Pepsico may not be required to pay tax on advertisement, marketing and promotion (AMP) expenses under transfer pricing mechanism. Delhi High Court has dismissed an appeal by the Income Tax Department related to additions of ₹2,800 crore towards AMP expenses by Pepsico.

Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. AMP under transfer pricing has always been a contentious issue. In the present matter, the Income Tax Department made transfer pricing additions of more than ₹2,800 crore. However, the Income Tax Appellate Tribunal (ITAT) deleted the addition and gave relief to Pepsico. Aggrieved by this, the Income Tax Department moved the Delhi High Court.

“Upon going through the order of ITAT and insofar as it deals with the aforesaid issue, we find that the AMP computation was based on the adoption of the Bright Line Test. That would clearly not sustain in light of the judgement rendered by the Court in Sony Ericson v. CIT,” a division bench comprising Justice Yashwant Varma and Purushaindra Kumar Kaurav said in a ruling dated May 16. Accordingly, it said that there is no merit in these appeals.

Manish Garg, Lead- Transfer Pricing and Litigation, AKM Global, said, the tax department compares the AMP expenses incurred by Indian subsidiaries with the industry average and alleges the excess expenses towards brand building activities. This is called Bright Line Test. Despite the categorical judgement of Delhi High Court in Sony case, the tax department has been making hefty additions in many cases towards AMP expenses and applying Bright Line Test methodology.

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