The Delhi High Court has rejected an appeal by tax authorities in a case involving Pepsico India’s advertising, marketing, and promotion (AMP) expenses. The tax authorities had challenged the Delhi-based Income Tax Appellate Tribunal’s (ITAT) decision, which nullified an addition of over Rs 2,800 crore made by the assessing officer (AO) concerning AMP expenses of Pepsico.
Manish Garg, a transfer pricing expert at the tax and consultancy firm AKM Global, explained that the AO had classified a portion of the AMP expenses as international transactions, arguing that Pepsico India was engaged in brand-building activities for its foreign parent company.
AO Conclusion
The AO reached this conclusion using the bright line test (BLT) in transfer pricing, where AMP expenses are compared to the industry average, and any excess is considered as brand-building expenses for foreign parents, subject to taxation. However, in a previous case involving Sony Ericsson, the Delhi High Court ruled that BLT is not a valid methodology under India’s transfer pricing rules. Following that precedent, the court dismissed the tax authorities’ appeal against Pepsico Holdings. Garg noted that the AMP issue remains one of the most contentious and complex topics in the transfer pricing field.
There is a lack of clarity in the law regarding the AMP issue, with the entire body of jurisprudence developing over the past several years solely through court and tribunal decisions.
