LG, Sony, Daikin, Haier, Reebok, Canon and many such multi-national companies lost an important tax case in the Delhi High Court Monday. It's a transfer pricing dispute about the money spent by the subsidiaries of these MNCs in India in promoting and maintaining the international brand.
Foreign multinationals often provide their Indian subsidiaries technical assistance and allow them to use their trademarks and brand name.
Indian subsidiaries often spend large amounts on advertising, marketing and promotion to boost domestic sales.
The tax department has been arguing that some of this spend helps promote the foreign brand and so the Indian subsidiary should be compensated for this promotion service and the compensation brought to tax.
In 2013, a Special Tax Tribunal Bench ruled in favor of the tax department on this issue. All these companies appealed the tribunal's order in the Delhi High Court.
Today, the Delhi High Court ruled in favor of the tax department. It said that advertising, marketing and promotion transactions are an "international transaction” and hence subject to transfer pricing.
But the court ruled in favor of the tax payers when it came to the issue of how much of that spend should be taxed tax and how the tax ought to be calculated. On this second issue the matter has now been sent back to the tribunal for fresh consideration.
Senior advocate Ajay Vohra who represented Daikin, Haier, Rebook and Canon at the Delhi HC said, "It's a landmark judgment which was much awaited on the issue of AMP expenses.
Although the HC has upheld the majority view of the special bench in the case of LG Electronics that incurring of AMP expenditure may amount to international transaction, the HC has laid down several important principles for benchmarking such transactions.
If the tribunal applies the principles laid down by the Delhi HC, then there should be no adjustment that will be sustained in majority of the cases."
So now, the ball is back in the tribunal's court and the MNCs are hopeful of getting a reprieve there.
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