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TMI Blog2023 (7) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction. Admittedly, in the present facts of the case, the assessee is a distributor 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 customers. The independent sales personne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imated 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 order giving effect passed on 18.03.2022, the only addition that remained was in respect of the AMP adjustment made in the hands of assessee amounting to Rs. 257,08,93,895/-. 2.14 Against the impugned final assessment order, the assessee is in appeal before this Tribunal. 3. Ground nos. 2 - 4 - The only issue that is raised by the assessee is in respect of the adjustment allegedly made towards the AMP expenses by adopting an appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 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 are made, there are no payouts that are done. He also submitted that on the payments made and classified under the distributors allowances TDS has been deducted u/s. 194H of the act and therefore these expenses are purely in the nature of selling expenses and cannot be categorised as AMP as alleged by the revenue authorities. 3.5 The Ld. Counsel submitted that, the Ld. TPO considered 50% of the distributor allowances without appreciating that TDS has already been deducte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gated 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‖ exercise, but have a live link and direct connect with marketing and increased volume of sales or turnover. The brand building connect is too remote and faint. To include and treat the direct marketing expenses like trade or volume discount or incentive as ―brand building‖ exercise would be contrary to common sense and would be highly exaggerated. These reduce the net profit margin. It would lead to abnormal financial results defying accountancy practices and commercial and business sense. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national 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 relied on the following observations of Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communication India (P) Ltd. (supra). "121. On the other hand, as recorded by us above, applying 'bright line test' on the basis of parameters prescribed in paragraphs 17.4 and 17.6 would be adding and writing words in the statute and the Rules and 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 accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 judgment in L.G. Electronics India Pvt Ltd case (supra) in paragraph 17.6 to bifurcate and segregate AMP expenses towards brand building and creation, the results would be startling and unacceptable. The same is the situation in case we apply the parameters and the =bright line test' in terms of paragraph 17.4 or as per the contention of the Revenue, i.e. AMP expenses incurred by a distributor who does not have any right in the intangible brand value and the product being marketed by him. This would be unrealistic and impracticable, if not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision in Sony Ericsson is concerned. the Court notes that the decision in Sony Ericsson expressly negatived the use of the BLT both as forming the base and determining if there is an international transaction and secondly for the purpose of determining the ALP. Once BLT is negatived, there is no basis on which it can be said in the present case that there is an international transaction as a result of the AMP expenses incurred by MSIL. 65. As already noticed. the decision in Sony Ericsson has done away with the BLT as means f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 advanced by both sides in the light of records placed before us. 3.15 In rejoinder the Ld. Counsel submitted that the DRP without appreciating the Business model adopted by the assessee took the view in 2.3.19 that the assessee merely purchases the products from AE and sells it further to the distributors / dealers in India. The DRP failed to appreciate that the products are sold to end customers by Direct Selling model and all the incentives / payouts to the agents are subjected to TDS. 3.16 He also referred to para 2.3.16 wherein the DRP is accepting that the assessee do not require to incur any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 Court in Maruti Suzuki India Ltd. (supra). Following the decision of the Hon'ble Delhi High Court in Maruti Suzuki India Ltd. (supra) and various other decisions, different Benches of the Tribunal have also held that in absence of an express arrangement/agreement between the assessee and the AE for incurring AMP expenditure to promote the brand of the AE, AMP expenditure incurred by making payment to third parties for promoting and marketing the product manufactured by the assessee, does not come within the purview of international transaction. Thus the sum and substance of the ratios in various decisions by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and adjustments have been made, then the profit margin as declared when matches with the com parables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible" 3.23 We also find merit in the submission of the Ld. Counsel that, if the net profit margin meets the Arm's length price, then no separate addition needs to be made. Considering the fact that no adverse inference is drawn by the Ld. TPO in respect of the Manufacturing segment which means that the Ld. TPO has accepted the overall m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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