The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a ₹5.19 crore transfer pricing adjustment made against Assessee holding that the Bright Line Test (BLT) cannot be used to determine the arm’s length price (ALP) of advertising, marketing and promotion (AMP) expenditure.
The bench of Sudhir Kumar (Judicial Member) and Ramit Kochar (Accountant Member) relied on the binding precedent of the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd., while clarifying that the final outcome would remain subject to the Supreme Court’s decision in the pending appeal against that judgment.
Assessee, a subsidiary of the Fujifilm Group with shareholding by Fujifilm Asia Pacific Pte. Ltd., Singapore and Fujifilm Corporation, Japan, is engaged in the trading and distribution of medical imaging systems, digital cameras, graphic printing solutions, data storage products and other imaging technologies in India. For the Assessment Year 2020-21, the company filed its income tax return declaring an income of over ₹51.29 crore and reported its international transactions with associated enterprises (AEs) in Form 3CEB.
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During scrutiny, the Assessing Officer referred the international transactions to the Transfer Pricing Officer (TPO). The TPO took the view that Assessee’s expenditure on advertising, marketing and promotion (AMP) primarily benefited the “Fuji” brand owned by its foreign parent company. According to the Revenue, such expenditure constituted an international transaction for which the Indian entity ought to have been compensated by its overseas AE.
The TPO applied the Bright Line Test, comparing Assessee’s AMP expenditure with that of comparable companies. The excess expenditure was treated as having been incurred for brand building on behalf of the parent company.
Initially, the TPO proposed a protective adjustment of ₹12.00 crore under the Bright Line Test; and a substantive adjustment of ₹22.90 crore using the intensity method.
The Dispute Resolution Panel (DRP) agreed that AMP expenditure constituted an international transaction and upheld the application of the Bright Line Test, though it directed certain modifications to the comparables and excluded CSR expenditure from operating costs. After giving effect to the DRP’s directions, the TPO reduced the transfer pricing adjustment under the Bright Line Test to ₹5.19 crore, while reducing the adjustment under the intensity method to nil. The Assessing Officer thereafter incorporated the ₹5.19 crore addition in the final assessment order.
Before the ITAT, Assessee challenged the adjustment, contending that the Bright Line Test had already been rejected by the Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd.; although the Revenue had filed a Special Leave Petition before the Supreme Court, there was no stay on the Delhi High Court’s judgment; consequently, the transfer pricing adjustment based solely on the Bright Line Test was legally unsustainable.
The company also relied upon the Delhi High Court’s decision in DCIT v. Casio India Company, where additions made using the Bright Line Test had similarly been deleted.
The Tribunal observed that the entire surviving adjustment of ₹5.19 crore had been made exclusively by applying the Bright Line Test to AMP expenditure allegedly incurred for promoting the “Fuji” brand owned by the foreign parent.
The Bench noted that the Delhi High Court had unequivocally rejected the Bright Line Test as a valid methodology for computing the arm’s length price of AMP expenditure. It further observed that although the Revenue’s appeal against the Sony Ericsson ruling is pending before the Supreme Court, no interim order or stay has been granted suspending the operation of the High Court’s judgment.
Accordingly, the Tribunal held that it remained bound by the Delhi High Court’s decision and deleted the transfer pricing addition of ₹5.19 crore.
While granting relief to Assessee, the Tribunal also clarified that since the Revenue’s Special Leave Petition against Sony Ericsson remains pending before the Supreme Court, both the Revenue and the assessee will be bound by the eventual outcome of those proceedings. The Assessing Officer was directed to implement the Tribunal’s order subject to the Supreme Court’s final decision.
The Tribunal partly allowed Assessee’s appeal. It deleted the ₹5.19 crore transfer pricing addition based on the Bright Line Test, dismissed one ground that had been conceded by the assessee, and held the ground relating to penalty proceedings to be premature.
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