LÓreal India Private Limited vs. DCIT (ITAT Mumbai)

DATE: May 4, 2016 (Date of pronouncement)
DATE: May 7, 2016 (Date of publication)
AY: 2008-09
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Transfer pricing of AMP Expenditure: In the case of a manufacturer operating in a competitive industry, high AMP expenditure cannot be assumed to have been incurred for the benefit of the brand owner. The TPO has to prove that the real intention of the assessee in incurring AMP expenses was to benefit the AEs and not to promote its own business. Also, if the assessee has reported high turnover & profits & offered to tax, the basic ingredient required to invoke s. 92 that there is transfer of profit from India remains unproved. In the absence of the AO/ TPO showing that there is a formal/ informal agreement to share the AMP expenditure, the adjustment cannot be made. The matter cannot be remanded to the AO/ TPO for reconsideration

(i) The sales of the assessee had increased 19 time since the year
1999, that the average annual growth of the cosmetic industry in India was reported to be about 15-20%, that the TPO had not compared the market share of the assessee for the year under consideration. Now, if the expenditure incurred by the assessee is considered in the back ground of the growth achieved by it one has to agree with the argument of the assessee that it made rapid progress in the Indian market and AMP played an important role in it. The assessee was manufacturer and distributor of cosmetic products. The very nature of the business carried out by the assessee was such that to establish its product it had to spend huge expenses. The TPO had ignored the fact that expenditure was incurred for products launched especially for the Indian market and that the brand of the AEs was not promoted. The manufacturing unit of the assessee had shown a huge turnover. Thus, we do not find force in the arguments of the TPO / DRP that AMP expenses incurred by the assessee were primarily or secondarily aimed to benefit the AEs and that it was entitled to a reasonable compensation for such AMP expenses;

(ii) Secondly, the important issue raised by the assessee that it had huge amount on account of sales promotion had not been dealt with by the TPO/DRP. In our opinion, it is an important factor for determining the ALP;

(iii) We further find that the TPO has not brought on record any evidence to prove that the assessee had rendered any services to its AEs under the head AMP. On the contrary, payment on account of advertisements etc was made to unrelated domestic third parties. In our opinion, these basic facts compelled the TPO to hold that in the case under consideration the international transaction was not the actual AMP expenditure, but the real issue was the benefit conferred by it to its AEs in form of promotion and brand value augmentation of the brands owned by them;

(iv) In these circumstances, the fundamental question to be answered is to decide as to whether in absence of any agreement for payment of AMP expenses by the AEs can it be held that there was an international transaction only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AEs, who owned the brands used by the assessee. In our opinion, the arguments suffers from the very basic flaw that it presumes that the assessees would incur AMP not to promote its own business. In other words, the TPO has failed to prove that the real intention of the assessee in incurring advertisement and marketing expenses were to benefit the AEs and not to promote its own business. The turnover of the assessee proves that during the year under consideration the assessee had done a reasonably good business, as stated earlier. The resultant profit was offered for taxation in India. Therefore, transferring of profit from India, the basic ingredient to invoke the provisions of section 92 of the Act, remains unproved;

(v) In the cases of Maruti Suzuki India Ltd.(64 Taxmann.com 150), Whirlpool of India Ltd.(64 Taxmann.com 324), Bausch & Lomb Eyecare (India) Pvt. Ltd (ITA 643 of 2014 of Hon’ble Delhi HC), the issue of AMP expenses had been deliberated upon extensively and each and every argument raised by the TPO/DRP have been analysed thread bare;

(vi) Considering the facts – like absence of an agreement between the assessee and the AEs for sharing AMP expenses, payment made by the assessee under the head AMP to the domestic parties, failure of the TPO prove that expenses were not for the business carried out by the assessee in India-and following the judgments of the Hon’ble Delhi High Court delivered in the case of Bausch and Lomb (India) Pvt. Ltd (supra), we are of the opinion that the transaction in question was not an international transaction and that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said transaction;

(vii) With regard to the submissions of the AR that the issue of AMP should be restored back to the file of the AO, we want to mention that law as a concept is supposed to evolve with passage of time-it cannot be static always. Non-availability of a particular decision of the higher forum cannot justify the restoration of issue/cases to the file of AO in each and every case. Unnecessary litigation has to be avoided and issues have to be settled for once and all. We are of the opinion that after the judgments of Maruti Suzuki and Bausch & Lomb there is no scope of any other interpretation about the AMP expenditure. In the case under consideration, the AO/TPO has not brought anything on record that there existed and agreement, formal or informal, between the assessee and the AE to share/reimburse the AMP expenditure incurred by the assessee in India. In absence of such an agreement the first and primary precondition of treating the transaction in question an international transaction remains un-fulfilled;

(viii) Conducting FAR analysis or adopting an appropriate method is the second stage of transfer pricing adjustments. The first thing is to find out whether the disputed transaction in is international transaction or not. Without crossing the first threshold second cannot be approached. In the case under consideration, we are of the opinion that AMP expenditure is not an international transaction and therefore we are not inclined to restore back the issue to the file of the AO.

(Sony Ericsson Mobile Communication India Private Limited (231 taxmann 113) & Honda Siel Power Products (64 Taxmann.com 328) & LG Electronics (140 ITD 41) referred)

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