The recent decision of the Hon’ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India (P) Ltd. Vs CIT has once again set the ball rolling in terms of the controversy surrounding the benchmarking of the Advertising, Marketing and Promotional (‘AMP’) Expenditure (i.e., Brand Promotion Expenditure)

1. Delhi High Court rekindles the controversy surrounding the benchmarking of Brand Promotion
Expenditure
- Thangadurai VP,Advocate
MPC Legal
May 02, 2015
Introduction:
The recent decision of the Hon’ble High Court of Delhi in the case of Sony Ericsson Mobile
Communications India (P) Ltd. Vs CIT [ITA Nos. 16, 70, 92, 93, 99 & 100 of 2014 dated March 16,
2015]has once again set the ball rolling in terms of the controversy surrounding the benchmarking of
the Advertising, Marketing and Promotional (‘AMP’) Expenditure.
It is important to highlight that the Hon’ble Delhi court was the first to take cognizance of the AMP
expenditure incurred by the subsidiaries of the foreign entitieslocated in India in the case of M/s.
Maruti Suzuki IndiaLtd. Vs ACIT [(2010) 328 ITR 210], by insistingon independentbenchmarking of the
AMP Expenditure to find outwhether the associated enterprise of a foreign entity (i.e., tax payer)has
spent more on AMP than what a similarly situated and comparable independent entity would have
spenton its AMP Expenditure.The Apex Courtcreatedfurtherconfusion,while entertaining the Special
Leave Petitionfiledagainstthe decisionof MarutiSuzukiIndia Ltd.(Supra),byinexplicitly remanded the
matter back to the file of Transfer Pricing Officer without expressly denying or acknowledging the
aforesaid decision.
Subsequently,the Hon’ble IncomeTax Appellate Tribunal(‘ITAT’) DelhiSpecial Bench had sought to put
the controversy to rest in the case of L.G. Electronics (P.) Ltd. Vs ACIT (2013) 152 TTJ 273 (Delhi Trib.)
(SB)by categorically holding that AMP expenditure is an international transaction and that its arm’s
length price had to be determined independently in accordance with theBright Line Test (‘BLT’)by
making a demarcation between routine and non-routine expenditure.
The Hon’ble Appellate Tribunal(the final fact finding authority) held that the non-routine expenditure
had to be reimbursedbythe foreignassociatedenterprises (‘AE’) of the tax payer.The other benches of
the Hon’ble Appellate Tribunal across India in substantial number of cases had plainly adopted the
principles propounded by the Delhi Special Bench to adjudicate the matters concerning AMP
expenditure worth several thousand of crores.
Now,the Hon’ble High Court has once again stirred the controversy by partly reversing the decision of
the Hon’ble Special bench of the ITAT by holding that the Bright Line Test (BLT) is not a statutory
mandate(It may be noted that the Delhi High Court did not disturb the Special Bench’s proposition that
AMPexpenditureis an internationaltransaction) andhence, the exerciseof computingroutineand non-
routine AMP expenses separately by applying the Bright Line Test should not be sanctioned.

2. Most importantly, it has also held that it is illogical and improper to treat the AMP expenses as a
separate international transactionthough the same is an international transaction. Therefore,
independently benchmarking the marketing intangibles is an unwarranted exercise.
All in all, this decision of Delhi High Court is a welcome respite for the tax payers.
Highlights:
 Significance of the decision:
Thisdecisionof the Delhi High Courtgivesamuch awaitedbreatherto the Indiantax payers and
the foreign MNCs alike as it not only holds that independent benchmarking of the AMP
expenditure isanunwarrantedexercisebutalsoholdsthatno reimbursementsfromthe foreign
AE are called for when this factor (AMP expenditure) was already accounted, in arriving at the
arm’s length price of the international transaction of the tax payer with its foreign AE.
Thus, this Delhi High Court’s decision has certainly gone a long way in promoting the brand of
the transfer pricing jurisprudence of India which augurs well for resorting the confidence of
foreign MNCs to increase their footprints in India.
 Was it expected or does it come as a surprise?
Our Response: I think the tax practitioners and communities across India were hopeful that
atleastonoccasionwere to happen where analysis ought to have been undertaken so as to be
able to adjudicate thoroughly upon this intricate aspect of transfer pricing.
 Working of BLT
BLT computesthe AMPexpenditure to salesratioof the tax payer and compares the same with
the AMP expenditure to sales ratio of the tax payer’s comparable entities.
The percentage of AMP which the tax payer has spent over and above the percentage of the
comparables’AMPistreatedas non-routine expenditureof the taxpayerwhichwentontobuild
the brand of the foreign AE and hence, the same has to be reimbursed by the foreign AE.
 Distinction between brand development and brand exploitation
The reported judgement identifies the distinction between brand development and brand
exploitation. The Hon’ble Court has asserted that equating brand building with the AMP
expenditure would largely be incorrect and fallacious since the AMP expenditures aims to
commerciallyexploit the brand value to increase the sales of the entity and not the other way
aroundi.e.,these AMPexpendituresare notspenttobuildthe brandvalue of the foreignAE but
only to boost the sales of the Indian subsidiary.
The court, while arriving at the aforesaid conclusion, also made a note on the unforeseen tax
implicationsandcomplicationsthatcouldarise if the parametersof the BLT were applied to the
Indian companies with reputed brands which incurs substantial AMP expenses. The Hon’ble

3. Court went on to name few of the highly reputed brand owners of India who are both
manufacturers and owners of the intangible property in India such as Tata, Mahindra, Bajaj,
Godrej and Videocon and held that the application of BLT to bifurcate and segregate AMP
expenditure towardsBrandbuildingonthese giantentitieswould make the results, in the view
of Hon’ble Court, startling and unacceptable.
 Independent Benchmarking of AMP Expenditure: Resulting in double or over taxation
The Hon’ble Delhi High Court has reiterated its stance of benchmarking of the marketing
intangibles independently is an irrational exercise by holding thatthe expenses incurred in
respect of services provided or property transferred, which havealready been factored into
determine the arm’s length price of the international transactions of the tax payer, cannot be
factored again for the second time for the purpose of benchmarking AMP expenditure.
The Hon’ble High Court was indicating to the Functions, Assets and Risks (FAR) analysis
undertaken by the tax payer in its Transfer Pricing report wherein these indirect factors (AMP
expenditure,risksundertaken,etc.)could be accounted,for arriving at the arm’s length price of
the international transaction with its foreign AE.
According to the Hon’ble Court, it would be injudicious and irrational to independently
benchmark and apply the BLT for the expenditure which have already been considered to
determine the arm’s length price of the international transaction of the tax payers through
some other method.

4. (* Viewsare personal)