India: Brand-promotion expenses not “international transaction” for arm’s length standard

India: International transaction, arm’s length standard

The Bangalore Bench of the Income-tax Appellate Tribunal held that advertising, marketing, and sales promotion expenses to promote brand value were incurred only for increasing the taxpayer’s sales, and not those of the foreign related party. Accordingly, even when these expenses were greater than those of comparable companies, without an agreement between the taxpayer and the foreign related party, these expenses were not an “international transaction” and, as such, the arm’s length price standard does not arise.

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The case is: Essilor India vt. Ltd. v. DCIT [IT(TP)A No .29/Bang/2014 and IT(TP)A No. 227 /Bang/2015]


The taxpayer, the wholly owned subsidiary of a French entity, is involved in the ophthalmic lenses business. The French entity charged a royalty on anti-glare and hard-coating technology. 

During the years at issue, the taxpayer engaged in international transactions involving the import of lenses and equipment and other related transactions. The taxpayer adopted the Transactional Net Margin Method (TNMM), and claimed that the international transactions were at arm’s length. During the assessment proceedings, the Transfer Pricing Officer observed that the taxpayer had incurred expenses for sales promotion and advertisement equal to 14.2% of total revenue (whereas the average expenditure for these items by a comparable company was only 3.3% of turnover). Thus, a transfer pricing adjustment was made based on the comparables.

The taxpayer countered that the advertising, marketing, and sales promotion expenses were not international transactions that were subject to the arm’s length standard under the transfer pricing rules. The Bangalore tribunal agreed, holding that the advertising, marketing, and sales promotion expenses incurred by the taxpayer were only for increasing its own sales—and not those of the related party—and were not an international transaction. 


Read a March 2016 report [PDF 368 KB] prepared by the KPMG member firm in India: Incurring more expenditure on AMP compared to comparable companies, cannot be inferred as an international transaction between the taxpayer and its foreign AE

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