2022 (12) TMI 239 - AT - Income Tax

TP Adjustment - use of BLT approach by the TPO - Benchmarking of AMP expenditure - Bright line concept (Protective Adjustment) - addition in respect of ALP adjustment made on protective basis by applying BLT - HELD THAT - d. DR could not cite any factual distinction or different proposition of law then followed in the assessee s own case 2019 (10) TMI 1536 - DELHI HIGH COURT for aforesaid previous years as relying on Sony Ericsson case 2015 (3) TMI 580 - DELHI HIGH COURT . Consequently the grounds pressed are sustained and appeal is allowed and the adjustment proposed on BLT approach is set aside.

Summary

Issues Involved:
1. Determination of total income and Transfer Pricing adjustment.
2. Jurisdiction over AMP expenditure as an international transaction.
3. Application of Bright Line Test (BLT) for AMP expenses.
4. Penalty proceedings under section 271(l)(c) of the Act.

Issue-wise Detailed Analysis:

1. Determination of Total Income and Transfer Pricing Adjustment:
The assessee, part of the Merck group, filed a return declaring an income of Rs. 67,01,81,320/-. The case was selected for scrutiny, and the Transfer Pricing Officer (TPO) proposed adjustments totaling Rs. 36,93,24,653/-. The adjustments included AMP expenses and support services. The Dispute Resolution Panel (DRP) upheld the TPO's adjustments, leading to a total income assessment of Rs. 1,03,95,05,970/-.

2. Jurisdiction Over AMP Expenditure as an International Transaction:
The assessee contested the inclusion of AMP expenditure as an international transaction, arguing it did not meet the criteria under Section 92B read with Section 92F(v) of the Act. The assessee claimed the expenses were for sales activities and not for brand promotion. The DRP, however, upheld the TPO's view, considering AMP expenses as an international transaction, which the assessee argued was incorrect.

3. Application of Bright Line Test (BLT) for AMP Expenses:
The primary contention was the application of the BLT for AMP expenses, which the assessee argued against, citing the Delhi High Court's decision in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. Commissioner of Income Tax. The Tribunal noted that the BLT approach had been rejected in the assessee's own case for previous years (2013-14 and 2014-15) and by the Delhi High Court. Consequently, the Tribunal set aside the adjustment of Rs. 36,93,24,653/- proposed on the BLT approach, aligning with the precedent that the BLT is not a prescribed method under Indian Transfer Pricing regulations.

4. Penalty Proceedings Under Section 271(l)(c) of the Act:
The assessee also faced penalty proceedings for allegedly furnishing inaccurate particulars of income. However, given the Tribunal's decision to set aside the BLT-based adjustment, the basis for the penalty was undermined, though the specific outcome of the penalty proceedings was not detailed in the judgment.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the BLT-based adjustment of Rs. 36,93,24,653/-. The decision was based on the precedent that the BLT is not a valid method for Transfer Pricing adjustments in India, as upheld in previous cases and by the Delhi High Court. The total income assessment was thus revised, and the penalty proceedings were likely impacted by this decision. The judgment emphasized adherence to established legal principles and precedents in Transfer Pricing disputes.