Understanding Bright line test for Advertisement, Marketing & Promotion (AMP)

 

Now a days lot of TP discussion is going with reference to Bright line test. The concept of the same is new to the tax world and hence in this respect few briefings given below.

The Concept:

Routine or day-to-day marketing or sale promotion expenses even, when excessive and exorbitant, would not amount per se to ―brand building‖ expenses. It would be incorrect to treat advertisement as equivalent or synonymous with ―brand building‖ for the latter in commercial sense refers to several facets and components.

Any excess expenditure beyond the bright line should be regarded as a separate international transaction of brand building. Such a broad-brush universal approach is unwarranted and would amount to judicial legislation.

There is nothing in the Act or the Rules to hold that it is obligatory that the AMP expenses must and necessarily should be subjected to bright line test and the non-routine AMP expenses as a separate transaction to be computed in the manner as stipulated.

Delhi High Court Judgement.

TBM  represented the recent path breaking decision rendered by the Delhi High Court (“DHC”), in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. v CIT and a batch of 17 connected appeals and cross-appeals, dealing with Transfer Pricing dispute related to marketing intangible.

DHC ruled that advertising, marketing and promotion expenses (“AMP”) spend in India in relation to a foreign brand constituted an international transaction. DHC laid down important transfer pricing principles, namely, (a) ‘Bright Line Test’ applied by the Revenue has no statutory mandate, and the contention of the Revenue that any excess expenditure beyond the bright line should be regarded as separate international transactions is unwarranted; (b) clubbing of closely linked transactions is permissible; (c) benchmarking of a bundle of transactions applying entity wide transactional net margin method (“TNMM”) is permissible; (d) once the Revenue accepts the TNMM as the most appropriate method, then it would be inappropriate for the Revenue to treat a particular expenditure like AMP as a separate international transaction; and (e) compensation for AMP expenses could also be benchmarked under resale price method (“RPM”) or cost plus method. The Court concluded that when TNMM and RPM methods adopted and applied show that the net / gross profit margins are adequate, no further Transfer Pricing adjustment on account of AMP expenses would be warranted.

TBM View

It is a welcome and significant judgment in the arena of transfer pricing. The maiden ruling lays down the broad parameters to be applied in case of AMP spend adjustments which would serve as a guiding principle to the transfer pricing officers.