India's Income Tax Appellate Court follows Special Bench Ruling on ...

15 April 2013
Global
<strong>Tax</strong> Alert
News and views from
Transfer Pricing
India’s <strong>Income</strong> <strong>Tax</strong>
<strong>Appellate</strong> <strong>Court</strong> <strong>follows</strong>
<strong>Special</strong> <strong>Bench</strong> <strong>Ruling</strong> on
advertising, marketing,
and sales promotion issue
in Glaxo Smithkline case
Executive Summary
This Alert summarizes a recent ruling of the Chandigarh <strong>Income</strong> <strong>Tax</strong>
<strong>Appellate</strong> Tribunal (ITAT) in the case of M/s Glaxo Smithkline Consumer
Healthcare Limited Vs. The Addl. CIT, Range IV, Chandigarh. [ITA 1148/
Chd/2011]. The issue under consideration was that of excessive
advertising, marketing and sales promotion (AMP) expenses under the
provisions of the Indian <strong>Tax</strong> Laws (ITL).
The ITAT placed reliance on the majority decision of the <strong>Special</strong> <strong>Bench</strong> in
M/s L.G. Electronics India P. Ltd. Vs. ACIT (SB <strong>Ruling</strong>) to adjudicate that
excessive AMP expenses constitute an international transaction. The
ITAT remanded the matter back to Transfer Pricing Officer (TPO) with
instructions that AMP expenses be benchmarked in light of the guidance
provided by SB <strong>Ruling</strong>. It was also held that expenses such as discount on
sales, market research expenses, sales promotion expenses, selling and
distribution expenses and service charges paid to selling agents do not
constitute brand building expenses and thus should be excluded from the
AMP computation. Further, expenses incurred by the <strong>Tax</strong>payer exclusively
for domestic brands owned by it were considered to be outside the purview
of AMP computation.

2
Background and Facts
• The <strong>Tax</strong>payer, Glaxo Smithkline
Consumer Healthcare Ltd, was
engaged in manufacturing and
selling of nutritional products
under the brands “Horlicks,”
“Boost,” “Maltova” and “Viva” in
India.
• During transfer pricing
proceedings for Financial Year
2006-07, the Transfer Pricing
Officer (TPO) took the view
that the taxpayer had created a
marketing intangible by incurring
a huge AMP expenditure on a
brand owned by an Associated
Enterprise (AE) and thus, should
have been compensated at arm’s
length by AE.
• The TPO added a mark-up of
13.04% to the “excessive” AMP
expenditure incurred by the
assessee after deducting the
brand development expenditure.
The TP adjustment was confirmed
by the Dispute Resolution Panel.
The contentions raised by the
<strong>Tax</strong>payer were similar to the
arguments raised by LG and
interveners before the <strong>Special</strong>
<strong>Bench</strong>, On the other hand, the
Departmental Representative
pointed out that the issue stands
covered against the taxpayer by the
SB <strong>Ruling</strong>.
ITAT <strong>Ruling</strong>
• The ITAT mentioned that the
SB <strong>Ruling</strong> has upheld that
AMP expenses constitute
an international transaction
under the provisions of Section
92B of the Act. The case was
not distinguished on facts by
the taxpayer and the <strong>Bench</strong>
concluded that similar to
the SB <strong>Ruling</strong>, there was an
understanding between the
parties to incur AMP expenses.
• Following the SB <strong>Ruling</strong>, the
ITAT dismissed the issue of
lack of jurisdiction of the TPO
to determine the ALP of the
aforesaid transaction.
• The issues relating to
appropriateness of comparables
selected by the TPO was
remanded back to the TPO. The
TPO has been directed to follow
the rationale given by the <strong>Special</strong>
<strong>Bench</strong>.
• The <strong>Tax</strong>payer had provided a
list of expenses which did not
constitute AMP expenses such
as discount on sales, market
research expenses, sales
promotion expenses, selling and
distribution expenses and service
charges paid to selling agents, but
were considered as AMP expenses
by the TPO. The TPO was directed
to exclude such expenses from
the AMP computation.
• The ITAT directed the TPO to
consider the position raised by
the assessee that AMP expenses
on foreign brand is lower than
AMP expenses on domestic brand
and re-determine the value of
arms’ length price in relation to
Global <strong>Tax</strong> Alert Transfer pricing
the AMP expenditure. Further, it
was held that no adjustment is
required to be made in respect
of the advertisement expenses
attributed to the promotion of
domestic brand owned by the
assessee.
Conclusion
A ruling by an SB is generally
binding on all other benches of the
Tribunal. Hence, it was expected
that the principles laid down in the
SB <strong>Ruling</strong> would be followed and
applied by the divisional benches.
The SB <strong>Ruling</strong> in many ways is
fact sensitive and the reasons for
concluding an oral understanding/
transaction in LG’s case have been
explained at length in the SB <strong>Ruling</strong>.
Appropriate regard must be given
to the facts of each case while
applying the SB <strong>Ruling</strong>.
This ruling also provides guidance
on the expenses that can be
considered to be “selling expenses”
and hence, excluded from the
purview of AMP expenses, an
area where much guidance is not
available in the <strong>Special</strong> <strong>Bench</strong>
<strong>Ruling</strong>. The observation that
<strong>Tax</strong>payer’s expenditure on domestic
brand needs to be considered while
determining whether AMP expenses
were excessive also adds strength
to the argument that domestic
brand owners can be considered as
comparable for AMP purposes.

For additional information with respect to this Alert, please contact the
following:
Ernst & Young LLP (India), Bangalore
• Rajendra Nayak +91 80 4027 5454 rajendra.nayak@in.ey.com
Ernst & Young LLP (India), New Dehli
• Vijay Iyer +91 11 6623 3240 vijay.iyer@in.ey.com
3 Global <strong>Tax</strong> Alert Transfer pricing
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