When an Indian distributor incurs substantial advertising, marketing and promotion (AMP) expenditure for a brand owned by its foreign associated enterprise (AE), the Transfer Pricing Officer (TPO) may contend that the expenditure creates marketing intangibles for the brand owner and warrants separate compensation. The resulting dispute centres on whether AMP expenditure represents the distributor's own business activity or an international transaction undertaken for its AE.
The Bright Line Test and Its Limitations
The Bright Line Test (BLT) compares the AMP-to-sales ratio of the tested entity with that of comparable independent distributors. Expenditure exceeding the benchmark is treated as excess brand-building expenditure attributable to the foreign AE, forming the basis for a transfer pricing adjustment.
However, this approach assumes that higher AMP expenditure necessarily represents a service to the brand owner, without independently establishing the existence of such a transaction. The Delhi High Court, in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT (2015), rejected the BLT as lacking statutory support under the transfer pricing framework.
What the Judicial Position Establishes
The Delhi High Court's decisions in Sony Ericsson and Maruti Suzuki India Ltd. v. CIT (2016) establish that AMP expenditure cannot automatically be treated as a separate international transaction merely because the Indian entity spends more than comparable distributors. The Revenue must establish the existence of an arrangement or transaction through relevant material rather than infer it from the quantum of expenditure alone.
The Court's subsequent application of these principles, including in PCIT v. Wrigley India Pvt. Ltd. (2025), reinforces the need to examine the actual circumstances in which the expenditure was incurred. The rejection of the BLT, however, does not mean that every AMP-related transfer pricing adjustment is automatically impermissible.
What Determines the Outcome
The analysis depends on the distribution and trademark arrangements, the extent of the AE's involvement in marketing decisions, any contractual obligations, reimbursement arrangements and the economic benefits arising from the expenditure. The distributor's functional profile and overall profitability must also be examined to determine whether its marketing activities are already compensated through its distribution returns.
Building a Defensible Position
Businesses should maintain clear documentation distinguishing routine selling expenditure from brand-related promotional activities, support the commercial rationale for local marketing decisions and assess AMP functions alongside the distributor's overall transfer pricing arrangement. Agreements, marketing approvals, reimbursement records and comparable distributor data can help establish the actual nature of the activities undertaken.
Conclusion
The rejection of the Bright Line Test has shifted the focus from identifying excess AMP expenditure to establishing whether an international transaction actually exists. Multinational groups should therefore evaluate marketing arrangements, contractual obligations and the distributor's overall functional and economic profile before determining whether separate compensation is warranted. A higher AMP-to-sales ratio, by itself, is not sufficient to establish a transfer pricing adjustment.
