Unilever Ghana Limited (UKL) filed an appeal with the High Court against an assessment of additional taxabel income issued by the tax authorities in 2019 on the following grounds. a) That the Respondent did not use a transfer pricing method as required by the Transfer Pricing Regulations, 2012 (LI 2188) in examining the Appellant Transfer Pricing Returns. b) That the Respondent misinterpreted, misunderstood and misapplied the OECD Transfer Pricing guidelines to arrive at a liability of Six Million, Two Hundred and Thirty-Six Thousand, Two Hundred Ghana Cedis (GHq:6,236,200.00) on the Advertising, Marketing and Promotion expenses incurred by the Appellant. c) That had the Respondent properly applied the OECD guidelines, the Appellant would not have been liable to pay tax on the Advertising, Marketing and promotion expenses. Judgment of the Court The High Court dismissed the appeal due to lack of statutory jurisdiction. “…I do not need to go further in this judgment than to dismiss the appeal on the grounds that the order granting leave to the Appellant to appeal against the objection decision was void. Therefore, the appeal has not properly invoked the jurisdiction of this court for the merits to be considered. The effect, is that the Appeal filed on 17th March, 2021 fails and same is dismissed. Consequently, the Respondent objection decision dated 19th September 2019 will continue to stand.” ...

Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company. Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income. An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside. An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be compensated with a payment from the group rather than having to pay huge royalties. Judgement of the High Court The Court ruled in favor of Amway India. Excerpts “9. A perusal of the above order reveals that the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Learned Counsel for the appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. In this view of the matter, we therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment (supra), was correct. The relevant portion of the said judgment reads as follows, “44. In light of the above findings, this Court concludes as follows: (a) The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. …………………..”    (Emphasis Supplied) 10. In this view of the matter, no substantial questions of law arise for consideration and accordingly, the appeal is dismissed” ...

Olympus Medical Systems India is a subsidiary of Olympus Corp and engaged in the import, sale and maintenance of medical equipment in India. For FY 2012 and 2013 the company reported losses. An transfer pricing audit was initiated by the tax authorities and later an assessment was issued. Since Olympus India had failed to provide audited financials of its associated enterprises to determine the overall profits of the group, it adopted the Resale Price Method using the Bright Line Test approach. An appeal was then filed by Olympus with the Tax Appellate Tribunal. Olympus India argued that the tax authorities was erroneous in adopting the Residual Profit Split Method in determining the arm’s length price of the AMP expenses and furthermore that the tax authorities could not make an adjustment without having information on the total profits of the group. Judgement of the Tax Appellate Tribunal The tribunal held that Olympus India should not benefit for non-cooperation in providing audited financials of associated enterprises. Olympus was obligated to submit the audited financials of the associated enterprises. Failure to do so could justify an assessment by applying the Residual Profit Split Method in the determination of the arm’s length price of the AMP expenses. Excerpts “The TPO has benchmarked using the Residual Profit Split Method. For applying the Residual Profits Split Method, it is incumbent upon the TPO first to combine profit from the international transaction of incurring AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. In order to work out the combined profit in the transaction the financials/profitability of the AE’s is very much essential. In the instant case, the Assessee has refused to submit the profitability of the AE’s, therefore the TPO has adopted the RPSM.” “In our opinion, the Assessee who is entering into the International transaction is duty bound to maintain and produce the same before the Department when it is asked to produce as per Section 92D of Income Tax Act R/w. Rule 10D and 92D of Income Tax Rules, 1962. If the assessee doesn’t provide the financials of its AE’s, the TPO/AO/DRP can very well invoke the provisions of Income tax Provisions of Income-Tax Act and the Rules framed there under to call for such records not only from the country of residence but also from any other country in cases of AE’s and decide the issue.” “In our opinion the TPO/Assessing Officer cannot apply wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non cooperation for providing the audited financials of AE.” “By following the above said binding decision in Assessee’s own case and also for the reasons mentioned above, we hold that the international transaction of AMP functions exists in the case of the Assessee and restore the issue to the TPO for following the direction of the Hon’ble Delhi High Court in the case of Sony Ericsson (supra) for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE’s or in the segregated manner, after taking into account appropriate comparables or applying of Resale price method or Cost Plus Method or Profit Split Method keeping in view the findings of the Hon’ble Delhi High Court. Needles to say that, the Assessee shall be given opportunity of being heard. Further Assessee is directed to provide all the relevant documents including the financials of its AE’s if required, failing to which the Authorities can act in accordance with law by invoking the relevant provisions.” ...

Adidas India Marketing Pvt. Ltd. is engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Following an audit for FY 2016-2017, an assessment had been issued by the tax authorities where adjustments had been made to (1) advertising, promotion and marketing activities in Adidas India which was considered to have benefitted related parties in the Adidas group, (2) royalty/license payments to the group which was considered excessive and (3) fees paid by Adidas India to related parties which was considered “fees for technical services” (FTS) subjekt to Indian withholding tax. Following an unfavorable decision on the first complaint, an appeal was filed by Adidas with the Income Tax Appellate Tribunal. Judgement of the ITAT The Tribunal decided predominantly in favor of Adidas. Issues 1 and 2 was restored back to the tax authorities for a new decision in accordance with the directions given by the Tribunal, and issue 3 was set aside ...

Kellogg India Private Limited is engaged in manufacturing and sales of breakfast cereals and convenience foods and it operates as a licensed manufacturer under the Kellogg brand. During the year under consideration, Kellogg India had commenced business of distributing Pringles products in the Indian markets. Kellogg India purchases the Pringles product from its AE Pringles International Operations SARL, based in Singapore. Singapore AE does not manufacture pringles, but in turn gets it manufactured from a third party contract manufacturer. Thereafter, the goods are supplied at a cost plus mark up of 5% on third party manufacturer’s cost. These Pringles are later imported by Kellogg India from its AE and distributed in the Indian market. Kellogg India characterised itself as a distributor of Pringles products and is responsible for the strategic and overall management of Pringles business in India. Singapore AE, being the least complex entity, was selected as the tested party for benchmarking the international transaction of import of finished goods. Kellogg India conducted a search in the Asia Pacific region to identify manufacturers and based on benchmarking analysis carried out, an arithmetic mean of 14 comparable companies with Gross Profit / Direct and Indirect Cost as the Profit Level Indicator (PLI) was determined at 50.07%. The tax authorities disregarded the benchmarking approach adopted by Kellogg India and instead selected the Indian entity as the tested party. The Transactional Net Margin Method (TNMM) was chosen as the Most Appropriate Method (MAM) for the transaction and based on 8 comparable companies the arm’s length profit margin was determined at 4.33%. Singapore AE was rejected as tested party by the tax authorities on the ground that the financial details of the company and the foreign comparables were not available. Judgement of the Tax Appellate Tribunal The Tribunal decided in favor of Kellogg India and set aside the assessment. Excerpt “In view of the aforesaid observations, we hold that Singapore AE should be considered as the tested party, being the least complex entity, in the facts and circumstances of the case, which has been rightly done by the assessee. Hence no adjustment to ALP is required to be made. Even if the comparables chosen by the ld TPO are considered, undisputably since the assessee is only engaged in purchase and resale of goods without any substantial value addition thereon, RPM would be the MAM and in case of RPM only the gross margins are to be compared. We find that gross margins of assessee are much more than the gross margins of comparable companies chosen by the ld TPO. Hence no adjustment to ALP is to be made in respect of import of finished goods even if the comparable companies chosen by the ld TPO are upheld. Hence we hold that no adjustment to ALP is required to be made in the instant case in respect of import of finished goods in either case. Accordingly, the said adjustment of Rs 1,31,60,199/- is hereby directed to be deleted. Accordingly, the Additional Grounds raised by the assessee are allowed.” ...

Sony Ericsson Mobile Communications India Pvt. Ltd. was engaged in distribution and marketing of imported and branded products (mobile phones), manufactured and sold to them by foreign group companies. Intangible rights in the brand-name/ trademark/ trade-name were owned by group parent. The tax authorities alleged that the Sony Ericsson India had contributed in the development of the brand (legally owned by the parent company) by incurring excessive and non-routine AMP expenses. They contended that such contribution could be considered mere services provided to the legal owner. And since Sony Ericsson India did not receive any compensation for these excessive AMP expenses, an assessment was issued where a compensation for these contributions had been added to the taxable income. In determining that there had been an additional AMP-transaction the authorities had applied a “bright line test” (a concept originating from the case of US vs. DHL Corporation), where the amount of AMP expenses incurred by Sony Ericsson India had been compared with AMP expenses incurred by the third parties. comparables. Sony Ericsson brought the tax assessment to the Courts. Judgement of the High Court The High Court ruled in favor of Sony Ericsson and set aside the assessment of the tax authorities. According to the Court, AMP expenses/functions had already been compensated in the overall remuneration of Sony Ericsson India. Para 137 “Aggregation of transactions is desirable and not merely permissible if the nature of transactions taken as a whole is so inter-related that it will be the more reliable means for determining the arm’s length consideration for the controlled transaction.” Click here for other translation ...

LG India is a wholly owned subsidiary of LG Korea, a multinational manufacturer of electronic products and electrical appliances. LG Korea and LG India entered into a technical assistance and royalty agreement in 2001 where LG India, as a licensed manufacturer, would pay a 1% royalty to LG Korea for the use of various rights for the manufacture and sale of products in India. The agreement also gave LG India a royalty-free use of the LG brand name and trademarks. The tax tribunal in 2013 held that the advertising, marketing and promotion (AMP) expenditure in excess of the arm’s length range helps to promote the brand of the foreign associated enterprise and that the Indian associated enterprise should necessarily be compensated by the foreign one. In reaching the above conclusion, the special bench applied the “bright line” test used by a US Court in DHL Corp v Commissioner. The 2014 Appeal Case The Prior 2013 Judgement from the ITA ...

Cheil Communications India Pvt. Ltd. is a subsidiary of a Korean based advertising agency, Cheil Communications. The Indian affiliate had excluded pass-through costs from its cost base when determining the arm’s length remuneration for its activities. The tax authority included the the pass-through costs in the cost base and issued an assessment for FY 2005-06 where these costs were also marked up. Judgement of the Tribunal The Tribunal annulled the assessment and ruled in favor of Cheil Communications India. Excerpt “(…)For performing the functions for and on behalf of associated enterprises, the assessee is remunerated by its associated enterprises on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular advertisement. It is also to be noted that advertising space (be it media, print or outdoor), has been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. We have gone through the invoices and purchase orders from third party vendors and find that they contain customers’ name, and all the terms of advertisement are finalized after taking the approval from the customers. The assessee simply acts as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendors is recovered from the respective customers or associate enterprises. In the event customer fails to pay any such amount to the advertisement agency, the bad debt risk is borne by the third party vendor and not by the advertising agency i.e. the assessee. It is, thus, clear that the assessee has not assumed any risk on account of non-payment by its customers or associated enterprises. At this stage a useful reference may be made to ITS 2009 Transfer Pricing Guidelines accepted by the OECD where it is laid down that when an associate enterprises is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may be not appropriate to determine arm’s length price as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type of cases, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. These guidelines are as under:- 3.41 In applying the transactional net margin method, various considerations should influence the choice of margin used. For example, these considerations would include how well the value of assets employed in the calculations is measured (e.g. to shat extent there is intangible property the value of which is not captured on the books of the enterprise) and the factors affecting whether specific costs should be passed through, marked up, or excluded entirely from the calculation. 41. In the proposed revision of Chapter I-III of the Transfer Pricing Guidelines issue don 9th September, 2009 – 9th January, 2010 by OECD, it has been provided in Para 2.134 as under:- “2.134 In applying a cost-based transactional net margin method, fully loaded costs are often used, including all the direct and indirect costs attributable to the activity or transaction, together with an appropriate allocation in respect of the overheads of the business. The question can arise whether and to what extent it is acceptable at arm’s length to treat a significant portion of the taxpayer’s costs as pass- through costs to which no profit element is attributed (i.e. as costs which are potentially excludable from the denominator of the net profit margin indicator). This depends on the extent to which an independent party at arm’s length would accept not to be remunerated on part of the expenses it incurs. The response should not be based on the classification of costs as “internal” or “external” costs, but rather on a comparability (including functional) analysis, and in particular on a determination of the value added by the tested party in relation to those costs.” 42. Further, OECD in ITS 2009 Transfer Pricing Guidelines has laid down as under:- “7.36 When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm’s length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of rending advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.” 43. In the light of these guidelines, it would be, therefore, clear that a mark-up is to be applied to the cost incurred by the assessee company in performing its agency function and not to the cost of rendering advertising space on behalf of its associate enterprises. We further find that the method adopted by the assessee while submitting ...