India: No transfer pricing adjustment for advertising, marketing, and promotion

India: No transfer pricing adjustment

The Mumbai Bench of the Income-tax Appellate Tribunal held that the tax officer must prove that the taxpayer’s real intention in incurring an advertising, marketing, and promotion expenditure was to benefit related parties, and not the taxpayer’s own business. Because this proof was not shown, the tribunal held that the advertising, marketing, and promotion was not an international transaction, and thus a transfer pricing adjustment was not appropriate.

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The case is: L’Óreal India Pvt. Ltd. v. DCIT  [ITA Nos. 7714, 1119; 976/Mum-2014 and 518, 335/Mum-2015]

Summary

The taxpayer was engaged in the business of manufacturing and distributing cosmetics. 

During a transfer pricing assessment proceeding, the tax officer found all but one of the taxpayer’s international transactions with related parties were at arm’s length. The one exception was an advertisement, marketing, and production expenditure, and the tax officer ultimately made a transfer pricing adjustment for this expenditure, and that adjustment was upheld by the Dispute Resolution Panel.

The taxpayer countered that its advertisement, marketing, and production expenditure was not an international transaction, but was instead incurred with respect to products in the Indian market (and not incurred for promoting the brand of the related parties). The tribunal agreed, and found that the tax officer’s assumption that the advertisement, marketing, and production expenditure would have benefited the related party-owner of the brand was flawed in that this assumed that the taxpayer would not have incurred such advertisement, marketing, and production expenses to promote its own business.

 

Read a May 2016 report [PDF 335 KB] prepared by the KPMG member firm in India: Agreement between taxpayer and its AE and proof that the AMP expenditure is not for the taxpayers business in India are prerequisite for treating the AMP expenditure as an international transaction   

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