Futile exercise to separate ‘routine’ & ‘non-routine’ AMP by applying BLT of non-comparable, highlights Delhi HC

While hearing a matter revolving around the issue as to whether Advertising, Marketing and Promotion expenses incurred by an Assessee would be tantamount to an international transaction, the High Court of Delhi touched upon the validity of the Bright Line Test which had been applied by the Transfer Pricing Officer in the Assessee’s case.

The Court re-iterated the findings laid down in several orders passed by the Coordinate Benches of the Income Tax Appellate Tribunal (ITAT), wherein it had repeatedly been held that the Bright Line Test had no ‘statutory mandate’.

A Division Bench of Justice Rajiv Shakdher and Justice Girish Kathpalia relied on the findings of the Coordinate Bench of the ITAT in Sony Ericsson Mobile Communications India (P) Ltd. v. Commissioner of Income-tax-III wherein it had been observed that – “…The ‘bright line test’ has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate ‘routine’ and ‘non-routine’ AMP or brand building exercise by applying ‘bright line test’ of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be ‘NIL’, or at best would mean the amount or compensation expressly paid for AMP expenses…”.

The Appellant-Revenue was represented by Mr. Ruchir Bhatia, Senior Standing Counsel, whereas the Respondent-Assessee was represented by Mr. Himanshu Sinha, Advocate.

In the present matter, the Transfer Pricing Officer had applied the Bright Line Test while benchmarking an ‘international transaction’ involving Advertising, Marketing and Promotion (AMP) Expenses. This also triggered the other legal aspect of this matter, namely whether incurring AMP Expenses amounted to an international transaction.

On hearing the arguments of both Parties, the Division Bench observed that while the Revenue had filed an appeal to the Supreme Court against the judgment rendered in Sony Ericsson Mobile Communications India (P) Ltd. v. Commissioner of Income-tax-III no order had come to be passed by the Supreme Court in this matter.

Hence the Bench observed that the position of law regarding the validity of the Bright Line Test was settled in favour of the Assessee, through the judgment of the Coordinate Bench of the ITAT in Sony Ericsson Mobile Communications India (P) Ltd. v. Commissioner of Income-tax-III as well as a catena of other judgments, such as Bausch & Lomb Eyecare (India) (P.) Ltd. v. Addl. CIT (2016) and Dy. CIT v. Sharp Business Systems (India) (P.) Ltd. (2022).

With these observations, the Bench proceeded to dismiss the Revenue’s appeal. However, it also gave liberty to the Revenue to revive the present appeal, should the Supreme Court render a favourable judgment in the Revenue’s appeal against the judgment of the ITAT in Sony Ericsson Mobile Communications India (P) Ltd. v. Commissioner of Income-tax-III.

Cause Title: The Principal Commissioner of Income Tax -7 Vs Yakult Danone India Pvt Ltd. [ITA 208/2023 / 2023-Enterslice-4-HC-Del-IT]

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