The latest to feel the taxman’s heat is Casio India, a wholly-owned subsidiary of Casio Computer Company Ltd, Japan (Casio Japan).
Indian income tax authorities have invariably been “marking up” the advertising, marketing and promotion (AMP) expenses incurred by the Indian units to promote brands legally-owned by the foreign parent, leading to uncertainty in the area of transfer pricing.
A Delhi Bench of the income-tax appellate tribunal (ITAT) has ruled against Casio India and concluded that some benefit of AMP expenses incurred by Casio India had indeed gone to Casio Japan.
Simply put, the excessive AMP expenses (for both assessment years 2007-08 and 2008-09) should be recovered from Casio Japan along with an arm’s length mark-up.
In the Casio case, the tribunal has relied on the special bench ruling in LG Electronics case. Casio India had relied on a ruling pronounced by the Delhi Bench in the case of BMW India, stating that no adjustment on account of AMP expenses was required to be made in case of a full-fledged distributor.
In the BMW ruling, the tribunal held that the special bench ruling (LG Electronics) was applicable to the facts of a licensed manufacturer and not to the facts of a distributor.
Casio India contended that it was a sole distributor of Casio products in India.
Products such as watches, consumer information products were sold here without any value addition.
Hence, the AMP expenses being incurred were part of Casio India’s distribution function and the benefit accruing to Casio Japan was only an incidental benefit.
Bearing the cost of such expenditure (AMP) was consistent with the arm’s length price, Casio India had said.
Argument rejected However, the Delhi ITAT has now rejected Casio India’s argument and held that Special Bench ruling in LG Electronics case was applicable with full force on all classes of assessees, whether they are licensed manufacturers or distributors.
This rejection came as the BMW ITAT ruling had no occasion to consider whether the transfer pricing officer had properly applied 14 parameters laid down in Special Bench ruling (LG Electronics).
The Special Bench order has more force and binding effect than the Division Bench ruling on the same issue.
In the Casio case, the Delhi ITAT also said that the 14 parameters listed in the special bench ruling (LG Electronics case) should be examined in each case for arriving at a conclusion. The positive sentiment created by the BMW ruling on the issue of marketing intangibles for distributors has been dampened by the Casio ruling, said PricewaterhouseCoopers in a note to its clients.
The situation that emerges now is that two divisional benches of the Tax Tribunal have interpreted the special bench ruling differently, it was pointed out.
TAX EXPERTS TAKE Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a firm of chartered accountants, said the issue of marketing intangibles has become one of the most hotly debated issues in transfer pricing in India.
This has led to a lot of uncertainty in the mind of foreign investors as the assessing officers are applying bright line test on AMP expenses as a matter of routine, he said.
Taxpayers should explore bilateral Advance Pricing Arrangement and Mutual Agreement Procedure route as an alternative dispute resolution mechanism since issues of AMP are very fact specific.