After reversal of the Tribunal (famously referred as LG electronic’s case) on the Transfer Pricing Adjustment made towards alleged “excessive” expenses incurred by the Taxpayers , the Revenue once again found itself on the losing side of the battle on the issue of TP adjustment in relation to the Advertising, Marketing and Promotion (‘AMP’) expenses, before the Delhi High Court.

Further Set-Back to Revenue in Maruti Suzuki’s case

After its ruling to the effect that Bright Line Test cannot be applied to deduce an international transaction [Sony ericsson’s case], the Delhi High Court moved one more step closer to the Taxpayer’s position on the issue of Transfer Pricing Adjustment in relation to alleged brand promotion services by an Indian company by virtue of incurring excessive Advertising spends.

The Delhi High Court  negatived the Revenue stand that excessive brand promotion expenses incurred by Maruti Suzuki could be analysed as an “International Transaction”  under the Indian Transfer Pricing provisions.

The Revenue’s case was that companies which use a foreign brand and incur aggressive Advertising and Marketing expenses are helping their parent / associate group company to improve the value of the Brand owned by the foreign associate, at the expense of the Indian entity of the group. The Revenue alleged that there exists an unwritten arrangement between the Indian entity and its foreign associated enterprise as a result of which the Indian company is incurring these expenses. By incurring such abnormal AMP expenses, the Indian company is effectively undertaking brand promotion / brand building for its foreign associated enterprise and therefore it must be compensated at arm’s length for such services, the Revenue contended.

The Court has taken the view that the provisions of the Indian Transfer Pricing law do not permit  an exercise of deducing the existence of an international transaction in the nature of brand promotion assistance / services being rendered by the Indian company, when such expenses have admittedly been incurred by the Indian company for its own business. Any incidental benefit of such expenses to the foreign company by way of improving its brand value cannot be deemed as an International Transaction without there being an express  provision  under the law, the Court ruled.