ITAT Delhi Rejects Bright Line Test; Deletes Rs. 22.35 Crore AMP Adjustment in Swatch India Case

Swatch Group (India) Pvt. Ltd., a distributor of luxury watches in India and a subsidiary of the Switzerland-based Swatch Group, was subjected to a transfer pricing adjustment for AY 2021-22. The Transfer Pricing Officer treated the assessee’s advertising, marketing and promotion (AMP) expenditure as an international transaction allegedly undertaken for brand-building of its associated enterprise (AE).

Applying the Bright Line Test (BLT), the TPO proposed an AMP adjustment of Rs. 34.19 crore, later reduced to Rs. 22.35 crore in the final assessment order passed under Section 143(3) read with Sections 144C (13) and 144B, pursuant to DRP directions. The assessee challenged the adjustment before the ITAT, contending that BLT is not a recognised method under the Act and has been consistently rejected by the jurisdictional Delhi High Court.

Main Issue: Whether the transfer pricing adjustment on account of AMP expenditure can be sustained by applying the Bright Line Test, despite its rejection by the Delhi High Court.

Tribunal’s Decision: The ITAT Delhi allowed the assessee’s appeal on the AMP issue and deleted the adjustment of Rs.22.35 crore. The Tribunal held that the Bright Line Test has no statutory mandate under Section 92C and has been expressly rejected by the Delhi High Court in Sony Ericsson and subsequent decisions. It observed that even the TPO and DRP acknowledged that BLT has not been approved by the High Court and that the Department’s SLP is pending without any stay.

Relying on Louis Vuitton India Retail Pvt. Ltd., the Tribunal ruled that no transfer pricing adjustment can be made by applying BLT. Since the AMP adjustment itself was deleted, the issue of whether AMP expenditure constituted an international transaction was left open as academic.

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