AMWAY INDIA ENTERPRISES PVT. LTD.,NEW DELHI vs. ADDI. NATIOANL E- ASSESSMENT CENTRE, NEW DELHI

1. This appeal filed by the assessee is directed against the order dated 30th April, 2021 passed by the AO u/s 143(3)/144C(13) r.w.s. 144B of the IT Act, 1961 for the assessment year 2016-17.

Facts of the case, in brief, are that the assessee is a wholly owned subsidiary of Amway Corporation engaged in the business of direct selling of consumer products. It sells its products through multi-level marketing (MLM). MLM marketing allows direct sellers to build a business through their own sales efforts and inviting others to become direct sellers. The assessee filed its return of income on 30.11.2016 declaring a loss of Rs.113,69,23,009/-. Since the assessee had entered into certain international transactions with its AE, the AO referred the matter to the TPO for determination of the ALP of the international transaction entered into by it.

According to the TPO, this approach of the tax payer is not correct since TNMM is less reliable when applied to the aggregate activities of a complex enterprise engaged in various different transactions or functions. Moreover, the method of TNMM is not generally applied on a company wide basis if the company is involved in a number of different controlled transactions which is the case with the assessee. Relying on various decisions, the TPO rejected the aggregation approach adopted by the assessee and proceeded to benchmark the various transactions by using segregation method after applying the most appropriate method. From the details furnished by the assessee in the financial statements he noted that the assessee company has incurred huge expenditure in the form of advertisement, marketing and promotion, seminars, literature and others. Similarly, the assessee has also incurred huge expenditure in the form of commission paid to the distribution agents who were responsible for the ultimate sale of the Amway products to the domestic customers. He noted that the expenses on these activities constitute almost 37% of the total sales during the year. He, therefore, inferred that the AMP activity is generating significant marketing intangible assets for the AEs. The TPO, referring to the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd., reported in 374 ITR 118 and held that the CP method is a recognized and accepted method under Indian transfer pricing regulation. It can be applied by the AO/TPO in case of AMP expenses are treated as a separate international transaction provided, CP Method is the most appropriate and reliable method. He, therefore, decided to adopt a segregation approach holding CP Method to be the most appropriate method on the facts of the case and, accordingly, issued a show cause notice to the assessee.

The assessee, in its reply submitted that it worked on a direct selling model. The selling activity was to be done to mainly family and friends, thus, no brand building can be done in such activities. It was further explained that the distributors also have the responsibility to educate the users regarding the product being sold. It was argued that in the multi-level marketing model the assessee applied, the business model was not comparable to FMCG companies. The assessee also objected that no exact details of the quantum of adjustment using CPM method had been provided.

However, the TPO was not satisfied with the arguments advanced by the assessee. Relying on various decisions, the TPO proposed an upward adjustment of Rs.6874,84,700/- on substantive basis on AMP expenses. While doing so, he noted that the DRP, in assessee’s own case for AY 2015-16, has also confirmed the advertisement expenses of Rs.56.77 crores for that year as AMP expenses. The TPO accordingly proposed an upward adjustment of Rs.68,74,84,700/- being the ALP of the international transaction entered into by the assessee.

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The AO, in the final assessment order accordingly made addition of the same to the total income of the assessee.

Aggrieved with such order of the AO/TPO/DRP, the assessee is in appeal before us by raising the following grounds:- “

The ld. Counsel for the assessee submitted that although a number of grounds have been raised by the assessee, however, essentially there are two issues in the appeal, i.e., (a) against AMP adjustment of Rs.68,74,84,700/-; and (b) disallowance related to sundry creditors of Rs.26,72,67,895/-

So far as the AMP adjustment of Rs.68,74,84,700/- is concerned, the ld. Counsel strongly challenged the addition of the same and submitted that the aforesaid adjustment is totally incorrect in view of the settled position in favour of the assessee in its own case. The ld. Counsel for the assessee drew the attention of the Bench to the following as per page-1 of his written synopsis:-

He submitted that the facts and circumstances of the matter in all these years have been the same. There is no change in the business model of the assessee. In fact, no such allegation was made, either by the TPO or by the DRP that the facts of the case for the year under consideration are in any way distinguishable or different from the earlier years. He submitted that the TPO, on the contrary, while passing the order for the year under consideration specifically mentioned that he was following the order of the DRP for the preceding year i.e. A.Y. 2015-16 but due to inadvertence/error made the adjustments. The ld. Counsel for the assessee, referring to page 40 of the order of the TPO, drew the attention of the Bench to the following:- “The Hon’ble DRP in its own case of AY 2015-16 has also confirmed that above expense is AMP expense. Therefore, the total expenses which should be compensated from the assessee’s AE is considered as Rs.5677 lacs. Based on above, the adjustment as per CPM on a substantive basis is calculated as under:-

The ld. Counsel for the assessee submitted that the above observation of the TPO is factually incorrect. Referring to page 497 to 500 of the paper book, which is the DRP appeal effect order in the case of the assessee for AY 2015-16, the ld. Counsel for the assessee drew the attention of the Bench to para 2 of the said appeal effect order and submitted that no adjustment on account of AMP expenses is made and the entire addition has been deleted.

He accordingly submitted that the TPO has erroneously assumed that the entire advertisement and marketing expenditure is disallowable AMP expenditure incurred on account of benefit of the AE. The ld. Counsel for the assessee drew the attention of the Bench to the order of the DRP and submitted that the DRP has grossly mis-directed itself by observing that the grounds of appeal related to the aforesaid aspect were general in nature and grossly erred in denying the indisputable relief to the assessee. The ld. Counsel accordingly submitted that since no adjustment were made from AY 2009-10 to 2015-16 towards adjustment/addition on account of AMP even though the assessee had the same business model and the facts and circumstances of the matter for the instant year are the same, therefore, no addition during the year is warranted.

The ld. DR, on the other hand, heavily relied on the order of the TPO/DRP. He submitted that the principle of res judicata does not apply to income-tax proceedings and each year is different and distinct. He submitted that if the DRP has not followed its earlier order, the matter may be set aside to the DRP with a direction to pass a speaking order. The ld. DR submitted that the ownership of the brand lies with the foreign AE, therefore, the huge advertisement expenses made by the assessee helps towards brand building of the foreign AE. Further, the assessee is paying huge royalty to the AE. He submitted that any non-routine 14 capital expenditure is adding to the value of the brand held by the foreign AE. Since as per the provisions of section 92B such expenditure is an international transaction, he submitted that the addition made by the AO/TPO/DRP being in accordance with law has to be upheld and the grounds raised by the assessee on this issue are to be dismissed.

We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the TPO, in the instant case, proposed an upward adjustment of Rs.68,74,84,700/- being the ALP of the international transaction entered into by the assessee. While doing so, the TPO rejecting the TNMM method adopted by the assessee held that cost plus method is the most appropriate method on the facts of this case. According to the TPO, the AMP expenditure incurred by the assessee is towards the promotion of the brand of the foreign AE and on development of marketing intangible for the AE in India. Further, the TPO held that the DRP in assessee’s own case for AY 2015-16 has also confirmed that the advertisement expenditure incurred by the tax payer is AMP expenses. We find, after the order of the DRP, the AO, in the final assessment order, made the above addition. It is the submission of the ld. Counsel that in view of the past assessment years from 2009-10 to 2015-16, no adjustment should be made since the assessee had same business model and the facts and circumstances of the matter are the same.

We find some force in the above argument of the ld. Counsel for the assessee. As mentioned earlier, the TPO at page 40 of his order has observed that the DRP in its own case for AY 2015-16 has confirmed that the advertisement expenses incurred by the assessee is AMP expenses and, therefore, the total expenses which should be compensated from the assesseee’s AE is considered as Rs.5677 lakhs. Accordingly, the adjustment as per CPM on a substantive basis was made by the TPO. However, on perusal of the DRP appeal effect order for AY 2015-16 in pursuance of the DRP’s order dated 11 September, 2019, copy of which is placed at pages 497 to 500 of the paper book, we find no such adjustment has been made on account of advertisement, marketing and promotion after the order of the DRP. The relevant observation of the appeal effect order reads as under:- “ Adjustment on account of Advertisement, Marketing and Promotion (AMP) 2. The Hon'ble DRP in its direction at para 2.3.11.2 and 2.3.11.3 on page no 30 has given direction to delete adjustment on account of AMP expenditure holding as under: “2.3,11.2. In terms of our findings and conclusions, taking the amount of AMP spend as per para-2.3.11 herein above, the ratio of AMP/Sales in the case of the tested party is as under:

From the various details furnished by the assessee in the paper book, we find no adjustment on account of AMP was made for AY 2009-10 although the assessee had same business model and the facts and circumstances of the matter are the same. The copy of the order of the TPO for AY 2009-10 is placed at page 530 of the paper book. Similarly, the perusal of the TPO order for AY 2010-11, copy of which is placed at paper book page 528, shows that no such addition on account of AMP expenses has been made. Similar is the case for AY 2011-12 and 2012-13 and the orders of the TPO are placed at pages 524 to 527 of the paper book. Similarly, perusal of the paper book page 532 shows that for AY 2013-14, an adjustment of Rs.512,47,66,707/- was proposed in the show cause notice dated 21.10.2016 on account of AMP adjustment, but, after considering the reply of the assessee and the facts and circumstances of the matter which are identical to the facts and circumstances for the year under consideration, no addition was made in 17 the order passed by the TPO, copy of which is placed at pages 536 to 556 of the paper book. Similarly, for AY 2014-15 also no adjustment was made after considering the submissions of the assessee. We find from the various details furnished by the assessee including the TPO appeal effect order for AY 2015-16, copy of which is placed at page 497 of the paper book, that adjustment of Rs.216,39,19,833/- was made on protective basis and adjustment of Rs.226,12,38,588/- was made on substantive basis by the TPO, copy of which is placed at page 279 of the paper book. We find, after the various submissions made by the assessee, the DRP considered the entire facts and circumstances of the matter in exhaustive details and deleted both substantive and protective addition. Copy of the DRP order is placed at page 431 of the paper book. The TPO has already passed the order giving effect to the order of the DRP and, in the final order passed by the TPO, no adjustment on account of AMP has been made, the details of which have already been reproduced in the preceding paragraph. Therefore, in view of the rule of consistency from AY 2009-10 to 2015-16 and considering the fact that the assessee had the same business model and the facts and circumstances of the matter for the impugned assessment year are the same, we set aside the order of the AO/TPO/DRP and direct the AO/TPO to delete the addition.

The second issue raised in the grounds of appeal relates to the addition of Rs.26,72,67,895/- on account of sundry creditors.

Facts of the case, in brief are that during the course of assessment proceedings, the AO asked the assessee to furnish complete party-wise details of sundry creditors along with explanation and justification for increase in sundry creditors and reduction in business income as compared to preceding year. Since the assessee could not furnish any details/justification/supporting evidence in this regard, the AO analysed the balance sheet filed by the assessee company and noted that there is huge increase in creditors amounting to Rs.93,07,00,000/-. He, therefore, gave a final opportunity to the assessee to furnish the details vide show cause notice dated 12.12.2019. The assessee, vide reply dated 13th December, 2019 submitted certain details of creditors according to which an amount of Rs.34,847 lakh as on 31st March, 2016 represents the amount payable by the assessee towards distributors/vendors, etc., in normal course of the business. The assessee also explained the reasons for increase of sundry creditors vis-à-vis previous year on account of increase in royalty and other payable to affiliate entities, payable in relation to clearing and forwarding expenses, payable for 19 CWIP, etc. After considering the reply given by the assessee, the AO noted that out of the total increase in creditors amounting to Rs.9307 lakhs during the year, an amount of Rs.66,34,32,105/- represents royalty payable to the AE for use of trade mark and technical know-how in normal course of business. However, the balance amount of Rs.26,72,67,895/- represents other payables except payable for royalty for which the assessee company could not furnish complete details. The AO, therefore, invoking the provisions of section 68 of the Income-tax Act, 1961 made an addition of Rs.26,72,67,895/- to the total income of the assessee in the draft assessment order. The ld. DRP upheld the action of the AO. The AO, in the final order accordingly made addition of the same to the income of the assessee.

The ld. Counsel for the assessee strongly challenged the order of the AO in making the addition. He submitted that the addition has been made solely for the reason that sundry creditors during the year increased by 93.07 crores in comparison to the Sundry Creditors outstanding during the preceding year. The ld. Counsel for the assessee, referring to the show cause notice issued by the AO on 12.12.2019, copy of which is placed at page nos. 578-579 of the paper book, submitted that the case was fixed for hearing on 13.12.2019. Despite the unfairly inadequate time given to respond, the assessee complied and submitted its reply, copy of whch is placed at page nos. 580 to 643 of the PB. He submitted that the reply also contained groupings in various sub-heads, the details of which are placed at page 585 of the paper book. He submitted that the AO without giving any further time or opportunity for rebuttal and without application of mind on the submission made passed the draft assessment order in great hurry on 15.12.2019. He submitted that the AO accepted the increase in sundry creditors amounting to nearly Rs.66.34 crores attributable to the royalty payable to an associate concern of the assessee but added the remaining difference of nearly 26.73 crores on account of increase in sundry creditors. He submitted that while making the addition of Rs.26.73 crores, the AO forgot to consider the increase of Rs.13.95 crores that had happened on account of transaction with associate concerns as well. He submitted that the provisions of section 68 cannot be applied to increase in outstanding sundry creditors. Referring to the provisions of section 68 he submitted that for making an addition under the above provision, the mandatory conditions that are required to be fulfilled are: (a) the sum has to be a cash credit; and (b) the assessee offers no explanation about the nature and source of any sum found credited in his books or the explanation given is not found acceptable to a judicious mind. He, submitted that the AO never sought details such as address, PAN, etc. as alleged in the draft assessment order while invoking provisions of section 68. There is inherent contradiction in the approach of the AO when he makes additions for the increase in creditors but alleges that PAN etc. were not furnished for invoking section 68. Further, the assessee has regularly been assessed u/s 143(3) for the last several years and no such addition has ever been made in the case of the assessee. Relying on various decisions, it was argued that the provisions of section 68 cannot be applied in case of sundry creditors. 21

He submitted that although this issue was brought to the notice of the DRP, however, they also chose to ignore the same without assigning any reason whatsoever. Referring to the submissions made before the DRP, he submitted that the assessee has specifically stated before the DRP that the number of creditors runs into tens of thousands and are for various categories like vendors for goods and services, distributors and employees. All the creditors shown in the books of accounts as per the balance sheet are true and genuine and the assessee is willing to provide any information or document with respect to them as desired by the Hon’ble DRP. He submitted that despite all the submissions made before the DRP, the addition was confirmed solely for the reason of increase in the sundry creditor.

The ld. Counsel for the assessee filed the following factual summary in tabular form with regard to the proceedings before the DRP on the aforesaid issue:- Date Remarks 25.09.2020 Brief Synopsis dated 25.09.2020 filed by the appellant before the DRP. (Paper Book Page No. 644) 28.09.2020 First Hearing took place on 28.09.2020. During the course of hearing the DRP heard the matter in details. No direction was given to the assessee to submit any further document/information 29.09.2020 The DRP forwarded the assessee’s submission dated 25.09.2020 to the AO vide letter dated 29.09.2020 (Paper Book Page No.670) with the direction to the AO to consider assessee’s comments/objections and submit remand report to the Hon’ble DRP on or before 15.10.2020. Remand Report notice issued to AO and copy to appellant. 29.09.20 No response from the AO 22

He accordingly submitted that although the assessee had filed the relevant details duly supported by documentary evidence, the AO did not find anything against these submissions made by the assessee. He submitted that in spite of 5-6 reminders, the AO chose not to respond to DRP notices. He accordingly submitted that the addition made by the AO and sustained by the DRP without finding anything wrong in the duly audited books of account maintained by the assessee is incorrect in law and no addition can be made u/s 68 of the Act on account of alleged increase in sundry creditors. He also relied on the following decisions:- (i) [2018[ 99 taxmann.com 449 (Punjab & Haryana): Kulwinder Singh; 24

The ld. DR, on the other hand, heavily relied on the orders of the AO/TPO/DRP. In his alternate contention, he submitted that the matter may be returned back to the file of the AO/TPO.

We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, made addition of Rs.26,72,67,895/- by invoking the provisions of section 68 on the ground that there is an increase in creditors amounting to Rs.9307 lakhs and an amount of Rs.66,34,32,105/- represents towards royalty payable to the AE and the assessee could not substantiate with evidence to his satisfaction regarding the remaining creditors. We find, after the order of the DRP, the AO, in the final assessment order made addition of the same which is under challenge before the Tribunal by the assessee. It is the submission of the ld. Counsel for the assessee that the AO while passing the draft assessment order, without giving sufficient time, made the addition which is not correct and against the principles of natural justice. Further, despite full details given before the DRP, the DRP also ignored the submissions made by the assessee and made the addition even after not getting any response from the AO after 5-6 reminders by them. It is also his submission that the provisions of section 68 cannot be applied to increase in sundry creditors. It is also his submission that no addition has been made on account of increase in sundry creditors in past or subsequent assessment years.

We find sufficient force in the above arguments advanced by the ld. Counsel for the assessee. From perusal of the details furnished by the assessee, we find the AO issued show cause notice dated 12th December, 2019 fixing the hearing for 13th December, 2019, copy of which is placed at page 578 of the PB. We find, the assessee furnished the details and the AO passed the draft assessment order dated 15th December, 2019 proposing the addition of Rs.26,72,67,895/-. We find, the DRP upheld the action of the AO, the reasons of which have already been reproduced in the preceding paragraph. The addition, in the instant case, has been made solely for the reason that the sundry creditors during the year increased by 93.07 crores in comparison to the sundry creditors outstanding during the previous year. From the various details furnished by the assessee in the paper book, we find the assessee before the AO had filed the following details towards sundry creditors/trade payable:-

Similarly, the assessee has filed the comparative details of sundry creditors/trade payable the details of which are filed at page 586 of the paper book, which read as under:-

The chronology of events filed by the assessee with regard to the proceedings before DRP on this issue has already been reproduced in the preceding paragraph and a perusal of the same shows that despite reminders after reminders there was no response from the AO. We further find in the assessment year 2017- 18 and 2018-19, copies of which are placed at pages 682-692 of the paper book, no such addition on account of sundry creditors have been made in the orders passed u/s 143(3).

We find, the Hon’ble Punjab & Haryana High Court in the case of Kulwinder Singh, reported in 99 taxmann.com 449 has held that provisions of section 68 are not attracted to amount representing purchase made on credits. The Hon’ble Allahabad High Court in the case of Zazsons Export Ltd. (2017) 88 taxmann.com 617 has held that credit purchases reflected in the books of account of the assessee of raw hide from petty dealers even if not confirmed would not mean that it was concealed income or deemed income of the assessee, which could be subjected to tax under section 68 when there was no dispute as to trade practice that payment in respect of purchase of raw hide was made subsequently. Similar view has been taken in various other decisions relied on by the ld. Counsel for the assessee filed in the case law compilation to the proposition that provisions of section 68 of the Act would not be attracted to sundry creditors. In view of the above discussion and considering the fact that the assessee has given sufficient details regarding the details of sundry creditors, no such disallowance has been made by the AO in the orders passed u/s 143(3) in the subsequent two years and inaction by the AO to reply to the various reminders of the DRP for submission of the remand report, we are of the considered opinion that the addition made on account of increase in sundry creditors is not justified. Further, as mentioned earlier, the provisions of section 68 cannot be attracted to amount representing purchase made on credits or outstandings payable. In view of the above discussion, we set aside the order of the AO and direct him to delete the addition. The second issue raised by the assessee in the grounds of appeal are accordingly allowed.

The appeal filed by the assessee is accordingly partly allowed.

In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 30.03.2022.