Identify the transaction and the applicable law
Identify what the associated enterprises actually transferred, licensed, developed or agreed to do. For years governed by the Income-tax Act, 1961, section 92B and its explanations cover specified intangible dealings and, in some circumstances, transactions involving third parties. Apply the 2025 Act and notified 2026 Rules for the tax years they govern. Use the OECD Transfer Pricing Guidelines as analytical guidance; the Indian statute, rules and relevant judgments determine the legal result.
Analyse the people, assets and decisions behind the intangible
| DEMPE function | Examples | What to establish |
|---|---|---|
| Development | Product architecture, R&D, trials or initial brand positioning | Who sets the budget and milestones, decides whether to proceed and bears the consequences of failure? |
| Enhancement | Product upgrades, localisation and substantial brand launches | Who controls the improvement and who has the right to use it? |
| Maintenance | Bug fixes, quality assurance, reminder advertising | Who determines ongoing scope, cost and standards? |
| Protection | Registrations, renewals and enforcement | Who controls the protection strategy, pays and has enforceable rights? |
| Exploitation | Licensing, manufacturing and distribution | Who sets commercial terms and controls relevant market, credit and inventory risks? |
Legal title is a starting point. Determine actual functions, assets, contractual rights, capacity to bear risk and conduct that shows control of risk. An entity that funds development but does not control financial risk generally receives no more than a risk-free financing return under OECD guidance. Control of the financing risk alone may support a risk-adjusted funding return. Neither rule dictates where all residual profit goes or mandates a profit split. Select the most appropriate prescribed method using available facts and comparables.
Use contracts, meeting and approval records, staff capability, actual funding and project decisions. Applicable master file requirements call for information about group strategy, important intangibles, legal ownership and related agreements; they do not mandate a separate five-part DEMPE schedule for every intangible.
Advertising, marketing and promotion (AMP) in India
First establish whether a controlled transaction exists. A brand connection or a large advertising budget alone does not prove an arrangement to provide marketing services. An arrangement may be written, oral or inferred from evidence of actual conduct. In Maruti Suzuki, the Delhi High Court required evidence of the alleged international transaction and rejected using a bright line to infer it. Sony Ericsson rejected the Bright Line Test as a pricing shortcut and required a reliable functional and comparability analysis for distribution and marketing. Closely linked functions may be priced together where the comparison reliably captures them; a higher overall margin alone is insufficient. Keep the two judgments’ facts and reasoning distinct.
A historical bright-line calculation might compare 8% of sales with a 2% comparator and treat the 6 percentage point difference as a service. Adding a 12% to 15% markup would yield 6.72% to 6.90% of sales. That arithmetic does not establish either a transaction or an arm’s-length price.
| Expense | Practical classification |
|---|---|
| Brand advertising and endorsements | Typically brand promotion; distinguish product and campaign objectives. |
| Trade or volume rebates and sales commissions | Ordinary sale-linked costs are generally distinct from brand advertising. Review whether rebates reduce revenue in the applicable accounting and use consistent comparables. |
| Freight, warehousing and routine packaging | Generally distribution costs; review actual function. |
| Samples, in-store schemes and slotting fees | Analyse the arrangement. They can incentivise immediate sales, promote a brand, secure distribution or combine purposes. |
Worked examples
1. Swiss watch distributor: bundled distribution and marketing
For FY 2024–25, assume sales of ₹100 crore, cost of goods ₹65 crore, advertising ₹10 crore, selling costs ₹8 crore and other expenses ₹7 crore, with sales and rebates presented on a consistent basis. Gross profit is ₹35 crore and operating profit ₹10 crore, or 10% of sales. Including the selling costs as AMP would produce a flawed bright-line proposal of (₹18 crore − ₹3 crore) × 1.15 = ₹17.25 crore. The actual advertising amount on the assumptions is ₹10 crore. The difference between the 10% margin and the assumed 5.50% median is ₹4.50 crore on the same sales base. The difference supports further analysis but does not prove adequate compensation; establish comparable functions, terms and adjustments.
2. Japanese appliance licensee: advertising on its own account
In FY 2024–25, ₹40 crore of independent Indian media spend is 8% of ₹500 crore of sales; the separate 2% licence royalty is ₹10 crore if the same base applies. The licence has no minimum advertising commitment. If the evidence shows the manufacturer bought advertising on its own account and no separate AMP arrangement existed, the proposed ₹25 crore adjustment cannot be justified merely by the size of the advertising spend or incidental benefit to the licensor.
3. Cayman title holder and Bengaluru software team
The Indian team has 300 specialists; the legal owner has two administrative directors and no technical staff. Cost of ₹100 crore plus 15% gives a fee of ₹115 crore and an operating spread of ₹15 crore before other expenses. Global licence revenue of ₹800 crore is not residual profit. Determine who actually controls the development and other significant risks. If a profit split is the most appropriate method, first establish combined profit, any routine or funding returns and a supportable split. An assumed 60% share means 0.60 times the established residual; no amount can be inferred from gross sales.
4. Technology and trademark royalty
On ₹400 crore of net sales, a 4% combined royalty is ₹16 crore. The assumed 3% technology portion is ₹12 crore and the 1% trademark portion ₹4 crore; a 22% materials saving would be 0.22 times the relevant comparable baseline, which is not specified. External rates of 3.50% to 6% imply ₹14 crore to ₹24 crore on the same base, and a 4.50% Brazilian licence rate would imply ₹18 crore. Check whether the rights, market, term, exclusivity, bundled technology, local marketing duties and economics are comparable. Local marketing of ₹20 crore does not establish that the trademark is worthless or that 1% is the correct combined rate.
5. India-funded payment software enhancement
The Indian company spends ₹25 crore over three years adapting parent software for UPI and biometric integration. In year four the parent licenses that module elsewhere. Identify rights under the base licence and development agreements, the parties controlling risk, and what was transferred or supplied. Arm’s-length compensation could be for development services, a licence, a transfer of rights or another properly delineated transaction. The spend does not prove legal ownership, an outbound royalty obligation or a specific price.
6. Market entry and promotions
In FY 2023–24, ₹15 crore of promotions on ₹30 crore of sales equals 50% of sales; the ₹5 crore operating loss is a margin of about −16.67%. If 80% is documented as immediate consumer or retailer incentives, that is ₹12 crore, leaving ₹3 crore to classify. Assess the promotional purpose and independent market behaviour. A start-up adjustment requires reliable evidence of a material comparability difference and a reasonably accurate adjustment; market entry does not automatically neutralise the spend.
Keep the evidence aligned
- Reconcile brand and selling costs to the ledger and the pricing study. Use the same revenue and expense definitions for tested and comparable businesses.
- Record actual obligations, campaign decisions, who controls risk and how compensation flows. Do not change contract terms without changing and documenting the underlying conduct.
- Keep royalty calculations, licences, independent pricing evidence and local or master file documentation as applicable. Report the transaction in the prescribed accountant’s report for the relevant year.
Frequently asked questions
1. Does the Bright Line Test determine an arm’s-length price?
The cited Delhi High Court decisions reject that shortcut. Check current authority and any case-specific orders; do not assume a fixed outcome.
2. What if an order proposes alternative AMP adjustments?
Review and contest each basis as appropriate, check the applicable objection or appeal procedure and guard against double counting.
3. Does use of a parent’s brand name establish an AMP transaction?
No. Examine the obligations, commercial terms and actual conduct rather than inferring a service from co-branding alone.
4. When can a marketing intensity adjustment be used?
Consider it only if a material functional difference can be adjusted with reasonable accuracy under the applicable method. It is not a replacement bright line.
5. How are cost contribution arrangements assessed?
Identify actual participants, risk control and expected benefits. Compare arm’s-length contributions with each participant’s share of expected benefits; balancing payments may be appropriate.
6. Can a long-established brand justify no continuing royalty?
Brand age alone does not answer the question. Examine enforceable rights, ongoing value, obligations and market comparables.
Sources
- Delhi High Court: Sony Ericsson Mobile Communications India Pvt. Ltd., ITA 16/2014
- Delhi High Court: Maruti Suzuki India Ltd., ITA 110/2014
- OECD Transfer Pricing Guidelines, Chapters VI and VIII
- Income Tax Department: transfer pricing under the 1961 Act
- Notified Income-tax Rules, 2026: transfer pricing methods and documentation