What’s in a name? That which we call a rose by any other name would smell as sweet – William Shakespeare
In recent years, India has become a focal point for the global business community. Developed economies are closely observing developments unfolding in India. Nascent tax controversies are indwelling to this. To this cavalcade, the controversy relating to appropriateness of Advertisement, Marketing and Promotion expenses (‘AMP expenses’) has turned out to be blackjack for Indian revenue authorities. Most well known global brands faced mammoth adjustment and consequential high-pitched tax demands on this count alone.
Pursuant to liberalisation of the economy, India witnessed significant in-flow of Foreign Direct Investments. Multinational Corporations (‘MNCs’) established their presence in India, either as joint ventures or subsidiaries. To strengthen their global presence and creditability, MNCs sell their products under common brands, across jurisdictions. Such global branding also provides competitive edge and recognition to the products. For example, Apple Inc. sells its flagship phone under brands name ‘i-phone’, uniformly and globally
With a view to promote products (which are sold globally under uniform brand, such as ‘i-phone’) in Indian market, the Indian arm of MNCs incurred advertising, marketing and promotion expenses. Such expenditure were on account of business exigencies of such Indian arm. Had it not been incurred, the Indian arm of such MNCs could not have achieved corresponding market share in India.
Traditionally, the Indian revenue authorities have alleged that such AMP expenditure which are incurred by the Indian arm of the MNCs should not be allowed as recurring / revenue expenditure as such expenditure contribute towards creation of asset in the nature of Trademark (in the Indian market). However, this argument of the revenue authorities could not find weight before the judiciary and disallowances on this count were scrapped.
Keeping pace with the best practices around the world and to counter profit-shifting, the Finance Act, 2001, implanted specialprovisions relating to avoidance of tax under the IncomeTax laws. These provisions enable the revenue authorities to compute the income arising from international transactions, having regard to the arm’s length price. These provisions are widely known as Transfer Pricing (‘TP’) regulations. In crux, under TP regulations, the Arm’s Length Price (‘ALP’) for a transaction is determined keeping into consideration the price which would have been payable by one independent party to the other.
In this backdrop, the revenue authorities realigned their earlier claim for disallowance of AMP expenditure. This time, the revenue authorities have thrust that the Indian entities are either creating assets or adding substantial value to the assets (i.e., brands) owned by its overseas AE by incurring AMP activities (for uniform products of MNCs). Thus, such AMP activities tantamount to international transaction and should satisfy ALP test. It has been assailed that if an Indian entity undertakes excessive AMP activities, then overseas AE should compensate the Indian entity for such excessive expenditure in relation to AMP activities.
In nutshell, the revenue authorities doubted the allowance of such excessive AMP expenditure, being excessive than ALP.
For the purpose of determining the excessive amount of AMP expenditure, the revenue authorities apply the ‘Bright Line Test’. As per the ‘Bright Line Test, AMP expenditures of the Indian entity are compared with average AMP expenses of the comparable companies in India. In case, an Indian entity has excessive AMP expenditure, the revenue authorities assail that such excessive amount should be recovered from the overseas AE.
The Special Bench of the Income Tax Appellate Tribunal in the case of L.G. Electronics India (P.) Ltd. : [2013] 29 taxmann.com 300, has also upheld such treatment of AMP expenditure.
Though, the aforesaid phenomenon may be scientific and based on established TP principles, however, with due respect, the authorities miserable failed to appreciate that in India the ‘Rule of Law’ prevails, and no tax can be levied except by the authority of law as enjoined by Article 265 of the Constitution, which reads that “no tax shall be levied or collected except by the authority of law”.
In terms of Article 265 of the Constitution, for levy of tax, (i) there must be a law; (ii) the law must authorize the tax and (iii) the tax may be levied and collected according to law. In other words, the quantum of levy of tax is to be determined strictly as per the provisions of the taxing statute. In the absence of express law, even the government is precluded to retain the amount recovered as tax under misconceived law. Thus, in case, the law failed to create charge or does not lay down the procedure for quantification of tax, then, it cannot be taxed.
The entire issue regarding adjustment for AMP expenses is founded on the premise that such expenses are incurred by an Indian entity for promotion of its foreign brand and/or logo in India, which develops or creates trademark for the overseas AE (owner of such brand).
With due respect, the Indian authorities failed to appreciate that all direct and immediate benefit (such as higher sales and consequential higher profits) of such expenses inure to Indian entity, which is exclusive user of such brands in India, whereas only remote and /or incidental benefit, which may be contingent, accrues to the overseas AE. It has also been ignored that these expenses have not been incurred at instance / direction of AE (which owns the brand). And, therefore, TPRegulations could not be invoked.
The whole controversy is based on a fragile assumption that AMP activities would either create or develop the trademark (which is owned by overseas AE). However, the fact is that trademark has no independent value and the benefit, if any, which the AMP expenditure may inure, is only transitory.
The Apex Court in the case of Sumat Prasad Jain vs. Sheojanam Prasad: 1972 AIR 2488, has laid down that the function of a trademark is to give indication to the purchaser as to the manufacture or quality of the goods, to give an indication to his eye of the trade source from which the goods come or the trade hands through which they passed on their way to the market.
In Corn Products Refining Co. vs. Shangrila Food Products Ltd.: AIR 1960 SC 142, it has been observed that the public should associate trademark with certain goods and accordingly, the corresponding reputation is attached to the trademark.
Thus, trademark has a very restricted function. It provides recognition to the product in the market, so that same can be identified. Accordingly, trademark is akin to the name of an individual which gives such individual an identity among the public and by itself it has no independent value.
Trademark, which is only a name, derived value from the product it is associated with ‘Trademark’, i.e., the name, derived its value from the reputation of the product on which it is affixed; in turn, reputation of the product is developed by providing consistent qualify of the product and meeting the consumer perception for the product. For example, ‘i-phone’ is a well known trademark for the mobile phone but the value of this trademark is determined by the consistent quality of the products which wear this trademark.
In fact, the function of trademark is to assure the end consumer about the qualityof the product bearing the trademark and assurance to meet the perception / expectations about the product (which are developed based on experience of the product).
Trademark per se has no value unless it is associated with a product, which could consistently meet consumer expectation.
Trademark is valuable, if it can create distinct identity for the product and consumer can come back and re-purchase the product. AMP expenditure add no substantial value to such quality of the trademark, it only helps in creating identity for the name of the product, i.e., the trademarks. AMP expenditure, in fact, promote the sale of the goods which wear the trademarks, and not for the trademarks per se. Value for the trademark is created by maintaining the consistency in quality of the product (which are sold under such trademarks) and meeting consumer perception. Name (i.e., trademark) only assists to get exclusive identity for the product in competitive market.
Hence, AMP expenditure directly affect promotion of products (which wear the trademark) and if the consumer perceptions about the product are met, then some value is created for the trademark as the consumer will again buy the product (which has such trademark). Thus, direct and immediate benefit of the AMP expenditure are promotion of sales of product and it may or may not culminate into development of the Trademark / Brand, depending on fulfillment of consumer perception which can persuade the consumer to re-purchase the same product.
In short, the advertisement, marketing and promotion expenditure are business promotion expenditure, which have direct impact on the sales. The value for trademark, i.e., brand is created by maintaining consistent quality for the product. Incurrence of AMP expenses, in noway adds value to the brand. Brand is nothing except the name; it derived its value from the contents of the product and not from the name. Thus, even if the brand of a foreign company is promoted, it is actually the contents which are sold under that name which are promoted.
The advertisement, marketing and promotion activities only create the market for the product and not for the Brand. The value for the Brand is created by the quality of the product sold under that Brand and it has no value in isolation. Trademark / Brand would be valuable if the consumer can identify the specific product (wearing that brand) distinctly in the homogeneous market. A further value is added to the brand, if the consumer has high perception about the contents of the products sold under a particular brand.
Thus, to conclude, the whole presumption underlying the adjustment proposed on account of excessive advertisement, marketing and promotion activity is fragile and misconstrued. These activities are wholly and exclusively for the business promotion, the brand promotion is based on the quality and (tentative) consumer perceptions only, as Brand is only an identity / name to the product. It has no value of its own, unless it has nexus with the product.
In light of aforesaid, the revenue authorities should revisit the sanctity of the proposed adjustment, as no separate value is ascribed to Brands by incurring the advertisement, marketing and promotion activities, they are incurred with the primary objective of business promotion and not for the brand promotion. Brand promotion is contingent upon meeting consumer perception, which would prompt them to buy the said product for the second time… and for that purpose Brand/Trademark acts only as a source of identity and nothing more.
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