HAZE OVER BRIGHT LINE TEST

Why transfer pricing over marketing intangibles has become a contested issue between companies and tax authorities

- INDIVIAL DHASMANA

On May 20, the Delhi High Court, in a matter about taxing PepsiCo India's advertising, marketing, and promotion (AMP) expenses, said the bright line test (BLT) was not a valid methodology. Earlier, too, in a case involving Sony Ericsson, the Court held that BLT was not a valid method under India's transfer pricing rules and lacked statutory mandate.

However, in a case involving LG Electronics India, a special bench of the Delhi-based income tax appellate tribunal (ITAT) accepted BLT as a tool to determine the arm's length nature of the AMP expenditure, while contending that part of it was an international transaction.

In a case involving Maruti Suzuki India, the Delhi high court has held that the AMP expenses are not an international transaction.

By this point, if you have begun to lose your way, that is understandable. So, let's get to the point. But first, here are some definitions.

TP, AMP, BLT, arm's length

Transfer pricing, or TP, refers to the prices of goods and services exchanged between companies under common control. For example, if a subsidiary sells goods or renders services to its holding company or a sister company, the price charged is referred to as the transfer price. In nutshell, transfer pricing rules prescribe how expenses incurred by related parties are to be taxed.

These are taxed according to the arm's length principle, which states that the price agreed upon in a transaction between two related parties must be the same as the price agreed upon in a comparable transaction between two unrelated parties.

There are six methods under India's transfer pricing rules to compute the arm's length price. One of the six methods adopted by the tax authorities is the BLT, about which the haziness can be seen from the accompanying box.