Taxman Disallows AMP Deductions Sought by MNCs

Taxman Disallows AMP Deductions Sought by MNCs

Says ad money spent not for India business uses hitherto unused provision of I-T Act

The income-tax department has started issuing notices to several multinational consumer firms, disallowing deductions on expenses of advertising, marketing and sales promotion under a hitherto unused provision of the Income Tax Act.
Notices have been issued to consumer companies such as Hindustan Unilever, P&G, L’Oreal, LG and Maruti Suzuki. Industry experts peg the total demand raised by the tax department on this count at about Rs.10,000 crore.

As AMP (advertising, marketing and promotional) expenses is a cost head, disallowing the deduction would inflate pre-tax accounting profits, translating into increased tax outgo for a company if tax claims are upheld.
The government claims that these expenses are not relevant for the India business and are mostly related to overseas brand building. Hence, they are sought to be disallowed under Section 37 of the Income Tax Act, which deals with the recognition or legitimacy of business expenses.

For instance, if a company has a profit of Rs.100 that is arrived at after deducting AMP costs of Rs.50, the tax at 30% would come to about Rs. 30. If these costs are disallowed, the profit would jump to Rs. 150 and tax would increase to Rs. 45.
Tax sleuths have been questioning these expenses for some years now but this is the first time that Section 37 of the I-T Act has been used in this manner.Tax experts have been calling these adjustments just another way of making transfer pricing or AMP adjustments for multinationals.

Notices Since 2010“Even as many multinationals have been litigating around AMP, the tax department is looking to explore whether deduction of advertising and marketing expenses toward the supposed foreign brand building would be disallowed. This is nothing but transfer pricing and AMP dispute in a new bottle,” said Munjal Almoula, partner, Grant Thornton India.

Tax experts point out that it is for the first time that the department is using Section 37 of the income tax act for disallowing advertising, marketing, sales promotion and branding expenses.“The said section (37 of income tax act) was mainly used in situations where the tax officer suspected that the expense was not genuine or not for business purposes. Disallowing these expenses in the P&L of a multinational without referring to transfer pricing AMP could lead to further litigation,” said Rajesh H Gandhi, partner, Deloitte India.

Under AMP, the income tax department argued that if an Indian subsidiary spends more than the average AMP expenses incurred by the industry, this additional amount goes toward promoting the global brand and not the product sold in India: Therefore, the additional tax demand is justified.Most of the fresh tax notices under the new tax section are sent to multinationals that have either got favourable court orders or to those that have never come under the AMP lens.

The tax department has been issuing notices under AMP head of transfer pricing since 2010. In several cases, the rulings of the Delhi High Court have gone against the income tax department’s rationale. Many cases are still pending in the Supreme Court. In one of the cases, the court has rejected the tax department’s methodology of arriving at the AMP transfer pricing adjustment.After the court judgment two years ago, the tax department moved away from ‘bright line test’— a calculation methodology used to fixing the quantum of AMP. A new methodology called ‘intensity approach’ has been used.

The Economic Times,New Delhi,25th May 2018