Facts of the Case

The present appeals were filed by the assessee, MSD Pharmaceuticals Pvt. Ltd., pertaining to Assessment Year 2011–2012, involving transfer pricing adjustments in relation to Advertisement, Marketing and Promotion (AMP) expenditure. The Transfer Pricing Officer (TPO), while determining the Arm’s Length Price (ALP), treated AMP expenditure as part of an international transaction and applied the Bright Line Test (BLT) for benchmarking such expenditure.

The Income Tax Appellate Tribunal (ITAT), relying upon the legal position emerging after the Delhi High Court’s decision in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT, remanded the matter back to the TPO for fresh determination of ALP. The assessee challenged this remand on the ground that similar issues for the previous assessment year had already been restored by the High Court to the ITAT for fresh adjudication and that certain issues had already attained finality.

 Issues Involved

  1. Whether AMP expenditure incurred by the assessee constituted an international transaction under transfer pricing provisions?
  2. Whether the Bright Line Test (BLT) could be applied for determining Arm’s Length Price of AMP expenditure?
  3. Whether the ITAT was justified in remanding the matter to the TPO instead of adjudicating the issues on merits?
  4. Whether issues claimed to have attained finality could again be reopened for adjudication?

 Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee contended that for Assessment Year 2010–11, the High Court had already restored similar issues to the ITAT for fresh adjudication and the same course ought to be followed in the present appeals.
  • It was argued that certain issues had already attained finality and therefore ought not to be remitted to the Assessing Officer again.
  • The assessee challenged the mechanical remand to the TPO and sought adjudication by the ITAT on the issues raised.

 Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue supported the ITAT’s remand order, contending that the determination of whether AMP expenditure constituted an international transaction required fresh factual examination.
  • It was submitted that ALP determination should be undertaken afresh in light of judicial precedents after the rejection of BLT in Sony Ericsson.
  • The Revenue maintained that all factual and legal contentions could be re-examined by the ITAT.

 Court Findings / Order

The Delhi High Court observed that in earlier appeals relating to Assessment Year 2010–11 between the same parties, the Court had restored the matter to the ITAT for de novo adjudication on merits. Following the same reasoning, the Court modified the impugned order and directed that the ITAT itself should decide the appeals on all questions raised by the parties.

The Court clarified that:

  • The ITAT must first determine whether an international transaction existed between the assessee and its Associated Enterprise concerning AMP expenditure.
  • Only after such determination could the question of Arm’s Length Price arise.
  • The assessee’s contentions regarding issues already settled must also be examined on merits.

Accordingly, the appeals were partly allowed and the matter was restored to the ITAT for fresh adjudication.

 Important Clarification

This judgment reinforces the principle laid down in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT that the Bright Line Test cannot be mechanically applied for transfer pricing adjustments relating to AMP expenditure. The existence of an international transaction is a jurisdictional precondition before ALP determination.

 Sections Involved

  • Section 92 – Computation of income from international transactions
  • Section 92C – Arm’s Length Price determination
  • Section 92CA – Reference to Transfer Pricing Officer
  • Section 260A – Appeal to High Court
  • Income-tax Act, 1961

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:6869-DB/SAS13112017ITA9722017.pdf

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