Herbalife International India Pvt Ltd Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that if the net profit margin meets the Arm’s length price, then no separate addition needs to be made. Accordingly, TPO directed to delete the adjustment made towards Advertising Marketing Price (AMP) expenses.
Facts- Herbalife India was incorporated in 1998. The case was selected for scrutiny and statutory notices were issued to the assessee.
The Ld. AO noted that as the transaction exceeded Rs. 15 crores, a reference was made to the TPO under 92CA of the act.
The Ld. TPO 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 the assessee had not benchmarked the AMP functions separately. He thus proposed to consider expenditures as international transactions by concluding them to be AMP expenses incurred by the assessee, that resulted in benefit to the AEs.
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. Thus, the adjustment u/s. 92C was proposed by the Ld. TPO.
Conclusion- Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd the tribunal has 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 is 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.
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.
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 margins of the said segment and respectfully following decision of the Hon’ble Delhi Court in the case of Sony Ericsson, we direct the Ld.TPO to delete the adjustment made towards the AMP.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal is filed by assessee against the final assessment order dated 26.03.2022 passed by the National Faceless Assessment Centre, Delhi on following grounds of appeal:
2. Brief facts of the case are as under:
2.1 Herbalife India was incorporated in 1998. It filed its return of income for year under consideration declaring
Rs. 1,84,86,54,510/-. The case was selected for scrutiny and statutory notices were issued to the assessee. In response to the statutory notices, the assessee filed various details. Before the Ld.AO, the assessee submitted that, it manufactures (through contract manufacturers) and sells wide range of advanced weight management and nutritional products. 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 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 personnel sell products directly to end customers without the involvement of any retail chains.
2.4 During the year under consideration, following international transactions were undertaken by the assessee.
2.5 The Ld.AO noted that as the transaction exceeded Rs. 15 crores, a reference was made to the Ld.TPO under 92CA of the act. On receipt of the reference, the Ld.TPO called for economic analysis of the international transactions in form 3CEB. From the details filed, the Ld.TPO noted that the assessee adopted TNMM as the most appropriate method and applied OP/sales as the PLI to determine its margin at 12.76%. The assessee considered all transaction with its AE to be closely linked to the primary transaction of manufacturing of goods (licensed manufacturer).
2.6 The Ld.TPO rejected the consolidated approach by the assessee in the TP study. The Ld.TPO segregated software development service as a separate segment and the remaining segments were treated to be under manufacturing segment.
2.7 Though the Ld.TPO under manufacturing segment adopted some different filters and conducted fresh search, the margin of the new comparables as per the Ld.TPO search was at 14.26% and the margin of assessee computed by the Ld.TPO under manufacturing segment was 15.55%. Hence no adverse inference was drawn with respect to the ALP of the international transaction of the manufacturing segment and no adjustment was proposed by the Ld.TPO under the manufacturing segment.
2.8 However, the Ld.TPO under SWD segment carried out fresh search of comparables based on certain filters, wherein, the median of 20 comparables was computed at 26.18% 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.
