Coca-Cola's $9-bn US tax appeal may shape India's transfer pricing rules

In August 2024, Coca-Cola announced it would appeal to the Atlanta-based Eleventh Circuit Court of Appeals, the US Tax Court's 2020 decision in favour of IRS' determination of $9 bn of transfer pricing adjustments and validity of IRS' blocked income regulations. With Coca-Cola finally filing its brief in March, the oral argument is expected soon. If the judgment is affirmed, the US will have the most senior judicial endorsement yet of the proposition that routine advertising by low- risk foreign affiliates cannot conjure up 'non-US intangibles'.

In ' Coca-Cola v. Commissioner', the Tax Court rejected the company's bid to recast its foreign concentrate plants as 'marketing investment points'. Coca- Cola argued that enormous local ad budgets had created foreign trademarks, entitling those plants to higher residual profits and rendering IRS' comparable-profits method unreliable. Judge Albert G Lauber disagreed on three grounds:

The plants bore no downside risk, because inter-company contracts guaranteed stable margins.

Legal ownership of trademarks remained in Atlanta in the absence of any cost-sharing agreement.

Neither the plants' ledgers nor the group accounts booked a foreign intangible. So, none could be assumed. The outcome was a $9 bn adjustment in favour of IRS.

So, why would an Atlanta ruling matter in Delhi?

Risk
Indian transfer-pricing Rule 10B already asks who shoulders market and credit risk. The US court's motto, 'no risk, no asset', gives revenue officers a ready answer when distributors with fixed gross margins claim their AMP (advertising, marketing and promotion) outlays create local intangibles.

Legal title
Indian law, like US regulations, starts with the registered owner of an intangible, and shifts the return only if a written cost-sharing or buy- in exists. Absence of such contracts was fatal to Coca- Cola's investor theory. It can be equally fatal to Indian taxpayers who rely on informal understandings.

Accounting proof
Under   Ind AS 38, a self-created intangible must be capitalised once technical feasibility and future benefit are demonstrated. If no marketing asset appears on the balance-sheet, Atlanta logic says the taxpayer's 'implicit trademark' story lacks substance.

Methods
The US Tax Court accepted a profit-based method, even though marketing intensity differed across entities, showing that India can defend TNMM (transactional net margin method) or CPM (comparable profits method) without resurrecting the discredited bright-line test. Taken together, these points form the 'Atlanta playbook':

• Start every audit with inter-company contracts and marketing guidelines and approvals.
• Map risk. If margins are contractually locked in, the spend is a service.
• Demand trial balances and fixed-asset registers to see whether any brand asset has been booked.
• Benchmark overall margins and, where necessary, give credit for any super-normal distribution profit already earned.

Applying this playbook would answer the very criticisms levelled by some recent Indian judgments. Delhi High Court's decision in March 2025 to quash the ₹35-cr adjustment in 'PCIT v. Beam Global Spirits', for instance, insisted that a large spend plus a group relationship does not, by itself, make an 'international transaction'. In this case, the court objected that the tax officer never proved an associated enterprise (AE)-directed arrangement. Contract extracts and HQ marketing approval letters would have met that threshold. But armed with the 'Atlanta playbook', officers can go to court with documents rather than ratios, answering the judiciary's repeated demand for substance over arithmetic.

Now, should the US Eleventh Circuit affirm the 2020 Tax Court decision, the world's most influential common-law tax bench will have endorsed the very principles Indian courts say they respect: documented risk allocation, legal-owner primacy and ledger evidence. And that endorsement could weigh heavily when the Supreme Court finally hears the combined appeals in the Sony Ericsson, Canon, Maruti Suzuki and PepsiCo cases here in India. Judges love international harmony. The prospect of a US appellate stamp on the risk-and-ownership approach could prove irresistible background music when our judges deliberate.

MNCs anxious about double taxation after an Eleventh Circuit affirmation will have fresh incentive to settle India risk through bilateral APAs (advance pricing agreements). At that point, the 'Atlanta playbook' may move from helpful precedent to guiding standard. And India's AMP scoreboard could potentially look very different.

The writer is former principal DG, income-tax (administration), New Delhi.



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