Relief for MNCs as Delhi High Court lays down rules regarding tax on advertisements [Read the Judgment]

Addressing the issue of taxation of advertising and marketing spends by multinational companies; the Delhi High Court today laid down rules regarding the same. The dispute before the Court involved questions regarding applicability of transfer pricing rules, which apply to transactions between multinational companies and their Indian arm.

The court decided that promoting and advertising advancement transactions are ineed universal exchange that fall inside the ambit of transfer pricing. However, the Court did not acknowledge forceful computational strategies utilized by tax authorities. The judgment, delivered by the Division Bench consisting of Justices Sanjiv Khanna and V. Kameswar Rao lays down 16 rules, thereby adding certainty to the law.

An earlier judgment delivered by Income Tax Appellate Tribunal emerging out of atax demand on LG Electronics which was in favour of tax authorities had negatively affected the chances of MNCs working in the country.

Mukesh Butani, partner at BMR Legal expressed happiness over the judgment and said, "The Delhi HC verdict is welcome as it clarifies several important principles which did not feature in the LG special bench ruling from ITAT (Income Tax Appellate Tribunal)." He added, "Whereas the primary question--whether marketing intangible transactions is an international transaction--has been answered in revenue's favour, all other aspects have been addressed in favour of the taxpayer (the MNCs)."

Vijay Iyer, Partner & transfer pricing leader, EY was also supportive of the judgment and said, "This judgment brings the flavor of international best practices."

S P Singh, Senior Director, Deloitte Haskins & Sells appreciated the judgment by saying, "The High Court has appreciated the business realities that many transactions are bunched together in business and benchmarking them also needs to be done jointly keeping in mind business realities. The clarifications provided by the High Court will go along way in settling a large number of cases and would provide clarity to taxpayers as well as tax authorities. This will reduce litigation substantially."

The High Court in its judgment said that the ownership of intellectual property needs to be accepted in current business times. The High Court rejected "Bright Line Method" and other methods that are currently being used by tax authorities to send claims that are aggressive in nature.

The case had gone to court as tax authorities had ordered MNCs including Sony, Canon, Daikin Air-conditioning, Haier Appliances, Reebok and Casio to pay taxes if the spending on AMP exceeded industry benchmarks set by the tax authorities. The tax department had used Bright Line method for the same. The idea of pegging AMP spend to an industry benchmark is known as the bright line method and had been debated by industry on the ground that it is inflexible on the grounds that a few items may need to be publicized more intensely than others.

Read the Judgment here.