DEEPENDER ANIL AND ASSOCIATES CHARTERED ACCOUNTANTS

1. DEEPENDER ANIL AND ASSOCIATESCHARTERED ACCOUNTANTS ADDITIONS BY TPO WHICH COULD NOT BE FORESEE BY THE ASSESSEE (AMP) Deepender Anil & Associates

2. DEFINITIONS • ADVERTISING Meaning of Advertising as per Black Law Dictionary • “The action of drawing the public’s attention to something to promote its sale” • “The business of producing and circulating advertisements” Generally, advertising is understood as “means of communication with the users of a product or service. Advertisements are messages paid for by those who send them and are intended to inform or influence people who receive them”. Deepender Anil & Associates

3. MARKETING Meaning of Marketing as per Black Law Dictionary “The act or process of promoting and selling, leasing or licensing products or services”. “The part of a business concerned with meeting customer’s needs”. “The area of study concerned with the promotion and selling of products and services”. Generally, marketing is understood as “the process of communicating the value of a product or service to customers, for the purpose of selling that product or service. Marketing can be looked at an organizational function and a set of processes for creating, delivering and communicating value to customers, and managing customer relationships in ways that also benefit the organization and its shareholders”. Deepender Anil & Associates

4. 3. PROMOTION Meaning of Promotion as per Oxford Dictionary “Activity that supports or encourages”. “The publicizing of a product or celebrity”. “Movement to a higher position or rank”. Generally, promotion is understood as “entire set of activities, which communicate the product, brand or service to the user. The idea is to make people aware, attract and induce to buy the product, in preference over others”. Deepender Anil & Associates

5. SECTION 92B OF INCOME TAX ACT, 1961 Explanation added to the definition of International Transaction by Finance Act, 2012 w.r.e.f 01-04-2002 :- “the expression “international transaction” shall include – ………………………..; the purchase, sale, transfer, lease or use of intangible property, ……………….. similar nature; ………………………..; provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, designs, …………. Service; ……………………….. Deepender Anil & Associates

6. II. the expression “intangible property” shall include – marketing related intangible assets, such as trademarks, trade names, brand names, logos; …………………………; . . . . . (l) …………………………. Deepender Anil & Associates

7. SECTION 92F OF INCOME TAX ACT, 1961 Sub – section (v) of Section 92F:- “transaction” includes an arrangement, understanding or action in concert, - • Whether or not such arrangement, understanding or action is formal or in writing; or • Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. Deepender Anil & Associates

8. Section 92B (1) read with Section 92F (v) From a conjoint reading of provisions of clause (v) of section 92F and sub-section (1) of section 92B of the Act it could be inferred that Transfer Pricing regulation would be applicable to any “transaction”, being an arrangement, understanding or action in concert, inter alia, in the nature of purchase, sale or lease of tangible or intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises. Therefore, in order to be characterized as an 'internationaltransaction', it would have to be demonstrated that the same arises pursuant to an arrangement, understanding or action in concert. Deepender Anil & Associates

9. BACKGROUND OF MARKETING INTANGIBLES The term marketing intangibles and its value is derived from the company’s levels of AMP expenses. These are created by the enterprise that invests to give market recognition or value to the brand. While the increased brand value at a local level may benefit the local entity only, it may not have the right to future perpetual intangible benefits arising from it. Hence, the tax authorities seek to identify and differentiate these spends that develop the intangible and provide enduring benefit over that of routine advertising costs. The excess AMP expenditure incurred by the Indian AE contributes towards the development and enhancement of the brand owned by the parent of the multinational group (the foreign AE). This perceived enhancement in the value of the brand is commonly referred to as ‘marketing intangibles’. Deepender Anil & Associates

10. OECD GUIDELINES Para 6.4 of OECD Guidelines:- Marketing intangibles include trademarks and trade names that aid in the commercial exploitation of a product or service, customer lists, distribution channels, and unique names, symbols, or pictures that have an important promotional value for the product concerned. Some marketing intangibles (e.g. trademarks) may be protected by the law of the country concerned and used only with the owner’s permission for the relevant product or services. The value of marketing intangibles depends upon many factors, including the reputation and credibility of the trade name or the trademark fostered by the quality of the goods and services provided under the name or the mark in the past, the degree of quality control and ongoing R&D, distribution and availability of the goods or services being marketed, etc. Deepender Anil & Associates

11. TRANSFER PRICING: FOCUS ON MARKETING INTANGIBLES Income earned from intangible property such as trademarks or brands is one of the most challenging issues in transfer pricing (TP). Transactions involving the licensing of trademarks are common amongst multinational enterprises and these pose challenges in terms of the valuation of the trademark and remuneration of the trademark owner. The tax authorities have argued that local AMP expenditure adds value to the trademark and as such, the local subsidiary should be compensated for this either in form of reduced royalty payments, no payment at all or by charging a fee. Deepender Anil & Associates

12. This is on the basis that significant AMP expenditure leads to the creation of a marketing intangible or economic ownership of the trademark by the local subsidiary as the AMP investment leads to the trademark becoming more recognizable and valuable in the marketplace. There needs to be a balance between how much the local entity spends on AMP versus the functions, risks and costs incurred by the trademark owner, particularly where the local entity is also paying a royalty to the trademark owner for the use of the trademark. Deepender Anil & Associates

13. CONTENTION OF INDIAN REVENUE AUTHORITIES (IRA) The issue (incurring of AMP expenses) has now entered the realm of transfer pricing controversy. The contention of the IRA has been that since the Indian company incurs expenses which benefit the foreign AE, the Indian company should be reimbursed for its expenses. In fact, the proposition has been that by promoting the brand in India, the Indian AE is providing a service to the foreign AE, for which it should receive due compensation (which could be the recovery of expenses incurred and an appropriate mark-up over and above such expenses). Deepender Anil & Associates

14. POINT FOR DISCUSSION The moot point to consider here is that where an Indian AE is engaged in distributing branded products of its foreign AE, and the Indian AE incurs AMP expenditure for selling the products, whether such expenses have been incurred for marketing of the product or for building the brand of the foreign AE in India. Deepender Anil & Associates

15. WRITER’S OPINION At times, the IRA have not appreciated the difference between product promotion and brand promotion. Product promotion primarily targets an increase in the demand for a particular product. Such product promotion expenditure may support brand building however such rub on effect would need to be analyzed on a case to case basis and not by comparing the same with the other companies identified for the purpose of determining the remuneration that the Indian AE should have earned from the sale of the product. Deepender Anil & Associates

16. MARKETING ACTIVITIES UNDERTAKEN BY ENTERPRISES NOT OWNING TRADEMARKS OR TRADE NAMES Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do not own the trademarks or trade names that they are promoting (such as distributor of branded goods). Deepender Anil & Associates

17. ISSUE ARISES How the return attributable to the marketing intangibles can be identified ? As per Para 6.37 of OECD Guidelines, the analysis requires an assessment of the obligations and the rights implied by the agreement between the parties. It will often be the case that the return on marketing activities will be sufficient and appropriate. One relatively clear case is where a distributor acts merely as an agent, being reimbursed for its promotional expenditures by the owner of the marketing intangible. In that case, the distributor would be entitled to compensation appropriate to its agency activities alone and would not be entitled to share in any return attributable to the marketing intangible. Deepender Anil & Associates

18. CASE LAWS Deepender Anil & Associates

19. MARUTI SUZUKI INDIA LTDVADDL. CIT[TS – 43 – HC – 2010 (DEL)] Deepender Anil & Associates

20. Deepender Anil & Associates

21. Deepender Anil & Associates

22. Deepender Anil & Associates

23. Deepender Anil & Associates

24. Deepender Anil & Associates

25. L.G. ELECTRONICS INDIA P LTDVACIT[TS – 11 – ITAT – 2013 (DEL) – TP] Deepender Anil & Associates

26. Deepender Anil & Associates

27. Deepender Anil & Associates

28. CASES THAT MAY BE REFERRED TO • NOKIA INDIA (P.) LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX [22 TAXMANN.COM 109 (DELHI – TRIB)]. • BMW INDIA PRIVATE LIMITED V. ADDITIONAL COMMISSIONER OF INCOME TAX [37 TAXMANN.COM 319 (DELHI TRIB.)] • SONY INDIA (P.) LTD. V. ADDITIONAL COMMISSIONER OF INCOME TAX [35 TAXMANN.COM 586 (DELHI – TRIB)]. • REEBOK INDIA CO. VS. ADDITIONAL COMMISSIONER OF INCOME TAX [35 TAXMANN.COM 578 (DELHI – TRIB)]. • RAYBAN SUN OPTICS INDIA LTD V. DEPUTY COMMISSIONER OF INCOME TAX [33 TAXMANN.COM 506 (DELHI – TRIB)]. Deepender Anil & Associates

29. 6. PANASONIC SLAES & SERVICES INDIA (P.) LTD V. ASSISSTANT COMMISSIONER OF INCOME TAX [34 TAXMANN.COM 276 (CHENNAI – TRIB)]. HAIER APPLIANCES INDIA (P.) LTD VS DEPUTY COMMISSIONER OF INCOME TAX [35 TAXMANN.COM 203 (DELHI – TRIB)]. GLAXO SMITHKLINE CONSUMER HEALTH CARE LTD. V. ADDITIONAL COMMISSIONER OF INCOME TAX [20 TAXMANN.COM 2 (CHD)] ASSISSTANT COMMISSIONER OF INCOME TAX V. GENOM BIOTECH (P.) LTD. [21 TAXMANN.COM 315 (MUM)]. PERFETTI VAN MELLE INDIA (P.) LTD VS DEPUTY COMMISSIONER OF INCOME TAX [41 TAXMANN.COM 358 (DELHI – TRIB)]. Deepender Anil & Associates

30. THANK YOU Deepender Kumar AgarwalB. Co., F.C.A.(Partner)101/E-36, Jawahar Park,Laxmi Nagar, Delhi - 110092 Deepender Anil & Associates