tax matters, we can hope this judgement will remain the last word on the matter.

It would be inappropriate to expect a thorough synopsis of the long and reasoned judgment in just two pages. This article does not pretend to do so. However it is an attempt to provide a quick idea about basic points covered the judgement. For a detailed understanding, please download and read the full text of the judgement.

The tax authorities often claimed that AMP expenses were ‘excessive’ and were really meant to promote the "brand" owned by foreign affiliates (intangibles, IPR etc. such as trademarks and brandname). 

The Court in the long judgement discusses the "bright line test" to determine what is excessive and goes on to state that

"it would be incorrect to treat advertisement as equivalent or synonymous with "brand building" for the latter in commercial sense refers to several facets and components. The primary being the quality and reputation of the product or name, which is acquired gradually and silently over a passage of time."

The Court also rules that where the bundled approach is adopted by the AO/TPO, AMP expenses cannot be taked separate. The judgement reads :

"Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction."