Background
Over the past decade, Indian Revenue has been the centre of global attention for its positions on controversies surrounding tax and transfer pricing. In the last few rounds of Transfer Pricing assessments, taxpayers promoting international brands in India have been scrutinised for the level of Advertising, Marketing and Promotion (‘AMP’) expenses incurred by them. These issues largely affected multinational enterprises (‘MNEs’) in consumer durables, electronics, automotive and media sectors. The controversy snowballed, leading to constitution of a three-member Special Bench of the Income-tax Appellate Tribunal (‘Appellate Tribunal’), for expert examination of the issues involved. Dissatisfied taxpayers later escalated the issue to the High Court and the same is now pending with the Indian Supreme Court. The most interesting aspect of the AMP controversy is the manner in which this issue has evolved in the judicial hierarchy. While some contentious issues are gradually dwindling as they move up the appellate forums, some issues remain unresolved and with each resolution come new challenges in practical implementation. In the next few paragraphs, we have attempted to summarise the controversy, the evolving judicial elucidation and some unresolved issues.
AMP in the Indian landscape
Under a typical license/distributor arrangement, the Indian entity of a MNE group uses the international brand/ trademark to sell its products in India. For doing so, the Indian entity would pay royalty for using such brand/ trademark. In order to spread awareness of the products and increase/maintain the market share of the products manufactured or distributed by them in India, the Indian entity would incur expenses on advertising, marketing and promotion of such brand/trademark.
During the course of Transfer Pricing assessments, the Indian Revenue has consistently been taking a position that the Indian entity of the MNE group provides assistance to the overseas affiliate, legal owner of the brand/trademark, by enhancing or building the international brand/trademark in India. According to the Revenue, AMP expense beyond the level of expense incurred by comparable businesses (termed as ‘Bright Line Test’ or ‘BLT ’) is non-routine and the same results in creation of marketing intangibles for the legal owner of the brand. Transfer Pricing adjustments have been made on the premise that the Indian entity ought to recover the excess costs along with an appropriate mark-up for such assistance.
Advent of the AMP controversy
The issue of AMP came to limelight in 2010, when the Delhi High Court pronounced a ruling in response to a writ petition filed by Maruti Suzuki1 challenging the show cause notice issued by the Transfer Pricing Officer. The High Court remarked that if the intensity of AMP expenses (defined by a ratio of AMP expense to sales) by the Indian taxpayer is more than what a comparable company would incur, the Indian taxpayer should be compensated at arm’s length, particularly when the use of trademark or logo of the foreign affiliate is obligatory on the part of the Indian taxpayer. With a shot in the arm, the Revenue Authorities made several transfer pricing adjustments in cases of distributors, licensed manufacturers, service providers, etc. using international brands. Without appreciating the difference in functional characterisation, business model and industry life-cycle of the Indian taxpayers, the Indian Revenue painted everyone with the same broad brush and made transfer pricing adjustments for excess AMP expenses.
The Indian Revenue seems to have taken inspiration from the US Tax Court ruling in the year 1998 in the case of DHL2, which was subsequently reversed by Ninth Circuit US Court of Appeal3. In the case of DHL, the Tax Court asked the taxpayer to prove that it incurr...