Reckitt Benckiser v. ACIT: the Bright Line Test and the AMP marketing-intangible

A note on which Reckitt matter this is

The Ahmedabad Bench has more than one Reckitt matter on its rolls, and they must not be conflated. This digest concerns the AMP and royalty transfer-pricing cross-appeals between Reckitt Benckiser Healthcare India and the Revenue, decided by Dr. B.R.R. Kumar (Vice President) and Shri Siddhartha Nautiyal (Judicial Member) on 14 May 2026, covering assessment years 2014-15 to 2017-18. It is a distinct matter from the separate Reckitt demerger appeal turning on section 2(19AA) of the Income-tax Act; that earlier matter is not the subject of this digest. We identify the AMP matter by its parties, bench, date and assessment-year range rather than by an ITA number, to avoid any cross-contamination between the two.

The facts in brief

Reckitt Benckiser Healthcare India manufactures and sells healthcare and consumer brands in India. For the assessment years 2014-15 to 2017-18, the Transfer Pricing Officer scrutinised the company's AMP expenditure. Applying the Bright Line Test, the TPO treated the portion of AMP spend that exceeded the spend of comparable companies as a distinct international transaction. The reasoning was that the excess promotion created brand value and marketing intangibles for the foreign associated enterprise — value for which, the TPO held, the foreign AE ought to have compensated the Indian subsidiary. On that footing the TPO made a transfer-pricing adjustment.

Separately, the Assessing Officer disallowed royalty payments the company had made for the use of trademarks and technology. The assessee contended that its AMP spend was incurred wholly for its own domestic business; that no agreement or understanding existed obliging it to promote a brand for the parent; and that the Bright Line Test had been judicially discredited and lacked any statutory foundation. Both the assessee and the Revenue were in appeal before the Income Tax Appellate Tribunal at Ahmedabad.

The transfer-pricing question

The transfer-pricing provisions apply to "international transactions" between associated enterprises. Section 92B defines an international transaction; section 92C and section 92CA govern the determination of the arm's-length price. The threshold question in any AMP dispute is whether the AMP expenditure is an international transaction at all. If it is not, the arm's-length-pricing machinery never engages, and there is nothing to adjust.

The Bright Line Test is a method, not a statutory concept. It posits that AMP spend up to the level of comparable companies is "routine" and incurred for the assessee's own business, while spend above that "bright line" is non-routine — a service to the foreign brand owner that should have been remunerated. The objection to the test, sustained by higher forums, is twofold: it has no anchor in the statutory definition of an international transaction, and it assumes the very thing it needs to prove — that the excess spend was incurred for the AE rather than for the assessee's own market.

What the Tribunal held

The Tribunal ruled in favour of Reckitt Benckiser, deleting both the AMP-related transfer-pricing adjustments and the royalty disallowances.

On the AMP adjustment, the Tribunal held that incurring AMP expenditure above an industry average does not, without more, amount to an international transaction. There must be a demonstrable agreement, arrangement or understanding under which the subsidiary promotes a brand owned by the foreign parent for the parent's benefit. The Revenue had failed to establish any such arrangement. Absent that foundation, there was no international transaction to price and no basis for an adjustment.

The Tribunal went further and addressed the method head-on. The Bright Line Test, it held, has already been rejected by higher judicial forums and has no statutory recognition under Indian transfer-pricing law. It cannot, therefore, be the engine for an AMP adjustment.

On the royalty disallowance, the Tribunal found that the payments for trademark and technology use were genuine and allowable. The assessee's appeals were allowed and the Revenue's appeals dismissed.

The doctrinal architecture

The decision reaffirms and applies the well-settled framework that has governed AMP disputes since the higher courts dismantled the mechanical Bright Line approach. Three propositions carry the reasoning.

First, the existence of an international transaction is a precondition, not a conclusion. An AMP adjustment cannot be reverse-engineered from a ratio. The Revenue must point to an agreement, arrangement or understanding under which the Indian entity agreed to build brand value for the foreign AE. Where the record discloses no such arrangement, the inquiry ends.

Second, the burden of demonstrating that arrangement lies on the Revenue. The Tribunal declined to infer an arrangement from the bare fact of above-average spend. The inference the TPO drew — that excess spend must be a service to the parent — is precisely the inference the higher forums have refused to permit.

Third, genuine royalty for the use of trademark and technology is allowable business expenditure and is not to be recharacterised or double-counted against the AMP analysis. The Tribunal kept the two questions distinct, resisting the tendency to treat brand-related royalty and AMP spend as a single recoverable benefit conferred on the parent.

The decision continues the lineage of the leading High Court and Special Bench authorities that displaced the Bright Line Test and insisted on proof of an international transaction — operationalising those principles in a 2026 application to a consumer-healthcare multinational.

The structural objection to the Bright Line Test

It is worth pausing on why the Bright Line Test has proved so durable a target for judicial criticism, because the Tribunal's terse rejection of it rests on a structural objection that the method can never answer. The test proceeds by comparison: it measures the assessee's AMP-to-sales ratio against that of comparable companies and treats the difference as the value of a service rendered to the foreign brand owner. But the comparison assumes the conclusion. The fact that one company advertises more than another tells us nothing about why it does so. A subsidiary may spend heavily on advertising because it is fighting for share in a competitive domestic market, because it is launching products, or because its category simply demands higher promotional intensity — all reasons rooted in the subsidiary's own business, none of which involve conferring a benefit on the parent.

To leap from "spent more than comparables" to "rendered a service to the AE" is to supply, by assumption, the very arrangement that the statute requires to be proved. That is the structural flaw. The transfer-pricing provisions apply to international transactions, and an international transaction presupposes a transaction — a mutual dealing, an arrangement or understanding between the associated enterprises. A unilateral business decision to advertise heavily in one's own market is not a transaction with anyone, least of all with the foreign parent. The Bright Line Test elides this requirement by treating a statistical excess as if it were itself the transaction.

The Tribunal's holding that the test has "no statutory recognition" is therefore not a quibble about methodology. It is a recognition that the test answers a different question — how much did the assessee spend relative to peers — from the one the statute poses — was there an international transaction at all. Once the latter question is restored to its proper place, the AMP adjustment cannot survive in the absence of a proven arrangement, however large the AMP-to-sales gap may be.

Why the ruling matters

The order is a high-value, recent data point in the AMP and marketing-intangibles controversy that has dogged consumer-goods, pharmaceutical and automobile multinationals for more than a decade. By squarely holding the Bright Line Test to be without statutory foundation, and by insisting on proof of an arrangement before any adjustment can be made, it strengthens taxpayers' hand against formulaic AMP additions. It is likely to be cited across FMCG, pharma and auto transfer-pricing disputes where the Revenue continues to reach for AMP-to-sales comparisons.

The decision also illustrates the Tribunal's role as the principal fact-finding forum in which the higher-court principles are operationalised. The Revenue may pursue the matter to the High Court on the "international transaction" characterisation. But the absence of any brand-promotion agreement makes the finding fact-heavy and resilient: a characterisation that depends on proving an arrangement is difficult to disturb on appeal when the Tribunal has found, on the evidence, that no arrangement existed. For the practitioner advising a multinational with significant Indian advertising spend, the message is concrete — keep the AMP function and its commercial rationale documented as the assessee's own, and an above-average ratio alone will not sustain an adjustment.

Related on Valkya

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• Tax: May–June 2026 roundup

Sources

1. Studycafe — "ITAT Grants Reckitt Relief in Marketing Intangibles Transfer Pricing Dispute": https://studycafe.in/itat-grants-reckitt-relief-in-marketing-intangibles-transfer-pricing-dispute-420944.html
2. Mondaq — "Advertisement, Marketing & Promotion Expenses (AMP) – A Tale Of Controversy" (doctrinal background on AMP and the Bright Line Test): https://www.mondaq.com/india/transfer-pricing/967746/advertisement-marketing-promotion-expenses-amp--a-tale-of-controversy
3. TaxGuru — "Marketing Intangibles – Transfer Pricing Challenges": https://taxguru.in/income-tax/marketing-intangibles-transfer-pricing-challanges.html
4. Income Tax Appellate Tribunal — official orders portal, Ahmedabad benches: https://itat.gov.in/