There have been disallowances of Advertising, Marketing and Promo (AMP) spends in the hands of Indian entities of various MNC’s under Transfer Pricing (TP) provisions on the reasoning that such AMP spends have been “found” either excessive or were incurred to promote the foreign brand owner rather than promoting the Indian entity or its products. The concept of Bright line test (BLT) has been read in from a US DHL case which appears like a case of borrowing and applying for keep sake.

The BLT compares if the spend is aligned with the market and the competitors and if not thus, then the spend over and above the market benchmark is read to be the “bright distinguishing line” or the non-routine spend warranting disallowance.

Comparing one’s AMP spend with its competitors itself is first flawed as each product/market/marketing strategy - effort is all unique. Just because TP provisions of Chapter X do not dovetail real income principles, reading a virtual non-existent transaction is uncalled for, let alone the fact that neither the concept of BLT nor the AMP spend being excessive has been accepted by courts.

Taxman vs businessman

It has been held that the taxman cannot sit in the armchair of the businessman to decide what expenditure is necessary or in what quantum/scenario etc. Neither it is expected of him nor is he competent to perform that function which is left to one’s business if at all questioned.

Suppose one were to apply the BLT and then say some part of an AMP expenditure was excessive and the assessee then establishes the genuineness of the need and the quantum of the spend, then also it is impractical for the revenue to go up in arms, having raked up the issue.

What is excessive/how was it was rather is the moot question. There are a number of forces in marketing and in deciding when a promotional campaign needs to be launched, timed, in what degree and so on. To simply say that the spend is excessive and it promotes the foreign owner’s brand more than that of the assessee’s endeavour on an overarching basis is farcical.

How excessive

Rubbing salt to one’s wounds is the fact that in almost in all the cases of AMP disallowances, revenue themselves have not been able to establish as to how the spend was excessive in the first place or has created a tax avoidance/arbitrage in the first place for the Multinational enterprise more than the assessee himself. When an assessee spends; the onus is on them to establish it before the taxman; so is the aspect equally on the revenue when they want to disallow the same.

Simply because there is a law which can impute a non-existent transaction does not mean a BLT has to be read as the benchmarking “Lakshman Rekha” where it need not be read at all. Think of a situation where the taxman looking into the spend of an AMP of an Indian entity in a foreign country; considers it excessive and says that much AMP spend contributed to that much lost income in India which otherwise would have been taxable in India thus needs an addition of income in India in an Indian assessee’s hands.

It is a case of putting the cart before the horse definitely. It is time some guidelines are ushered in on this topic to avoid meaningless litigation.

The writer is a chartered accountant

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