Multinationals guns await Supreme Court verdict on advertising and promotion tax claim



As many as 19 Indian branches of multinational companies are before the Supreme Court for a final answer as to whether they should pay taxes on significant parts of the “advertising, marketing and sales promotion” (AMP) spent, which the authorities Indian tax authorities consider a brand-building exercise on behalf of the foreign parent companies of these companies.

According to the Department of Income Tax (IT), AMP is a service rendered by Indian companies to foreign parent companies. If the Supreme Court rules in favor of the tax administration, it could increase the taxable income of many companies, as the tax service would reject a large part of their AMP spent as an expense in the profit and loss accounts and require a tax on a ‘mark-up’ set on an arm’s length basis.

The Supreme Court has clubbed several cases involving companies such as Maruti Suzuki, Canon, Sony India, Daikin Air Conditioning, Reebok, Haier Appliances, Honda Siel Power Products, Bausch and Lomb Eyecare (India), Discover Communication India and Bose Corporation India, among others. The case is scheduled to be heard on September 28 and 29.


“In business, every organization competes by continually investing to educate consumers and be loyal to its products and services. With the goal of enhancing the value of brands or other intellectual property owned by its parent company overseas? If so, does it still need an independent review to do so? This issue is now before the Supreme Court to decide. Remember, being “out of sight” of consumers, slowly leading to be “Out of mind,” resulting in decreased sales and profitability, resulting in lower taxes paid, ”said Hitesh Gajaria, senior partner, KPMG India.

The case is followed closely by multinationals and corporate tax specialists. Interpreting the GPA as a “service” could also bring it under the net of the GST. “Unfortunately, AMP spending has become a very controversial issue,” said Sanjay Sanghvi, partner, Khaitan & Co. “There are many legal and practical aspects that need to be considered here – for example, whether promoting the brand of Foreign “associate” is a transaction ‘in the first place. Can it be said that the Indian branch or subsidiary does not need to spend money to manage and maximize its own business (i.e. those of Indian society) in India? ”Sanghvi said.

Transfer pricing is a business law and a lot would depend on the facts and business realities in each case. Consider a business with a turnover of 600 crore, with manufacturing expenses of 300 crore and an AMP of 100 crore. At present, the company pays tax on 100 crore’s (profit before tax). If the IT department gets its way, a portion of 100 crore – for some companies this could be almost the entire amount while for some it could be a large portion of AMP – cannot be considered expenditure. In addition, the company must set a “profit margin” on an arm’s length basis with its parent company in accordance with transfer pricing rules. Let’s say the markup is ₹ 6 crore. Suppose the AMP ₹ 60 crore is denied as an expense by the tax authorities. In such a situation, the company has to pay taxes on 166 crore (100 plus 60 plus 6 crore instead of 100 crore (as is the current practice).

According to Senior Accountant Dilip Lakhani, “The deal or arrangement between the foreign parent company and the Indian branch is very critical in deciding the nature of the advertisement and the amount of spending. After deciding this point of law, the Court may also formulate guidelines. and the parameters to be followed for quantification. But since the facts differed from case to case, only time will tell if he would provide a definitive answer.

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