Case Law Details

Case Name : Loreal India P. Ltd. vs. DCIT (Bombay High Court)
Appeal Number : I.T.A. 7714/MUM/2012
Date of Judgement/Order : 04.05.2016
Related Assessment Year : 2008-09,2009-10,2010-11
Courts : All High Courts (1347) Bombay High Court (304)
CA Saurabh Chokhra

Brief of the case:

  • The Bombay HC in the above cited case held that Advertising, Promotion and Marketing expenses (AMP) cannot be considered as international transaction unless there exist an agreement between the assessee and its 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. Conducting functional & risk 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.
  • Therefore, such AMP expenses are not international transaction.

Facts of the case:

  • During the assessment proceedings, the AO found that the assessee had entered into international transactions with its associated enterprises (AEs). During the TP proceedings, the TPO accepted all the international transactions to be at ALP except one and that was the Advertising, Marketing and Promotion expenses (AMP).
  • The TPO was of the opinion that the AMP expenditure incurred by the assessee had resulted in creation of marketing intangibles for its AE, that it should have been compensated by its AEs to the extent of excess AMP incurred vis a vis comparable companies. Accordingly, he applied Bright Line Test (BLT) to determine the ALP of the AMP expenses. In the test applied the comparables suggested by the assessee was rejected. Accordingly an upward adjustment to returned income by Rs. 41.74 crores were made. DRP also confirmed the addition suggested by TPO.
  • Aggrieved assessee is in appeal before the High Court.

Contention of the Assessee:

  • It was contended by the learned counsel of the assessee that AMP expenses was not an international transaction as per the provisions of section 92B of the act, that the TPO had not shown any existence of an agreement/arrangement/understanding between the assessee and its AE’s whereby the assessee was obliged to incur AMP expenditure in excess of the bona fide requirements of its own business.
  • The advertisements by the assessee were for products of the assessee and not for brand of the group, that certain products were developed specifically for the Indian markets as per the requirements/ preferences of Indian people, that none of the AE.s of the group would be benefited at any time in future by the advertisement/ marketing/promotion of the products of the assessee, that the assessee was independent risk bearing entity, that it alone enjoyed the increased sales of the product as a result of AMP expenditure, that even if some benefits were derived by the AEs same were incidental and ancillary, that the purpose of AMP expenses was essentially to create product awareness among the Indian customers ,that the AMP expenses were incurred for commercial considerations, that same could not be anyway linked to the development of brands owned by the AE.

Held by Hon’ble High Court:

  • High court observed that the assessee had bench marked the International transactions in two different segments i.e. Manufacturing Segment(MS) and Distribution Segment (DS) and claimed  them to be at Arm Length Price by using  Cost Plus Method and Retail Sale Price Method. Transfer Pricing Officer (TPO)  held that the assessee had incurred huge expenses for promoting the brands owned by its  Associated Enterprises (AEs) and that it was a deemed international transaction.
  • Accordingly , he made transfer pricing adjustment using the Bright Line Standard (BLS) Court also observed that 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%.
  • 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 Advertising , Marketing and Promotion expenses (AMP) played an important role in it.
  • The TPO had ignored the fact that expenditure was incurred for products launched especially for the Indian market. TPO also has not brought on record any evidence to prove that the assessee had rendered any services to its AE.s under the head AMP.
  • The fundamental question to be answered is to decide as to whether in the absence of any agreement for payment of AMP expenses by the AE.s 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 AE.s., who owned the brands used by the assessee. The entire exercise carried on by TPO and confirmed by DRP suffered from the very basic flaw that it presumes that the assessees would incur AMP just to benefit its AEs and not to promote its own business.
  • 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. 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, therefore, the court is of the opinion that AMP  expenditure is not an international transaction.

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