Notices sent to HUL, P&G, LG: Taxman disallows AMP deductions sought by MNCs

Several multinational consumer companies have received notices from the income-tax department regarding the cancellation of deductions on expenses of advertising, marketing, and sales promotion under a hitherto unused provision of the Income Tax Act.

Consumer companies such as Hindustan Unilever, P&G, L’Oreal, LG and Maruti Suzuki have already been notified by the income-tax department. Industry experts peg the total demand raised by the tax department on this count at about Rs 10,000 crore.

As AMP (advertising, marketing and promotional) amounts to overhead expenses, disallowing the deduction would inflate pre-tax accounting profits, meaning the increased tax return for a company if tax claims are upheld.

The country authorities have claimed expenses in an attempt to build an overseas brand building without influencing much of the Indian businesses. Hence, they are sought to be disallowed under Section 37 of the Income Tax Act, which deals with the recognition or legitimacy of business expenses.

For instance, if a company has a profit of Rs 100 that is arrived at after deducting AMP costs of Rs 50, the tax at 30% would come to about Rs 30. If these costs are disallowed, the profit would jump to Rs 150 and tax would increase to Rs 45. Tax sleuths have been questioning these expenses for some years now but this is the first time that Section 37 of the I-T Act has been used in this manner.

With the implementation of these tax norms, experts find it another way of making transfer pricing or AMP adjustments for multinationals.