Sennheiser Electronics India Pvt. Ltd., Gurgaon V. ACIT, CIRCLE- 4(1), Gurgaon

ITA 7574/DEL/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0790 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2013-2014
• Appeal Filed On: 18-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ALOK VASANT
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I - 2 BENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA , ACCOUNTANT MEMBER, AND S HRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 7574 /DEL/201 7 [A.Y 20 13 - 14] M/S SENNHEISER ELECTRONICS INDIA L TD VS. THE A .C.I.T 102 - A, FIRST FLOOR, TIME TOWER CIRCLE 4(1) M.G. ROAD, GURGAON, HARYANA GURGAON PAN : AA KCS 4629 Q [APPELLANT] [RESPONDENT] DATE OF HEARING : 1 0 . 0 9 .201 8 DATE OF PRONOUNCEMENT : 1 9 .0 9 .2018 ASSESSEE BY : SHRI ALOK VASANT, ADV REVENUE BY : SHRI H.K. CHOUDHARY, CIT - DR MS. ANCHAL KHANDELWAL, SR. DR ORDER PER N.K. BILLAIYA , ACCOUNTANT MEMBER, WITH T HIS 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 2. THE ASSESSEE IS AGGRIEVED BY THE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE USING BRIGHT LINE TEST ON PROTECTIVE BASIS AMOUNTING TO RS. 4,08,18,553/ - AND IS FURTHER AGGRIEVED BY THE ADDITI ON OF RS. 5,95,56,701/ - USING COST PLUS METHOD ON SUBSTANTIVE BASIS ON ACCOUNT OF THE ALLEGED DIFFERENCE IN ARMS 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 C OMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF SALES AND DISTRIBUTION OF HEADPHONES, M I CROPHONES, RECEIVERS, MONITORING SYSTEMS, TOUR GUIDE SYSTEMS AND AVIATION HEAD SETS. 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 H AS SERVICE CENTRE S LOCATED IN HARYANA, MUMBAI AND BANGALORE AND ALSO SERVICE PRODUCTS WITHIN AND OUTSIDE WARRANTY. THE APPELLANT ALSO IMPORT SPARES FROM SE NN HEISER GROUP COMPANIES. 3 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 DR AFT 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 PASSED ITS ORDER ON 28.09.2017. PURSUANT TO THE DIRECTIONS OF THE DRP, THE TPO FINALLY FRAMED THE ORDER AND THE SAME R EADS AS UNDER: THE HONBLE DRP HAS DIRECTED TO APPLY BRIGHT LINE METHOD FOR COMPUTATION OF ALP OF EXPENSES. HENCE, THE WORKING OF ADJUSTMENT USING BRIGHT LINE METHOD IS AS UNDER: 3 . 1 THE ASSESSEE HAS INCURRED RS. 3,75,58,618/ - TOWARDS AMP EXPENSES DURING TH E YEAR UNDER CONSIDERATION. DURING THE COURSE OF PROCEEDINGS FOR AY 2012 - 13, THIS OFFICE HAD TAKEN A STAND THAT BRIGHT LINE TEST SHOULD BE APPLIED AND ANY AMP EXPENDITURE INCURRED BY THE TAXPAYER IN EXCESS OF THE EXPENDITURE INCURRED BY THE COMPARABLES SHO ULD BE CONSIDERED AS THE EXPENDITURE INCURRED 4 BY THE TAXPAYER FOR THE BENEFIT OF THE PARENT AE AND CORRESPONDING ADJUSTMENT SHOULD BE MADE. THE ILONBLE HIGH COURT IN THE CASE OF SONY MOBILE COMMUNICATION (INDIA) PVT LTD. HAS REJECTED THE CONTENTION OF REV ENUE ON THE APPLICABILITY OF BRIGHT LINE TEST AND CORRESPONDING CALCULATIONS. THE DEPARTMENT HAS FILED AN APPEAL AGAINST THE ORDER OF THE HONBLE HIGH COURT AND CONTESTING THE JUDGMENT BEFORE THE HONBLE SUPREME COURT. FURTHER, THE HONBLE DRP HAD ALSO DIR ECTED TO APPLY BRIGHT LINE METHOD FOR COMPUTATION OF ALP OF AMP EXPENSES FOR THE AY 2013 - 14 VIDE ITS DIRECTIONS DATED 28.09.2017. 3 . 2 THE AMP/ SALES OF THE FINAL COMPARABLES AS SELECTED BY THE ASSESSEE ARE AS UNDER - 3 . 3 THE MEAN OF THE EXPENDITURE INCURRED ON AMP/SALES OF SUCH COMPANIES IS THE BRIGHT LINE. ANY EXPENDITURE IN EXCESS OF THE BRIGHT LINE IS FOR THE PROMOTION OF BRAND/TRADE NAME (WHICH IS OWNED BY THE AE) THAT NEEDS TO BE SUITABLY COMPENSATED BY THE AE. TH E AMOUNT WHICH REPRESENTS THE BRIGHT LINE AND THE AMOUNT 1 S - .1 0. NAME OF COMPARABLES AMP EXPENDITURE (IN RS.) SALES TURNOVER (IN RS.) 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, 000 0.24% 5 SALORA INTERNATIONAL LTD 20,69,000 3,64,63,68.00 0 0.06% AVERAGE AMP/ SALES RATIO IN CASE OF COMPARABLE COMPANIES 0.22% SENHEISER ELECTRONICS INDIA PVT. LTD. 3,75,58,618 61,63,22,571 6.09% 5 THAT SHOULD HAVE BEEN COMPENSATED TO THE TAXPAYER COMPANY ARE COMPUTED HEREUNDER: 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 HONBLE 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, MARKETIN G 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 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 6 ADJUSTMENT THEREFORE WORKS OUT TO RS. 4,08,18,553/ - . ACCORDINGLY, ADJUSTMENT OF RS. 4,08,18,553/ - IS MADE ON PROTECTIVE BASIS. THE HONBLE DRP HAS DIRECTED TO RE - COMPUTE THE ADJUSTMENT BY FOLLOWING THE MANNER OF COMPUTING ALM AND ALP ADJUSTMENT AS DEMONSTRATED IN PARA 8.1.3 OF THE DRPS ORDER DATED 28.10.2016 FOR THE AY 2012 - 13. THE CALCULATION OF ADJUSTMENT FOR THE YEAR UNDER CONSIDERATION IS A S UNDER - ACCORDINGLY, ADJUSTMENT OF RS. 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 RS. 4,33,12,598/ - IS BEING REVISED TO RS 5,95,56,701/ - ON SUBSTANTIVE BASIS. BESIDES, AN ADJUSTMENT OF RS, 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 7 4,08,18,553/ - IS BEING MADE ON PROTECTIVE BASIS . THE A.O. SHALL ENHANCE THE INCOME OF THE ASSESSEE BY AN AMOUNT OF RS. 5,95,56,701/ - IN COMPUTATION OF ITS TOTAL INCOME WHILE PASSING THE FINAL ORDER. 6. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. 7. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE DIRECTIONS OF THE DRP FOLLOWED BY THE TPO , APPL YING BRIGHT L INE METHOD HAS BEEN DISCARDED BY THE HON'BLE JURISDICTIONAL HIGH COURT OF DELHI IN TAX APPEAL NO. 16 OF 2014 BY LISTING ITS FINDINGS AS UNDER : 18. REJECTING THE APPLICAT ION OF BRIGHT LINE TEST, THE HON'BLE HIGH COURT OF DELHI HAS LISTED ITS FINDINGS AS UNDER: (I) IN CASE OF A DISTRIBUTOR AND MARKETING AE, THE FIRST STEP IN TRANSFER PRICING IS TO ASCERTAIN AND CONDUCT DETAILED FUNCTIONAL ANALYSIS, WHICH WOULD INCLUDE 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. 8 (I II) 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 TRANSAC TIONS 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 DETE RMINING 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 I S 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 WHI CH MAY BE REQUIRED. AS THE DEGREE OF THE COMPARABILITY INCREASES, EXTENT OF POTENTIAL DIFFERENCES WHICH WOULD RENDER THE ANALYSIS INACCURATE NECESSARILY DECREASES. 9 (IV) THE ASSESSED, I.E. THE DOMESTIC AE MUST BE COMPENSATED FOR THE AMP EXPENSES BY THE FOR EIGN 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 INC LUDE 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 IN TERNATIONAL 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 DETERMIN E 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 - 10 AVAILABILITY OF COMPARABLES. (SEE SECTION 92C(3) OF THE ACT). (VII) WHEN THE ASSESSING OFFICER/TPO REJECTS THE METHOD ADOPTED BY THE ASSESSED, HE IS ENTITLED TO SELECT THE MOST APPROPRIATE METHOD, AND UNDERTAKE COMPARABILITY ANALYSIS. SELECTION OF T HE METHOD AND COMPARABLES SHOULD BE AS PER THE COMMAND AND DIRECTIVE OF THE ACT AND RULES AND JUSTIFIED BY GIVING REASONS. (VIII) DISTRIBUTION AND MARKETING ARE INTER - CONNECTED AND INTERTWINED FUNCTIONS. BUNCHING OF INTER - CONNECTED AND CONTINUOUS TRANSAC TIONS IS PERMISSIBLE, PROVIDED THE SAID TRANSACTIONS CAN BE EVALUATED AND ADEQUATELY COMPARED ON AGGREGATE BASIS. THIS WOULD DEPEND ON THE METHOD ADOPTED AND COMPARABILITY ANALYSIS AND THE MOST RELIABLE MEANS OF DETERMINING ARMS LENGTH PRICE. (IX) TO AS SERT AND PROFESS THAT BRAND BUILDING AS EQUIVALENT OR SUBSTANTIAL ATTRIBUTE OF ADVERTISEMENT AND SALE PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDINATED SYNERGETIC IMPACT CREATED BY ASSORTMENT LARGELY REPRESENTING REPUTATION AND QUALITY. BR AND HAS REFERENCE TO A NAME, TRADEMARK OR TRADE NAME AND LIKE 11 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 NON - ROUTINE AMP OR BRAND BUILDING EXERCISE BY APPLYING BRIGHT LINE TEST OF NON - COMPARABLES SHOULD BE SANCTIONED AND IN ALL CASES, 12 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 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 R EVEAL 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 ARMS LENGTH PRICE OF THE CONTROLLED TRANSACTION CANNOT BE ADEQUATELY OR RELIABLY DETERMINED WITHO UT 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 B E ADEQUATELY COMPARED ON AGGREGATE BASIS. 13 (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 A LLOCATING EXERCISE TO PREVENT ARTIFICIAL SHIFTING OF NET INCOMES OF CONTROLLED TAXPAYERS AND TO PLACE THEM ON PARITY WITH UNCONTROLLED, UNRELATED TAXPAYERS. THE EXERCISE UNDERTAKEN SHOULD NOT RESULT IN OVER OR DOUBLE TAXATION. THUS, THE ASSESSING OFFICER/T PO CAN SEGREGATE AMP EXPENSES AS AN INDEPENDENT INTERNATIONAL TRANSACTION, BUT ONLY AFTER ELUCIDATING GROUNDS AND REASONS FOR NOT ACCEPTING THE BUNCHING ADOPTED BY THE ASSESSED, AND EXAMINING AND GIVING BENEFIT OF SET OFF. SECTION 92(3) DOES NOT BAR OR PRO HIBIT SET OFF. (XIII) CP METHOD IS A RECOGNISED AND ACCEPTED METHOD UNDER INDIAN TRANSFER PRICING REGULATION. IT CAN BE APPLIED BY THE ASSESSING OFFICER/TPO IN CASE AMP EXPENSES ARE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION, PROVIDED CP METHOD IS THE MOST APPROPRIA TE AND RELIABLE METHOD. ADOPTION OF CP METHOD AND COMPUTATION OF COST AND GROSS PROFIT MARGIN COMPARABLE MUST BE JUSTIFIED. 14 (XIV) THE OBJECT AND PURPOSE OF TRANSFER PRICING ADJUSTMENT IS TO ENSURE THAT THE CONTROLLED TAXPAYERS ARE GIVEN TAX PARITY WITH UN CONTROLLED 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 ARMS LENGTH PRICE BY APPLYING CP METHOD, CANNOT BE AGAIN FACTORED OR INCLUDE D AS A PART OF INTERCONNECTED INTERNATIONAL TRANSACTION AND SUBJECTED TO ARMS 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 SERVICE S. 9. THE ASSESSEE HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD WITH OPERATIVE PROFIT TO SALES AS PLI AND THE SAME IS AS UNDER: 15 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 PROF I T/OPERATING SALES [OP/SALES] 304238583 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 APPELLANTS MARGIN IS 3.71% , WHEREAS THE COMPARABLES MARGIN IS 2.57%. 11. IT IS TRUE THAT THERE WAS NO AGREEMENT, UNDERSTANDING OR ARRANGEMENT BETWEEN THE APPELLANT AND ITS AES FOR INCURRENCE OF SUCH EXPENDITURE BY THE APPELLANT. 16 12. AS MENTIONED ELSEWHERE, THE TPO HAS FOLLOWED BRIGHT LINE METHOD FOR COMPUTING THE ALP OF THE TRANSACTION. THE APPELLANTS AMP/SALES RATIO IS AT 6.09% AND THAT OF THE COMPARABLES IS 0.22% , TAKING A MARK UP OF 12.75% ON CO ST , WHICH IS WRONGLY ADOPTED AS COST PLUS MARK UP AT 58.57% WHILE GIVING EFFECT TO THE DIRECTIONS OF THE DRP. 13 . THE FUNCTIONS PERFORMED BY THE AES ARE MANUFACTURING, RESEARCH AND DEVELOPMENT, CORPORATE STRATEGY AND NEW PRODUCT DEVELOPMENT AND MARKETING AND SALES. 14. WE FIND THAT THE ADVERTISEMENT SPEND BY THE APPELLANT WAS WITH A FOCUS ON SELLING THE PRODUCT BY HIGHLIGHTING ITS FEATURES TO POTENTIAL CUSTOMERS ON ONE TO ONE BASIS, MOST COMMONLY THROUGH DIRECT MAIL, E - MAIL AND ONLINE MARKETING. 15. IN O UR CONSIDERED OPINION, THE AMP EXPENSES INCURRED WERE NOT WITH A VIEW TO BENEFIT THE AES BUT TO ONLY INCREASE THE APPELLANTS OWN SALES. 16. THE FUNCTIONS PERFORMED BY SENNHEISER GROUP ARE DESCRIBED IN THE FOLLOWING PARA: 17 MANUFACTURING SENNHEISER GROUP MANUFACTURES ITS PRODUCTS AT THREE FACTORIES, LOCATED AT GERMANY, IRELAND AND THE USA RESPECTIVELY. IN ADDITION, IT USES CAPACITIES AT LONG - TERM PARTNER COMPANIES IN EUROPE, ASIA AND AMERICA WHO FULFIL THEIR STRICT QUALITY REQUIREMENTS. TH E PRODUCT PORTFOLIO OF SENNHEISER GROUP INCLUDES MICROPHONES, NEUMANN MICROPHONES, WIRELESS MICROPHONE AND MONITOR SYSTEMS, CONFERENCE AND VISITOR INFORMATION TECHNOLOGY, AND HEADSETS FOR AVIATION ETC. IN ADDITION, THE COMPANY PROVIDES CENTRAL LOGISTICS SE RVICES 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 RESE ARCH AND DEVELOPMENT CENTRE IN GERMANY AND HAS RESEARCH AND DEVELOPMENT OFFICES IN CALIFORNIA AND SINGAPORE 9 . SENNHEISER INDIA DOES NOT PLAY ANY ROLE IN THE RESEARCH AND DEVELOPMENT ACTIVITY P ERFORMED BY THE GROUP. 18 CORPORATE S TRAT E GY 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 PRODUCT S DEV E LOP MENT AES DECIDE ON THE INTRODUCTIO N 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 OU T 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. 19 MARKETING AND SALES AES PERFORM MARKETING ACTIVITY THROUGH ITS W IDE 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 STRAT EGY RELATING TO POSITIONING OF N E W SE RVIC ES O R SOLUTI O NS, LAUNCHING A NEW SERVICE LINE OR SOLUTION, DEVELOPING PLANS TO CAPT URE A CERTAIN SEGMENT OF THE MAR KET, ETC. ARE ALL DEVELOPED BY THE AES. 17. THE FUNCTIONS PERFORMED BY THE APPELLANT COMPANY ARE DESCRIBED IN THE FOLLOWING PARA: SENNHEISER INDIA PROCURES HEAD PHONES, MICROPHONES AND WIRELESS SYSTEMS (HEREAFTER THE 'PRODUCTS'; FROM ITS AES. THE COMPANY DOES NOT PURCHASE ANY GOODS FROM ANY THIRD PARTY VENDOR. HOWEVER, THERE IS NO SALE TO ANY AE BY SENNHEISER ELECTRONICS (INDIA) I.E . THE ULTIMATE CUSTOMERS FOR THE TRADED PRODUCTS ARE UNRELATED PARTIES. THE MAJORITY OF THE SALES TAKE PLACE IN THE INDIAN TERRITORY. THE CUSTOMERS INCLUDE PRODUCTION STUDIOS, AIRLINES, AUDIO & TV CHANNELS, CALL CENTRES IN INDIA . 20 THE AE SELLS GOODS TO THE SENNHEISER INDIA AT A PRICE LIST WHICH IS SAME FOR ALL THE OTHER FELLOW SUBSIDIARIES. THE SENNHEISER INDIA SELLS GOODS TO DISTRIBUTORS OR OTHER MIDDLE MEN AT AN APPROXIMATE GROSS MARGIN OF 45%. DISTRIBUT I ON A ND I NVENTORY MANAGEMENT SENNHEISER INDIA IS RE SPONSIBLE FOR ITS OWN INVENTORY MANAGEMENT. SENNHEISER INDIA SELLS IN THE DOMESTIC MARKET AGAINST A CONFIRMED ORDER FROM THE CUSTOMER FURTHER, SENNHEISER INDIA MAINTAINS WAREHOUSES AT VARIOUS LOCATIONS FOR FACILITATING DISTRIBUTION OF GOODS IN VARIOUS PARTS OF INDIA. QUALITY CONTROL IS UNDERTAKEN BY EACH MANUFACTURER BEFORE THEY ARE SHIPPED TO INDIA. ONCE THE GOODS REACH THE INDIAN SHORE, SENNHEISER INDIA ALSO PERFORMS QUALITY CHECK. MARKETING & SATES OF FINISHED GOODS SENNHEISER INDIA IS RESPONSIBLE FOR DISTRIBUTION, INVOICING, COLLECTION, ORDERING OR DELIVERY TO THE END - USER AS WELL AS WHOLESALERS. SENNHEISER INDIA IS RESPONSIBLE FOR MARKETING AND OTHER SALES PROMOTION ACTIVITIES. MARKETING STRATEGY REQUIRED TO BE FOLLOWED IN INDIA IS PERFORMED BY SE NNHEISER INDIA 21 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 IN DIA 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 R ESPECT 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 TH E EQUIPMENT. SENNHEISER INDIA HANDLES ALL CUSTOMER COMPLAINTS AS WELL AS THE BILLINGS AND COLLECTION TO/FROM THE CUSTOMERS. 22 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 ARRANGEME NT BETWEEN THE ASSESSEE AND ITS AES, RESPECT IVE 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 T HE RESPECTIVE FUNCTIONS AND FRAME DE NOVO ASSESSMENT. 23 19. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THIS CONTENTION OF THE LD. DR. WE DO NOT FIND MUCH FORCE IN THE CONTENTION OF THE LD. DR BECAUSE THE TPO, WHILE FRAMING THE ORDER U/S 92CA(3) OF THE A CT WAS WELL AWARE WITH THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF SONI ERICCSON MOBILE COMMUNICATION INDIA PVT LTD REPORTED AT 276 CTR 97, AND THEREFORE, IT CANNOT BE SAID THAT THE TPO WAS NOT AWARE THAT THE BRIGHT LINE TEST HAS BEEN DISCARDED BY THE HON'BLE HIGH COURT OF DELHI. RELEVANT OBSERVATIONS OF THE TPO ARE AT PAGE 8 OF HIS ORDER. IT WAS ONLY ON THE BASIS OF BRIGHT LINE TEST THAT THE IMPUGNED ALP ADJUSTMEN T WAS MADE , BUT THAT APPROACH HAS ALREADY BEEN NEGATIVED BY THE HON'BLE HIGH COURT. THEREFORE, WE SEE NO REASON TO REMIT THE MATTER TO THE FILE OF THE TPO AS IS PRAYED FOR BY THE LD. DR. A REMAND TO THE ASSESSMENT STAGE CANNOT BE A MATTER OF ROUTINE. IT HAS TO BE SO DONE ONLY WHEN THERE IS ANYTHING IN THE FACTS AND CIRCUMSTANCES TO SO WARRANT OR JUSTIFY. IN OUR CONSIDERED OPINION, NO NEW FACTS HAVE EMERGED AND ALL THE FACTS BROUGHT ON RECORD DURING THE COURSE OF ASSESSMENT PROCEEDINGS, DO NOT INDICATE L EGALLY SUSTAINABLE BASIS FOR REMITTING THE MATTER TO THE FILE OF THE TPO. 24 20. SIMPLY BECAUSE THE DEPARTMENT HAS NOT ACCEPTED THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT OF DELHI, THE BINDING NATURE OF SUCH JUDGMENT IS NOT MITIGATED IN ANY MANNE R. 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% , WHERE AS 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 DETER MINED. 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 MAND ATE FOR CONSIDERING THE ASSESSEES OWN G.P. RATE FOR THIS PURPOSE. WE, THEREFORE, DO NOT AGREE WITH THE WORKING DONE BY THE TPO IN THIS REGARD. 25 22. WE FURTHER FIND THAT THE TPO HAS RESORTED TO SEGREGAT ION OF AMP EXPE N SES AS A SEPARATE INTERNATIONAL TRAN SACTION 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 T HE 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) (A) 3.71% REVENUE OF THE ASSESSEE (B) 61,63,22,894 OPERATING PROFIT OF THE ASSESSEE (C = A*B) 2,28,37,894 AMP EXPENSES (EXCL. SALES COMMISSION AND DISCOUNT)(D) 3,75,58,618 OPERATING PROFIT BEFORE AMP EXPENSES, BEING SEPARATELY BENCHMARKED (E = C+D) 6,03,96,512 ARM'S LENGTH OPERATING MARGIN (F) 2.57% ARM'S LENGTH OPERATING PROFIT (G = B*F) 1,58,39,490 26 PROFIT AVAILABLE FOR SET OFF (H = E - G) 4,45,57,022 - SBI BASE RATE PLUS 300 BASIS POINTS ADOPTED BY TPO FOR BENCHMARKING AMP EXPENSES (I) 12.75% COMPENSATION FOR AMP EXPENSES COMPUTED BY TPO 4,08,18,553 ADJUSTMENT ON ACCOUNT OF AMP EXPENSES AFTER SET OFF (K = J - H) (37,38,469) 23. CONSIDERING THE FACTS OF THE CASE IN TOTALITY FROM ALL POSSIBLE LEGAL ANGLES, WE DO NOT FIND ANY PLAUSIBLE REASON FOR TP ADJUSTMENT ON ACCOUNT OF AMP EXPENSES. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ADJUSTMENTS. 24. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 7574 /DEL/201 7 IS ALLOWED. THE ORDER IS PRON OUNCED IN THE OPEN COURT ON 1 9 .0 9 .2018. S D / - S D / - [ SUDHANSHU SRIVASTAVA ] [ N.K. BILLAIYA ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 9 T H SEPTEMBER , 2018 VL/ 27 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER