The Unresolved Issue of AMP Expenses in Transfer Pricing - India - The Daily Guardian
Connect with us

Legally Speaking

The Unresolved Issue of AMP Expenses in Transfer Pricing – India

Published

on

One of the most perplexing yet significant concepts within the Transfer Pricing Dispute Resolution is with regards to the Advertisement, Marking and Promoting (AMP) Expenses that are drawn by the Indian Entities of a company for the products of its foreign Associate Entity. This concept has been surrounded by controversy and confusion since its inception within the practice and study of Transfer Pricing and this is because of the absence of any statutes or regulations dealing with it and its jurisprudence is built purely on the judicial precedents that have been delivered by the Tribunals and High Courts, however, interestingly even the courts appear to have a tough time dealing with issues pertaining to AMP expenses.

The origin of this dispute can be traced back to the United States Tax Court in the case of United States v. DHL Corporation, after the introduction of the US Regulations of 1968 which introduced an important concept pertaining to “Developer Assister Rules” as per which the entity which has incurred the AMP Expenses (Developer) would be treated as the economic owner of the brand which is being marketed even though it might not be its legal owner, and the legal owner of the Brand i.e., the Assister need not pay any compensation for the use of the brand by the developer. These regulations were grounded on the notion of equitable ownership of a brand on the basis of the fiscal expenditure and the risk incurred by them, and the legal ownership of the brand has not to be taken as one of the criteria for ascertaining who would be considered as the developer of the Brand or the intangible property in question.

However, it is pertinent to consider that the Transfer Pricing Rules in America create a clear distinction between “Routine” and “Non-Routine” expenditure, which is essential to understand the issue of the monetary remuneration that is given to the domestic associated entity for marketing intangibles. In DHL, the court framed the Bright Line Test (BLT) which created a distinction between the routine and non-routine expenses that were incurred by the companies. According to the Bright Line Test, it is necessary to ascertain the non-routine expenses that have been incurred i.e., for marketing purposes in contrast to the routine expenses that the incurred by the brand’s distributor for product promotion while ascertaining the economic ownership of the intangible in question.

The issue pertaining to AMP expenses was first dealt with in the case of Maruti Suzuki India Ltd. v. Additional Commissioner of Income Tax [(2010) 328 ITR 210] before the Delhi High Court, where the Bench held that the Advertisement, Marketing and Promoting Expenses will be considered as an international transaction only in cases where it exceeds the costs and expenses that have been incurred by comparable domestic entities which are similarly situated. However, the Delhi High Court’s judgement was remanded following which it was challenged before the Honourable Supreme Court in Maruti Suzuki v. Additional Commissioner of Income Tax [2011] 335 ITR 121 (SC) where it was overturned by the Apex Court.

In LG Electronics India Pvt. Ltd. v Assistant Commissioner of Income Tax [(2013) 140 ITD 41 (Delhi) (SB)], the Delhi Bench of the ITAT referred to the precedent by the Delhi High Court in Maruti Suzuki and held that the as per Chapter X of the Income Tax Act, 1961 the Assessing Officer has the right to make an adjustment for Transfer Pricing vide application of the Bright Line Test in issues pertaining to the AMP expenses that have been drawn by the Indian Entity, since this would fall within the ambit of an international transaction, and this would be deduced from the proportionally higher AMP expenses that were incurred by the Domestic Entity in contrast to two similarly situated domestic entities. The Revenue’s understanding that the AMP expenses which are incurred by the Domestic Associated Entity will inevitably result in a benefit to the Foreign Associated Entity in terms of increasing its brand value along with the lack of lack adequate compensation to the latter for the same, is the primary reason behind its attempt to bring all expenses pertaining to advertising, marketing and promotion within the ambit of the country’s Transfer Pricing Laws, thus it takes the job of applying an Arm’s Length Prince on such transactions which are used for AMP and the test that is most widely employed for this purpose is the Bright Line Test which used by the court in the case of LG Electronics, where it looked at the Bright Line, which is a line drawn within the total expenditure for the purposes of AMP which signified the average spending for the same purpose by comparable entities and any amount which would exceed the line would be considered as an international transaction which would represent the expenses that were drawn by the domestic entity for the building the brand value of the Foreign Associated Entity’s product.

The precedent in Sony Ericsson proved to be a gamechanger wherein the court went to the extent of overruling all of the abovementioned judgements with regards to whether AMP Expenses by the Domestic Entity would be considered as an internal transaction. In this case, the court did not face any issues in determining whether it would constitute an international transaction since the entities had submitted that the international between the Foreign Associated Entity and the Domestic Entity also included the money for the purposes of AMP. While the Revenue had relied on the precedent in LG Electronics to show cause for their application of the Bright Line Test in determining the part of the expenses towards AMP that would be considered as an international transaction. However, the court reject the Revenue’s submissions and reasoning while holding that the Bright Line Test did not have legislative or statutory backing and thus the precedent in LG Electronics was overruled with regards to the use and applicability of the Bright Line Test for ascertaining international transactions since this would be considered as an outcome of judicial legislation.

After the precedent in Sony Ericsson there has been a drastic change in the judicial approach towards issues pertaining to AMP expenses within the realm of transfer pricing. However, since the Court has failed to elaborate upon what would constitute an international transaction in Sony Ericsson, the courts and tribunals have gone back to the phase of drowning in confusion to deal with cases pertaining to AMP expenses and have struggled with determining a proper method for the same.

A transfer pricing adjustment can only be made when it has met the statutory framework of highlighting the existence of an international transaction, determination of the price and fixing an ALP in compliance with Section 92 C of the Income Tax Act. While the element of the international transaction was not disputed in all of the aforementioned cases, the primary issue was with regards what would constitute an international a transaction. The definition of an international transaction as per the Income Tax Act includes the parties to have an agreement between themselves for such a transaction and a shared understanding with regards to the transaction and its purpose. In LG Electronics and other cases prior to Sony Ericson, the primary criteria that were adopted by the courted in ascertaining international transactions and unsaid understanding, were on the basis of proportionally higher expenses with reference to comparable i.e. the courts had adopted the Bright Line Test which had been deemed incompatible with the Income Tax Act of 1961

At a glance at most of the cases pertaining to this issue, the Revenue has resorted to proving the existence of international transactions on the basis of the Bright Line Test, and most of the revenue’s judgements also fail to highlight or prove the same, otherwise except for the unique cases in which the Assessee Domestic Associated Entity and the Foreign Associated Entity had a written agreement between the two of them. This issue is purely because of the lack of any regulatory or statutory provisions within the Income Tax Act, and this was also brought to attention by the court in Maruti Suzuki(2011). In the absence of Statutory provisions and the inability to apply the Bright Line Test because of the precedent in Sony Ericsson, it becomes impossible for the revenue in such cases, especially in the absence of a written or express agreement between the Domestic and Foreign Associated Entities, where it is forced to assess the Domestic Entity’s subjective intentions however this method was also rejected in Maruti Suzuki(2011).

While the decision in Sony Ericsson has left the Revenue and Courts baffled with regards to the method, they should use to ascertain international transactions in matters pertaining to AMP expenses, hopefully, this will finally come to a conclusion since it is currently being heard by the Country’s Apex Court. It is of the utmost importance for the Apex Court to elaborate upon the method and procedure that must be followed by the revenue in determining cases pertaining AMP expenses and issue guidelines for the same.

The origin of this dispute can be traced back to the United States Tax Court in the case of United States v. DHL Corporation, after the introduction of the US Regulations of 1968 which introduced an important concept pertaining to “Developer Assister Rules” as per which the entity which has incurred the AMP Expenses (Developer) would be treated as the economic owner of the brand which is being marketed even though it might not be its legal owner, and the legal owner of the Brand i.e., the Assister need not pay any compensation for the use of the brand by the developer. These regulations were grounded on the notion of equitable ownership of a brand on the basis of the fiscal expenditure and the risk incurred by them, and the legal ownership of the brand has not to be taken as one of the criteria for ascertaining who would be considered as the developer of the Brand or the intangible property in question.

The Daily Guardian is now on Telegram. Click here to join our channel (@thedailyguardian) and stay updated with the latest headlines.

For the latest news Download The Daily Guardian App.

Legally Speaking

TELANGANA HIGH COURT: PLACE OF RESIDENCE OF THE ARBITRATOR WOULD NOT BE THE SEAT OF ARBITRATION

Published

on

The High Court of Telangana in the case M/s S. Square Infra v. Garneni Chalapathi Rao observed and held that the place of residence of the arbitrator would not determine the seat of arbitration.

The Single bench comprising of Justice P. Sree Sudha observed and held that merely because an arbitrator residing in Hyderabad has been appointed, it does not mean that only the Courts at Hyderabad would have the jurisdiction to decide all the matters arising out of arbitration agreement.

Facts of the Case:

In the present case, after the dispute arouse between the parties, the respondent sent a letter to the petitioner for nomination an arbitrator who is residing in Hyderabad. To its said notice, petitioner replied and declined the appointment of the arbitrator for the reason that there was no dispute which required the appointment of an arbitrator.

A suit was filled by the respondent before the VII Additional District Judge Sangareddy, seeking for relief of permanent injunction. An application was filled by the petitioner under Section 8 of the Arbitration & Conciliation Act and the parties referred to the arbitration.

An application was filled by the respondent under section 9 of the Arbitration & Conciliation Act before the Principal District Judge, Sangareddy, Subsequently, an application was filled by the petitioner for transferring the application from the Court at Sangareddy to Court at Hyderabad.

Contentions made by Parties:

On the following grounds, the petitioner sought the transfer of application.

An arbitrator residing in Hyderabad was nominated to respondent. However, only the courts in Hyderabad would have the jurisdiction to decide all the matters arising out of the arbitration.

It was stated that the nomination of an arbitrator residing in Hyderabad amounted to designating Hyderabad as the Seat of Arbitration.

On the following grounds, the respondent countered the submissions of the petitioner:

An application was filled by the petitioner under Section 8 of the A&C Act before the Court at Sangareddy. However, in terms of Section 42 of the A&C Act, only the court at Sangareddy would have the jurisdiction to decide all the matters arising out of arbitration.

Court Analysis:

The Court held that the seat of arbitration would not be decide by the place of residence of the arbitrator.

The argument of the petitioner was rejected by the court that since the respondent had initially nominated an arbitrator residing in Hyderabad, the Hyderabad Court would have the jurisdiction.

The court stated that merely because a party has nominated an arbitrator who resides in Hyderabad, the same would not designate Hyderabad as the Seat of arbitration in absence of any designation of the seat under the arbitration agreement.

It was further stated by the court that the application filled by the petitioner filled under Section 8 application before the Court at Sangareddy consequent to which the parties were referred to arbitration. Therefore, the Court would have the jurisdiction, in terms of Section 42 of the A&C Act.

The Transfer petition was dismissed by the Court.

Continue Reading

Legally Speaking

DELHI HIGH COURT REMANDS IN THE MATTER BACK TO ASSESSING OFFICER AFTER SETTING ASIDE: JUST 3 DAYS’ TIME GRANTED TO RESPOND TO THE INCOME TAX NOTICE

Published

on

plea in Delhi High Court seeking repatriation of 56 pregnant nurses

The Delhi High Court in the case Shubham Thakral Vs ITO, the Delhi bench comprising of Justice Manmohan and Justice Manmeet Pritam Singh Arora observed and remanded the matter back to the assessing officer as just 3 days’ time was granted to respond to the income tax notice.

In the present case, the petitioner/assessee assailed the notice under Section 148A (b) of the Income Tax Act, 1961 and the order passed under Section 148A (d) for the Assessment Year 2018–19.

It was contended by the assessee that only three days’ time was granted to the assessee to respond, as against the mandatory statutory period of at least seven days. However, despite of the fact that the annexure attached to the notice gave the petitioner eight days to respond, the e-filing submission portal was closed earlier, in violation of Section 148A (b) of the Income Tax Act.

Furthermore, the petitioner relied on the decision of Delhi High Court, in the case of Shri Sai Co-operative Thrift and Credit Society Ltd versus ITO, the Delhi High Court in the case held that under Section 148A (b), a minimum time of seven days has to be granted to the assessee to file its reply to the show cause notice.

No objections were raised by the department/respondent to the matter being returned to the Assessing Officer for a fresh decision in accordance with the law. Accordingly, the court set aside the order passed under Section 148A (d) for the Assessment Year 2018-19. The Assessing officer was directed by the court to pass a fresh reasoned order in accordance with the law after considering the reply of the petitioner, which was directed to be filed within a week.

Continue Reading

Legally Speaking

ALLAHABAD HIGH COURT: ADVOCATES SHOULDN’T ADVISE CLIENTS TO REAGITATE MATTERS IF THERE IS NO ERROR APPARENT ON FACE OF RECORD

Published

on

The Allahabad High Court in the case Malhan and 17 Others Vs. State Of U.P. And Another observed and stated that an advocate should be given such a piece of advice when there is no error apparent on the face of the record nor was there any reason why the matter be re-agitated it was finally decided.

The bench comprising of Justice Dr. Kaushal Jayendra Thaker and Justice Vivek Varma observed while dealing with the civil review application wherein the bench observed the concerned advised his client to make a chance by filling the instant review application after a period of six year.

In the present case, a civil review petition was filled along with the application under section 5 of the Limitation Act, 1963., the application was filled for seeking condonation of delay in filling the application, the application was filled with a delay of six years i.e., 1900 days.

It was stated by the applicant that the review application could not be filled due to the blockage of public transportation on account of the COVID-19 guidelines.

Moreover, the court observed that the appeals were disposed of by the Apex Court in the year 2016 and only in 2020-2021, the pandemic struck India and furthermore, it cannot be said that due to the COVID guidelines the public transportation was blocked and however, the applicant could not come to Allahabad Court to file review.

Further, it was stated that the court asked the counsel for the review applicants to explain the delay in filling the review application, to which the council gave a strange reply that the counsel had advised the clients that they must take a chance by filling this review application after a period of six years.

Following this, the Court observed:

The court noted that an advocate should not give such an advice when there is no error apparent on the face of record nor was there any other reason that when the matter was finally decided, why the matter be re-agitated.

It was stated that the court has no reason to condone the delay of six years as the same was not explained as to why this review application is filed after such an inordinate delay.

The Court opined that the lapse in approaching the court within the time is understandable but a total inaction for long period of delay without any explanation whatsoever and that too in absence of showing any sincere attempt on the part of suiter, this would add to his negligence and the relevant factor going against him.

The court observed that careless and reckless is shown by the review applicant in approaching the court and due to the condemnation of delay in the application with a token cost of Rs.10,000/, the court dismissed the application.

Continue Reading

Legally Speaking

SUPREME COURT CRITICISES HIGH COURT: POSTING ANTICIPATORY BAIL PLEA AFTER TWO MONTHS CAN’T BE APPRECIATED

Published

on

The Supreme Court in the case Sanjay versus The State (NCT of Delhi) & ANR observed and stated that in the case where personal liberty is involved, the court is expected to pass orders at the earliest while taking into account the merits of the matter in one way or other. Further, the top court observed that posting of an application for anticipatory bail after a couple of months cannot be appreciated by the court.

The bench comprising of Justice C. T. Ravikumar and the Justice Sudhanshu Dhulia was hearing a June 2 SLP against the Delhi High Court in a petition filed under section 420, 467, 468, 471, 120-B, 34 of the Indian Penal Code, 1860 for seeking anticipatory bail in a 2022 FIR, a notice is issued. It was stated that the learned APP for the state is present and accepts the notice and seeks time to file status report. The High Court in the impugned order stated that Let the status report be filed by the state prior to the next date with an advance copy to the learned counsel for the petitioner. The matter is to be list on 31.08.2022.

It was noted by the bench comprising of Justice Ravikumar and the Justice Dhulia that in the captioned Special Leave Petition, the grievance of the petitioner is that the application for anticipatory bail moved by the petitioner, being Crl. M.A. No. 11480 of 2022 in Bail Application No. 1751 of 2022 without granting any interim protection, was posted to 31.08.2022. on 24.05.2022, the bail application was moved on.

However, the bench asserted that the bench is of the considered view that in a matter involving personal liberty, the Court is expected to to pass orders at the earliest while taking into account the merits of the matter in one way or other.

It was declared by the bench that at any rate posting an application for anticipatory bail after a couple of months cannot be appreciated by the court.

Further, the bench requested to the High Court to dispose off the application for anticipatory bail on its own merits and in accordance with law expeditiously, preferably within a period of three weeks after reopening of the Court. Adding to it, the bench stated that if the main application could not be disposed off, for any reason, within the stipulated time, relief sought for in the interlocutory and on and on its own merits, the application shall be considered.

While disposing of the SLP, the bench directed in its order that we grant interim protection from arrest to the petitioner herein, Till such time.

Continue Reading

Legally Speaking

IN THE CIRP OF BOMBAY RAYON FASHIONS LTD, NATIONAL COMPANY APPELLATE TRIBUNAL (NCLT) STAYS THE CONSTITUTION OF COC

Published

on

The National Company Appellate Tribunal (NCLT) in the case National Company Appellate Tribunal (NCLT), comprising of the bench of Justice M. Venugopal (Judicial Member) and the technical member, Shri Kanthi Narahari observed while adjudicating an appeal filed in Prashant Agarwal v Vikash Parasprampuria, has stayed in the Corporate Insolvency Resolution Process (CIRP) the constitution of the Committee of Creditors (COC) of Bombay Rayon Fashions Ltd. on 15.06.2022, the order was passed.

FACTS OF THE CASE:

The Operational Creditor or the Respondent, Vikash Parasprampuria is the sole Proprietor of Chiranjilal Yarn Traders and the respondent had supplied goods to a public listed company i.e., Bombay Rayon Fashions Limited (“Corporate Debtor”). The Operational Creditor raised nine invoices which was accepted by the Corporate Debtor without any demur and it was noted that the dispute, protest and part payments were also made towards certain invoices.

The reminder letter was sent by the Operational Creditor when the Corporate Debtor failed to release balance payments letters followed by a Demand Notice under Section 8 of the IBC dated 05.11.2020, which was delivered to the Corporate Debtor but no response was received from the Corporate Debtor.

MUMBAI NCLT PROCEEDINGS

An application under section 9 of the Insolvency & Bankruptcy Code, 2016 was filled by the Operational Creditor before the NCLT Mumbai Bench, seeking to initiation of CIRP against the Corporate Debtor, for defaulting in payment of Rs.1,60,87,838/-, wherein the principal amount was Rs. 97,87,220/- and remaining was interest. 01.11.2020, was the default date.

the Operational Creditor placed reliance so as to justify the compliance of Rs. 1 Crore threshold for initiating CIRP of the NCLT judgement in the case Pavan Enterprises v. Gammon India, it was held in the case that interest is payable to the Operational of Financial Creditor then the debt will include interest, in terms of any agreement. However, by including the interest component the threshold of Rs. 1 Crore was being me and no reply has been filled by the Corporate Debtor.

NCLT DECISION:

An order dated 07.06.2022, the NCLT Mumbai Bench observed that the Corporate Debtor had time and again by its letter, invoices and by making part payment acknowledged its liability.

It was stated by the bench that the application under Section 9 was complete in all respects as required by law and there was a default in the payment of debt amount by the Corporate Debtor. The bench accepted the application and the CIRP was initiated against the Corporate Debtor, Mr. Santanu T Ray, Interim Resolution Professional was appointed.

NCLT PROCEEDINGS:

An application was filled by the appellant, Prashant Agarwal before the NCLT against the order dated 07.06.2022.

The settlement was proposed by the Respondent by submitting that if it would be satisfied if the Appellant pays the principal amount along with the CIRP cost towards settlement and on the settlement proposal, the appellant is yet to seek instructions.

Accordingly, the bench in the CIRP of the Corporate Debtor stayed the constitution of CoC and the CIRP process would otherwise continue.

The Appellant to accept or reject the settlement proposal of the Respondent, the bench listed the matter on 07.07.2022.

Continue Reading

Legally Speaking

ESTOPPEL CANNOT OVERRIDE LAW: SUPREME COURT ACCEPTS UNSUCCESSFUL CANDIDATES’ CHALLENGES TO SELECTION PROCESS HELD AGAINST REGULATIONS

Published

on

The Supreme Court in the case Krishna Rai (Dead) Through LRs versus The Benarus Hindu University & Others observed and held that the principle of estoppel or acquiescence would not be applied in a selection process when the principle of estoppel is held contrary to the relevant rules.

The bench comprising of Justices Dinesh Maheshwari and Justice Vikram Nath observed and reiterated that that the procedure in the relevant service manual will prevail over the principle of estoppel and the principle of estoppel cannot override in the eye of law.

An appeal was considered by bench relating to the filling up of 14 posts in Class III (Junior Clerk) in the Benarus Hindu University by way of promotion. However, the notification inviting the applications from Class IV employees for promotion to Class III had not prescribed that interview will be conducted in addition to the typing test. It was also stated that the The service rules also did not mention interview for promotion to Class III. However, it finalized 14 candidates, the Board of Examiners conducted an interview as well.

Before the Allahabad High Court, some of the candidates challenged the selection process by some candidates, who did not get selected. The candidates alleging that through the manual did not prescribe an interview and the Board of Examiners conducted the interview by “changing the rules of the game”. The Selection process was set aside by the Single bench of the High Court by holding that a grave error was committed by preparing the merit list on the basis of the interview as well.

on appeal by the BHU, the division bench of the High Court set aside the judgement of the Single bench on the ground that the petitioners without protest after having participated in the interview, the petitioners are estopped from challenging the selection process after becoming unsuccessful. The appellants approached the Supreme Court challenging the order of division bench.

The Court noted that the Supreme Court held that the division bench fell in error by applying the principle of estoppel. the Manual duly approved by the Executive Council, According to para 6.4, all Class-IV employees who had put in five years’ service and passed matriculation examination or equivalent, those employees were eligible for the promotion to the post of Junior Clerk Grade.

the departmental written test of simple English, Hindi, and Arithmetic, but could not pass the typing test, was passed by the eligible candidates and still the candidates would be eligible for promotion.

It was observed by the Court that the Board on their own changed the criteria and by introducing an interview it made it purely merit based and the merit list was also prepared on the basis of marks awarded in the type test, the written test and interview.

The Top Court said that it is settled principle that the principle of estoppel cannot override the law and the manual duly approved by the Executive Council will prevail over any such principle of estoppel or acquiescence.

The Court remarked, while referring to the precents that If the law requires something to be done in a particular manner, there can be no estoppel against law, then it must be done in that particular manner, and if it is not done in that particular manner, then in the eye of the law, it would have no existence.

It was stated that the case laws relied upon by the Division bench had no application in the facts of the present case as none of those judgments laid down states that the principle of estoppel would be above in the eye of law.

Accordingly, The judgement of the Single bench was restored and the appeal was allowed, the judgement of the division bench was set aside.

Continue Reading

Trending