Why Tax Officials are Investigating PepsiCo’s Advertising Spending?

The Delhi High Court recently ruled in favour of PepsiCo, rejecting the Income Tax Department’s appeal over Rs.2,800 crore in advertising, marketing, and promotional (AMP) expenses.

AMP expenses are the costs PepsiCo India incurs for advertising and marketing. Normally, these expenses are tax-deductible, meaning PepsiCo doesn’t have to pay taxes on the money spent on marketing; they only pay taxes on their profits after these expenses are deducted.

However, the tax authorities are trying to get PepsiCo India to pay additional taxes on some of these marketing expenses. The issue arises because PepsiCo India’s marketing might also benefit PepsiCo’s related companies in other countries like Bangladesh, Nepal, Bhutan, and Sri Lanka. The tax authorities believe these foreign entities should pay PepsiCo India for this benefit, increasing PepsiCo India’s taxable income.

To check if PepsiCo India is spending too much on marketing to benefit its parent company, tax authorities use a method called the BrightLine Test (BLT). This test compares PepsiCo India’s advertising expenses with those of similar companies. If PepsiCo India spends significantly more, the tax authorities argue that the extra spending benefits the parent company and should be taxed.

While this might seem fair, courts usually side with companies like PepsiCo. They argue that any benefit to related companies is incidental and that PepsiCo India’s main goal is to boost its own sales. Also, it’s hard to determine exactly how much marketing expenses impact brand value due to various factors like customer loyalty and market trends.

Courts have rejected the BrightLine Test, saying tax authorities need actual proof, like contracts, showing PepsiCo India’s spending benefits the parent company directly, rather than just relying on comparisons.

Despite court rulings, the Income Tax Department keeps pursuing these claims. Maybe this latest ruling will clarify the situation or push the government to update tax laws. Until then, these disputes are likely to continue.