Advertising, Marketing, and Promotion (AMP) Expenses-A controversy
One of the most important and unsolved puzzles of transfer pricing litigation is AMP expenses which has no statutory provision or provision to its effect and complete analogy and understanding are getting developed purely through judicial precedents and the same is still at very early stage.
Normally the Indian subsidiary of MNCs acts as a provider of goods and services and incurs AMP expenses for the promotion of goods and services. It has been contented before various judicial forums that the AMP expenses are incurred necessarily for the purpose of selling the company’s products/services in the Indian market.
Journey of AMP in India
One of the first cases with this issue in India was Maruti Suzuki Ltd v/s Income Tax in which Delhi High Court (HC) held that AMP expenses incurred would result in the international transaction if it exceeds the expenditure which was incurred by a similar comparable independent domestic entity. However, this was challenged in the Supreme Court (SC) which overruled the decision of HC.
There were many similar cases over the years, where this precedent was quoted by the judges of various courts to give the judgment. In all the cases there is a thin line distinguishing between regular and irregular expenses incurred on advertisement and brand promotion. So due to the lack of statutory law and legislative framework governing transfer pricing, the taxability of AMP expenses has become a point of dilemma.
There are many such cases lying in SC for judgment. Now SC has clubbed all these cases together and the matter will be heard during this week. As many 19 arms of MNCs are before the SC for a final answer on whether they have to pay tax on sizeable parts of AMP spent, which the Indian tax authorities believe is a brand-building exercise on behalf of the foreign parents of these companies.
According to Income Tax (I-T) department, the AMP is a service rendered by Indian companies to foreign parents. If SC rules in favour of the tax office, it could raise the taxable income of many such companies as the tax department would disallow large portions of their AMP spent as expenditure in the profit and loss accounts as well as demand a tax on markup fixed.
Today. MNC arms treat AMP as expenditure to arrive at a profit before tax (PBT). IT department claims AMP is a brand-building exercise on behalf of a foreign parent company..
In business, every organisation competes continually investing in making consumers aware and being loyal to its product and services. Whether it is within parameters of Indian tax law to assume every Indian entity belonging to an MNC group, advertises products and services solely with a view to enhance the value of brands or other intellectual property owned by the overseas parents. If that is the case, does it always need a separate rule for arriving on taxable income?
Now there is one more point, if AMP is considered as a ‘service’, this could bring it under the provision of GST. Secondly, can one say that the Indian arm or subsidiary does not need to spend any money for running and maximising its own business in India?
Consider a company with sales revenue of Rs 500 Cr and AMP of Rs 100 Cr. At present, the company pays tax on Rs 100 Cr (the pre-tax profit). If the IT department has its way, a part of Rs 100 Cr – for some companies it could be almost the entire amount while for some it could be a large slice of AMP that can not be considered as an expenditure. Besides, the company has to fix a ‘mark up’ on the basis of arm’s length with its parent company in accordance with the transfer pricing rules. Say, the mark up is Rs 6 Cr. Suppose, theRs 60 Cr of AMP is disallowed as expenditure by the taxman. In such a situation, the company has to pay tax on Rs 166 Cr (100+60+6) instead of Rs 100 Cr ( as per current practice).
Several MNCs are awaiting the SC ruling on this matter. Some expect the court to lay down the rules of quantifying AMP for tax.
In my opinion, also, certain parts of AMP should be under taxable income as definitely part of AMP goes in the brand building processn whereas brand is owned by parent foreign company.
Waiting for your views on this blog.
Anil Malik
Mumbai, India.
27th September 2021.