Maruti Suzuki gets favourable ruling on ad spend issue

 

In a landmark ruling, the Delhi High Court has held that advertising and marketing expenses incurred by Maruti Suzuki India cannot be treated as an "international transaction" for income tax purposes and would not therefore attract transfer pricing provisions of income tax law.

The Delhi High Court has therefore set aside the Income Tax Appellate Tribunal Orders in relation to transfer pricing adjustments of Rs. 151 crore (Assessment Year 2005-06) and Rs. 158 crore (Assessment year 2006-07) on account of AMP expenses.

Tax authorities had contended that Maruti Suzuki India had incurred excessive spend on advertising, marketing and promotion (AMP) in India, leading to benefits for its overseas parent on the intangibles (brand, trademark) owned in India by the Japanese auto major.

The income tax department had therefore sought to make adjustments (under transfer pricing provisions) on the AMP spend so as bring them to tax.

There have been several instances in the past where income tax department had asked MNCs to fork out tax on AMP expenses incurred over and above industry average.

Reacting to this Delhi High Court ruling, Rakesh Nangia, Managing Partner, Nangia & Co, a firm of chartered accountants, said this was a welcome ruling for multinational companies as it "uncluttered the obscurity " around taxation of excessive AMP spend.

"This ruling is in one step ahead of the Mumbai High Court Ruling in the case of Sony Ericsson in terms of not considering the AMP expenses as an international transaction and making a clear distinction between the AMP spend of distributor with that of a manufacturer", Nangia said.

Aseem Chawla, Partner, MPC Legal, said that the latest Delhi High Court decision and the recent trend in resolving transfer pricing matters in constructive manner is a welcome relief.