HC Grants Relief to PepsiCo India

Jun 30, 2025

In a landmark ruling, the Delhi High Court (HC) has dismissed the tax department’s appeal against PepsiCo India regarding the taxation of its Advertising, Marketing, and Promotion (AMP) expenses under Section 92C of the Income Tax Act, 1961.

The Case at a Glance:

The tax authorities had challenged the Income Tax Appellate Tribunal’s (ITAT) decision, which deleted an addition of ₹2,800 crore made by the Assessing Officer (AO). The AO had argued that PepsiCo India's AMP expenses constituted an international transaction, benefiting its foreign parent company. To support this, the AO relied on the Bright Line Test (BLT)—a method used to determine excessive marketing expenses in transfer pricing.

BRIGHT LINE TEST:

A bright-line test in transfer pricing refers to a clear, objective rule that defines whether a transaction or pricing method complies with tax regulations. However, transfer pricing rules are typically principle-based rather than bright-line because they rely on the arm’s length principle (ALP) and comparability analysis, which require judgment.

It defines minimum profit margins for certain industries (e.g., IT services, contract R&D). If companies meet these margins, their transfer pricing is automatically accepted without further scrutiny.

Key Reasons Bright-Line Tests Do Not Apply Universally in Transfer Pricing:

1. Complexity of Transactions - Industries, markets, and business models vary widely; a one-size-fits-all approach doesn’t work.
2. Subjectivity in Comparability Analysis - No two transactions are identical, making strict thresholds unreliable for fair pricing.
3. Intangible Assets and Unique Business Models - The value of patents, trademarks, and proprietary algorithms cannot be measured by fixed rules.
4. Market and Economic Variability - Business conditions shift over time, and rigid benchmarks may fail to reflect real-world pricing.
5. Differences in Tax Regulations Across Jurisdictions- What works in one country may lead to double taxation or disputes in another.
6. Potential for Tax Avoidance - A principle-based approach ensures authorities can challenge artificial pricing tactics.

Transfer pricing demands flexibility and judgment-not rigid formulas like BLT.

Why do AMP expenses lead to tax disputes?

When an Indian subsidiary spends on advertising, marketing, and promotion (AMP), it may also benefit its foreign parent or associated enterprise (AE). This raises a key transfer pricing question: Should AMP expenses be treated as an "international transaction"?

Under the Income Tax Act, 1961, transactions between AEs must follow the Arm’s Length Principle (ALP)—priced as if between independent entities. If tax authorities believe AMP spending exceeds a fair limit, they may scrutinize and adjust taxes, leading to ongoing disputes over what qualifies as an international transaction

What has been the contention of the tax department?

1. Excessive AMP spend creates marketing intangibles for the foreign parent.
2. Indian entities should be compensated for benefiting the foreign brand.
3. The tax department should have the power to assess and adjust AMP expenses.

Judgement: -

The HC referred to its earlier decision in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT, in which it dismissed the use of Bright Line Test (BLT) to identify excess AMP expenses. It further observed that the BLT is not a method prescribed under the Indian transfer pricing (‘TP’) law and has not been recognized or accepted in international commentaries and principles of taxation.

The HC firmly rejected the tax department’s arguments and ruled that:

1. The BLT is not a recognized method under Indian tax laws or international standards.
2. The Sony Ericsson case had already dismissed BLT for AMP expense adjustments.
3. Applying the BLT universally is legally unsustainable and goes beyond statutory provisions.
4. The ITAT decision was upheld, and the tax department’s appeal was dismissed.

Conclusion:

This ruling reinforces that Indian tax authorities cannot arbitrarily apply the BLT to AMP expense adjustments. Instead, transfer pricing assessments must be based on recognized methods like ALP. It also provides greater clarity and consistency in tax regulations, reducing unnecessary disputes for multinational companies.

With this judgment, the Delhi High Court has sent a strong message: Only legally sound and internationally accepted methods should govern transfer pricing disputes.