Adjusted TNMM upheld partially; Bright Line Test deleted and Cost Plus limited, ALP adjustment directed as margin gap.

The note addresses transfer pricing treatment of distributor AMP expenditure, clarifying that the Bright Line Test is legally unsustainable and BLT-based adjustments should be deleted. It states the Cost Plus Method is not appropriate where AMP is incurred in connection with trading operations and cannot be wholly segregated as a separate international service, so Cost Plus adjustments exceeding actual AMP/trading reality must be reduced. It endorses an adjusted TNMM (intensity/aggregate approach) consistent with Sony Ericsson guidance where comparability yields an average adjusted PLI above the tested party, directing an ALP adjustment equal to the margin gap (here 1.36% of net sales) to be computed by the assessing officers.

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Issues: (i) Whether the Adjusted TNMM (intensity adjustment) as directed by the DRP should be applied and sustained and whether the Cost Plus and Bright Line Test adjustments made by AO/TPO/DRP to benchmark AMP (advertising, marketing and promotion) expenses require deletion or reduction.

Analysis: The dispute concerns transfer pricing treatment of AMP expenses for a distributor for AY 2012-13 under the framework of sections 92B, 92CA and related provisions of the Income-tax Act, 1961. The issues examined include (a) applicability and legal validity of the Bright Line Test (BLT) and Cost Plus Method for treating AMP as a separate international transaction; (b) suitability of an adjusted TNMM (intensity adjustment) / aggregate approach consistent with Sony Ericsson guidance for distributor-marketing AEs; and (c) appropriate quantum of ALP adjustment where comparability study yields an average adjusted PLI exceeding the tested party's margin. The Tribunal found BLT legally unsustainable and deleted additions based on BLT. It found that Cost Plus Method application was not justified on facts because AMP expenses were incurred in connection with trading operations and the record did not support segregating the entire AMP as a separate international service; hence the substantive Cost Plus addition was not sustainable in full. On adjusted TNMM, the Tribunal accepted the comparability analysis results (average adjusted PLI 7.41%) and concluded that an addition should be limited to the gap between that comparable margin and the assessee's margin; it directed AO to compute ALP adjustment of 1.36% of net sales in line with DRP directions and Sony Ericsson principles, leaving factual computation to AO/TPO.

Conclusion: The Tribunal deleted the BLT-based addition, rejected the Cost Plus addition to the extent it exceeded actual AMP expense and trading reality, and upheld application of adjusted TNMM only to the extent of the margin gap, directing an ALP adjustment of 1.36% on net sales to be made by AO/TPO; the appeal is partly allowed in favour of the assessee.

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