Recently, the Delhi High Court issued its much anticipated ruling on marketing intangibles in the Sony Ericsson Mobile Communications India Pvt. Ltd. case. The High Court ruling is partially in favor of the taxpayers engaged in the import, marketing and distribution of branded products of their associated enterprises.
The ruling delivers important guidance on how the issue of marketing intangibles should be viewed in cases where the taxpayer is characterized as a provider.
However, the most important issue to note from the High Court ruling is that it is not mandatory to subject advertising, marketing and promotion (AMP) expenses to a bright-line test and consider non-routine AMP activities as separate transactions. The High Court decided that marketing and distribution functions are closely connected, and thus may be bundled for purposes of determining the arm’s length price.
Furthermore, where, upon testing the bundled transaction under either the transactional net margin method (TNMM) or resale price method (RPM) with appropriate comparables it is concluded that the transactions were at arm’s length, there is no need to unbundle the transactions and look at AMP activities as separate transactions.
