TaxTMI 
TaxTMI 
2026 (1) TMI 885
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....p is active in the manufacture of finished watches, jewellery and watch moments and components. Swatch Group India Pvt. Ltd. is a part of the Swatch Group and it commenced operations during the financial year 2002-03. Swatch India as distributor is primarily engaged in the import and resale of watches and spare parts of watches. Some of the major brands under which luxury watches are imported and resold by Swatch group India are Omega, Rado, Tissot, Breguet Balmain, Jaquet Droz, Blancpain, Calvin Klein, Longines and Swatch. 3. The TPO based on the FAR profile of the assessee as discussed in his order observed that there was sufficient evidence that it was discharging marketing function, function of market development including adding value to the intangibles of its AE and was not merely engaged in purchase and sale of goods with insignificant promotional activities. Accordingly, the TPO was of the view that the marketing function carried out by the assessee was required to be considered while carrying out the benchmarking of the international transactions. The TPO further observed that the contribution that the assessee had made must be treated as part of the brand building exer....
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.... calculations. The Department has filed an appeal against the order of the Hon'ble High Court and contested the judgment before the Hon'ble Supreme Court. The Hon'ble Supreme Court has rejected the petitioner's application for stay of the order of the Hon'ble High Court. Accordingly, the primary contention of this office remains the same as mentioned above. The comparables identified for this approach are same as the comparables considered in the case of alternative approach discussed below. In view of the Hon'ble Supreme Court order refusing the stay, the alternative approach in line with the directions/judgment of the Hon'ble High Court on AMP in case of Sony Ericsson is discussed below. ............................xxx...................... 4.1 The assessee submitted its reply to the above show-cause notice which was summarized by the TPO in para no. 13 (placed at page no. 122 of the appeal set) which is reproduced as under: "REPLY GIVEN BY THE ASSESSEE: The assessee company has given its replies in the matter vide submission dated 19.10.2023, and has raised following issues/points: i. AMP Expenses is not an internation....
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.... Advertisement expenses 2111.63 2. Selling and distribution expenses 81.09 3. Point of sale material 494.04 4. Trade Discount 902.17 Total AMP Expenditure by the assessee 3588.73 Gross sales of the assessee 38548.73 AMP to gross sales (AMP /Sales) 9.31% 17. The list of comparable selected, as per the SCN, along with the calculation of AMP / Sales ratio as per annual reports is as follows: Sl. No. Company Name AMP / Sales 1 Ethos Ltd. 4.06% 2 Kapoor Watch Co. Pvt. Ltd. 0.99% 3 Johnson Watch company Pvt. Ltd. 0.76% Arithmetic Mean 1.94% 18. The amount which represents the bright line and the amount that should have been compensated to the assessee company are computed hereunder: Particulars Value (Rs. in Lacs) Value of gross sales of assessee A 38,548.73 Arithmetic mean of AMP / Sales of comparables B 1.94% Amount that represents price for routine AMP activities C=B*A 747.85 Total expenditure incurred by assessee on AMP D 3,588.93 Arm's Length Price of the service /expenditure for c....
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.... total income of the assessee at Rs. 41,07,12,920/- (placed at pg. no. 107 of the appeal set) as under: Sl. No. Description Amount (in INR) 1 Income as per Return of Income Filed 6,87,87,920/- 2 Income as computed u/s 143(1)(a) 6,87,87,920/- 3 Variation as discussed in Para 3.7 34,19,25,000/- 4 Total income / Loss determined as per the above proposal 41,07,12,920/- 8. Aggrieved with the said order, the assessee filed its objections before the Ld. DRP. The Ld. DRP vide its order dated 09.09.2024, upheld the finding of the AO, and the relevant directions of the Ld. DRP in para no. 7.3 and 7.3.1 at page nos. 31 to 34 of its order (placed at pg. no. 92 to 95 of the Appeal set) are reproduced as under: "7.3 Ground No. 7- That on the facts and circumstances of the case and in law, Ld. AO/Ld. TPO have erred in proposing adjustment to the income of the Assessee on protective basis without appreciating that there are no underlying provisions in the Act that support protective adjustment making the order bad in law. Ground No. 8- That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO have erred in propo....
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....e) to the sales ratio for comparability analysis. 4. TPO chose comparables and worked out mean of the "expenditure incurred on AMP/sales" of such companies, which is the excess expenditure assessee made vis-à-vis its comparables also called the "bright line". Expenditure more than this amount was considered to have been used for the promotion of brand/trade name for the AE for which assessee needed to be suitably compensated by the AE. The amount which represents the bright line and the amount that should have been compensated to the assessee company was computed as under and added in hands of the assessee as transfer pricing adjustment: 5. As per section 92C (1) of the Act- "The arm's length price in relation to an international transaction shall be determined by any of the following methods being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribed namely: - (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; ....
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....chmark the impugned transaction that the available provision next in line are considered. In the present context it means, referring to Rule 10AB which has been introduced with the understanding that there may be transaction which cannot be benchmarked using the traditional 5 methods and a new method is required for transfer pricing study. Not many alternative methods are available. In any case, assessee and revenue quote and emphasize upon OECD guidelines which are also not a part of Indian study/statute. 10. BLT is a popular statistical tool used abroad and has been considered by revenue to be a good alternative. In order to separate the advertising, marketing and promoting (AMP) expenditure incurred by the tax payer for its own business and for brand promotion of its parent enterprise, this test was propounded by the US Tax Court in DHL Incorporated and Subsidiaries case, T.C. Memo. 1998-461. The US Tax Court in that case laid down that AMP expenses, to the extent incurred by uncontrolled comparable distributors is to be regarded within the 'Bright Line limit' of the routine expenses and AMP expenses incurred by the distributors beyond such 'Bright Line limi....
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....enged by the Department in the Hon'ble Supreme Court (the Department has also challenged other similar decisions in the Hon'ble Supreme Court and the Hon'ble High Court against the decisions of the Hon'ble High Court/ITAT), the adjustment on the basis of BLT is proposed on protective basis till the issue in this regard is settled by the Hon'ble Supreme Court. The method applied for this purpose is 'such other method as prescribed by the Board' provided in section 92C(1) (f) read with Rule 10B(1) (f) and Rule 10AB. 13. This ground of objection is accordingly disposed off." 9. After the receipt of the directions of the Ld. DRP, the AO passed the final assessment order on 02.09.2024, reducing amount the adjustments from Rs. 34,19,25,000/- to Rs. 22,35,89,000/- as per the directions of the Ld. DRP. 10. Aggrieved with the said order, the assessee is in appeal before us on the following grounds of appeal: "1. That on the facts and circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("Ld. AO") under Section 143(3) read with section 144C(13) read with section 144B of the Act is bad in law and liable to be q....
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.... 8. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Hon'ble DRP have erred in making adjustment applying bright line test ("BLT") as a 'tool' to benchmark the alleged international transaction, even though BLT has been jettisoned by jurisdictional Hon'ble High Court. 9. That on the facts and circumstances of the case and in law, Ld. AO/Ld. TPO/ Hon'ble DRP have erred by not appreciating that BLT is not a prescribed method under the purview of section 92C of the Act. 10. That on facts and circumstances of the case and in law, Ld. AO/Ld. TPO/ Hon'ble DRP have erred in making an adjustment of INR 22,35,89,000/- on non-protective basis applying the BLT. 11. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP have erred by wrongfully selecting inappropriate comparables for determining the BLT. 12. That the Ld. TPO/Ld. AO/Hon'ble DRP erred in including 'Point of Sales Material' expenses in computing the AMP expenses of the Appellant. 13. That on facts and circumstances of the case and in law, Ld. TPO/Ld. AO/Hon'ble DRP have e....
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....of applying BLT. In this regard, the Appellant wishes to submit that principle of judicial discipline requires that the decision of the Jurisdictional High Court be binding on the authorities subordinate to it. Reliance may be placed on the following decision of Supreme Court in various judgments, where it was held that "When an order is passed by a higher authority, the lower authority is bound thereby keeping in view the principles of judicial discipline' i. Hon'ble Supreme Court in 'Union of India v. Kamlakshi Financial Corpn. Ltd'. AIR 1992 SC 710 (SC) ii. East India Commercial Co. Ltd. vs Collector of Customs AIR 1962 SC 1893 iii. Commissioner of Income Tax, Bhopal v. Ralson Industries Ltd. (2007) 2 SCC 326 (SC)" 13.2 Further, in this regard, the assessee has also filed a written submission at page no. 457 to 462 of the paper book, in respect of its grounds nos. 8,9, & 10 challenging the application of Bright Line Test for marking the adjustment in respect of AMP expenses which are reproduced as under: "Ground No. 8, Ground No. 9 and Ground No. 10 "That on the facts and circumstances of the case and in law, the Ld....
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....did not clearly refer to the settled legal position thereon and left the conclusion arrived at by the Hon'ble High Court in ambiguity, When we consider how "Intensity approach" as a method which has been carved out by the DRP which we have referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts of the present case as it is a reverse of bright line test as its mirror image. The said mental acrobatics and athletics do not have any judicial sanction and cannot be approved." Hence, the use of BLT is without any statutory mandate with a single-minded objective of imputing Transfer Pricing adjustment. The Ld. AO/Ld. TPO has proposed the BLT when computing the AMP adjustment in the case of the Assessee although this approach has been rejected by Delhi High Court in case of Sony Ericsson Mobile Communications India Private Limited & Others (ITA No. 16/2014 & connected matter wherein it was held that the BLT is not a correct meth....
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....rking of AMP expenses is required. Furthermore, Assessee would like to submit that in the case of the Maruti Suzuki India (supra), the taxpayer initially filed a writ petition before the high court questioning the jurisdiction of the TPO on the issue. The high court set aside the matter for the fresh assessment for the TPO with reference to the guidance provided in the ruling. Thereafter the taxpayer challenged the matter in the Supreme Court. The Hon'ble Supreme Court remitted back the matter to the TPO, with liberty to proceed with the matter uninfluenced by the observations of the high court. The Hon'ble SC set aside the order passed by the Hon'ble high court to the extent of providing guidance on the issue of AMP. Post Supreme Court order, the order of the Hon'ble high court has been nullified and therefore cannot be relied upon. Thus, relying upon the order is in contradiction of the order of the Hon'ble Supreme Court. Later on, the Hon'ble high court in the same case of Maruti Suzuki passed an order on appeal filed by the Assessee against the order of the tribunal. The Hon'ble High Court in the Maruti Suzuki Ruling (subsequent rul....
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....was used only to arrive at the quantum of the TP adjustment, the order of the TPO in the present case proceeds on the basis that an international transaction can be inferred only because the AMP expenses incurred were significantly higher that what was being spent by comparable entities and it was also used for quantifying the amount of the TP adjustment. Consequently, the Court does not agree with the submission of the learned Special counsel for the Revenue that de hors the BLT, which has been rejected in the Sony Ericsson judgment, the existence of an international transaction on account of the incurring of the AMP expenses can be established." (Emphasis Supplied) In this regard, the Assessee would also like to place reliance on the Sony Ruling which had upheld that BLT is not a tool to benchmark international transaction of AMP expenses. The relevant para of the HC Ruling is produced below for kind reference: "121. During the course of hearing before us, counsel for the Revenue had submitted that paragraph 17.4 should be treated as illustrations and not as binding comparables. We would prefer to observe, that an Assessing Officer/ TPO can go and must examin....
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.... transactions for distribution and marketing as a package are not executed between a foreign enterprise and an independent enterprise. The bright-line test, we hasten to reiterate is not and cannot be the criteria, reason or data. Commercial men would seek appropriate margins to incur AMP expenses and yet earn net profit as per market conditions." The Assessee has also relied on the following rulings wherein the Hon'ble Delhi High Court has upheld the rejection of bright-line test by relying on the Sony Ruling: Bausch & Lomb Ruling "60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. In any event, after the decision in Sony Ericsson (supra), the question of applying the BLT to determine the existence of an international transaction involving AMP expenditure does not arise." (Emphasis Supplied) Whir....
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.... / DRP in their respective orders, as the relevant extract of the same are reproduced once again for ready reference: TPO (In its show cause notice dated 11.10.2023 as reproduced earlier in para no. 4 of this order). "Primary Approach - Bright Line In relation to advertising, marketing and promotion expenses, this office has taken a stand that bright line test should be applied and any non-routine expenditure incurred by the assessee in excess of the expenditure incurred by the comparables should be considered as the expenditure incurred by the assessee for the benefit of the parent AE and corresponding adjustment should be made. The Hon'ble High Court in case of Sony Ericsson has rejected the contention of revenue on the applicability of bright line test and corresponding calculations. The Department has filed an appeal against the order of the Hon'ble High Court and contested the judgment before the Hon'ble Supreme Court. The Hon'ble Supreme Court has rejected the petitioner's application for stay of the order of the Hon'ble High Court. Accordingly, the primary contention of this office remains the same as mentioned abov....
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.... in section 92C(1) (f) read with Rule 10B(1) (f) and Rule 10AB." 15.1 Further, on similar facts, the co-ordinate bench of Tribunal, in the case of Louis Vuitton India Retail Pvt. vs. DCIT (supra) allowed the appeal of the assessee wherein the assessee had challenged the adjustment made in respect of AMP expenses by the TPO by applying the Bright Line Test. The relevant extract of the said order in para no. 21 to 26 are reproduced as under: "21. Ground No. 4 is regarding adjustment of Rs. 1,84,35,150/-on protective basis on the ground of excess advertisement, marketing and promotion expenditure. 22. The Ld. Counsel for the Assessee submitted that Bright Line Test does not have a statutory mandate and cannot be applied in order to determine the international transaction relate to incurring of AMP Expenses on behalf of AE. The Ld. Assessee's Representative placed reliance on Assessee's own case for Assessment Year 2012-13 in ITA No. 980/Del/2017, order dated 10/07/2017 and other Judgments of Hon'ble High Court of Delhi mentioned as under and sought for allowing the Ground No. 4.:- i. Sony Ericsson Mobile Communications India Private Limited & Othe....
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....e contention of the Ld. AR, claiming departure from the earlier year, on this score, is not tenable. Therefore, in light of the non-sustainability of the objections taken by the Ld. AR and following the earlier view taken by the ITAT in assessment year 2010- 11 in the case of the assessee, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judicial position, after allowing a reasonable opportunity of being heard to the assessee. 5.3 It is further clarified that if a situation for determining the ALP of AMP expenses arises, then no transfer pricing adjustment should be made by applying the Bright Line Test because the Hon'ble Jurisdictional High Court has not approved the application of the bright line test in severa....