IMPORTANT POINT
The main legal point established in the judgment is the need for adequate compensation for expenses incurred for AMP activities and the legal error in applying the bright line test (BLT) tool in determining the arm's length price (ALP).

JUDGMENT

Rajiv Shakdher, J.

Prefatory facts:

1. This appeal concerns Assessment Year (AY) 2007-08. Via the instant appeal, the appellant/revenue seeks to assail the order dated 21.12.2018 passed by the Income Tax Appellate Tribunal [hereafter referred to as "the Tribunal"].

2. Although a perusal of the appeal discloses that three (3) questions are proposed on behalf of the appellant/revenue, in substance, they veer around one (1) issue, which is, whether the reimbursement of advertising, marketing and promotion expenses (AMP), incurred by the respondent/assessee on behalf of its Associated Enterprise (AE), was at arm's length. In other words, whether any upward adjustment was required to be carried out in the amount received by the respondent/assessee from its AE.

2.1. The inter-related issue that arose for consideration was whether the Transfer Pricing Officer (TPO) ought to have used the bright line test (BLT) in computing the arm's length price (ALP) concerning AMP activities carried out by the respondent/assessee.

3. The aforementioned issues arise for consideration against the backdrop of the following broad facts and circumstances.

3.1. In and about November 1994, the respondent/assessee was incorporated as a wholly-owned subsidiary of Sony Corporation, Japan (SCJ). SCJ held shares in the respondent/assessee via its subsidiaries, Sony Holding (Asia) B.V., Netherlands, and Sony Gulf FZE, Dubai.

3.2. Initially, the respondent/assessee was into manufacturing, assembling, importing, and distributing various colour televisions, audio recording media equipment, information technology products, software, and general audio products.

3.3. However, with effect from 01.07.2004, the respondent/assessee shut down its manufacturing activities.

3.4. Thereafter, on 01.04.2005, the respondent/assessee entered into an advertisement agreement with Sony Electronics Asia Pacific Pte. Ltd.

4. The respondent/assessee filed its return of income (ROI), for AY 2007-08, on 30.10.2007. In the ROI for AY 2007-08, the respondent/assessee declared its income as Rs.82,58,38,988/-. This return was processed under Section 143(1) of the Income-tax Act, 1961 [hereafter referred to as "Act"].

4.1. The respondent's/assessee's return was, thereafter, picked up for scrutiny, and accordingly, notices under Sections 143(2) and 142(1) of the Act were issued.

4.2. In the course of assessment proceedings, a reference was made to the TPO, under Section 92CA of the Act, for the determination of ALP.

4.3. The TPO issued a notice, dated 22.09.2010, calling upon the respondent/assessee to show cause as to why international transactions concerning reimbursement of advertisement expenses should not be benchmarked under the provisions of Section 92C of the Act. The thrust of the show cause notice was that the respondent/assessee, which was primarily engaged in the distribution of imported audio and visual products in the Indian market, was incurring AMP expenses on behalf of its AE.

4.4. As per the TPO, although the respondent/assessee had incurred Rs.119,54,43,600/- towards brand promotion and developing marketing intangibles for its AE, it was reimbursed only Rs.72,63,324/-.

4.5. In response to the notice, the respondent/assessee filed a reply dated 11.10.2010.

4.6. Ultimately, the TPO passed an order, dated 25.10.2010, whereby, Rs.65,34,38,272/- was added to the taxable income of respondent/assessee, having regard to the amount by which AMP expenses incurred by the respondent/assessee exceeded the amount, as determined by applying the BLT dicta.

5. The Assessing Officer (AO), thus, passed a draft assessment order in line with the adjustment made by the TPO. Against the TPO's order, the respondent/assessee preferred objections with the Dispute Resolution Panel (DRP), which were rejected via order dated 27.09.2011.

6. Consequentially, the AO passed a final assessment order on 10.10.2011, as per the directions of the DRP.

7. The record shows that the respondent/assessee preferred an appeal to