VA represented the recent path breaking decision rendered by the Delhi High Court (“DHC”), in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. v CIT and a batch of 17 connected appeals and cross-appeals, dealing with Transfer Pricing dispute related to marketing intangible.
DHC ruled that advertising, marketing and promotion expenses (“AMP”) spend in India in relation to a foreign brand constituted an international transaction. DHC laid down important transfer pricing principles, namely, (a) ‘Bright Line Test’ applied by the Revenue has no statutory mandate, and the contention of the Revenue that any excess expenditure beyond the bright line should be regarded as separate international transactions is unwarranted; (b) clubbing of closely linked transactions is permissible; (c) benchmarking of a bundle of transactions applying entity wide transactional net margin method (“TNMM”) is permissible; (d) once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure like AMP as a separate international transaction; and (e) compensation for AMP expenses could also be benchmarked under resale price method (“RPM”) or cost plus method. The Court concluded that when TNMM and RPM methods adopted and applied show that the net / gross profit margins are adequate, no further Transfer Pricing adjustment on account of AMP expenses would be warranted.
It is a welcome and significant judgment in the arena of transfer pricing. The maiden ruling lays down the broad parameters to be applied in case of AMP spend adjustments which would serve as a guiding principle to the transfer pricing officers.