Bright Line Test is not a valid test to determine international transactions for purposes of income tax

Delhi High Court: A Division Bench of the High Court comprising of S. Murlidhar and Pratibha M. Singh JJ, held that the ITAT cannot remand a matter to the Assessing Officer or Transfer Pricing Officer for determining the arm’s length price of the alleged international transaction involving advertisement marketing and promotion expenses, when the Revenue was unable to show that an international transaction between the assessee and it’s associated enterprises.

The assessee is a wholly owned subsidiary of Valvoline International inc. USA and Cummins India Ltd. The assessee filed a return for the relevant assessment year, declaring an income of Rs 1,34,82,35,760. Upon scrutiny, the AO noticed that there were international transactions undertaken by the assessee by way of import, export of materials and finished goods and provision of support services and payment of royalty. He then made a reference to the Transfer Pricing Officer for determining the arm’s length price of the said transactions with associated enterprises. Accordingly, the TPO and AO came with a different calculation for purposes of return.

The Court firstly categorically found that the ‘Bright Line Test’ is not an appropriate yardstick for determining the existence of an international transaction much less for calculating the ALP of such transactions based on Sony Ericsson Mobile Communications India Pvt. Ltd.  v. CIT, 2015 SCC OnLine Del 8083 : (2015) 374 ITR 118 (Del). The Court further held that since the AO and TPO were unable to prove international transactions to associated enterprises for tax evasion or transfer pricing purposes in the first place, the ITAT was not justified in remanding the matter to the AO/TPO for determining the ALP for alleged AMP expenses. The appeal was allowed. [Valvoline Cummins Pvt. Ltd. v. Dy. CIT, 2017 SCC OnLine Del 9484, decided on 31.07.2017]

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