9911796707
TMI Blog2018 (9) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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, tour guide systems and aviation headsets. It imports goods from Sennheiser Group Companies for reselling through its distributors in India. The appellant company distributes all brands of the Sennheiser group and has service centres located in Haryana, Mumbai and Bangalore and also service products within and outside warranty. The appellant also import spares from Sennheiser group Companies. 4. During the course of scrutiny assessment proceedings, the case was referred to the TPO who framed order dated 26.10.2016 u/s 92CA of the Act and determined adjustment of Rs. 4,33,12,598/- on account of AMP adjustment. Pursuant to the order of the TPO, a draft assessment order was passed on 19.12.2016 wherein the total income was assessed at Rs. 6,13,75,390/- after making addition of Rs. 4,33,12,598/- on account of T.P. adjustment/addition. 5. Aggrieved by the proposed addition, the assessee company raised objections against the draft assessment order before the DRP and the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value Value of gross sales 61,63,22,571 AMP/Sales of comparables 0.22% Amount that represent hi i&nt line 13,55,910 Expenditure on AMP by taxpayer 3,75,58,618 Expenditure in excess of bright line 3,62,02,708 3.4 Since the amount of Rs. 3,62,02,708/- was spent by the taxpayer company over and above the bright line limit for provision of services related to AMP purely for the AE, an independent entity under similar circumstances would have charged a mark-up on this amount, for the money spent and for the service element. The Hon'ble DRP had directed to apply mark up of SBI base rate plus 300 basis points in the case of the assessee for the AY 2012-13. The SB1 base rate comes to 9.75% for the FY 2012-13, Hence, mark up of 12.75% is applied on the amount of Rs. 3,62,02,708/- for computation of ALP. 3.5 Therefore, the taxpayer company should have been compensated by the AE at Rs. 3,62,02,708/- plus mark-up @ 12.75% (Rs. 46,15,845/-) for undertaking advertisement, marketing and publicity activities purely for AE and most importantly creating a marketing intangible for the AE. The net Particulars Value Value of gross sales 61,63,22,571 AMP/Sales of comparables 0.22% Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A comparable is acceptable, if based upon comparison of conditions a controlled transaction is similar with the conditions in the transactions between independent enterprises. In other words, the economically relevant characteristics of the two transactions being compared must be sufficiently comparable. This entails and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the comparability increases, extent of potential differences which would render the analysis inaccurate necessarily decreases. (iv) The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a great number of facts relevant for a particular business. It reflects the reputation which the proprietor of the brand has gathered over a passage or period of time in the form of widespread popularity and universal approval and acceptance in the eyes of the customer. Brand value depends upon the nature and quality of goods and services sold or dealt with. Quality control being the most important element, which can mar or enhance the value. (x) Parameters specified in paragraph 17.4 of the order dated 23rd January, 2013 in the case of L.G. Electronics India Pvt Ltd (supra) are not binding on the assessed or the Revenue. The 'bright line test' has no statutory mandate and a broad-brush approach is not mandated or prescribed. We disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate routine' and 'non-routine' AMP or brand building exercise by applying 'bright line test' of non-comparables should be sanctioned and in all cases, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. It would be conspicuously wrong and incorrect to trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded as a part of interconnected international transaction and subjected to arm's length pricing." 8. Keeping in mind the aforesaid findings of the Hon'ble High Court of Delhi [supra], we find that the assessee company is engaged in the business of sales and distribution of headphones, microphones, receivers, monitoring systems, tour guide systems and aviation headsets. It also imports goods from Sennheiser group companies for reselling through its distributors in India. It also undertakes after-sales services. 9. The assessee has adopted TNMM as the most appropriate method with operative profit to sales as PLI and the same is as under: International transaction Transfer pricing method Profit level indicator[PLI] Sennheiser India Total value of transaction [Amount in NRI] Margin Compar -ables findings arithmeti c mean Purchase of Goods Transact -ional Net Margin Method [TNMM] Operating Profit/Operating sales [OP/Sales] 304238583 3.71% 2.57% Provision of services 7584825 Allocation of expenses paid 1609631 Reimbursement of expenses paid &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifornia and Singapore9. Sennheiser India does not play any role in the research and development activity performed by the group. Corporate Strategy The ultimate parent company formulates the overall corporate strategy for the benefit of the entire group. The corporate strategy of Sennheiser India is based on the broader guidelines set by the ultimate parent company. New Products development AEs decide on the introduction of any new products and accordingly 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 marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indirect sales. Direct sales are the sales made by Sennheiser India to the customer in India, In respect of indirect sales AEs sell directly to customers in India. Sennheiser India provides a warranty for the equipment supplied to the customer. In case of any warranty claims made by the customers Sennheiser India either repairs or replaces such goods. Thereafter, Sennheiser India is reimbursed for the actual expenses 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 als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .....is determined." Thus, it is vivid that it is adjusted g.p. mark-up of the comparables which is applied to the direct and indirect cost incurred by the assessee in respect of international transaction for determining ALP under cost plus method and there is no mandate for considering the assessee's own g.p. rate for this purpose. We, therefore, do not agree with the working done by the TPO in this regard. 22. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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