TaxTMI 
TaxTMI 
2018 (9) TMI 1302
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....e 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, 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 ....
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....nditure (In Rs.) Sales turnover (In Rs.) AMP / Sales that should have been compensated to the taxpayer company are computed hereunder: Particulars 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 ac....
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....lude AMP function expenses (ii) The second step mandates ascertainment of comparables or comparable analysis. This would have reference to the method adopted which matches the functions and obligations performed by the tested party including AMP expenses. (iii) 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 availabil....
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....tment largely representing reputation and quality. 'Brand' has reference to a name, trademark or trade name and like 'goodwill' is a value of attraction to customers arising from name and a reputation for skill, integrity, efficient business management or efficient service. Brand creation and value, therefore, depends upon 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 '....
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....ransfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. Costs or expenses incurred for services provided or in respect of property transferred, when made subject matter of arm's length price by applying CP Method, cannot be again factored or included 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 arith....
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....nce and visitor information technology, and headsets for aviation etc. In addition, the company provides central Logistics services for products manufactured by our Asian partner companies. Sennheiser India does not perform any manufacturing activity. Research and development Research and development activity is a centralized activity done by the AEs. The group has a large research and development centre in Germany and has research and development offices in California 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&....
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.... Sennheiser India is responsible for marketing and other sales promotion activities. Marketing strategy required to be followed in India is performed by Sennheiser India based on the broad guidelines as provided by Sennheiser group. All the brochures and other marketing literature is designed and developed by Sennheiser India with inputs regarding brochure specification from the parent company. Sennheiser India is responsible for controlling and coordinating the marketing activities in India. Sennheiser India also provides after sales support for both direct 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....
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....e Jurisdictional High Court of Delhi, the binding nature of such judgment is not mitigated in any manner. Unless the Hon'ble Supreme Court reverses the judgment of any High Court, the same holds field, and remains binding on all the authorities working under its jurisdiction. 21. As mentioned elsewhere, the TPO has adopted cost and mark up of 58.57%, whereas the appellant earns gross margin of 34.30%. A bare perusal of the mandate of section 10B(1)(c) postulates under said clause (ii) that "the amount of a normal gross profit mark-up to such costs ..............in a comparable uncontrolled transaction ........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 considerin....