Companies ordered to pay taxes on ad, marketing & promotion expenses incurred over & above industry average
It would appear that not everyone's got Finance Minister Arun Jaitley's oft-repeated message seeking a reversal in the aggressive policies of the tax department that prevailed under the previous government as the Narendra Modi administration looks to improve India's investment climate and make it more attractive to overseas companies. The transfer-pricing bogey that has haunted multinationals over the past few years still hasn't been entirely laid to rest.
The income-tax department has ordered several MNCs, mostly fast moving consumer goods (FMCG) companies, to pay taxes on advertising, marketing and sales promotion (AMP) expenses incurred over and above the industry average.
This hard line has been adopted in the latest transfer pricing audit as demands have intensified with January 31 being the last date by which these can be made. The tax department's argument is this: If the Indian subsidiary spends more than the average AMP expenses, then this additional amount is going towards promoting the brand and not the product, justifying the levy. The concept of pegging advertising spend as a proportion of turnover against industry average is an example of the 'bright-line test', a rule set by precedent that's inflexible.
This approach flies in the face of the government's avowed aversion to aggressive tax tactics because of their ultimate lack of success. "Ultra-aggressive taxes have not yielded any revenue," Jaitley said at the Economic Times Global Business Summit last week. "Unfair and aggressive taxes momentarily will give me a false belief that my taxation kitty will be very large. But none of the controversial cases has brought me a single rupee of revenue, it has only brought the Indian economy a bad name." He reiterated this at Davos on Thursday, saying he would simplify taxes but would not raise even "a rupee in the budget from aggressive taxation".
The I-T department contends that when a company spends more than the industry average, it's creating "marketing intangibles".
"When a company bears the cost of marketing and advertising, it must co-relate with the benefits, whether in sales or otherwise, resulting from such an activity," a tax official said on condition of anonymity.
"If the spend is not corresponding to the benefits, it can be said that the money spent behind the marketing activities is creating marketing intangibles." Transfer pricing refers to charges that various entities of a large company levy on each other for various services rendered.
Companies that face tax demands based on this extra ad spend include Hindustan Unilever, P&G, L'Oreal, LG and Maruti Suzuki. Industry experts peg the total demand raised by the I-T department on this count at about Rs 10,000 crore.
"This matter is a big thorn in the flesh of MNCs," said Dinesh Kanabar, CEO of tax advisory Dhruva.
The move has been challenged in the Delhi High Court while some of the MNCs have approached the I-T tribunal on the matter.
The court is expected to decide in the next 10 days. "One is hoping that the judgement is delivered so that the matter is resolved," Kanabar said.
"The department is taking an aggressive stand and we have seen demand being raised from many multinationals in last few days," said Jeenendra Bhandari, partner, MGB and Co, a tax firm.
"In my experience, the bigger demands are raised in the last 10 days (before January 31) by the transfer-pricing officials." For instance, a demand of Rs 400 crore was slapped on one of the top three FMCG companies in the last few days, said a person who's aware of this.
"The IT department is not applying any range before they apply AMP. So what is happening is that so many large claims are being made by IT department every year but no actual tax is being collected, as these claims are being challenged," said Sanjay Tolia, partner, PwC India, echoing finance minister Arun Jaitley's statement above.
"This is spoiling the country's image at a time when we want more investment in the country," said Tolia, who is a transfer-pricing expert.