TaxTMI 
TaxTMI 
2023 (7) TMI 1138
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....cts. Herebalife India's products include performance 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....
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.... and the assessee's margin was computed at 15.63% thereby proposing 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 ....
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....ese are purely in the nature of sales incentives having direct correlation to the sales made by the direct sellers. 3.3 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." ....
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....re us the computation of alleged AMP expenses computed by the Ld. TPO as under: 3.9 He submitted that the Ld. TPO used bright line test to bench mark the alleged AMP expenditure 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- dist....
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....ke a quantitative 'adjustment' to the ALP to the extent that the expenditure exceeds the expenditure by comparable entities. 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. 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 p....
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....l 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 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 diff....
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....#39; of non-comparables and in all case, costs or compensation paid for AMP expenses would be 'NIL', or at best would mean the amount or compensation expressly paid for AMP expenses. Further, the Hon'ble Delhi NC in the case of Maruti Suzuki stated that Sony Ericsson 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 validati....
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....ntire adjustment proposed by your good self by applying BLT ought to be deleted since the application of BLT has been rendered ultra-vires by the Hon'ble HC." 3.13 The Ld. Counsel relied on the following decisions to support the submissions that unless and until the Ld. TPO brought on record any evidence to prove that assessee had rendered any 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....
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....nsfer pricing. This test was laid down by the United States Courts. The test states that the AMP expenditure which is in excess of the expenses incurred by comparable companies in a controlled transaction has to be compensated to the overseas enterprise. The Indian authorities consider this excessive expenditure as an enhancement of the global branch and a step towards creating marketing intangibles. 3.19. This issue was been heavily 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. ....
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....urred 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. 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 prof....
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....Income-tax Officer, National e-Assessment Centre, Delhi (learned Assessing Officer' or 'learned AO) dated March 26, 2022, to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. Grounds relating to transfer pricing ("TP") matters 2. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel (Hon'ble DRP) erred in not appreciating that the order of the learned Deputy Commissioner of Income-tax (Transfer Pricing)-1(3)(1), Bangalore (learned Transfer Pricing Officer or 'learned TPO) passed under section 92CA of the Act is contrary to law and, thus, liable to be quashed. 3. On the facts and in the circumstances of the case and in law, the Hon'ble DRP/ learned AO/ learned TPO erred in determining the arm's length price of an alleged international transaction of an alleged advertising. marketing and sales promotion (AMP) expenses of INR 2,570,893,895. 4. Adjustment with respect to alleged advertising, marketing and promotion expenses On the facts and in the circumstances of the case and in law, the Hon'ble DRP / learned AO erred i....
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....luding that the Appellant is a contract manufacturer and has asserted that separate compensation is required for the alleged excess AMP expenses; 4.9. disregarding the multiple submissions furnished by the Appellant to provide a detailed representation of facts in relation to the FAR profile of the Appellant and its AEs; 4.10. determining the ALP separately for the alleged excess AMP expenses and disregarded that marketing function forms an intrinsic part of the manufacturing along with sales process of the Appellant; 4.11. concluding that the alleged excessive AMP expenditure amounted to a 'service' being rendered by the Appellant to its AE and that a mark-up was required to be charged in respect of such services; 4.12. rejecting the comparability analysis carried out by the Appellant in the TP documentation and in conducting a fresh comparability analysis for the licensed manufacturing segment. 4.13. without prejudice to the above, the learned TPO has erred in performing a fresh comparability analysis to determine the alleged excess AMP expense. In addition, the Hon'ble DRP/ learned AO/learned TPO erred in: a. rejecting filters applied by th....
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....ings under section 274 read with section 270A of the Act. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal. Document 4 1 2 3 Reimbursement of expenses paid Sl. No. Nature of international transaction Provision of contract IT support services Purchase of goods Amount (INR) 1,596,061,774 26,013,067 28,406,607 4 Reimbursement of expenses received 1,918,702 5 Payment of administration fees 675,144,109 6 Payment of IT and other technical services (gross of TDS) 264,760,742 7 Payment of royalty (gross of TDS) 858,044.935 8 Amount written back 1,314,349 9 Amount written off 259,108 Document 5 3 Break up of business promotions expense Sr. Particulars No Brief Description of Nature of expenses and characterisation into Amount (Rs. Crore) Nature (Selling vs marketing/selling expense Marketing) 1 Advertising The expenses are towards advertisement in print medias, events, conferences etc. 1.16 Marketing 2 A....
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....distributor allowance (A) 224.425 Business promotion expenses Income from sale of tickets Net business promotion expenses (B) Alleged AMP expense (A+B) 52.31 (20.17) 32.14 256.565 Document 8 2.3.15 Though the assessee claims that it is a licensed manufacturer, the TP study report indicates that it is a contract manufacturer and distributes a wide range of advanced weight management and nutritional products. In addition, the minor trading activity is considered as part of overall manufacturing and distribution activity of the assessee. The assessee is not exclusive manufacturer is evident from the fact that it houses IT support services for the distribution segment of the group as well as the assessee. The assessee is entered with agreement with Herbalife America for receipt of certain support services related to distributor information, maintenance of inventory and marketing services like providing sales promotion material, meetings, events and marketing analysis. The functions of the assessee therefore include manufacturing, distribution and marketing of Herbalife group products and the products manufactured using th....
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.... "Sales: The sales function primarily includes planning promotional and sales events, training, communication with the distributors, etc. Herbalife India maintains constant contact with distributors to achieve high level of motivation and recognition of distributor's networks and to promote, protect and enrich the business and organizational productivity. का OF DISPUTE RE Herbalife India implements annual and multiyear promotional plans, events and training to match with the overall strategies and objectives of the group." imited n Document 10 2.3.17 In order to motivate the above network of distributors, the assessee has structured various modes of incentives in the name of distributor allowances. This incentives include Commission, Royalty Earnings, Production Bonus and Mark Hughes Bonus etc.. According to the volume of sales made by the Associates and other members of distribution network the percentage of benefit is awarded in various names as described above. As observed by the TPO and also the information provided in Herbalife's guide to Associates suggest that the sale of products is done by the distr....
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....s advertisement and promotion. The assessee as described above is thus considered to be low risk entity in terms of distribution of products of the group in India. 2.3.22 Further, the Hon'ble High Court in case of Sony Ericson has discussed as how a pure or a simple independent distributor or a distributor having low-risk should be compensated. The relevant finding of the Hon'ble High Court is reproduced as under: UTAT "124. There is a difference between a pure and a simple independent distributor and a distributor with marketing rights. An independent distributor with a full marketing right is a person or an entity legally independent of the manufacturer, who purchases goods from the manufacturer for re-sale on its own accounts. The transaction between the two is a straightforward sale in which the distributor takes all economic risk of product distribution and ultimately gains or makes loss depending upon market and other conditions. The manufacturer is not concerned. In case of a low or no risk distributor and he virtually acts as an agent for the loss and gain is that of the manufacturer. There is no economic risk on dist....
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....e functions performed by the Herbalife Group in the areas of product development, manufacturing, buy back policies, network marketing system and Global distribution system. The above said information in TP study reports also clearly show that the assessee has been assigned a crucial role to play, at least in the Enhancement and Maintenance of the AEs brand in India and accordingly the assessee has been providing such service or benefit to the AE over the years, which is also reflected in the excessive AMP Spend. 2.3.24 The conduct of the taxpayer in pursuance of such arrangement / understanding is a relevant factor to decipher the function carried out by the assessee. It is pertinent to refer to the relevant extract in the BEPS Report for the purpose, which is as under: - "It is, therefore, particularly important in considering the commercial or financial relations between associated enterprises to examine whether the arrangements reflected in the actual conduct of the parties substantially conform to the terms of any written contract, or whether the associated Document 13 enterprises' actual conduct indicates that the contractual t....