Bright Line Test not Applicable for TP Adjustments on Jewellery, Textiles and Gift Exports: ITAT Remands Joy Alukkas’ Income Tax Case for Fresh Benchmarking [Read Order]

The Income Tax Appellate Tribunal (ITAT), Cochin bench, directed the remand of transfer pricing adjustments relating to benchmarking of exports, treatment of Associated Enterprise, and advertisement expenses to the Assessing Officer/Transfer Pricing Officer for fresh adjudication after noting that the adopting bright line method adopted by the Dispute Resolution Panel-2, Bangalore (DRP) is not an approved method for benchmarking the transaction of advertisement expenditure.

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The appellant, M/s. Joyalukkas (India) Pvt. Ltd., is a company engaged in manufacturing and trading of gold ornaments, textiles, and lifestyle products, and has reported international transactions with its group entities, including Joy Alukkas Jewellery LLC, Dubai, and Alukkas Ltd., London.

For the Assessment Year 2011-12, the appellant exported jewellery worth ₹18,84,01,929, textiles worth ₹5,12,56,914, and supplied gift items worth ₹2,86,032. The company adopted the internal Transactional Net Margin Method (TNMM) as the most appropriate method and submitted a transfer pricing study to justify that the transactions were at arm’s length price (ALP).

The Transfer Pricing Officer (TPO), however, rejected the internal TNMM and treated Joy Alukkas Jewellery LLC, Dubai, as an Associated Enterprise. He adopted the operating profit margin on cost as the Profit Level Indicator (PLI), arriving at 6.89% for the domestic segment and 0.08% for the export segment.

In comparison, the transfer pricing adjustments were computed at ₹6,32,43,154. The TPO suggested an additional adjustment of ₹1,54,18,632 by applying the Bright Line Test (BLT) on advertisement expenses, alleging excess expenditure towards brand utilization.

The Assessing Officer incorporated these in the draft assessment order, proposing additions of ₹7,86,61,786 crore on account of transfer pricing, alongside other disallowances.

The Dispute Resolution Panel (DRP) confirmed the transfer pricing adjustments and upheld the treatment of advertisement expenses under Section 92B as international transactions. It also endorsed the use of Bright Line Test despite it not being a statutorily recognized method. The appellant challenged these findings before the Tribunal.

The appellant represented by Parvathy Ammal, contended that Joy Alukkas Jewellery LLC, Dubai, could not be treated as an Associated Enterprise under Section 92A of the Income Tax Act, 1961 as there was no evidence of prior agreement or influence on pricing of gold exported to AI Ras Jewellery Est., Dubai. It was further submitted that advertisement expenses incurred in India did not constitute an international transaction, and therefore the benchmarking by the TPO was invalid.

It was argued that the Bright Line Test is not a recognized method under Indian transfer pricing law and should not have been applied. Additionally, it was pointed out that the export segment costs could not be compared with the domestic segment because the appellant procured gold for exports at current international rates from Nova Scotia Bank, whereas the domestic segment was based on different pricing.

The Revenue represented by Sanjit Kumar Das, argued that the TPO was justified in treating the Dubai entity as an Associated Enterprise and applying benchmarking to ensure that the transactions were at arm’s length. It was submitted that the advertisement expenditure incurred in India had the effect of brand promotion for the overseas entities and therefore fell within the scope of international transactions under Section 92B. The representative defended the use of Bright Line Test as a reasonable method to segregate routine selling expenses from brand-building expenditure.

The Bench consisting of Rahul Chaudhary, Judicial Member & Inturi Rama Rao, Accountant Member, held that the submissions made by the appellant went to the root of the computation of arm’s length price and benchmarking. It found merit in the contention that Bright Line Test is not an approved method and that advertisement expenditure may not by itself constitute an international transaction.

Further, the Tribunal emphasized that comparison of export and domestic segments must account for differences in procurement of gold at international rates.

In the interest of justice, the Tribunal remanded the entire issue of transfer pricing adjustments to the Assessing Officer/Transfer Pricing Officer for fresh adjudication.

Thus, the appeal was partly allowed for statistical purposes.

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