Advertisement, Marketing & Promotion Expenses (AMP) – A Tale of Controversy
One of the most important and unsolved puzzles of transfer pricing litigation is Advertisement, Marketing & Promotion (AMP) Expenses, which has no statutory provision or provision to its effect and its complete analogy and understanding is getting developed purely through judicial precedents and the same is still at a very nascent stage.
In normality, the Indian subsidiary of the MNCs acts as a provider of good and services and incurs AMP expenses for the promotion of its goods and services. It has been contended before various judicial forums that the AMP expenses are incurred necessarily for the purpose of selling a company’s products/services in the Indian market.
ORIGIN OF AMP DISPUTE
This issue of AMP was first deliberated in the case of DHL by the US Tax Court. This was primarily on account of US Regulations, 1968 which had provided for separate rules, known as the ‘Developer Assister Rules’. As per these rules, the developer was treated as the economic owner of the product if he incurs the AMP expenses on that product.
The principal focus of these regulations appeared to be ownership based on economic expenditures and risk. Legal ownership of intangibles was not identified. However, the US Tax Court recognised that there is a distinction between regular and irregular expenditure and this difference is important to examine the necessary amount of expenses which are spent on Associate Enterprises and other independent comparables.
In the context of the above regulations, the US Tax court in the case of DHL has elucidated the concept of ‘Bright Line Test’ (BLT) by distinguishing the regular expenses and irregular expenses.
JOURNEY OF AMP IN INDIA
One of the first cases to have dealt with this issue in India was Maruti Suzuki India Ltd. v Additional Commissioner of Income Tax [(2010) 328 ITR 210] in which the Delhi High Court held that AMP expenses incurred would result into an international transaction if it exceeds the expenditure which was incurred by the similar comparable independent domestic entities. The matter was then remanded, however, this judgment was subsequently challenged before the Hon’ble Apex Court which was overruled in case of Maruti Suzuki India Ltd. v. Addl. CIT  335 ITR 121 (SC).
The Maruti Suzuki case was again referred to by the Delhi Bench of ITAT in the case of LG Electronics India Pvt. Ltd. v Assistant Commissioner of Income Tax [(2013) 140 ITD 41 (Delhi) (SB)], wherein it was held that the Bright Line Test can be said to be a real test to determine the International Transactions and transfer pricing adjustment can be made on the basis of the Bright Line Test.
The ratio of LG Electronics India Pvt. Ltd. (Supra) was rejected by the Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. v Commissioner of Income Tax [(2015) 374 ITR 118], wherein the court overruled the aforementioned judgment to the extent that they dealt with the question of AMP expenses and held that legal ratio accepted and applied by the Tribunal relying upon the majority decision in L.G. Electronics India (P.) Ltd. (supra) is erroneous and unacceptable.
“It further held that we disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate ‘routine’ and ‘non-routine’ AMP or brand building exercise by applying ‘bright line test’ of non-comparables should be sanctioned and in all cases”
BRIGHT LINE TEST
The theory of Bright Line Test (BLT) as originated from the DHL case by the US Tax Court is a thin line distinguishing between the regular and irregular expenditures incurred on advertisement and brand promotion.
AMP expenses incurred by the distributors beyond such Bright Line Test constitute irregular expenditures resulting in creation of an economic ownership, as expenses which are made on promoting the brand of a product and not an advertisement.
However many judicial precedents in India have discarded the concept of BLT by stating that the Arm Length Price (ALP) adjustment based on BLT to determine international transactions is not permissible. The High Court of Delhi in case of Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT, (Supra) held that the “’bright line test’ has no statutory mandate and a broad-brush approach is not mandated or prescribed.”
Due to the lack of statutory law and legislative framework governing transfer pricing, the taxability of AMP expenses has become a point of dilemma. It also fails to offer any guidance in situations where an express agreement does not exist between the companies to provide for the specific clause of spending on advisement of a product.
The decision of Sony Ericsson (Supra) is definitely a silver lining in the right direction in as much as it has overruled the BLT. The BLT is full of difficulties and arbitrariness and it cannot be said to be a real test to distinguish the regular and irregular expenses.
The issue of AMP is now pending before the Supreme Court in case of Sony Ericsson and Maruti Suzuki, and a final word on the same would definitely solve the most controversial area of transfer pricing litigations and would give a clear view on AMP.
For provisions applicable exclusively to importers of medical devices
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(Republished with Amendments)