Bright line test can’t be applied to determine AMP Exp. ALP

The bright-line test can’t be applied to determine the ALP of AMP expenses.

Honda Siel Power Products Ltd. v. DCIT,

Facts of the Case

• Assessee is engaged both in the manufacture of licensed products as well as the distribution of goods manufactured by its associated enterprises (AE).The assessee has entered into international transactions with its AE.
• Under a Technical Collaboration Agreement, the Assessee is granted exclusive license to manufacture & sell products of the foreign AEs against payment of royalty of 4% on sales.
• Additionally, the assessee entered into an agreement for obtaining a license to use the trademark (HONDA) of its AE.
• The consideration for use of such trademark is determined at 1 % of the sales of licensed products.
• AO invoked Section 92CA(1) of the Act & referred the case of the Appellant to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price in relation to international transactions undertaken by the Appellant with its AEs.

The decision of the Court

• Hon’ble High Court held that the mere existence of an agreement whereby a license has been granted to the assessee to use the brand name would not ipso facto imply any further understanding or arrangement between the Assessee and its foreign AE regarding the AMP expense for promoting the brand of the foreign AE.
• The assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE.
• It was further held that the absence of an international transaction involving AMP spend with an ascertainable price,
• Even if such price were to be nil, neither the substantive nor the machinery provision of Chapter X of the Act are applicable to the transfer pricing adjustment exercise.
• The Transfer Pricing adjustment envisages the substitution of the price of an international transaction with the ALP.
• Therefore, the Bright Line Test (BLT) is not a valid method for either determining the existence of international transactions or for the determination of ALP of such transactions.

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