TMI Blog2023 (7) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... r and is functioning its activities under the MLM sales model. On perusal of the records and the activities carried out by the assessee described in the TP study reports, no action foised it as an international transaction. The entire sales of the assessee is effectuated in India and the entire profits are also assessee s own profit. The expenditure incurred by assessee is to carry out its day to day business activity of distribution and are directly linked with the business carried out by assessee in India. It is not disputed by the revenue that TDS has been deducted by the assessee on the royalty earning, production bonus u/s. 194H of the Act, and thus payouts are made only when the members / associates /distributors effectuate a successful sale. In any event, all these expenses have been considered by the assessee while computing the margin under the manufacturing segment which already has been held to be at arms length by the Ld. TPO in the transfer pricing order u/s. 92CA. We also find merit in the submission that, if the net profit margin meets the Arm's length price, then no separate addition needs to be made. No adverse inference is drawn by the Ld. TPO in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and performing all significant functions with respect to its business and thus bears the entrepreneurial risk in India. All expenses including revenues earned by Herbalife India, are entirely on its own account and not on behalf of any of its AE(s). 2.3 It is submitted that, Herbalife India's business model is a direct selling model, where Herbalife India is a direct selling entity. Herbalife India distributes and sells its products through a network of independent members through the direct selling channel (chain of people referred to as associates / supervisors / members / distributors), which is vastly different from a normal retail sale model. It was submitted by the assessee that 'Direct Selling' means, marketing, distribution and sale of goods or providing of services as a part of network of direct selling to the consumers. The assessee submits that, this generally occurs in the consumers' houses, at their workplace or through demonstration of such goods and services at a mutually convenient venue. It is submitted that under this model, the associates / supervisors / distributors are paid incentives / commissions to remunerate them for bringing in new cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowances 448.85 2 Business promotion expenses 52.31 Total expenses 501.16 2.10 The Ld. TPO while proposing the AMP adjustment estimated the adjustment based on the sale of goods by the assessee thus computing it by applying bright line test. 2.11 Thus the total adjustment proposed by the Ld. TPO are as under: Particulars Amount of adjustment (INR) SWD 14,56,14,319 AMP expenses 271,76,64,583 Total adjustment u/s. 92CA 286,32,78,902 2.12 On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order by proposing an addition in the hands of the assessee at Rs. 471,19,33,412/- by order dated 25.05.2021. 2.13 On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP while considering the objections passed certain directions, wherein the adjustment proposed under the software development segment stood deleted. As per the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a volume point and 1 volume point = 1 USD. This has been done to maintain a uniform currency throughout the Herbalife Group companies. Volume Points are used for qualification and bonuses and volume rebate earnings are ranging from 1% - 5% made to Fully Qualified Supervisors on the monthly volume/ total transaction done by his downline associates o Production bonus: Production bonus is paid to those Associates who are a part of the Top Achievers Business Team (TAB') and can earn bonus ranging from 2%- 7% depending upon o the sales made by them and their member associates who are registered under him o Mark Hughes Bonus: The President team members of the Assessee are been provided with additional 1% bonus of the value of the total world wide sales based on certain qualifications. 3.4 The Ld. Counsel submitted that, the payouts that form part of distributor allowances have direct nexus to the sales and they are nothing but sales incentives/commissions paid to its members for the sales undertaken by them. He also emphasised that these payments are made only when the sales to the ultimate customers are concluded by the associates / members and if no sales ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance on the decision of Hon ble Delhi High Court in case of Sony Ericsson Mobile Communication India (P) Ltd. reported in (2015) 374 ITR 118 wherein the Hon ble High Court held that the direct marketing / sales related expenses or discounts/concessions would not form part of the AMP expenditure. He emphasised on the following observations of the Hon ble High Court in case of Sony Ericsson Mobile Communication India (P) Ltd. (supra). 176. The aforesaid argument, when AMP expenses are segregated from the composite transaction including distribution and marketing function, is flawed and has to be rejected. The respondent-assessees are engaged in distribution and marketing of consumer goods. Distribution and marketing exercise in case of tangibles requires transfer/sale of goods to third parties, be it sub- distributors or retailers. The said transaction is in the nature of sale of goods for consideration. The marketing or selling expenses like trade discounts, volume discounts, etc. offered to sub-distributors or retailers are not in the nature and character of ―brand promotion‖. They are not directly or immediately related to ―brand building‖ exercis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Since none of the above issues that arise in the present appeals were contested by the Appellant who appeals were decided in the Sony Ericsson case, it cannot be said that the decision in Sony Ericsson, to the extent it affirms the existence of an international transaction on account of the incurring of the AMP expenses, decided that issue in the appeals of MSIL as well. 51. The result of the above discussion is that in the considered view of the Court the Revenue has failed to demonstrate the existence of an international transaction only on account of the quantum of AMP expenditure by MSIL Secondly, the Court is of the view that the decision in Sony Ericsson holding that there is an international transaction as a result of the AMP expenses cannot be held to have answered the issue as far as the present Appellant MSIL is concerned since finding in Sony Ericsson to the above effect is in the context of those Appellant whose cases have been disposed of by that judgment and who did not dispute the existence of an international transaction regarding AMP expenses. (Emphasis Supplied) 3.11 In respect of application of bright line test for ALP determination, the Ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronics India Pvt. Ltd. (supra). This would be necessary when the arm's length price of the controlled transaction cannot be adequately or reliably determined without segmentation of AMP expenses. 3.12 The Ld.AR relied on the following observations in case of Sony Ericsson Mobile Communication India (P) Ltd. (supra). The High Court asserted that applying BLT would be introducing a new concept which has not been recognised and accepted in any of the international commentaries or as per the general principles of international taxation accepted and applied universally. 111. Accepting the parameters of the 'bright line test' and if the said parameters and tests are applied to Indian companies with reputed brands and substantial AMP expenses, would lead to difficulty and unforeseen tax implications and complications. Tata, Hero, Mahindra, TVS, Baja], Godrej, Videocon group and several others are both manufacturers and owners of intangible property in the form of brand names. They incur substantial AMP expenditure. If we apply the 'bright line test' with reference to indicators mentioned in paragraph 17.4 as well as the ratio expounded by the majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of determining Arm's Length Price. An extract of the ruling has been provided below for your good self s ready reference: (vi) The TPO/AO could overrule the method adopted by the Assessee for determining the ALP and select the most appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in a comparable business. When suitable comparables relating to a particular method were not available and functional analysis or adjustment was not possible, it would be advisable to adopt and apply another method. (viii) The Bright Line Test was judicial legislation. By validating the Bright Line Test the Special Bench in LG Electronics Case went beyond Chapter X of the Act. ..It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. 47. As regards the submission regarding the BLT having been rejected in the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a separate international transaction. He emphasised that without there being an agreement between the assessee and its AE, such expenditure cannot be treated as independent international transaction. a) Nestle India Ltd. 111 TTJ 498 b) CIT vs. Adidas India Marketing (P) Ltd. reported in (2010) 195 Taxman 256 (Delhi) c) Wiltshire Brewery Ltd. vs. Bruce reported in 6 TC 399 (HL) d) Campa Beverages (P) Ltd. vs. IAC reported in 34 ITD 241 (ITAT Delhi) e) Star India (P) Ltd. vs. Addl. CIT reported in (2006) 103 ITD 73, 104 TTJ1 (ITAT Mumbai) f) CIT vs. Chandulal Keshavlal reported in 38 ITR 601 (SC) g) Maruti Country Auto Financial Services Pvt. Ltd. in ITA Nos. 2181 to 2183/Del/2010 h) Honda Siel Power Products Ltd. reported in TS-631-SC-2016-TP i) Mattel Toys (India) Pvt. Ltd. reported in TS-466-ITAT-2016 (Mum)-TP in ITA No. 4415/Mum/2014 j) Heinz India Pvt. Ltd. reported in TS-194-ITAT-2016 (Mum)-TP in ITA No. 7732/Mum/2010. 3.14 The Ld.DR on the contrary relied on para 2.3.15 to 2.3.28.2 of the DRP directions in support of his arguments that reads as under: We have perused the submissions adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, in the case of Maruti Suzuki, reported in (2010)192 Taxman 317, Hon ble Delhi High Court had held that that the AMP expenditure amounted to an international transaction. A similar matter was then again heard by Hon ble Delhi Special Bench in case of LG Electronics, reported in [2013] 29 taxmann.com 300, wherein it was held that, bright-line test can be used to determine if the AMP expenditure is an international transaction. The second decision in case of Maruti Suzuki by Hon ble Delhi High Court reported in [2015] 64 taxmann.com 150, held that there should be an understanding between the domestic company and the associated enterprises for incurring AMP expenditure for it to be considered an international transaction. 3.20. Now, it is fairly well established that determination of arm's length price of AMP expenditure by applying BLT method is not valid. In a catena of decisions, the Hon'ble Delhi High Court while disapproving the decision of Hon ble Delhi Special Bench in L.G. Electronics India (P.) Ltd. (supra) have held that, BLT method is invalid as it is not prescribed in the statute. In this context, we may refer to the decision of the Hon'ble Delhi High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing segment which already has been held to be at arms length by the Ld. TPO in the transfer pricing order u/s. 92CA. 3.22 In this context, we draw specific reference to the observation of Hon ble Delhi High Court in case of Sony Ericsson Mobile Communication India (P) Ltd. (supra) which is as under: 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/ segregation, it would as noticed above lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rule 10B(J)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test ..... X X X X Extracts X X X X X X X X Extracts X X X X
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