Unwrapping the Issues around “AMP” Expenditure in Transfer Pricing


There are numerous activities which are carried out by the Indian subsidiaries of foreign entities including manufacturing of goods, advertising, marketing, promotion, etc. Deduction for all the expenses incurred for the business is allowed in accordance with Section 37 of the Income Tax Act, 1961 (hereinafter referred as “The IT Act”). While computing the Profits and gains of business or profession for taxation purposes, the expense of ‘advertising, marketing & promotion’ (hereinafter referred as “AMP”) is allowed as deduction in accordance with the above stated section. The dispute in taxation arises when an Indian subsidiary/associated enterprise of a foreign entity spends way too much on AMP i.e., the amount spent by them on AMP is much higher than what is spent by a legally distinct and separate enterprise performing the same or similar functions under the same or similar conditions.

The Revenue argues that the excessive amount spent on AMP by the subsidiary leads to an increase in the brand image of the foreign entity which further leads to an increase in the market intangibles such as Goodwill, etc. of the foreign entity. The excess AMP spent is an international transaction which must happen at Arm’s Length Price.

The reason which Revenue states is that if the same expenditure was done by an independent entity for a foreign company, it would have been termed as a service provided to the foreign company and the independent entity would have received some consideration for it. Thus, the Indian subsidiary also needs to be given consideration for the excess AMP spent whose taxation must happen at ALP. The various issues surrounding AMP expenses are as follows,

  • Whether the AMP expenses are in the guidance nature of international transaction?
  • Existence of an arrangement,
  • Rejection of Bright Line Test (‘BLT’) as a method for benchmarking the transaction,
  • Exclusion of sales related expenses,

The article tries to uncover the controversies surrounding the AMP Expenditure from an Indian transfer pricing perspective.

Whether AMP expenditure is an International Transaction?

The marketing and advertisement function is carried out by the taxpayer includes the intention of driving its sales, resultant profit and loss in India, and to be in competition. The same is manifested in the form of domestic transaction by a domestic entity with a third-party in India. These transactions cannot per se partake the character of an “international transaction” within the meaning of Section 92B unless the conditions laid down in the provision are met.

The Revenue authorities have alleged the presence of an international transaction in almost all cases involving AMP spends whereas the stand of the taxpayers is that incurrence of AMP expenditure cannot be considered to be an international transaction without any conclusive or tangible evidence substantiating that the licensee, i.e., Indian company exploiting the brand/trademark of the foreign company has incurred AMP expenditure for the foreign licensor’s direct benefit and should have been reimbursed in this regard by the associated enterprise (‘AE’). This stand of the taxpayers currently stands upheld by various decisions passed by the Delhi High Court.

Maruti Suzuki India Ltd. v. CIT (Delhi)

The Delhi High Court held that even if the word ‘transaction’ is given its widest connotation, and need not as suggested involve any transfer of money or a written agreement by the revenue, and even if resort is had to section 92F(v) which defines ‘transaction’, it is still incumbent on the revenue to show the existence of an ‘understanding’ or an ‘arrangement’ or ‘action in concert’ between the taxpayer and its Associated Enterprise as regards AMP spend for brand promotion.

The transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by the taxpayer and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. Thus, concluding that the very existence of an international transaction cannot be a matter for inference or surmise and for commencing the transfer pricing exercise it is sine qua non to show the existence of an international transaction. Similar stand is upheld in the case of CIT v. Whirlpool of India Ltd. [2015] 64 taxmann.com 324 (Delhi).

Diageo India Pvt. Ltd. v. ACIT Mumbai

Mumbai Tribunal held that there exists an arrangement between the parties and disagreed to follow the taxpayer’s own case for the previous year on this issue, since there was an amendment in the agreement with the associated enterprise clarifying the allocation/apportion of the AMP expenses. There is a mutual agreement in existence between the Assessee and its AE to incur AMP expenses and further that agreement is also existing to allocate or apportion or to contribute the AMP cost or expense. Thus, when there is an agreement that the overseas associated enterprise will share the AMP expense of the Assessee, which benefitted, undoubtedly the AMP expense becomes an international transaction and the TPO cannot be debarred from examining the said international transaction with respect to the arms-length price.

Rejection of BLT as a method for benchmarking the transaction

The Revenue authorities have been aggressively using the BLT method to determine the existence of international transaction. The determination of ALP in respect of AMP expenses by applying the ‘bright line test’, is not one of the recognized methods under the Indian legislation.

The Indian Revenue authorities used this method to compute transfer pricing adjustment by comparing AMP sales ratio of the tested party with that of comparable companies and any amount exceeding the bright line was considered to be an international transaction. The validity and legality of this method was challenged by the taxpayers before the Courts.

Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT (Delhi)

The Delhi High Court overruled the said approach and held that it cannot be accepted as an appropriate yardstick for determining the existence of an international transaction as it is neither mandated in the Act nor the Rules. The Court held that application of BLT by the Revenue authorities would be adding and writing words in the statute and introducing a new concept which has not been recognized, validated and accepted. There is nothing in the legislation to hold that it is necessary, let alone obligatory, that the AMP expenses must be subjected to BLT and the non-routine AMP expenses as a separate transaction to be computed in the manner as stipulated.

Exclusion of sales related expenses

The issue as to whether the direct selling and marketing expenses in the nature of trade discounts, volume discounts, etc. should form part of AMP expenses or not, had been challenged.

The Special Bench in the case of L.G. Electronics India had held that expenses in connection with sales, which do not lead to brand promotion, could not be brought within the ambit of AMP expenses for determining cost/value of international transaction.

Further, the Delhi High Court in the case of Sony Ericsson (supra) also held that expenses being in the nature of selling expenses have an immediate connect with price/consideration payable for the goods sold and are not incurred for publicity or advertisement, accordingly, would not form part of the AMP expenses.

AMP Intensity Adjustment

The rejection of the ‘BLT’ by the High Courts in India has pushed the Indian Revenue authorities to resort to the concept of ‘AMP intensity adjustment’ to make transfer pricing adjustments for excessive AMP expenses incurred by the Indian counterparts of multinational concerns. In this approach, AMP activity is treated as a marketing function performed by the taxpayer.

The Delhi Tribunal in the case of Luxottica India Eyewear (P.) Ltd. v. ACIT [2017] 82 taxmann.com 361 (Delhi – Trib.) has upheld this approach. For application of this approach, this approach entails economic adjustment on the margins of the comparable companies to account for differences in intensity of marketing function vis-à-vis the tested party. Intensity adjustment methodology leads to nil transfer pricing adjustment in cases displaying reasonable profitability at net level. In fact, the taxpayers are taking contrary positions regarding the validity of the said approach, i.e. accepting or taking refuge of the approach in situations where its proving favourable not leading to any adjustment and challenging it aggressively on the ground that it is a mirror image of the bright-line approach in cases where it does not seem to benefit or leads to adjustment.

Use of Residual Profit Split Method (‘RPSM’)

The Revenue authorities are also increasingly resorting to RPSM as the most appropriate method (‘MAM’) for benchmarking the international transaction of excessive AMP expenditure. The Revenue authorities by using this methodology seek to attribute the excess of non-routine AMP expenses to the Associated Enterprise. The taxpayers are filing contesting the validity of using RPSM as the MAM for benchmarking and in some cases, computation methodology adopted by the Revenue authorities for arriving at residual profits is also under question.

The Tribunal has rejected the use of RPSM as the MAM in the case of Pepsico India Holdings Pvt. Ltd. v. Addl. CIT [2018] 100 taxmann.com 159 (Delhi – Trib.) where it held that such an approach is erroneous at the threshold, because RPSM is applicable mainly in an international transaction involving transfer of unique intangibles or in multiple international transactions which are interrelated and interconnected that they cannot be evaluated separately for the purpose of determining the Arm’s Length Price of any one transaction. There was no dispute that no transfer of any unique intangibles has been made except for license to use trademark which too was royalty free. Also, the profit earned on account of AMP expenses incurred by the taxpayer by way of economic exploitation of the trademark/brand in India already stood captured in the profit and loss account for the Indian company the same has duly offered to tax and hence there was no logic to compute or make any Transfer Pricing Adjustment on this score.

Leave a Reply

Your email address will not be published. Required fields are marked *