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Advertising, marketing and promotion (AMP) expenses incurred by
an Indian entity may cause benefit to an overseas related party or
an associated enterprise (AE). Treatment of AMP expenses is an
issue that has arisen in transfer pricing regulations under the
Income Tax Act, 1961,which regulates 'International
Transactions' between two or more AEs.
International transactions have a wide and inclusive definition
under the IT Act. AE is defined in the IT Act and includes related
parties as defined under Indian law. The transfer pricing (TP)
regulations provide that transactions between AEs should be at
'arm's length price' (ALP).If the transactions are not
at ALP, the tax authorities have the power to review the
transaction.
The TP regulations are broader; it is not limited to
disallowance of expenses.
How do marketing intangibles complicate tax computations?
Marketing intangibles are not defined in the IT Act. However,
for the purpose of TP regulations, 'intangible property'
has been explained to include marketing-related intangible assets,
such as trademarks, trade names, brand names and logos. Under
Indian law, these would generally be regarded as trademark property
and copyrighted material.
Courts have ruled that in certain circumstances marketing
intangible may be created in favour of the foreign AE.
What has been the contention of the tax department?
Domestic entities that incur huge
(beyond a reasonable/comparable limit) AMP expenses are helping
create marketing intangible for a foreign AE
All AMP expenses benefit foreign AE
and in all scenarios, Indian entity should be compensated
Tax department should be empowered to
determine reasonable AMP expenses
How do taxpayers counter these claims?
Indian entities also benefit from AMP
expenses. These help increase sales that lead to higher
profits
Indian entities are 'economic
owners' and hence have a vested interest in developing and
promoting their licensed brands. However, the concept of economic
ownership is not recognised under the IT Act
AMP expenses are incurred by making
payments to unrelated third parties (for example, ad
agencies/online channels). These expenses are not an international
transaction and are not transactions with AEs to begin with
How is the case relating to Flipkart's discounts related to
AMP?
The tax department argued that discounts were excessive and the
expenses were in the nature of capital expenses and not revenue
expenses. The expenditure was such that it would provide a benefit
of enduring nature and hence, it was treated as a marketing
intangible. Tax department argued that marketing intangibles were
created through discounts. However, the Bangalore Tax Tribunal
rejected the contention and ruled that the expenses were revenue
and not capital. The argument on the creation of an asset (in the
nature of marketing intangible) was also rejected. Although not
related to the TP regulations and the issue of AMP, this case shows
that the principle of marketing intangibles may be applied in a
different context by the tax department.
What is the current status?
Appeals from the Delhi High Court and other courts relating to
AMP and marketing intangibles are pending with the Supreme Court.
The Bangalore ITAT ruled in favour of Flipkart in April 2018 and as
of date, no appeal has been filed yet.
Originally published in Bussiness Standard
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