AMP Adjustment of ₹4.32 Cr Based on Bright Line Test Unsustainable: ITAT Grants Partial Relief to Callaway Golf India [Read Order]

The Income Tax Appellate Tribunal (ITAT) Delhi Bench has provided some relief holding that the Bright Line Test (BLT) cannot be applied for determining the Arm’s Length Price (ALP) of Advertisement, Marketing, and Promotion (AMP) expenditure under the transfer pricing provisions.

The assessee is an indirect subsidiary of Callaway Golf Company, USA, and is engaged in the distribution of golf equipment, balls, and accessories in India. For the Assessment Year 2012-13, the assessee has disclosed international transactions with its Associated Enterprise (AE) in the area of marketing and distribution of the goods of the assessee.

During the transfer pricing proceedings, the Transfer Pricing Officer (TPO) observed that the assessee has incurred significant AMP expenditure of ₹2.39 crores, which forms a substantial part of the sales made by the assessee. The TPO has proposed the ALP adjustment of ₹4.32 crores using the Cost Plus Method and has further proposed the application of the Bright Line Test in a protective manner.

The Dispute Resolution Panel (DRP) has followed the approach of the TPO and has directed the computation of the ALP using various methods including the application of the Bright Line Test and the Adjusted TNMM.

It was contended that the assessee was merely a distributor of products in India, and the AMP expenditure was incurred in the course of normal business to boost sales. It was further contended that these expenditures were inextricably linked with the activity of distribution and could not be treated as a separate international transaction in the context of brand promotion of AE.

Further,the assessee stated that the decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P) Ltd. v. CIT is relevant in the present case, wherein it was held that the Bright Line Test has no statutory mandate in transfer pricing.

the Tribunal consisting Judicial Member Sudhir Kumar and S. Rifaur Rahman [Accountant Member] held that the Bright Line Test is not a legally sustainable method of benchmarking AMP expenditure. It was further observed that the assessee is merely a distributor of products in India, and the AMP expenditure was incurred primarily to boost sales in India.

In rejecting the BLT-based adjustment method and the application of the Cost Plus Method it was held by the Tribunal that benchmarking shall be performed on an aggregate basis by the Transactional Net Margin Method (TNMM).

Accordingly, the Tribunal allowed the appeal partially.

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