2018 (9) TMI 1302 - AT - Income Tax

Tribunal rules in favor of assessee, directs deletion of AMP expense adjustments

M/s Sennheiser Electronics India Ltd Versus The A.C.I.T, Circle – 4 (1), Gurgaon

M/s Sennheiser Electronics India Ltd Versus The A.C.I.T, Circle – 4 (1), Gurgaon - [2018] 67 ITR (Trib) 634 Issues Involved:1. Addition to total income using Bright Line Test on protective basis.2. Addition using cost plus method on substantive basis due to alleged difference in Arm's Length Price (ALP) of international transaction of Advertisement, Marketing, and Promotion (AMP) expenses.Detailed Analysis:Issue 1: Addition to Total Income Using Bright Line Test on Protective BasisThe assessee challenged the correctness of the order dated 29.11.2011 framed under section 143(3) read with section 144C of the Income-tax Act, 1961. The assessee was aggrieved by the addition of Rs. 4,08,18,553/- using the Bright Line Test on a protective basis. The TPO had determined an AMP adjustment of Rs. 4,33,12,598/- which was included in the draft assessment order. The DRP directed the application of the Bright Line Method for computing the ALP of AMP expenses. The AMP/sales ratio of the assessee was 6.09%, while the comparables had an average ratio of 0.22%. The excess expenditure over the bright line limit was Rs. 3,62,02,708/-, and a markup of 12.75% was applied, resulting in a total adjustment of Rs. 4,08,18,553/- on a protective basis.The Hon'ble High Court of Delhi in the case of Sony Mobile Communication (India) Pvt Ltd rejected the Bright Line Test, stating it had no statutory mandate and should not be applied broadly. The court emphasized the need for a detailed functional analysis and comparability analysis, rejecting the segmentation of AMP expenses as a separate international transaction without proper justification.Issue 2: Addition Using Cost Plus Method on Substantive BasisThe assessee was also aggrieved by the addition of Rs. 5,95,56,701/- using the cost plus method on a substantive basis. The TPO, following the DRP's directions, recomputed the adjustment using the cost plus method. The AMP expenses after excluding selling expenses were Rs. 3,75,58,618/-, and the gross profit margin was 58.57%. The ALP of AMP expenses was calculated to be Rs. 5,95,56,701/-, leading to an adjustment of the same amount on a substantive basis.The Hon'ble High Court of Delhi in the case of Soni Ericsson Mobile Communication India Pvt Ltd held that if the TNMM is accepted as the most appropriate method, segregating AMP expenses as a separate transaction without bifurcation would lead to incongruous results. The court stated that the AMP expenses should be included in the overall comparability analysis under the selected method, and any adjustment should be based on a comprehensive view of the functions performed, assets used, and risks assumed by the entities involved.Findings and Conclusion:The tribunal found that the assessee's AMP expenses were incurred to increase its own sales and not to benefit the associated enterprises (AEs). The tribunal rejected the TPO's adoption of the Bright Line Test and the cost plus method with a 58.57% markup, as these approaches were not aligned with the High Court's directives. The tribunal emphasized that the TPO was aware of the High Court's decision rejecting the Bright Line Test and should have followed the correct legal principles.The tribunal concluded that the AMP expenses did not warrant a separate adjustment and directed the Assessing Officer to delete the impugned adjustments. The appeal filed by the assessee was allowed.Final Judgment:The appeal filed by the assessee in ITA No. 7574/DEL/2017 was allowed, and the order was pronounced in the open court on 19.09.2018.