Bright Line Test Cannot Be Used by AO to Make AMP Adjustments: Delhi HC [Read Order]

In a recent ruling, the Delhi High Court held that the Assessing Officer cannot use the Bright Line Test (BLT) to make transfer pricing adjustments on Advertisement, Marketing, and Promotion (AMP) expenses, and that such expenses cannot automatically be treated as an international transaction under the Income Tax Act.

The Principal Commissioner of Income Tax, the appellant, filed two appeals challenging the order dated 24 February 2020 passed by the Income Tax Appellate Tribunal (ITAT) in favour of Casio India Company Pvt. Ltd., the respondent, for the assessment years 2012-13 and 2013-14.

The Tribunal had deleted the AMP adjustment proposed by the Transfer Pricing Officer, who had applied the Bright Line Test and made an adjustment of Rs. 5.92 crore, treating the AMP expenses as brand-building for the foreign associated enterprise.

The appellant’s counsel argued that the AMP expenses incurred by the assessee resulted in the promotion of the foreign parent’s brand and hence should be treated as an international transaction. They further argued that the Tribunal erred in deleting the adjustment without applying the Bright Line Test, which the department believed was a proper method to identify excessive AMP spending.

The assessee’s counsel (Casio India) argued that the AMP expenses were incurred for its own business operations in India and not on behalf of the foreign parent. They also argued that there was no agreement or arrangement requiring the assessee to promote the parent company’s brand, and that the Delhi High Court had already rejected the Bright Line Test in earlier cases.

The Division Bench comprising Justice V. Kameswar Rao and Justice Renu Bhatnagar observed that the same issue had already been decided in the assessee’s favour in earlier years. The Court explained that in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT, the Bright Line Test was found not to be a recognized method under Indian transfer pricing law.

The Court also pointed out that the Revenue must show tangible evidence of an international transaction, and mere incurring of AMP expenses is not sufficient to draw such a conclusion.

The Court held that since the issue was already settled in the assessee’s favour in previous assessment years, no substantial question of law arose in the present appeals. The appeals were dismissed, and the order of the Tribunal deleting the AMP adjustment was upheld.

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