AMP Expenses & Transfer Pricing: Why Substance Over Form Is Winning the Tax Battle

In today’s competitive marketplace, businesses spend significantly on Advertisement, Marketing, and Promotion (“AMP”) to boost brand visibility and drive sales. However, when it comes to taxation and transfer pricing—especially in the case of multinational enterprises (“MNEs)”—AMP expenses often fall under scrutiny.

Transfer pricing is a widely recognized and critical aspect of tax regulation that focuses on determining an arm’s length price for transactions between two independent enterprises. The law of transfer pricing provides a fair allocation of profits among related entities within MNEs. Taxation must align with the principle that profits are taxed where economic activities occur and value is created. In the case of intangibles, mere legal ownership such as holding a trademark in a tax haven is insufficient to claim substantial profits. Instead, entities performing key DEMPE functions (Development, Enhancement, Maintenance, Protection, and Exploitation) are entitled to the corresponding returns.

Recent trends indicates that Transfer Pricing Officers (“TPOs”) are increasingly scrutinizing transactions involving AMP expenses incurred by Indian subsidiaries of MNEs. The primary focus lies on whether such expenditures amount to a separate international transaction under Section 92B of the Income-tax Act, 1961 (“the Act”). This article examines key judicial developments and tribunal rulings that delve into the complexities surrounding the characterization of AMP expenses.

What Are AMP Expenses?

AMP expenses are costs incurred by a business to promote its brand, increase visibility, and drive sales through various advertising and marketing activities. Such expenditures are essential for the survival and growth of any business, forming an integral part of its operational strategy. These are considered routine business expenses aimed at generating local sales and building brand awareness.

This article delves into two distinct scenarios, examining the relevant legal precedents and TP implications that are now being applied in this context:

• Scenario 1: The Indian entity incurs AMP expenditure on behalf of the foreign Associated Enterprise (“AE”), primarily contributing to brand building and the creation of intangible value for the AE. Here, the Indian entity typically functions as a limited-risk distributor, performing minimal functions and bearing limited entrepreneurial risk.
• Scenario 2: The Indian entity is engaged in manufacturing activities and assumes significant business risks. In such cases, AMP expenses are incurred for its own commercial benefit, aimed at expanding market share and strengthening its competitive position, rather than promoting the AE’s brand.

The AMP Debate in Cross-Border Taxation:

When an Indian AE of a MNE incurs substantial AMP expenses to market and sell branded goods bearing the trademark owned by its foreign AE. In such scenarios, Indian tax authorities often invoke Section 92B of the Act to contend that these AMP expenses may constitute a separate “international transaction” between the Indian entity and its AE. The basis for this contention is the presumed benefit to the foreign AE arising from the brand-building activities conducted in India. The core issue is whether the Indian entity is acting solely as a distributor/reseller or whether it is also engaged in brand-building activities that enhance the Brand/ intangible value of the foreign AE’s, thereby creating measurable economic value for the parent entity.

Example- Consider a situation where an Indian company manufactures and sells branded products of its foreign parent company in India and incurs substantial AMP expenses in the process. The critical question that arises is: Are these expenses incurred purely for driving local sales and business growth, or are they also conferring an intangible benefit upon the foreign AE by strengthening the brand’s presence in India?

While intellectual property falls under the scope of ‘international transactions,’ Indian transfer pricing regulations offer no specific guidance on AMP-related expenses. Moreover, AMP is not explicitly included in the definition of an international transaction. Generally, the Bright Line Test has been used to suggest that AMP spend above comparable levels implies a deemed international transaction—an approach that lacks a solid legal foundation.

Two Schools of Thought: TPO vs. Assessee on AMP Expenses

1. The TPO’s approach is based on the presumption that when an Indian entity incurs substantial AMP expenses for products bearing the foreign AE’s brand, it is effectively promoting the AE’s brand. This is treated as an international transaction under Section 92B of the Act, even in the absence of a formal agreement. The TPO benchmarks the so-called “excess” AMP spending by applying a mark-up, arguing that the Indian entity is effectively rendering a service to its AE and should be compensated accordingly. This position often relies on the Bright Line Test (“BLT”), which compares AMP-to-sales ratios of comparable domestic entities to infer whether AMP spending is excessive that result in development or enhancement of marketing intangibles. Thus, the TPO asserts that a Transfer Pricing (“TP”) adjustment is warranted on account of the allegedly excessive AMP expenditure.
2. Conversely, the assessee contends that AMP expenses are incurred purely for local business purposes to boost domestic sales and market share. It relies on a detailed FAR analysis to establish that AMP functions are routine and not performed on behalf of the AE. Through a detailed Functional, Assets, and Risk (FAR) analysis, the assessee demonstrates that these functions are routine and not designed to enhance the brand of the AE. It categorically rejects the application of BLT, arguing that this method lacks statutory backing and oversimplifies the nuanced commercial realities of marketing. It maintains that unless there is clear, tangible evidence of an agreement or concerted action obligating the Indian entity to undertake brand promotion on behalf of the AE, such expenses cannot be treated as international transactions for transfer pricing purposes. The assessee further explains that the benefit of these AMP expenses is directly linked to its own rising sales, establishing a clear cause-and-effect relationship between the expenditure and business performance. Consequently, the question of any additional compensation from the AE to the Indian entity simply does not arise.

Judicial Pronouncements:

• Tupperware India Pvt. Ltd. [TS-95-ITAT-2025(DEL)-TP]

Emphasis is placed on the Supreme Court’s ruling in Whirlpool of India Ltd., along with landmark judgments of the Hon’ble High Courts in Bausch & Lomb Eyecare (India) Pvt. Ltd., Moet Hennessy India (P.) Ltd., and Maruti Suzuki India Ltd. These precedents establish a critical principle: tax authorities cannot presume the existence of an “international transaction” under Section 92B merely because an Indian subsidiary incurs high AMP expenses. For such a transaction to exist, there must be clear evidence of a mutual agreement, arrangement, or understanding between the Indian entity and its foreign AE.

Incidental or indirect benefits to the foreign AE’s brand are not sufficient grounds for imputing a transaction. The Bright Line Test, once used to benchmark AMP intensity, has been categorically held as invalid under Indian law. The relevant extracts are reproduced below:

Quote

“32. Thus we are of the considered view that on the basis of AMP expenditure quantum alone assessee cannot be said to have benefitted the AEs’ brand. Brands are not product or services centric, but, more of customer centric. In exercise of brand building or enhancement, it is essential to establish as to how the AMP expenses generated awareness of the brand which was more useful to the foreign AE than to help the assessee in procuring its share of market. The AO was, thus, required to establish that the AMP expenses were not for tearing into the local market alone, but, were made at the instance of foreign AE for enhancement and creating a brand value beyond the local market. In the absence of any such facts coming out of a concerted action of the assessee with its foreign AE, or in absence of independent inquiry on the basis of nature of product, services or retail brands catered by the assessee the AO cannot draw any presumption on the basis of AMP expenses quantum or sales that the expenses must have resulted into any benefit to the AE……”

Unquote

• Whirlpool of India Ltd [TS-491-SC-2024-TP] & Whirlpool of India Ltd [TS-622-HC-2015(DEL)-TP]

The decision of the Hon’ble Supreme Court has recognised the cardinal principles covering AMP issue that there should be concrete evidence to establish international transactions.

Further, the Hon’ble Delhi High Court has held that there should be some tangible evidence on record to demonstrate that there exists an international transaction in relation with incurring of AMP expenses for development of brand owned by the AE. The relevant extracts are reproduced below:

Quote

“35. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understanding or action in concert, this cannot be a matter of inference. There has to be some tangible evidence on record to show that two parties have “acted in concert.”

Unquote

• Sony Ericsson Mobile Communications India Pvt Ltd & Ors [TS-96-HC-2015(DEL)-TP]

The Delhi High Court ruled that while AMP expenses can be treated as international transaction, the Bright Line Test is invalid. Transfer pricing adjustments must rely on fact-specific comparability analysis and internationally accepted methods (OECD/UN guidelines). The judgment underscores the need for judicial restraint in creating non-statutory tests and reaffirms the primacy of legal ownership in brand-related disputes.

• Other Judgements where BLT was rejected:

Key Takeaways:

In recent years, Indian courts have consistently invalidated the application of the BLT in TP assessments. Judicial rulings have made it clear that, in the absence of any specific statutory provision authorizing its use, the BLT cannot be employed to benchmark AMP expenses. This firm legal stance reinforces a foundational principle: the burden lies squarely on the TPO to establish, with tangible evidence, that an Indian entity’s AMP spend constitutes a service rendered to its foreign AE. The mere presumption that an Indian subsidiary, particularly one engaged in marketing and distribution, is building the brand of its overseas parent is not enough. Unless the TPO can prove a direct correlation between the AMP expenditure and a quantifiable benefit to the foreign brand owner, no transfer pricing adjustment is warranted. This evolving jurisprudence sets a strong precedent that effectively excludes the Bright Line Test from the ambit of Indian TP regulations.

Additionally, the judiciary has categorically rejected the application of the Bright Line Test even if AMP expenses can be treated as international transaction, reaffirming that any AMP-related adjustment must be fact-specific and grounded in contractual or economic substance including the functions performed, assets deployed and risk assumed by the Indian AE, rather than derived from arbitrary thresholds or theoretical constructs.

In view of the above rulings, it is well established that tax authorities cannot presume the existence of an “international transaction” under Section 92B merely because an Indian AE incurs high quantum of AMP expenses. In the case of manufacturing entities, classified as Scenario 2, courts have consistently held that elevated AMP spending alone does not give rise to an international transaction, in such cases necessitates concrete evidence of a mutual agreement, arrangement, or understanding between the Indian entity and its foreign AE. Incidental or unintended brand-related benefits accruing to the foreign AE are not sufficient to justify a TP adjustment. However, the issue remains subject to ongoing litigation in the context of distributor entities, classified as Scenario 1, where the delineation of functions and attribution of AMP expenses continue to be scrutinized by the courts.

It thus follows that the BLT continues to be considered invalid. However, the possibility of AMP expenses qualifying as international transactions cannot be entirely ruled out, as the judiciary has, in certain cases, held that excessive AMP expenditure may fall within the scope of international transactions. Nevertheless, the determination of the value of such transactions and their benchmarking must adhere to the prescribed methods outlined in Chapter X of the Act. The selection of the most appropriate method should be guided by the availability of reliable comparables, with due consideration to the principles of comparability analysis.

Concluding Remarks:

AMP Adjustments Require Clear Evidence

The evolving jurisprudence around AMP-related transfer pricing makes one principle abundantly clear: expenditure alone does not establish an international transaction. In light of various judicial pronouncements, it is now well established that in cases where an entity is engaged in manufacturing and distribution activities, without a demonstrable arrangement, mutual understanding, or directive from the foreign AE, AMP expenses incurred by Indian entities cannot trigger adjustments under Section 92B. In this framework, the mere presence of brand building activities or incidental benefit to a foreign AE is insufficient to justify TP adjustments. As the judiciary continues to uphold substance over form, tax authorities must recalibrate their approach: only concrete evidence, not presumptive logic, can validate an AMP-related transfer pricing adjustment.

Interestingly, a strong debate persists within the transfer pricing community regarding the implications of the McCann Erickson India Pvt. Ltd. case (ITA No. 5871/Del./2011), particularly on the acceptance of the Transactional Net Margin Method (TNMM) to justify disproportionate AMP expenditure. In the instant case, it was held that where the assessee’s overall profit margin exceeded that of comparable companies, the excess margin could reasonably be attributed to the performance of additional functions, thereby negating the need for a separate transfer pricing adjustment. By extension, applying the same principle, if an assessee demonstrates a higher margin relative to its comparables, it may be inferred that the AMP function is already compensated within the overall profitability, rendering further adjustment unwarranted.

As a parting note, the significance of well-drafted intra-group agreements cannot be overstated. These agreements play a pivotal role in clearly defining the respective roles and responsibilities of the ultimate brand owner and the Indian selling and distribution entity. They provide essential clarity on functional delineation and the allocation of economic risk. When aligned appropriately, such agreements help establish a clear correlation between the margins earned by the Indian entity and the additional functions performed in relation to AMP expenditure, thereby reinforcing the argument that these functions are adequately compensated within the overall profit structure.

Publication – Taxsutra

By Amit Agarwal