Tax axe over endorsement pacts: Dealers of imported sports goods under taxman’s lens

MUMBAI:Does getting a sport star to endorse a brand or sponsoring a sports event be treated as imports? The intelligence arm of the tax department seems to think so. They content many dealers of imported sports goods and equipment unvalued their imports and sign contracts that obligates them to plough a sizeable amount of the value into endorsements and sponsorship deals.

Revenue sleuths are investigating whether Indian dealers who import golf kits, table tennis rackets, badminton rackets and shuttlecocks must treat any marketing spend like sponsoring events and roping in brand ambassadors as imports.

Directorate of Revenue Intelligence (DRI) has initiated investigations against dealers of imported golf kits, badminton and table tennis goods of brands like Callaway, Ping, Yonex, Donex, Li Ning and Tietlist. In some cases, notices have been issued and dealers — who typically have territories assigned to them within India —have been asked to cough up additional taxes. In most cases this would lead to about 28% hit on all the marketing spend of the dealers.


Dealers, who tend to sponsor events and players in their respective regions, claim the demand doesn’t have merit as they don’t have any connection to the multinationals and such valuation scrutiny can only take place between related parties.

“When a dealer imports goods from a sports manufacturer based outside India, it is possible that the transactions are not between related parties and so there is no need for scrutinising the valuation. Moreover, promotional expense incurred by the dealer, either through sponsorship of sport personalities or events, cannot be construed as the import cost for levying customs duty,” said Abhishek A Rastogi, partner, Khaitan & Co The taxman is claiming that many multinationals are undervaluing imports and marketing spend is nothing but a mandatory requirement embedded in the cost to hoodwink Indian authorities. Tax experts said whether this argument of the taxman stands would depend on documentation or contracts between Indian dealers and the multinational.

“The key is whether payments under investigation would qualify as ‘condition of sale’ as part of the contractual obligation of the seller: to such extent the essence of agreement or documentation would be crucial. This would typically be a fact based issue,” said Suresh Nair, Partner, EY India. Tax experts say that not just contracts but even an email communication between Indian dealers and multinational could be a cause of worry.

“The investigators would look at all documentation including emails and if there is a demand and or communication from the multinational about the marketing spend, that could be considered condition for sale. To levy these taxes DRI has to prove that there the marketing spend was one of the conditions for the import of goods,” said Sachin Menon, national head of indirect tax, KPMG.

For instance, suppose Saina Nehwal endorses a Japanese badminton brand, or an Indian dealer of an American golf kit manufacturer sponsors a Noida amateur golf tournament— DRI is demanding that the cost must be added to cost of imports and taxed. In most cases, the sponsorship costs or paying a brand ambassador are incurred by a local dealer. If a dealer imports goods worth Rs 1,000, and spends Rs 100 on sponsoring a sports star, should he be subjected to customs duty on Rs 1,000.Tax officials are claiming that the actual cost of import is actually Rs 1,100 as Rs 100 spent on sponsorships was a prerequisite for the import.

Tax experts point out that the marketing or promotional spend can be subjected to taxes only in situations when the contract between the Indian dealer and the multinational specifies this as a condition of sale.“The promotional expenses can be added to the import cost only when these costs are condition of sale. In most of these transactions, the responsibility of incurring the promotional cost is on the importer and hence the condition of sale is not kicked,” added Rastogi.