TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 1138
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....mance protein powder, Formula 1 nutritional shake mix, multivitamin mineral and herbal tablets, calcium tablets, cell activator tablets, active fibre control and flavourless vegetarian protein powder. 2.2 It is submitted that, Herbalife India obtains its technical information with regard to manufacture, use and sale of Herbalife Group's products from its AEs. Herbalife India is responsible for managing the procurement of raw and packing materials, standardizing the manufacturing process and quality control. It is submitted that, Herbalife India operates as an entrepreneur in India, under licensed manufacturing model, taking all key decisions 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 t....
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....posing an adjustment being the shortfall at Rs. 14,56,14,319/-. 2.9 The Ld. TPO further observed that assessee carried out certain advertising, marketing functions which could benefit the AE who is a legal owner of the intangibles. The Ld. TPO noted that assessee had not benchmarked the AMP functions separately. He thus proposed to consider following expenditure as international transaction by concluding them to be AMP expenses incurred by the assessee, that resulted in benefit to the AEs. Sr.No. Particulars Amount in Crores 1 Distributor allowances 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.....
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....The Ld. Counsel submitted that, the distributor allowances can be categorised in the following nature. o "Commission: Associates earns up to 25% as commission on the sales made by their downlines o Royalty earnings: All products carry 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 incentiv....
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....xpenditure under CUP. The Ld. Counsel emphasised that, bright line test is not applicable, as it does not fit into any of the 5 methods prescribed under the transfer pricing regulations. He placed reliance 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. o....
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....pproved 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. 45. 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....
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....even zero attribution could be possible, but facts should so reveal 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 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. I....
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.... has expressly negated the use of BLT for both forming the base as well as determining if there is an international transaction or for the 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 ve....
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.... services to its AE by making such AMP expenses which has led to any benefit to the AE, it cannot be treated 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 ....
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....avily contended for years. In 2010, 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 ....
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....puting 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. 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 ....