TMI Blog2018 (9) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... AIYA, ACCOUNTANT MEMBER, AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Assessee : Shri Alok Vasant, Adv For The Revenue : Shri H.K. Choudhary, CIT-DR And Ms. Anchal Khandelwal, Sr.DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, With this appeal, the assessee has challenged the correctness of the order dated 29.11.2011 framed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act']. 2. The assessee is aggrieved by the addition to the total income of the assessee using Bright Line Test on protective basis amounting to ₹ 4,08,18,553/- and is further aggrieved by the addition of ₹ 5,95,56,701/- using cost plus method on substantive basis on account of the alleged difference in arm s length price [ALP] of the international transaction of advertisement, marketing and promotion [AMP] expenses. 3. Briefly stated, the facts of the case are that the appellant company was incorporated on 11.01.2007 as a subsidiary of Sennheiser Global Operations Gmbh. The appellant company is primarily engaged in the business of sales and distribution of headphones, microphones, receivers, monitoring systems, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1s- .1 Name of comparables AMP expenditure Sales turnover (In AMP / Sales 1 Advanced Micronic Devices Ltd. 11,86,741 44,86,16,502 0.26% 2 Dax Networks Ltd. 16,06,768 37,92,97,823 0.42% 3 Priya Ltd. 20,18,929 2,11,17,30,474 0.10% 4 Redington (India) Ltd. 54,01,64,000 2,28,99,05,57, 0.24% 5 Salora International Ltd 20,69,000 3,64,63,68.00 0.06% Average AMP/ Sales ratio in case of comparable companies 0.22% Senheiser Electronics India 3,75,58,618 61,63,22,571 6.09% 3.3 The mean of the expenditure incurred on AMP/sales of such companies is the bright line . Any expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No. Particulars Value (Rs.) 1 AMP expenses after excluding selling expenses (A) 3,75,58,618 Reimbursement received from AE (B) Nil Total expenditure incurred by assessee on AMP (C) 3,75,58,618 2 Sales 61,63,22,571 C.O.G.S 38,86,69,622 Gross Profit 22,76,52,949 Markup (gross profit margin) (D) 58.57% 3 ALP of AMP expenses (E)=(C*D)+C 5,95,56,701 4 Adjustment u/s 92CA = (E)-(B) 5,95,56,701 Accordingly, adjustment of ₹ 5,95,56,701/- is made on substantive basis by using cost plus method. 5. Therefore, in view of the direction of the Ld DRP-1, New Delhi the earlier adjustment of ₹ 4,33,12,598/- is being re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. the domestic AE must be compensated for the AMP expenses by the foreign AE. Such compensation may be included or subsumed in low purchase price or by not charging or charging lower royalty. Direct compensation can also be paid. The method selected and comparability analysis should be appropriated and reliable so as to include the AMP functions and costs. (v) Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction. (vi) The Assessing Officer/TPO can reject a method selected by the assessed for several reasons including want of reliability in the factual matrix or lack / non- availability of comparables. (see Section 92C(3) of the Act). (vii) When the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to treat the segregated transactional value as NIL when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G. Electronics India Pvt. Ltd. (supra). This would be necessary when the arm s length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. (xi) The Assessing Officer/TPO for good and sufficient reasons can debundle interconnected transactions, i.e. segregate distribution, marketing or AMP transactions. This may be necessary when bundled transactions cannot be adequately compared on aggregate basis. (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.71% 2.57% Provision of services 7584825 Allocation of expenses paid 1609631 Reimbursement of expenses paid 61,848 Purchase of advertisement material 426.514 Reimbursement of expenses received 1659460 10. There is no quarrel so far as the most appropriate method i.e. TNMM is concerned. It can be seen from the aforementioned chart that the appellant s margin is 3.71%, whereas the comparable s margin is 2.57%. 11. It is true that there was no agreement, understanding or arrangement between the appellant and its AEs for incurren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... send relevant advertising and promotional materials to Sennheiser India for distribution to customers in its sales territory, this includes products arid information and materials to be used in training the distributor's personnel. Thus, the product conceptualization is the function of AEs and all related research development activities are carried out by the AEs. Sennheiser group owns the Intellectual Property Rights relating to products (patents), corporate logo/ trademark, technical know-how (in the form of presses and technical data), quality standards, etc. Marketing and Sales AEs perform marketing activity through its wide network of dealers and direct sales force team for promoting and marketing the Products in order to expand its market share in the Territory and defend its market position as against its competitor. The marketing strategy relating to positioning of new services or solutions, launching a new service line or solution, developing plans to capture a certain segment of the market, etc. are all developed by the AEs. 17. The functions performed by the appellant company are described in the following para: Sennheiser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for replacement/ repair under warranty, on cost to cost basis without any mark up by the AEs. The Company also provides training to the customers with regard to the operation of the equipment. Sennheiser India handles all customer complaints as well as the billings and collection to/from the customers. Training to the sales force regarding the operation and mechanism of the product is provided by Sennheiser India. Information on the Products and information and materials to be used in training the employees to perform the Marketing Services are developed by Sennheiser group at the request of Sennheiser India. Administration Sennheiser India is responsible for all its local administrative functions like, human resource,/recounting and IT. It also prepares its own financial statements. 18. The ld. DR had vehemently contended that since there was no agreement, understanding or arrangement between the assessee and its AEs, respective functions performed cannot be determined. The ld. DR further contended that since the Bright Line Test has been negative by the Hon'ble High Court, let the TPO adjudicate the issue afresh after determining the respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We further find that the TPO has resorted to segregation of AMP expenses as a separate international transaction requiring independent bench marking by considering the same set of comparables as adopted by the assessee. The Hon'ble High Court of Delhi in the case of Soni Ericsson Mobile Communication India [P] Ltd Vs. CIT ITA No. 16/2014 has held that once the Assessing Officer/TPO accepted and adopted TNMM but chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/segregation, it would lead to unusual and incongruous results as AMP expenses was the cost or expenses and was not diverse. Even if the AMP expenses incurred by the appellant company are bench marked on a separate basis, no adjustment on account of AMP expenses would survive because of the following : Particulars Amount (Rs) Operating Margins of the assessee (OP/Revenue) 3.71% (Revenue of the assessee (B)A) 61,63,22,894 Operating profit of the assessee (C = A*B) 2,28,37,894 AMP expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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