Introduction
In the case of Principal Commissioner of Income-tax, Central v. Pepsico India Holding (P.) Ltd.[i], the Delhi High Court (‘HC’) addressed one of the key issues regarding the computation of arm’s length price (‘ALP’) for advertising, marketing, and promotion (‘AMP’) expenses under s. 92C of the Income-tax Act, 1961 (‘Act’). This matter addressed the applicability of the bright line test (‘BLT’) in determining the ALP for AMP expenses for multinational enterprises operating in India.
Brief Facts
The Income Tax Appellate Tribunal (‘ITAT’) upheld the computation of AMP expenses using the BLT in its order.
The case pertains to assessment years (‘AYs’) 2006-07 to 2013-14, during which time the dispute arose over the methodology used for computing the ALP for AMP expenses incurred by Pepisco India Holding (P.) Ltd. (‘Assessee’).
The tax authorities adopted the BLT to determine the excess AMP expenditure requiring adjustment. The Assessee contented that the BLT was not an appropriate method for computing the ALP for AMP expenses.
Held
The HC referred to its earlier decision in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [ii], in which it dismissed the use of BLT to identify excess AMP expenses. It further observed that the BLT is not a method prescribed under the Indian transfer pricing (‘TP’) law and has not been recognized or accepted in international commentaries and principles of taxation. The US Tax Court originally pronounced the BLT in the case of DHL, invalidating its use for AMP expense computations and holding that AMP expenses constitute an international transaction.
The HC reviewed the ITAT’s order and found that the AMP computation was based on the BLT. It was determined that the BLT could not be sustained as a method for AMP expense adjustment.
The HC found no merit in the appeals, emphasizing that the BLT’s use was legally unsustainable. Consequently, the appeals were dismissed.
Our Analysis
By dismissing the Appeals that relied on the BLT, the HC reinforced the view that the BLT is not a valid method for determining AMP expense adjustments under TP regulations. This decision not only aligns with the HC’s previous judgment but also provides clarity and consistency in the application of TP rules. It highlights the necessity for tax authorities and multinational enterprises to employ appropriate and legally sustainable methods in their TP practices.
End Notes
[i] [2024] 162 taxmann.com 724 (Delhi) [16.05.2024].
[ii] 2015 SCC OnLine Del 8083.
Authored by Jitin Bharadwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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