Indian transfer pricing case could signal new approach for advertising, promotional expense

by Ajit Jain

Contrary to recent court decisions, the Delhi Income Tax Appellate Tribunal has sanctioned a transfer pricing adjustment made by the Indian tax authority on account of advertisement, marketing, and promotional (AMP) expenses.

The 26 May decision, Luxottica India Eyewear, is surprising given that Indian tax tribunals and courts have been regularly reversing transfer pricing adjustments made by the tax authority on account of AMP expenses, concluding that AMP is not a separate international transaction and therefore need not to be benchmarked separately. A bright line test applied by revenue was also rejected by the courts, as this is not one of the prescribed methods in the Indian transfer pricing regulations.

In Luxottica, the taxpayer was engaged in the trading of sunglasses and frames without any value addition. The resale price method (RPM) was determined to be most appropriate method over the transactional net margin method. The transfer pricing officer examined the AMP expense of the tested party with reference to the AMP expense of the comparables. While making adjustments on account of excessive AMP expense, the officer treated AMP as a distinct function and made an adjustment on account of AMP intensity.

The transfer pricing officer computed the intensity of AMP expense incurred by the taxpayer by taking AMP expenditure of the taxpayer as a percentage of sales. Similar intensity of AMP expense of comparable companies was computed. The excessive expenditure on AMP was computed by comparing the intensity of AMP expense of the taxpayer with that of the comparables. The transfer pricing officer then carried out the AMP intensity adjustment in the profit margins of the comparables and not in the margin of the tested party.

The Tribunal determined that a distinction must be drawn between a function and a transaction and that every expenditure forming part of function cannot be construed as a transaction.

Since RPM was used as the most appropriate method, whether such AMP intensity adjustment can be made at the gross margin level was another question before the Tribunal.

The Tribunal concluded that if such adjustment cannot be made due to some reasons while applying RPM, then RPM should be discarded and another suitable method must be adopted.

Is this the beginning of a new era in Indian transfer pricing litigation where the concept of bright line has been reintroduced as AMP intensity test?

It is now for the courts to examine whether the concept of bright line can be rebranded.

Ajit Jain is a Chartered Accountant with LL.M. in International Taxation from Vienna, located at Mumbai specializing in transfer pricing dispute resolution.  He can be reached at

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