Chennai ITAT applies SB ruling in LG’s case to decide the TP adjustment in respect of AMP expenses

TP Adjustments in respect of AMP expenses as per SB ruling in LG electronics justified; 50% of product development expenses should be allowed as deduction.

The facts of the instant case were as under:

1) Assessee, a wholly owned subsidiary of Ford Motor Company, USA (FMC), entered into international transactions with its Associate Enterprise;

2) Business activity of the assessee consisted of manufacturing and distribution of vehicles. The assessee entered into a technical collaboration agreement with FMC, by which, FMC licensed the assessee to manufacture motor vehicles using the technical knowhow supplied by it;

3) Assessee was to pay royalty in consideration of such grant of license, and for the technical information and assistance provided by FMC. Licensed products were motor vehicles, which had to carry the logo of ‘Ford’ along with the model name. The AO referred such transactions to TPO for determining the arm's length price;

4) TPO considered 1% of the total sales affected by the assessee during the relevant previous year, as the arm's length price for development of brand name and logo of FMC in India. Thus, consequently such addition was proposed. TPO had also made addition in respect of the expenditure incurred by assessee for promoting the ‘Ford’ brand in India.

Issue under consideration:

Whether there is any international transaction coming within purview of Chapter X of the Act by way of brand development done in India for FMC?

The Tribunal held as under:

1) It is true that Mr. Henry Ford had manufactured the first car and "Ford" as a brand was developed over hundred years and had a substantial value even prior to their entry in India. But this cannot be so interpreted to mean that every Indian knew "Ford" before assessee sold the cars in India;

2) Ford might have been known among middle class and upper middle class strata, but, without doubt, there would be a substantial number of persons in India, who would have become aware about the brand ‘Ford’ through the advertisements placed by the assessee and its marketing efforts in India;

3) When FMC fixed the royalty payable by the assessee on sale of cars at 5%, they would have definitely considered the advantage they would eventually derive from their brand promotion done by the assessee in India;

4) There was a remote possibility of FMC giving the knowhow to any other company or person in India and they could also market products carrying ‘Ford’ logo through any other person in India;

5) Had it done so, still it could not be said that there was no intangible benefit derived by it, by virtue of the earlier AMP expenses incurred by the assessee, which promoted the ‘Ford’ logo. Thus, there was an international transaction for creating and improving the marketing intangible comprised in the logo ‘Ford’ by the assessee for and on behalf of FMC. FMC as a non-resident and such transaction was of the nature of ‘provision of service’ as held by Special Bench in the case of L.G. Electronic's case - 
FORD INDIA (P.) LTD. V. DY. CIT [2013] 34 taxmann.com 50 (Chennai - Trib.)

This Article has been written by Vinanti Zatakiya. You can reach her at vinanti2504@gmail.com

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