Appeal Details
Counselvise Citation
[2019] 116 COUNSELVISE.COM (IT) 4171 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 8 month(s) 3 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
23-08-2019
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
Not Allotted
Assessment Year
misc
Appeal Filed On
20-12-2017
Judgement Text
P A G E | 1 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI M.BALAGANESH , ACCOUNTANT MEMBER AND SHRI RAVISH SOOD , JUDICIAL MEMBER ITA NO.7194 /MUM/2017 (ASSESSMENT YEAR: 2013 - 14 ) M/S LOREAL INDIA PVT. LTD. A - WING, 8 TH FLOOR, MARATHAN FUTUREX, N.M. JOSHI MARG, LOWER PAREL, MUMBAI 400013 VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), AAYAKAR BHAVAN, MAHARISHI KARVE ROAD, MUMBAI - 400020 PAN AAACL0738K (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI NIRAJ SHETH , A .R RESPONDENT BY: SHRI ANAND MOHAN, CIT D .R DATE OF HEARING : 09 .07.2019 DATE OF PRONOUNCEMENT: 2 3 .08.2019 O R D E R PER RAVISH SOOD, JM THE PRESENT APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PAS SED BY THE A.O UNDER SEC.143(3) R.W. SEC.144C(13) OF THE INCOME TAX ACT, 1961 (FOR SHORT ACT) , DATED 15 .11.2017 FOR A.Y. 2012 - 13 . THE ASSESSEE HAS ASSAILED THE IMPUGNED ORDER ON THE FOLLOWING GROUNDS OF APPEAL: BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, L'OREAL INDIA PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE 'APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ASSESSMENT ORDER PASSED BY THE LEARNED DEPUTY COMMISSION ER OF INCOME TAX - 7(L)(2), MUM BAI DATED 15 NOVEMBER 2017 (RECEIVED ON 20 NOVEMBER 2017) UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE INCOME - TAX ACT, 1961 ('THE ACT') [HEREINAFTER REFERRED TO AS 'THE LEARNED AO] IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE HON BL E DISPUTE RESOLUTION PANEL - 1, ( HEREINAFTER REFERRED TO AS THE HON BLE DRP') ON THE FOLLOWING GROUNDS, EACH OF WHICH ARE WITHOUT PREJUDICE TO ONE ANOTHER. P A G E | 2 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, LEARNED AO/ JOINT COMMISSIONER OF INC OME - TAX, TRANSFER PRICING - 3(1), MUM BAI ('LEARNED TPO') /HON BLE DRP ON FACT AND IN LAW HAS: FOLLOWING GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER: GENERAL 1. E RRED IN ASSESSING THE TOTAL INCOME AT R S 401.38 CRORES AS AGAINST RS. 46.65 CRORES COMPUTED BY THE APPELLANT. A. ADJUSTMENT ON ACCOUNT OF ADVERTISEMENT, MARKETING AND PROMOTION ('AMP') EXPENSES PRESUMPTION OF FICTITIOUS TRANSACTION IN THE NATURE OF 'PROVISION OF BRAND PROMOTION SERVICES' 2. ERRED IN MAKING AN ADJUSTMENT IN RESPECT OF AMP E XPENSES OF RS 354.73 (RS. 254.58 CRORE FOR THE MANUFACTURING SEGMENT AND RS. 100.05 CRORE FOR THE DISTRIBUTION SEGMENT) ALLEGING THAT THE AMP EXPENSE INCURRED BY THE APPELLANT IS AN INTERNATIONAL TRANSACTION UNDER SECTION 92B; 3. ERRED IN IGNORING THAT THE APPELLANT HAS NOT RENDERED ANY SERVICE TO THE ASSOCIATED ENTERPRISES (AES ) AND HENCE ERRONEOUSLY TREATING AND CATEGORIZING AMP EXPENSES INCURRED BY THE APPELLANT ON ITS OWN BEHALF, AS AN INTERNATIONAL TRANSACTION BETWEEN THE APPE LLANT AND AES UNDER SECTION 92B OF THE ACT; 4. ERRED IN NOT APPRECIATING THAT THERE IS NO ARRANGEMENT WHATSOEVER BETWEEN THE APPELLANT AND ITS AES FOR PROMOTION OF AES BRAND BY INCURRING AMP EXPENSES ON BEHALF OF THE AES: 5. ERRED IN CONC LUDING THAT THE APPELL ANT IS EN GAGED IN PERFORMING DEVELOPMENT, ENHANCEMENT, MAINTENANCE, PROTECTION OR EXPLORATION (DEMPE') SERVICES WHICH INCLUDES MARKET DEVELOPMENT, VALUE ADDITION, CREATION OF MARKETING INTANGIBLES ETC AND THERE IS MUTUAL AGREEMENT/ ARRANGEMENT BETWEEN THE APPELLANT AND ITS AE FOR DISCHARGING MARKET DEVELOPMENT FUNCTIONS; 6. ERRED IN ALLEGING THAT THE VARIOUS INFORMATION THAT WERE CALLED FOR, WERE NOT SUBMITTED BY THE APPELL ANT WHILE TREATING THE AMP EXPE NSES INCURRED BY THE APPELLANT AS AN INTERNATIONAL TRANS ACTION; 7. ERRED IN STANDING THAT NO DETAILS HAVE BEEN SUBMITTED NOT GIVING COGNIZANCE TO THE FACT THAT THE APPELLANT HAS PROVIDED THE DETAILS. 8. ERRED IN OVERRIDING THE CHARGING PROVISIONS OF THE SEC.4 OF THE ACT BY THE MACHINERY PROVISIONS OF SEC.92 OF THE ACT TO BRING TO TAX FICTIONAL/ASSUMED/HYPOTHETICAL INCOME/BENEFIT; BUSINESS AND COMMERCIAL EXPEDIENCY 9. ERRED IN HOLDING THAT THE APPELLANT INCURRED AMP EXPENSES FOR PROMOTING THE BRANDS OWNED BY OVERSEAS AE, INSTEAD OF APPRECIATING THAT THE APPELLANT WAS ONLY CARRYING OUT ITS BUSINESS BY USING THE WELL - ESTABLISHED BRANDS AND ANY BENEFIT DERIVED BY THE AE IS PURELY INCIDENTAL; MOST APPROPRIATE METHOD 10. ERRED IN APPLYING BRIGHT LINE TEST ('BLT ) AND TREATING THE SAME AS ROUTINE ALP DETERMINATION MET HOD UNDER OTHER METHOD TO DETERMINE THE ARM'S LENGTH PRICE OF THE AMP EXPENSES INCURRED BY THE APPELLANT; P A G E | 3 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) 11. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT CONSIDERING THE PROFIT LEVEL INDICATOR OF 'AMP ADJUSTED GROSS PROFIT' FOR BENCHMARKING AMP TRANSACTION; MA NUFACTURING SEGMENT - COMPARABLE SET 12. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN ASSUMING THAT THE ALLEGED AMP EXPENSES INCURRED BY THE APPELLANT WAS IN PROPORTION TO THE NET SALES EARNED IN RESPECTIVE SEGMENT, WITHOUT REQUESTING FOR SUCH DATA/ INFORMATION F ROM THE APPELLANT; 13. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN COMPUTING THE BLT OF THE COMPARABLES AS 10.41% INSTEAD OF 11.28%; 14. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN REJECTING THE ANALYSIS SUBMITTED BY THE APPELLANT AND NOT ADOPTING A SCIENTIFIC SEARCH PROCESS TO IDENTIFY COMPANIES COMPARABLE TO THE APPELLANT'S MANUFACTURING SEGMENT FOR BENCHMARKING OF THE AMP EXPENSES AND CONSIDERING INAPPROPRIATE COMPARABLES, NOT HAVING SIMILAR PRODUCT/ BRAND PROFILE AS THE APPELLANT; DISTRIBUTION SEGMENT - COMPARABLE SET 15. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN ASSUMING THAT THE ALLEGED AMP EXPENSES INCURRED BY THE APPELLANT IN ITS DISTRIBUTION SEGMENT WAS IN PROPORTION TO THE NET SALES EARNED IN RESPECTIVE SEGMENT, WITHOUT REQUESTING FOR SUCH DATA/ INFORMATION FROM THE APPELLANT; 16. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN COMPUTING THE BLT OF THE COMPARABLES AS 8.78% INSTEAD OF 10.52%; SALES RELATED EXPENSES 17. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN HOLDING THAT ITEMS OF SELLING EXPENDITURE SUCH AS RENT COST FOR WINDOW DISPLAY, POINT OF SALES MATERIALS ETC. AMOUNTING TO RS. 99.94 CRORES SHOULD BE CONSIDERED FOR MAKING AN ADJUSTMENT WITHOUT APPRECIATING THE FACT THAT NONE OF THESE EXPENSES CAN IN ANY WAY BE CONSIDERED AS INCURRED FOR BRAND PROMOTION BUT WERE FOR EFFECTING SALES FOR THE APPELLANT; 18. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN ARTIFICIALLY BIFURCATING THE ADVERTISEMENT AND SALES PROMOTION EXPENSE OF CO MPARABLE COMPANIES IN THE RATIO OF APPELLANT'S ALLEGED ADVERTISEMENT AND SALES PROMOTION EXPENSE (LE 83.5:16.5), IN CASE OF COMPARABLE COMPANIES: MARK - UP ON AMP EXPENSES 19. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN DISREGARDING THAT EVEN IF THE APPELLANT HAD TO BE COMPENSATED FOR THE EXCESSIVE AMP, IN ABSENCE OF ANY SERVICE ELEMENT, THE APPELLANT SHOULD BE ENTITLED TO REIMBURSEMENT OF 'ACTUAL' EXCESSIVE AMP EXPENSES INCURRED, RATHER THAN A MARK - UP ON THE SAME; 20. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN HOLDING THAT THE APPELLANT SHOULD HAVE EARNED A MARK - UP OF 16.90% ON THE ALLEGED EXCESSIVE AMP EXPENSES IN RELATION TO MANUFACTURING AND DISTRIBUTION SEGMENT WHICH ARE TO BE REIMBURSED TO THE APPELLANT WITHOUT ADOPTING A SCIENTIFIC SEARCH PROCESS TO IDENTIFY COMPARABLE COMPANIES: 21. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN COMPUTING MARK - UP OVER ALLEGED EXCESSIVE AMP EXPENSES INCURRED WITHOUT APPRECIATING THAT ADDITION IF ANY, S HALL BE COMMENSURATE WITH AGENCY FUNCTION, IF ANY, UNDERTAKEN BY THE APPELLANT; P A G E | 4 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) B. ALTERNATE ADJUSTMENT ON MANUFACTURING SEGMENT ON ACCOUNT OF PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOW - HOW AND TRADEMARK 22. ERRED IN MAKING AN ARBITRARY ALTERNATE ADJUSTMENT OF RS 56.37 CRORES (RS 34.20 CRORES FOR TECHNICAL KNOW - HOW AND RS 22.17 CRORES FOR TRADEMARK) IN RESPECT OF PAYMENT OF ROYALTY TO THE AES BY THE APPELLANT FOR USE TECHNICAL KNOW - HOW AND TRADEMARK; 23. ERRED I N NOT ACCEPTING THE BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT USING THE COMPARABLE UNCONTROLLED PRICE METHOD ('CUP'), WHEREIN RELIANCE WAS PLACED ON A ROYALTY BENCHMARKING STUDY UNDERTAKEN BY INDEPENDENT CONSULTANT - NERA ECONOMIC CONSULTING, IN AC CORDANCE WITH THE PROVISIONS OF THE ACT, READ WITH THE RULES, FOR THE DETERMINATION OF ARM'S LENGTH PRICE OF THE AFORESAID INTERNATIONAL TRANSACTION PAYMENTS MADE TO AES FOR USE OF TECHNICAL KNOW - HOW 24. ERRED IN TREATING ARM'S LENGTH PRICE OF PAYMENT OF ROY ALTY FOR USE OF TECHNICAL KNOW - HOW AT AN ADHOC RATE OF 2.3% AS AGAINST 5% PAID BY THE APPELLANT: 25. ERRED IN RESORTING TO CHERRY PICKING OF COMPARABLE AGREEMENTS (OUT OF 12 COMPARABLE AGREEMENTS IDENTIFIED BY THE APPELLANT THROUGH A ROYALTY BENCHMARKING SEAR CH UNDERTAKEN) WHILE ALLEGEDLY DETERMINING THE ALLEGED ARM'S LENGTH COMPARABLE RATE FOR PAYMENTS MADE BY THE APPELLANT TO ITS AE. FOR USE OF TECHNICAL KNOW - HOW; PAYMENTS MADE TO AES FOR USE OF TRADEMARK 26. ERRED IN HOLDING THAT THE APPELLANT HAS CARRIED OUT SIGNIFICANT AMP EXPENSES AND THEREBY ASSUMING APPELLANT BEING ECONOMIC OWNER, NO TRADEMARK ROYALTY IS PAYABLE BY THE APPELLANT. IN HOLDING THE SAME, THE LEARNED AO / TPO ERRED IN DETERMINING THE ARM'S LENGTH PR ICE FOR PAYMENT OF TRADEMARK ROYALTY AS NIL VIS - A - VIS THE ACTUAL PAYMENT OF RS. 22.17 CRORES MADE BY THE APPELLANT; 27. FAILED TO APPRECIATE THAT IN ABSENCE OF PAYMENT OF TRADEMARK ROYALTY AS STIPULATED IN THE LICENSE AGREEMENT, THE APPELLANT WOULD NOT HAVE THE LEGAL RIGHT TO USE THE LOREAL TRADEMARK; 28. ERRED IN NOT USING ANY OF THE METHOD PRESCRIBED UNDER SECTION 920 OF THE ACT FOR BENCHMARKING THE SAID INTERNATIONAL TRANSACTION OF PAYMENT OF TRADEMARK ROYALTY AND DETERMINING THE ARM'S LENGTH PRICE OF ROYALTY ALTERNATE ADJUSTMENT ON THE DISTRIBUTION SEGMENT - INTERNATIONAL TRANSACTION OF IMPORT FINISHED GOODS FROM AES F OR RESALE 29. ERRED IN MAKING AN ARBITRARY ALTERNATE ADJUSTMENT AMOUNTING TO RS.60.03 CRORES TO THE DISTRIBUTION SEGMENT OF THE APPELLANT ON ACCOUNT OF ALLEGED DIFFERENCES IN INTENSITY OF AMP FUNCTIONS PERFORMED BY THE APPELLANT VIS - A - V I S THE COMPARABLE COMPA NIES TO ALIGN THE FUNCTIONS, ASSETS AND RISKS (FAR') PROFILE OF THE APPELLANT WITH THAT OF THE COMPARABLE COMPANIES; 30. ERRED IN REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT BY USE OF RESALE PRICE METHOD ('RPM') TO BENCHMARK THE AFORESAID TRAN SACTION WITHOUT GIVING AN OPPORTUNITY WITH REGARD TO THE PROPOSED ADJUSTMENT; 31. ERRED IN HOLDING THAT THE APPELLANT INCURRED AMP EXPENSES FOR PROMOTING THE BRANDS OWNED BY OVERSEAS AE. INSTEAD OF APPRECIATING THAT THE APPELLANT WAS ONLY CARRYING OUT ITS BUSI NESS BY USING THE WELL - P A G E | 5 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ESTABLISHED BRAND NAME OF 'L'OREAL' AND ANY BENEFIT DERIVED BY THE AE IS PURELY INCIDENTAL: 32. BASED ON THE ABOVE ASSUMPTIONS (IE BRAND PROMOTION FOR AE WAS UNDERTAKEN BY THE APPELLANT ON BEHALF OF AE AND THAT DIFFERENCES EXISTED VIS - A - VI S FAR OF COMPARABLE COMPANIES), ERRED IN PROPOSING USE OF ADJUSTED RPM BY CALCULATING ADJUSTED COST AS THE MOST APPROPRIATE METHOD, TO BENCHMARK THE SAID INTERNATIONAL TRANSACTION: 33. ERRED IN DISREGARDING THE FACT THAT INTENSITY BASED COMPARABILITY ADJUST MENT WOULD RESULT IN RE - CHARACTERIZATION OF THE BUSINESS OF THE APPELLANT; 34. WITHOUT PREJUDICE TO THE ABOVE, IN AN ATTEMPT TO ACCOUNT FOR DIFFERENCE IN INTENSITY OF AMP FUNCTIONS, ERRED IN INADVERTENTLY MAKING AN ADJUSTMENT BASED ON THE TOTAL 'GENERAL AND A DMINISTRATIVE EXPENSES' INCURRED BY THE COMPARABLE COMPANIES, INSTEAD OF AMP EXPENSES ITSELF, AS STATED IN THE TP ORDER; 35. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN APPLYING ADHOC MARKUP FOR 16.90% (WITHOUT PROVIDING ANY BACKUP) TO ARRIVE AT THE ADJUSTED SALE S FOR COMPUTATION OF MARGINS OF THE COMPARABLE COMPANIES. 36. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT PROVIDING THE BENEFIT OF THE VARIATION/ REDUCTION OF 3 PERCENT FROM THE VALUE OF THE INTERNATIONAL TRANSACTION AS PROVIDED IN PROVISO TO SECTION 920(2) O F THE ACT, WHILE DETERMINING THE ARM'S LENGTH PRICE; 37. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT FOLLOWING LEARNED TPO'S OWN APPROACH IN APPELLANT'S OWN CASE FOR AY 2012 - 13 USING WHICH THE ALTERNATE ADJUSTMENT VALUE WOULD HAVE BEEN RS. 33.89 CRORE AS AGAI NST RS. 60.03 CRORE; 38. WITHOUT PREJUDICE TO THE ABOVE, ERRED IN NOT CONSIDERING THE PROFIT LEVEL INDICATOR OF 'AMP ADJUSTED GROSS PROFIT' UNDER RPM: C. LEVY OF INTEREST AND INITIATION OF PENALTY PROCEEDINGS 39. ERRED IN CHARGING INTEREST UNDER SECTION 234B, 2340, 234D OF THE ACT; 40. ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C). THE APPELLANT CRAVES THE LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 2. BRIEFLY STATED, THE ASSESSEE VIZ. LOREAL INDIA PVT. LTD. (HEREINAFTER REFERRED TO AS LOREAL INDIA) IS A WHOLLY OWNED SUBSIDIARY OF LOREAL S.A. FRANCE (HEREINAFTER REFERRED TO AS LOREAL FRANCE). THE ASSESSEE HAD ENTERED INTO A LICENSE AGREEMENT DATED 02.01.2012 WITH LOREAL FRANCE , WHICH WAS EFFECTIVE FROM 01.01.2012. AS PER THE AGREEMENT , THE ASSESSEE WAS AWARDED THE EXCLUSIVE RIGHT TO IMPORT, MANUFACTURE (OR HAVE MANUFACTURED BY ANOTHER LOREAL AFFILIATE), MARKET, DISTRIBUT E AND SELL BRANDED PRODUCT S OF LOREAL GROUP . T HE ASSESSEE HA S ITS OWN MANUFACTURING FACILITY AT CHAKAN, PUNE AND DERIVES ITS REVENUES FROM THE PROFESSIONAL PRODUCTS DIVISION, CONSUMER PRODUCTS DIVISION AND THE ACTIVE COSMETICS DIVISION . THE PROFESSIONAL PRODUCTS DIVISION P A G E | 6 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) CO NSIST S OF THE HIGH E ND PREMIUM PRODUCTS LIKE LOREAL PROFESSIONAL , WHEREAS THE CONSUMER PRODUCT S DIVISION CONSISTS OF THE MID - MARKET BRANDS SUCH AS LOREAL PARIS , GARNIER, MAYBELLINE ETC. THE MAJOR PORTION OF THE TOTAL SALES REVENUE OF THE ASSESSEE IS GENE RATED FROM ITS CONSUMER PRODUCTS DIVISION . 3. THE ASSESSEE COMPANY HAD E - FILED ITS RETURN OF INCOME FOR A.Y. 2013 - 14 ON 29.11.2013, DECLARING ITS TOTAL INCOME AT RS.46,65,64,620/ - . THE RETURN OF INCOME FILED BY THE ASSESSEE WAS PROCESSED AS SUCH UNDER SEC .143(1) OF THE ACT. SUBSEQUENTLY, THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT UNDER SEC.143(2). THE A.O IN THE COURSE OF THE ASSESSMENT PROCEEDINGS MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (FOR SHORT TPO) UNDER SEC. 92CA(1) OF T HE ACT FOR DETERMIN ING THE ARMS LENGT H PRICE (FOR SHORT ALP) OF THE TRANSACTIO NS BETWEEN THE ASSESSEE AND ITS ASSOCIATE ENTERPRISES (FOR SHORT AES) . 4. THE TPO IN THE COURSE OF THE PROCEEDINGS OBSERVED THAT THE ASSESSEE COMPANY HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES WHICH WERE REPORTED TO BE ARMS LENGTH IN ITS FORM 3CEB: NATURE OF TRANSACTION VALUE OF INTERNATIONAL TRANSA CTION (RS.) IMPORT OF RAW MATERIAL/PACKING MATERIAL FOR MANUFACTURE OF FINISHED GOODS 89,629,740 / - EXPORT OF RAW MATERIAL/PACKING MATERIAL 1,29,554 / - IMPORT OF FINISHED GOODS FOR RESALE IN INDIA 980,077,220 / - EXPORT OF FINISHED GOODS MANUFACTURED BY LOREAL INDIA 531,884,820 / - RENDERING EVALUATION AND TECHNICAL TESTING SERVICES 567,680,621 / - ROYALTY PAYMENTS FOR USE OF TECHNICAL KNOW - HOW, BRAND NAME, TRADEMARK, ETC. 854,994,314 / - AVAILING INTERNATIONAL MARKETING SUPPORT SERVICES 341,404,193 / - AVAI LING CONSULTANCY SERVICES 216,607,263 / - P A G E | 7 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) IMPORT OF FIXED ASSETS 12,009,395 / - REIMBURSEMENTS RECEIVABLE 61,555,224 / - REIMBURSEMENT PAYABLE 390,953,415 / - T HE TPO PROPOSED THE FOLLOWING DISALLOWANCE S /ADDITION S TO THE RETURNED INCOME REPORT ED BY THE ASSESSEE: INTERNATIONAL TRANSACTIONS AMOUNT DISALLOWED (INR) (IN CRORES) OBSERVATIONS/REASON OF ADJUSTMENT (AS PER TPO) AMP EXPENSES INCURRED IN MANUFACTURING SEGMENT (ALLEGEDLY TREATED AS INTERNATIONAL TRANSACTION BY THE LEARNED TPO) 254.68 PRIMARY ADJUSTMENT - THE TPO HELD THAT THE ASSESSEE INCURRED AMP EXPENSES WITH A VIEW TO ENHANCE THE BRAND IMAGE OF LOREAL AND HENCE PROVIDED BRAND BUILDING SERVICES TO THE AES, FOR WHICH IT SHOULD BE COMPENSATED. PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOWHOW AND TRADEMARKS 56.37 (PRIMARY ADJUSTMENT IS INR 254.68 CRORES) ALTERNATE ADJUSTMENT ON THE MANUFACTURING SEGMENT - IF THE ABOVE DOES NOT SUSTAIN IN APPELLATE STAGE, AN ALTERNATE ADJUSTMENT HAS BEEN PROPOSED BY THE TPO BY TREATING ARMS LENGTH PRIC E OF PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOW - HOW @ 2.3% AS AGAINST 5% P AID BY THE ASSESSEE AND ALSO BY CHERRY PICKING THE COMPARABLE AGREEMENTS. FURTHER, THE TPO COMPLETELY DISALLOWED PAYMENTS FOR TRADEMARK STATING THAT ASSESSEE WAS ENGAGED IN DEVELO PING LOREAL TRADEMARKS IN INDIA BY INCURRING AMP EXPENSES. HENCE ROYALTY PAYMENT FOR USE TRADEMARK WAS NOT MANDATED. AMP EXPENSES INCURRED IN DISTRIBUTION SEGMENT (ALLEGEDLY TREATED AS INTERNATIONAL TRANSACTION BY THE LEARNED TPO) 100.05 PRIMARY ADJUSTMENT THE TPO HELD THAT THE ASSESSEE HAS CARRIED OUT DEVELOPMENT, EXPLOITATION, MAINTENANCE, PROTECTION AND EXPLOITATION (DEMPE) FUNCTIONS BY INCURRING AMP EXPENSES FOR WHICH IT SHOULD BE REMUNERATED BY THE AES. HOWEVER, AS SUGGESTED BY BEPS REPO RT, SINCE THE INTENSITY IS VERY HIGH AS COMPARED TO COMPARABLE, IT SHOULD BE COMPENSATED. IMPORT OF FINISHED GOODS TO AES FOR RESALE 60.03 ALTERNATE ADJUSTMENT - IF THE ABOVE DOES NOT SUSTAIN IN APPELLATE STAGE, AN ALTERNATE ADJUSTMENT ON ALP OF THE IMPORT/RESALE TRANSACTION BY ADJUSTMENT FOR INTENSITY OF AMP FUNCTIONS WAS PROPOSED. TOTAL (EXCLUDING ALTERNATE ADJUSTMENT) 354.73 5. THE A.O AFTER RECEIVING THE ORDER PASSED BY THE TPO UNDER SEC.92CA(3), DATED 31.10.2016 GAVE EFFECT TO THE RECOMMENDED TOTAL ADJUSTMENTS OF RS.354.73 CRORES VIZ. (I) ADJUSTMENT ON ACCOUNT OF DISTRIBUTION SEGMENT: RS.100.05 CRORES; AND (II) ADJUSTMENT ON ACCOUNT OF MANUFACTURING SEGME NT: RS.254.68 CRORES. ACCORDINGLY, ON THE BASIS OF THE AFORESAID RECOMMENDATION S OF THE TPO THE A.O VIDE P A G E | 8 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) HIS DRAFT ASSESSMENT ORDE R PASSED UNDER SEC.143(3) R.W.S 144C(1), DATED 27.12.2016 INTER ALIA MA DE AN ADDITION OF RS.354.73 CRORES AND PROPOSED TO ASSESS THE INCOME OF THE ASSESSEE AT RS.426,77,40,190/ - . 6. AGGRIEVED, THE ASSESSEE FILED ITS OBJECTIONS WITH THE DISPUTE RESOLUTION PANEL - 1 (WZ), MUMBAI (FOR SHORT DRP). T HE ASSESSEE OBJECTED TO THE ALLEGED PRESUMPTION OF PRO VISION OF BRAND PROMOTION SERVICE S - AMP EXPENDITURE AS AN INTERNATIONAL TRANSACTION BY THE TPO. IT WAS AVERRED THAT THE TPO HAD ERRED IN ALLEGING THAT THE AMP EXPENSES INCURRED BY THE ASSESSEE WAS AN INTERNATIONAL TRANSACTION. IN FACT, IT WAS THE CLAIM OF THE ASSES SEE THAT THE AFORESAID EXPENSES WERE EXCLUSIVELY INCURRED FOR ITS BUSINESS AND NOT FOR THE BRAND PROMOTION OF ITS AE. HOWEVER, THE DRP DID NOT FIND FAVOUR WITH THE CONTENTION S ADVANCED BY THE ASSESSEE. IT WAS OBSERVED BY THE DRP THAT AS THE EXPENSES IN CURR ED BY THE ASSESSEE CLEARLY REVEALED THAT THE SAME WERE IN THE NATURE OF ADVERTISEMENT EXPENSES , THEREFORE, THE CLAIM OF THE ASSESSEE THAT THE SAME BE TREATED AS SALE EXPENSES AND NOT AMP EXPENSES DID NOT MERIT ACCEPTANCE. T HE CLAIM OF THE ASSESSEE THAT THE TPO WAS IN ERROR IN SELECTING COMPARABLES WHICH WERE NOT FUNCTIONALLY COMPARABLE TO THE BUSINESS OF THE ASSESSEE, ALSO DID NOT FIND FAVOUR WITH THE DRP. IT WAS OBSERVED BY THE DRP THAT AS THE TPO HAD SELECTED ALL COMPANIES WHICH ALIKE THE ASSESSEE WERE IN TO FMCG INDUSTR Y , THEREFORE, NO INFIRMITY DID EMERGE FROM THE SELECTION OF COMPARABLE S BY THE TPO. FURTHER, IT WAS OBSERVED BY THE DRP THAT IN THE CASE BEFORE THEM THE INTERNATIONAL TRANSACTION BEING CONSIDERED WAS NOT THE AMP EXPENDITURE INCURRED PER SE, BUT THE BENEFIT THAT WAS CONFERRED ON THE AES IN THE FORM OF BRAND - VALUE AUGMENTATION THROUGH INCURRING OF EXCESSIVE AMP BY THE ASSESSEE . ACCORDINGLY, THE DRP WAS IN AGREEMENT WITH THE A.O/TPO REGARDING THE DETERMINING OF THE NON - ROUTINE AMP EXPENSES WHICH COULD BE RECOVERED FROM THE AE. P A G E | 9 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) IT WAS OBSERVED BY THE DRP THAT IN A.Y. 2011 - 12 THE ISSUE WAS DECIDED BY THE DRP IN FAVOUR OF THE ASSESSEE BY RELYING ON CERTAIN DECISION S OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF (I). MARUTI SUZUKI INDIA LTD. VS. ADDL. CIT/TPO (2010) 328 ITR 210 (DEL) ; (II). W HIRLPOOL OF INDIA VS. CIT [ITA NO. 228/2015 & CM NO. 5751/2015] ; (III). BAUSCH & LOMB EYECARE (INDIA) PVT. LTD. VS. ADDL. CIT & ORS (2016) 381 ITR 227 (DEL); AND (IV).HONDA SIEL POWER PRODUCTS LTD. VS. DCI T (2016) 237 TAXMAN 304 (DELHI) , WHEREIN IT WAS HELD THAT IN ABSENCE OF AN EXPLICIT ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AES FOR INCURRING OF AMP EXPENSES THERE COULD BE NO INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE S . IT WAS OBSERVED BY THE DRP THAT THE DEPARTMENT HAD NOT ACCEPTED THE AFORESAID DECISION AND HAD CARRIED THE MATTER IN APPEAL BEFORE THE TRIBUNAL. ALSO, IT WAS OBSERVED BY HIM THAT THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF MARUTI SUZUKI (I) LTD. VS. ADDL. CIT/TPO (2010) 328 ITR 210 (DEL) WAS ASSAILED BY THE REVENUE BY WAY OF A SPECIAL LEAVE PETITION (FOR SHORT S L P) BEFORE THE HONBLE SUPREME COURT, WHICH HAD BEEN ADMITTED BY THE HONBLE APEX COURT. IN THE BACKDROP OF THE AFORESAID FACTS, THE DRP KEEPING IN VIEW THE CHANGED LEGAL SCENARIO AS PER WHICH AN ISSUE DECIDED ON ITS PART IN FAVOUR OF AN ASSESSEE WAS NO LONGER APPEALABLE BY THE DEPARTMENT , THEREFORE, IN ORDER TO KEEP THE ISSUE ALIVE AND PROTECT THE INTEREST OF THE DEPARTMENT REJECTED THE OB JECTIONS RAISED BY THE ASSESSEE AND UPHELD THE ORDER OF THE TPO . THE DRP WHILE CONCLUDING AS HEREINABOVE , OBSERVED VIZ. (I) THAT, THE TPO HAD USED A REASONABLE METHOD TO DETERMINE WHETHER THE AMP SPEN T BY THE ASSESSEE WAS IN LINE WITH THE OTHER COMPARABLES OR WAS EXCESSIVE; (II ) THAT, THE TPO HAD RIGHTLY OBSERVED THAT EXCESSIVE AMP EXPENDITURE LEADS TO PROMOTION OF BRAND OF THE AE FOR WHICH THE ASSESS E E WAS REQUIRED TO BE COMPENSATED; (III) THAT, THE TPO HAD RIGHTLY OBSERVED THAT EXCESSIVE P A G E | 10 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) AMP EXPENDITURE REPRESENTS AN INTERNATIONAL TRANSACTION UNDER THE PROVISIONS OF SEC. 92B OF THE ACT; AND (IV) THAT, THE TPO WAS RIGHT IN CONCLUDING THAT EXCESSIVE AMP EXPENDITURE NEEDS TO BE BENCHMARKED SEPARATELY AND NOT THROUGH A BUNDLED APPROACH. AS REG ARDS THE OBJECTION OF T HE ASSESSEE IN RESPECT OF ADJUSTMENT PROPOSED BY THE TPO ON ACCOUNT OF PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOWHOW AND TRADEMARK, IT WAS OBSERVED BY THE DRP, THAT THE ASSESSEE HAD MADE PAYMENTS @ 6.75% ON SALES, WHICH WAS COMPR ISED OF VIZ. (I). ROYALTY FOR TECHNICAL KNOWHOW : 5% ; AND (II). ROYALTY FOR TRADEMARK S : 1.75%. IT WAS OBSERVED BY THE DRP THAT THE TPO HAD REJECTED THE ENTIRE ROYALTY THAT WAS PAID BY THE ASSESSEE TO ITS AE TOWARDS TRADEMARK S , FOR THE REASON, THAT IN VIEW O F THE AMP EXPENDITURE THAT WAS INCURRED BY THE ASSESSEE TOWARDS DEMPE FUNCTIONS AS REGARDS THE BRANDS OF ITS AE , ANY PAYMENT TOWARDS ROYALTY FOR TRADEMARK WAS UNWARRANTED . THE DRP CONCURR ED WITH THE VIEW TAKEN BY THE TPO AND UPHELD THE DISALLOWANCE OF THE ENTIRE CLAIM OF ROYALTY PAID BY THE ASSESSEE TO ITS AE FOR TRADEMARK S . AS REGARDS THE ROYALTY FOR TECHNICAL KNOWHOW , IT WAS OBSERVED BY THE DRP THAT THE TPO HAD DONE A DETAILED WORKING AND HAD ARRIVED AT AN ARMS LENGTH PERCENTAGE OF THE SAME. THE DRP HOLDING A CONVICTION THAT THE WORKING OF THE ROYALTY FOR TECHNICAL KNOWHOW BY THE TPO WAS FAIR AND REASONABLE, THEREFORE, CONCURRED WITH HIS VIEW AND REJECTED THE OBJECTION OF THE ASSESSEE. TO SUM UP, THE PAYMENT OF ROYALTY @ 4.45% VIZ. (I) ROYALTY FOR TRADEMARK:1.75% ; AND (II) ROYALTY FOR TECHNICAL KNOWHOW: 2.7% [5% ( - )2.3%] WAS HELD BY THE DRP TO BE EXCESSIVE IN NATURE. 7. THE A.O AFTER RECEIVING THE ORDER PASSED BY THE DRP UNDER SEC.144C(5), DATED 22.09.2017, THEREIN PASSED THE FINAL ASSESSMENT ORDER UNDER SEC.143(3) R.W.SEC.144C(13), DATED 15.11.2017. THE A.O WHILE FRAMING THE ASSESSMENT CARRIED OUT ADJUSTMENT OF P A G E | 11 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) RS.354,73,00,000/ - TO THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AND ASSESSED ITS INCOME AT RS.401,38,64,620/ - . 8 . THE ASSESSEE BEING AGGRIEVED WITH THE ASSESSMENT FRAMED BY THE A.O UNDER SEC.143(3) R.W. SEC.144C(13), DATED 15.11.2017 HAS CARRIED THE MATTER IN APPEAL BEFORE US. WE HAVE HEARD THE AUTHORIZED REPRESENTATIVES FOR BOTH THE PARTIES, PERUSED THE ORDERS OF THE LO WER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD , AND ALSO THE JUDICIAL PRONOUNCEMENT S RELIED UPON BY THEM. WE FIND THAT OUR INDULGENCE IN THE PRESENT APPEAL HAS BEEN SOUGHT BY THE ASSESSEE FOR ADJUDICATING THE CORE ISSUE VIZ. (I) THAT, AS TO WHETHER T HE A.O/DRP ARE RIGHT IN LAW AND THE FACTS OF THE CASE IN MAKING AN ADJUSTMENT IN RESPECT OF AMP EXPENSE S OF RS.354.73 CRORES . APART THERE FROM, THE ASSESSEE HAS ALSO ASSAILED THE ADJUSTMENT MADE BY THE AO/ TPO OF ROYALTY OF 4.45% (ON SALES) PAID BY THE ASSESSEE TO ITS AE VIZ. (I) ROYALTY FOR TRADEMARK: 1.75% AND (II) ROYALTY FOR TECHNICAL KNOWHOW: 2.7% [5% ( - ) 2.3%], ON THE GROUND THAT THE SAME WAS EXCESSIVE IN NATURE. ALSO, THE ASSESSEE HAS ASSAILED THE ALTERNATE ADJUSTMENT OF RS. 60.03 CRORE TO THE DI STRIBUTION SEGMENT OF THE ASSESSEE ON ACCOUNT OF ALLEGED DIFFERENCES IN INTENSITY OF THE AMP FUNCTIONS PERFORMED BY THE ASSESSEE VIS - - VIS THE COMPARABLES. 9 . WE SHALL FIRST ADVERT TO THE PRIMARY CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE (FOR SHORT A.R) FOR THE ASSESSEE , THAT IN THE ABSENCE OF ANY AGREEMENT WITH ITS AE FOR INCURRING OF AMP EXPENSES FOR CARRY ING OUT DEMPE FUNCTIONS FOR THE INTANGIBLES OWNED BY THE AE, THE AMP EXPENSES INCURRED BY THE ASSESSEE WOULD NOT FALL WITHIN THE REALM OF THE MEANING OF AN INTERNATIONAL TRANSACTION ENVISAGED IN SEC. 92B OF THE ACT. AS IS DISCERNIBLE FROM THE ORDERS OF THE LOWER AUTHORITIES, WE FIND , THAT THE PRIMARY FOCUS O F THE LD. A.R IS TO IMPRESS UPON US THAT THE LOWER AUTHORITIES HAD ERRED IN NOT APPRECIATING THAT P A G E | 12 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) THE AMP EXPENSES INCURRED BY THE ASSESSEE CANNOT BE HELD AS AN INTERNATIONAL TRANSACTION UNDER SEC.92B OF THE ACT. IT WAS VEHEMENTLY AVERRED BY THE LD. A.R THAT THE ASSESSEE HAD INCURRED THE AMP EXPENSES FOR ITS OWN BUSINESS AND NOT BY WA Y OF ANY SERVICE TO ITS AE. T HE LD. A.R IN ORDER TO FORTIFY HIS AFORESAID CLAIM HAD TAKEN US THROUGH THE AGREEMENT DATED 02.01.2012 (EFFECTIVE FROM 01.01.2012) ENTERED INTO BETWEEN THE ASSESSEE AND ITS AE VIZ. LOREAL S.A. , FRANCE. IT IS THE CLAIM OF THE LD. A.R THAT AS THERE WAS NO ARRANGEMENT WHATSOEVER BETWEEN THE ASSESSEE AND ITS AE FOR PROMOTION OF THE BRAND OF ITS AE VIZ. LOREAL S.A., FRANCE BY INCURRING AMP EXPENSES FOR AND ON THEIR BEHALF, THEREFORE, THE LOWER AUTHORITIES HAD ERRED IN ATTRIBUTING THE AMP EXPENSES INCURRED BY THE ASSESSEE TOWARD BRAND PROMOTION OF ITS AE. ON THE CONTRARY, IT IS THE CLAIM OF THE REVENUE , THAT THE ASSESSEE BY INCURRING HEAVY AMP EXPENDITURE HAD CARRIED OUT INTENSIVE MARKET FUNCTIONS WHICH HAD LED TO CREATION OF VALUA BLE MARKETING INTANGIBLE S FOR THE AE, FOR WHICH NO COMPENSATION WAS RECEIVED BY IT EITHER IN THE FORM OF DIRECT COMPENSATION OR BY WAY OF DISCOUNT IN ITS PRICE. IT IS SUBMITTED BY THE LD. D.R , THAT THE ASSESSEE HAD RENDERED DEMPE SERVICES WHICH INCLUDED MA RKET DEVELOPMENT, VALUE ADDITION, CREATION OF MARKETING INTANGIBLE S ETC. THE LD. D.R REBUTTED THE CLAIM OF THE ASSESSEE THAT THERE WAS NO EXPLICIT ARRANGEMENT WHATSOEVER BETWEEN THE ASSESSEE AND ITS AE FOR PROMOTION OF THE BRAND OF THE AE BY INCURRING AMP EXPENSES ON THEIR BEHALF. IT WAS SUBMITTED BY THE LD. D.R , THAT A PERUSAL OF THE FACT S AND CIRCUMSTANCES OF THE CASE AND ALSO T HE MATERIAL AVAILABLE ON RECORD CLEARLY REVEAL ED THAT THERE WAS AN ARRANGEMENT, UNDERSTANDING AND ACTION IN CONCERT BETWEEN THE ASSESSEE AND ITS AE FOR INCURRING AMP EXPENSES IN ORDER TO FACILITATE RENDERING OF DEMPE SERVICES FOR THE INTANGIBLE S OWNED BY THE AE . IN ORDER TO FORTIFY HIS AFORESAID CONTENT ION THE LD. D .R HA D TAKEN US THROUGH THE DEFINITION OF INTERNATIONAL TRANSACTION AS PRESCRIBED IN P A G E | 13 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) SEC.92B OF THE ACT. IN SUM AND SUBSTANCE, IT WAS THE CLAIM OF THE LD. D .R THAT THE ASSESSEE BY INCURRING THE SIGNIFICANT AMP EXPENDITURE HAD PROMOTED THE BRAN DS / INTANGIBLES WHICH WERE OWNED BY THE AE , FOR WHICH IT HAD NOT BEEN COMPENSATED. 10. WE SHALL BEFORE ADVERTING ANY FURTHER BRIEFLY CULL OUT THE BUSINESS PROFILE OF THE ASSESSEE COMPANY. AS IS DISCERNIBLE FROM THE ORDERS OF THE LOWER AUTHORITIES, LOREAL G ROUP IS A FRENCH CONGLOMERATE FOUND ED IN 1907 BY THE C HEMIST EUG E N SCH U ELLER , AND IS A LEADING PLAYER IN THE GLOBAL COSMETIC INDUSTR Y . I T IS ALSO ACTIVE IN THE DERMATOLOGY SECTOR. LOREAL GROUP H AS ITS BUSINESS IN MORE THAN 130 COUNTRIES WITH OFFICES IN 66 COUNTRIES AND EMPLOY S MORE THAN 6 8 ,900 PE O PLE . IT HAS LOTS OF CONSUMER BRANDS RECOGNISE D ALL OVER THE WORLD. SOME OF THE MAJOR BRAND S OF LOREAL GROUP INCLUD E LOREAL PARIS , GARNIER, RALPH LAUREN, BIOTHERM, MAYBELLINE ETC. AS OBSERVED BY US HEREINABOVE, T HE ASSESSEE COMPANY VIZ. LOREAL INDIA PVT. LTD. IS A WHOLLY OWNED SUBSIDIARY OF LOREAL S.A. , FRANCE. THE ASSESSEE COMPANY HAD COMMENCED ITS OPERATIONS IN INDIA IN THE YEAR 1994. THE ASSESSEE HAD ENTERED INTO A LICENSE AGREEMENT DATED 02.01.2012 (EFFECTIV E FROM 01.012012) WITH LOREAL S.A., FRANCE, AS PER WHICH IT WAS AWARDED THE EXCLUSIVE RIGHT TO IMPORT, MANUFACTURE (OR HAVE MANUFACTURED BY ANOTHER LOREAL AFFILIATE ) MARKET, DISTRIBUT E AND SELL BRANDED PRODUCTS OF LOREAL GROUP. A PERUSAL OF THE ORDERS O F THE LOWER AUTHORITIES REVEALS THAT THE ASSESSEE DERIVES REVENUES FROM TWO PRIMARY ACTIVITIES VIZ. (I) MANUFACTURING OF COSMETIC PRODUCTS; AND (II) DISTRIBUTION OF COSMETIC PRODUCTS IMPORTED FROM ASSOCIATE ENTERPRISES. 11. WE FIND THAT T HE ASSESSEE HAD D ETERMINED THE ARMS LENGTH PRICE (FOR SHORT ALP) O F ITS INTERNATIONAL TRANSACTIONS IN THE MANUFACTURING SEGMENT AND THE DISTRIBUTION SEGMENT BY APPLYING C OST P LUS M ETHOD (FOR SHORT CPM) AND R ESALE P RICE M ETHOD (FOR SHORT RPM), P A G E | 14 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) RESPECTIVELY . IT HAD TAKEN THE GROSS MARGIN TO SALES RATIO AS THE P ROFIT L EVEL I NDICATOR (FOR SHORT PLI) IN THE MANUFACTURING SEGMENT AND DISTRIBUTION SEGMENT . AS PER THE TP STUDY REPORT, IN THE MANUFACTURING SEGMENT THE PLI OF THE ASSESSEE IS WORKED OUT AT 2 17.65% , WHEREAS THE AVERAGE PLI OF THE COMPARABLES IS ARRIVED AT 98.44%. AS THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION WAS GREATER THAN THE ARITHMETIC MEA N PRICE, THEREFORE, THE SAME HAD BEEN TREATED BY THE ASSESSEE AS BEING AT ARMS LENGTH. IN THE DISTRIBUTION SEGMENT , THE PLI OF THE ASSESSEE COMPANY AS PER THE TP STUDY REPORT HAD BEEN WORKED OUT AT 58.20% ON SALES , WHEREAS THE AVERAGE PLI OF THE COMPARABLES IS ARRIVED AT 36.02% . AS THE PRICE CHARGE D IN THE INTERNATIONAL TRANSACTIONS IN THE DISTRIBUTION SEGMENT WAS GREATER THAN THE ARITHMETIC MEAN PRICE, THEREFORE, THE ASSESSEE HAD CONTENDED THAT THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS WERE FOUND TO BE AT ARMS LENGTH. ALSO, THE ASSESSEE COMPANY HAD DURING THE YEAR PAID ROYALTY FOR THE EXCLUSIVE RIGHT TO MANUFACTURE AND DISTRIBUTE THE LICENSE D PRODUCTS USING THE TECHNOLOGY AND TRADEMARK OF ITS OVERSEAS ASSOCIATED ENTERPRISE IN ACCORDANCE WITH THE TERMS ENVISAGED IN THE AGREEMENT ENTERED INTO WITH ITS AE. AS THE INTERNATIONAL TR ANSACTIONS HAD TAKEN INTO ACCOUNT BOTH THE SEGMENT S I.E MANUFACTURING SEGMENT AND DISTRIBUTION SEGMENT , THEREFORE, THE TRANSFER PRICING ANALYSIS WAS ALSO UNDERTAKEN BY THE ASSESSEE COMPANY INDEPENDENTLY IN RESPECT OF BOTH OF THE SEGMENTS. 1 2 . IN THE C OURSE OF THE TP STUDY PROCEEDINGS, IT WAS OBSERVE D BY THE TPO THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION VIZ. A.Y. 2013 - 14 HAD SPENT AN AMOUNT OF RS.561.41 CRORES ON ADVERTISEMENT , MARKETING AND PROMOTION (AMP). THE AFORESAID EXPENSES INCURRED B Y THE ASSESSEE WORKED OUT TO 34% OF ITS NET SALES OF RS. 1 651.40 CRORE. THE TPO WAS OF THE VIEW THAT THE ASSESSEE BY INCURRING THE AFORESAID P A G E | 15 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) AMP EXPENDITURE HAD CREAT ED VALUABLE MARKETING INTANGIBLE S FOR ITS AE VIZ. LOREAL S.A. , FRANCE, FOR WHICH NO COMPENSATION WAS RECEIVED BY IT EITHER IN THE FORM OF DIRECT COMPENSATION OR BY WAY OF DISCOUNT IN ITS PRICE. ACCORDINGLY, THE TPO WAS OF THE VIEW THAT AS THE ASSESSEE WAS CARRYING OUT MARKETING FUNCTIONS FOR BRAND BUILDING OF ITS AE, THEREFORE, THE SAME WERE ALSO REQUIRED TO BE BENCHMARKED. WHILE CONCLUDING AS HEREINABOVE , THE TPO HAD DRAWN SUPPORT FROM THE BEPS REPORT PUBLISHED BY OECD. T HE TPO CALLED UPON THE ASSESSEE TO FURNISH THE BREAKUP OF THE AMP EXPENDITURE. THE ASSESSEE FURNI SHED THE BIFURCATION DETAILS OF THE AMP EXPENDITURE WHICH WERE CLAIMED TO HAVE BEEN INCURRED BY IT FOR THE PROMOTION OF ITS OWN PRODUCTS IN INDIA, AS UNDER: SR. NO. HEAD OF EXPENSE AMOUNT (RS.) 1. PRODUCT ADVERTISEMENT EXPENSES 3,325,647,907/ - 2. MARKE TING FEES (DMI FEES PAID TO OVERSEAS AE) 341,404,193/ - 3. PURE SALES PROMOTION EXPENSES 1,947,090,162 / - TOTAL 5,614,142,262/ - IT WAS THE CLAIM OF THE ASSESSEE THAT OUT OF THE AFORESAID AMP EXPENSES OF RS.561.41 CRORE S (34% ON SALES) AN AMOUNT OF RS.366.71 CRO RES (21.44%) HAD BEEN SPEN T ON ADVERTISEMENT (INCLUDING DMI FEES PAID TO THE OVERSEAS AE AMOUNTING TO INR 34,14,04,193/ - ) AND THE BALANCE AMOUNT OF RS.194.71 CRORES (11.38%) WAS SPENT ON SALES PROMOTION . HOWEVE R, THE TPO AFTER NECESSARY VERIFICATIONS WAS NOT PERSUADED TO SUBSCRIBE TO THE AFORESAID CLAIM OF THE ASSESSEE. IT WAS OBSERVED BY HIM THAT IN RESPECT OF THE FOLLOWING ITEMS TO THE TUNE OF RS.228,84,94,357/ - THE ASSESSES CLAIM THAT THEY WERE PURE SELLING E XP ENSES COULD NOT BE ACCEPTED: SR. NO. ITEM OF EXPENDITURE AMOUNT OF RS. SUBMISSION OF THE ASSESSEE COMMENTS OF THE TPO 1. PROMOTIONS - 9,13,95,843 GIFTS (LIKE, PURSE, T - SHIRTS, AFTER VERIFICATION OF THE P A G E | 16 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) PROMOTIONAL GIFTS, SPECIAL OPS UMBRELLA ETC) GIVEN TO CONSUMERS ON PURCHASES. IT IS IN THE NATURE OF PROMOTIONAL ACTIVITY. SUBMISSION OF THE ASSESSEE, THE CONTENTION OF THE ASSESSEE IS ACCEPTED AND THE EXPENDITURE IS HELD TO BE IN THE NATURE OF SELLING EXPENDITURE. 2. MARKETING PROMOTIONS 3,02,41,161 COSTS RELATING TO PROMOTIONS RUN AT MALLS AND KEY RETAIL OUTLETS ON OCCASION OF SPECIFIC DAYS LIKE VALENTINES DAY, FATHERS DAY ETC. COSTS INCLUDE PROMOTERS FEES, SITE RENTALS, STAGE/PODIUM, GIFTS AND PRIZES. AIMED AT INCREASING RETAIL SALES. AS PER THE EXPLANATION GIVEN BY THE ASSESSEE, THESE ARE THE EXPENSES ON PROMOTIONS AT MALLS AND KEY RETAIL OUTLETS. OBVIOUSLY THESE EXPENSE ARE FOR DEMPE FUNCTIONS AND HENCE CANNOT BE CATEGORISED AS SELLING EXPENSES. HENCE, THE SAME ARE CONSIDERED TO BE I N NATURE OF ADVERTISEMENT EXPENSES. 3. PUBLIC RELATIONS 11,86,81,081 CUSTOMER RELATION MAINTENANCE EXPENSES LIKE PHOTOSHOOT, BSP (BEAUTY SALES PROMOTER) SALARY ETC. AS PER THE EXPLANATION GIVEN BY THE ASSESSEE, THESE ARE THE EXPENSES ON CUSTOMER RELAT ION MAINTENANCE, OBVIOUSLY THESE EXPENSES ARE FOR DEMPE FUNCTIONS AND HENCE CANNOT BE CATEGORISED AS SELLING EXPENSES. HENCE, THE SAME ARE CONSIDERED TO BE IN NATURE OF ADVERTISEMENT EXPENSES. 4. POINT OF SALE (POS) MATERIALS 25,41,24,318 BUSINESS PROMOTION EXPENSES IS COST OF MATERIAL LIKE HANGERS, DANGLERS, DISPLAY UNITS ETC INSTALLED AT VARIOUS POINT OF SALES (POS) LIKE MALLS, SHOPS, STORES, RETAILERS ETC. AS PER THE EXPLANATION GIVEN BY THE ASSESSEE, THESE ARE THE EXPENSES ON DISPLAY AT MALLS, SHOPS, STORES AND RETAILERS ETC. OBVIOUSLY THESE EXPENSES ARE FOR DEMPE FUNCTIONS AND HENCE CANNOT BE CATEGORISED AS SELLING EXPENSES. HENCE, THE SAME ARE CONSIDERED TO BE IN NATURE OF ADVERTISEMENT EXPENSES. 5. MARKETING EXPENSES - INDUSTRIAL DEVELOPMENT 1,66,55,382 COST FOR PACKAGING /RE - PACKAGING IN CASE OF PROMOTIONAL ACTIVITIES LIKE ARTWORK, TAPING TOGETHER A COMBO PRODUCT, LABEL ETC. AFTER VERIFICATION OF THE SUBMISSION OF THE ASSESSEE, THE CONTENTION O THE ASSESSEE IS ACCEPTED AND THE EXPENDITURE IS HELD TO BE IN THE NATURE OF SELLING EXPENDITURE. 6. MARKETING EXPENSES - OTHERS 12,59,24,167 MISC EXPENSES LIKE ENTRY FEES FOR PRODUCT OF THE YEAR 2011, DIARY CALENDAR, OTHER COSTS AT SALES CONFERENCES AFTER VERIFICATION OF THE SUBMISSION OF THE ASSESSEE, THE CONTENTION OF THE ASSESSEE IS ACCEPTED AND THE EXPENDITURE IS HELD TO BE IN THE NATURE OF SELLING EXPENDITURE. 7. RENT COST FOR POS (WINDOW DISPLAY) 29,94,37,046 BUSINESS PROMOTION EXPENSES I.E RENT COST FOR HIRING OF SPACE AT VARIOUS POS LIKE MALLS, SHOPS, STORES AND OTHER RETAILERS FOR DISPLAY TO SELL THE PRODUCTS AS PER THE EXPLANATION GIVEN BY THE ASSESSEE, THESE ARE RENT EXPENSE FOR HIRING OF SPACE AT VARIOUS PO S LIKE MALLS, SHOPS STORES A ND OTHER RETAILERS FOR DISPLAY. OBVIOUSLY THESE EXPENSES ARE FOR P A G E | 17 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) DEMPE FUNCTIONS AND HENCE CANNOT BE CATEGORISED AS SELLING EXPENSES. HENCE, THE SAME ARE CONSIDERED TO BE IN NATURE OF ADVERTISEMENT EXPENSES. 8. VALUE SYSTEM REIMBURSEMENT 6,76,91,569 REIM BURSEMENT/DISCOUNTS GIVEN TO SALONS FOR ACHIEVING ANNUAL TURNOVER AFTER VERIFICATION OF THE SUBMISSION OF THE ASSESSEE, THE CONTENTION OF THE ASSESSEE IS ACCEPTED AND THE EXPENDITURE IS HELD TO BE IN NATURE OF SELLING EXPENDITURE. 9. QPS/INSHOP/TRADE SCH EME 51,84,72,797 SECONDARY SCHEMES IN TRADE (I.E OFFERED AT SHOPS ETC) FOR PROMOTING SALES TO RETAILERS FROM COMPANY DISTRIBUTORS. SCHEMES ARE VALUE (LIKE DISCOUNTS BUY 36 SHAMPOOS & GET 3% DISCOUNT) OR QUANTITY (LIKE BUY 24 UNITS AND GET 2 UNITS). COST VALUE OF SCHEME IS REIMBURSED TO DISTRIBUTORS. NOTE: PRIMARY TRADE SCHEMES ARE THOSE WHICH ARE GIVEN FROM COMPANY TO DISTRIBUTOR WHICH IS NEGLIGIBLE. AFTER VERIFICATION OF THE SUBMISSION OF THE ASSESSEE, THE CONTENTION OF THE ASSESSEE IS ACCEPTED AND THE E XPENDITURE IS HELD TO BE IN THE NATURE OF SELLING EXPENDITURE. 10. COST OF GOODS SOLD FREE ISSUES (INCLUDING COST CENTRE) 11,16,80,983 FINISHED GOODS USED AS TESTERS BY RETAILERS AND COST REIMBURSED. QUANTITY REPLACED INSTEAD OF VALUE REIMBURSED FOR SECONDARY TRADE SCHEMES. AFTER VERIFICATION OF THE SUBMISSION OF THE ASSESSEE, THE CONTENTION OF THE ASSESSEE IS ACCEPTED AND THE EXPENDITURE IS HELD TO BE IN THE NATURE OF SELLING EXPENDITURE. 11. PROMOTIONS ANIMATION 31,27,85,817 VARIOUS COSTS INCURR ED IN RESPECT TO PRODUCT ANIMATION LIKE MATERIAL, SALON ACCESSORIES, GIFTS, EVENT COST ETC. TRADE SCHEMES OFFERS (OTHER THAN COST OF FINISHED GOODS) LIKE SALON ACCESSORIES (BACKWASH, SALON CHAIRS), WHITE GOODS (FRIDGE, TV), EDUCATIONAL TRIPS ETC. NOTE: PRO DUCT ANIMATION: TRAINING USING A COMBINATION OF ANIMATED VIDEO AND 3D VIRTUAL SIMULATION (LEARNING BY DOING) TO ACHIEVE MAXIMUM KNOWLEDGE RETENTION MPARTED TO HAIRDRESSERS. AS PER THE EXPLANATION GIVEN BY THE ASSESSEE, THESE ARE THE EXPENSES IN RESPECT TO PRODUCT ANIMATION, GIFTS, EVENT COSTS ETC. OBVIOUSLY THESE EXPENSES ARE FOR DEMPE FUNCTIONS AND HENCE CANNOT BE CATEGORISED AS SELLING EXPENSES. HENCE, THE SAME ARE CONSIDERED TO BE IN NATURE OF ADVERTIS E MENT EXPENSES. 12. MARKETING FEES (DMI FEES PAID TO OVERSEAS AE) 34,14,04,193 AVAILING INTERNATIONAL MARKETING SERVICES FROM OVERSEAS AE. THE CENTRALIZED INTERNATIONAL MARKETING MANAGEMENT STRUCTURE (DMI) PROVIDING COMMON MARKETING SERVICES FOR THE DEVELOPMENT OF INTERNATIONAL MARKETING MATERIAL AND TOOLS FOR THE BENEFIT OF THE LOREAL AFFILIATES. SERVICES RECEIVED ARE IN CONNECTION WITH COMMUNICATION DEVELOPMENT, LAUNCH INFORMATION AND AFTER VERIFICATION OF THE SUBMISSION OF THE ASSESSEE, THE CONTENTI ON OF THE ASSESSEE IS NOT ACCEPTED. HENCE, THE SAME ARE CONSIDERED TO BE IN NATURE OF ADVERTIS E MENT OF EXPENSES. P A G E | 18 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) INTERNATIONAL MARKETING STUDIES, PACKAGING DEVELOPMENT. ON THE BASIS OF HIS AFORESAID OBSERVATIONS THE TPO CONCLUDED THAT THE TOTAL AMP EXPENSES OF RS.561,41,42,262/ - COMPRISED OF S ELLING EXPENSES OF RS.93,18,20,741/ - (WHICH WORKED OUT TO 16.5% OF TOTAL AMP EXPENSES) . ACCORDINGLY, IT WAS OBSERVED BY HIM THAT THE BALANCE AMOUNT OFRS.468,23,21,521/ - (WHICH WORKED OUT TO 83.5% OF TOTAL AMP EXPENSES) WERE TO BE CONSIDERED AS THE BASE FIGURE OF AMP EXP ENSES FOR DETERMINATION OF THE AMOUNT FOR WHICH THE ASSESSEE WAS TO BE COMPENSATED BY ITS AE. O N THE BASIS OF THE AFORESAID CALCULATION OF THE ADVERTISEMENT EXPENSES AT RS.468,23,21,521/ - , IT WAS OBSERVED BY THE TPO THAT THE SAME WORKED OUT AT 28.35% OF TH E NET SALES OF THE ASSESSEE COMPANY. AS THE ASSESSEE DESPITE SPECIFIC DIRECTION S OF THE TPO FAILED TO FURNISH THE BIFURCATED DETAILS OF THE ADVERTISEMENT EXPENSES OF RS.468.23 CRORES INCURRED IN RESPECT OF ITS RESPECTIVE BUSINESS SEGMENT S VIZ. (I ) MANUFACTURING SEGMENT; AND (II) DISTRIBUTION SEGMENT, THEREFORE, THE TPO BIFURCATED THE SAME IN THE RATIO OF THE RESPECTIVE SALES OF BOTH THE SAID SEGMENTS, AS UNDER: PARTICULARS MANUFACTURING DISTRIBUTION TOTAL NET SALES 1214.09 CR 437.309 CR 1651.40 CR TOTAL AMP EXPENSES CONSIDERED FOR DEMPE FUNCTIONS 344.25 CR 123.98 CR 468.23 CR AMP EXPENSES AS A % OF NET SALES 28.35% 28.35% 28.35% FURTHER, IT WAS OBSERVED BY THE TPO , THAT FOR CARRY ING OUT A FEASIBLE COMPARISON BETWEEN THE ASSESSES AMP EXPENDITURE AS AGAINST THAT OF ITS COMPARABLES, AS THE SELLING EXPENSES HAD BEEN EXCLUDED IN THE CASE OF THE ASSESSEE, THEREFORE, A SIMILAR APPROACH HAD TO BE ADOPTED IN THE CASE OF THE COMPARABLES. HOWEVER , IT WAS OBSERVED BY HIM THAT AS THE DETAILS OF THE SELLING EXPENSES IN THE CASE OF THE COMPARABLES W AS NOT AVAILABLE IN THE PUBLIC DOMAIN, THEREFORE, THE SAME RATIO OF P A G E | 19 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ADVERTISEMENT EXPENSES TO SELLING EXPENSES AS WAS WORKED OUT IN THE CASE OF THE ASSESSEE I. E . 83.5%:16.5% COULD FAIRLY BE ADOPTED IN THE CASE OF THE COMPARABLES FOR BENCHMARKING PURPOSES. ALTERNATIVELY, IT WAS OBSERVED BY THE TPO THAT IN CASE THE ALLOCATION OF ADVERTISEMENT EXPENSES TO SELLING EXPENSES ON PRO RATA BASIS IN THE CASE OF THE COMPAR ABLES WAS NOT UPHELD BY THE APPELLATE AUTHORITIES, THEN THE ENTIRE AMP EXPENDITURE (WITHOUT EX CLUDING SELLING EXPENSES) OF THE ASSESSEE WILL HAVE TO BE COMPARED TO THE ENTIRE AMP EXPENDITURE OF THE COMPARABLES . 13 . WE FIND THAT T HE TPO ON THE BASIS OF HIS AFORESAID DELIBERATIONS HAD CARRIED OUT THE BENCHMARKING OF THE AMP EXPENSES IN RESPECT OF BOTH THE SEGMENTS OF THE ASSESSEE COMPANY VIZ. (I) MANUFACTURING SEGMENT; AND (II) DISTRIBUTION SEGMENT, AS UNDER: (A) MANUFACTURING SEGMENT: T HE COMPARABLES SELECTED BY THE ASSESSEE WERE REJECTED BY THE TP O FOR THE FOLLOWING REASONS: SR. NO. NAME OF THE COMPARABLES FINDINGS OF THE TPO 1. GILLETTE INDIA LTD. ONE COMMON FEATURE, IN RESPECT OF THESE COMPARABLES IS THAT THE INTANGIBLES IN ALL THESE CASES ARE OWNED BY THE FOREIGN AE. HENCE THE AMP TRANSACTION IN ALL THESE CASES IS CONTROLLED TRANSACTIONS. IT IS A BASIC TENET OF THE TRANSFER PRICING REGULATIONS THA T A CONTROLLED TRANSACTION HAS TO BE COMPARED WITH AN UNCONTROLLED TRANSACTION. A CONTROLLED TRANSACTION CANNOT BE COMPARED WITH ANOTHER CONTROLLED TRANSACTION. HENCE THESE COMPARABLES CANNOT BE TAKEN INTO ACCOUNT FOR DETERMINATION OF THE AMP ADJUSTMENT. I T IS NO WHERE THE CONTENTION OF THE ASSESSEE THAT THESE BRANDS ARE OWNED BY THE COMPARABLES ENTITY ITSELF. HENCE THE CONTENTION OF THE ASSESSEE ON THIS POINT STANDS REJECTED. 2. PROCTER & GAMBLE HYGIENE AND HEALTH CARE LTD. 3. RECKITT BENCKISER (INDIA) LTD. 4. COLGATE PALMOLIVE INDIA LTD. 5. RECKITT BENCKISER INDIA LTD. ANNUAL ACCOUNTS N.A. THE TPO AFTER REJECTING THE AFORESAID COMPARABLES SELECTED 5 FRESH COMPARABLES FOR BENCHMARKING THE AMP TRANSACTIONS IN RESPECT OF THE MANUFACTURING SEGMENT OF THE ASSESSEE, AS UNDER : P A G E | 20 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) SR. NO. NAME OF THE COMPANY NET SALES FOR F.Y. 2012 - 13 AMP EXPENSES AMP AS % OF NET SALES PROPORTIONATE AMP IN THE RATIO OF 83.50:16.50 WITH SALES PROMOTION EXPENSES (RS. CR.) ADJUSTED AMP TO SALES (%) (RS. CR.) ( RS.CR.) 1. DABUR INDIA LTD. 4349.39 502.37 11.55% 419.48 9.64% 2. MARICO LTD. 3457.30 382.18 11.05% 319.12 9.23% 3. GODREJ CONSUMER PRODUCTS LTD. 3581.02 577.38 16.12% 482.11 13.46% 4. EMAMI LIMITED 1627.09 253.12 15.56% 211.36 12.99% 5. JYOTHI LABORATORIES 1017.38 81.81 8.04% 68.31 6.71% AVERAGE (%) 10.41% AS OBSERVED BY US HEREINABOVE, THE TPO WORKED OUT THE PROPORTIONATE AMP EXPENSES (AFTER EXCLUDING THE SALES PROMOTION EXPENSES IN THE RATIO OF 83.50:16.50) AND WORKED OUT THE AVERAGE MEAN OF THE ADJUSTED AMP/SALES PERCENTAGE OF THE COMPARABLE COMPANIES AT 10.41%. IT WAS FURTHER OBSERVED BY THE TPO THAT THE AMP EXPENSES INCURRED BY THE ASSESSEE WERE TO BE RAISED BY A MARK UP. IN ORDER TO WORK OUT THE M ARK UP THE TPO SELECTE D 3 COMPANIES WHI CH WERE ENGAGED IN THE BUSINESS OF MARKET SUPPORT SERVICES AND WORKED OUT THE AVERAGE MARK UP OF THE SAID COMPANIES AT 16.90% , AS UNDER SR. NO. COMPANY NAME OP/TC 1. BVG INDIA LTD. 24.08 2. HGS BUSINESS SERVICES PRIVATE LTD. 14.52 3. ASIAN BUSINESS EXHIBITION & CONFERENCES LTD. 12.09 MEAN 16.90% ACCORDINGLY , THE TPO WAS OF THE VIEW THAT THE ASSESSEE WAS TO BE COMPENSATED BY ITS AE FOR THE AMP EXPENSES ALONG WITH A MARGIN OF 16.90%. IN THE BACKDROP OF HIS AFORESAID WORKING THE TPO WORKED OUT THE EXCESS AMP EXPENDITURE INCURRED BY THE ASSESSEE (MANUFACTURING SEGMENT) AT RS.254.68 CRORES, AS UNDER: NET SALES OF THE TAXPAYER = RS.1214.09CR . ARMS LENGTH % OF AMP EXPENDITURE = 10.41% ARMS LENGTH AMP (10.41 % * RS.1214.09 CR) = 126.39 CR . EXPENDITURE INCURRED BY THE TAXPAYER ON AMP (MANUFACTURING SECTOR) = RS.344.25 EXPENDITURE INCURRED FOR DEVELOPING THE INTANGIBLES P A G E | 21 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) [RS.344.17 ( - ) RS.126.26 CR.] = RS.217.86 CR. ADD M ARK UP @ 16.90% (16.90% * RS.232.23 CR) = RS.36.82 CR. ARMS LENGTH VALUE FOR AMP ACTIVITY = RS.254.68 CR. VA LUE RECEIVED BY THE TAXPAYER = NIL DIFFERENCE = RS.254.68 CR. O N THE BASIS OF HIS AFORESAID CALCULATIONS, IT WAS OBSERVED BY THE TPO , THAT AN ADJUSTMENT OF RS. 254.68 CRORE TOWARDS AMP EXPENDITURE INCURRED BY THE ASSESSEE ( M ANUFACTURING SEGMENT) FOR SERVICES RENDERED TOWARDS DEMPE FUNCTIONS FOR THE INTANGIBLES OWNED BY THE AE WAS REQUIRED TO BE CARRIED OUT. (B) DISTRIBUTION S EGMENT: THE TPO ACCEPTED THE COMPARABLES WHICH WERE SELECTED BY THE ASSESSEE IN ITS TP STUDY REPORT . ACCORDINGLY, THE AMP EXPENDITURE INCURRED BY THE ASSESSEE (DISTRIBUTION SEGMENT) FOR SERVICES RENDERED TOWARDS DEMPE FUNCTIONS FOR THE INTANGIBLES OWNED BY THE AE WAS BENCHMARKED BY THE TPO, AS UNDER: SR. NO. NAME OF THE COMPARABLES COMMENTS OF THE ASSESSEE FINDINGS OF THE TPO 1. J.K. HELENE CURTIS LTD. THE COMPANY IS FORMING PART OF STUDY REPORT AND IS BEING ACCEPTED FOR THE PAST THREE YEARS BY THE TPO ITSELF. THE COMPARABLES IS ACCEPTED 2. J.L. MORISON (INDIA) LTD. THE COMPANY IS FORMING PART OF STUDY REPORT AND IS BEING ACCEPTED FOR THE PAST THREE YEARS BY THE TPO ITSELF. THE COMPARABLES IS ACCEPTED. AFTER ACCEPTING THE AFORESAID COMPARABLES THE T PO DETERMIN ED THE REIMBU RSEMENT BY THE AE FOR SERVICES RENDERED TOWARDS DEMPE FUNCTIONS PERFORMED BY THE ASSESSEE , AS UNDER: SR. NO. NAME OF THE COMPANY NET SALES FOR F.Y. 2012 - 13 AMP EXPENSES AMP AS % OF NET SALES PROPORTIONATE AMP IN THE RATIO OF 83.50:16.50 WITH SALES PROMOTION EXPENSES (RS. CR.) ADJUSTED AMP TO SALES (%) (RS. CR.) (RS. CR.) 1. J.K. HELENE CURTIS LTD 248.91 40.96 16.45% 34.20 13.74% 2. J.L. MORISON (INDIA) LD. 113.94 5.22 4.58% 4.35 3.83% AVERAGE (%) 8.78% P A G E | 22 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ACCORDINGLY, IT WAS OBSERVED BY THE TPO THAT THE ALP OF THE AMP SPENDING FOR THE DISTRIBUTION SEGMENT WORKED OUT AT 8.78%. IN OTHER WORDS, HE WAS OF THE VIEW THAT AMP SPENDING OF 8.78% WAS TO BE TREATED AS THE PERMISSIBLE EXPENDITURE TO HAVE BEEN INCURRE D BY THE ASSESSEE (DISTRIBUTION SEGMENT) IN THE NORMAL COURSE OF ITS BUSINESS. AS AGAINST THAT, IT WAS OBSERVED BY THE TPO THAT AS THE ASSESSEE HAD INCURRED AMP EXPENDITURE OF 28.35%, THEREFORE, THE EXPENDITURE I.E 19.57% [28.35% ( - ) 8.78%] WAS TO BE TREAT ED TO HAVE BEEN INCURRED IN EXCESS OF THE PERMISSIBLE LIMIT. ON THE BASIS OF HIS AFORESAID OBSERVATIONS , THE TPO CONCLUDED THAT THE ASSESSEE (DISTRIBUTION SEGMENT) WAS REQUIRED TO BE COMPENSATED ALONG WITH A SUITABLE MARK UP FOR THE AMP EXPENDITURE THAT WAS INCURRED BY IT FOR THE DEMPE FUNCTIONS PERFORMED IN RESPECT OF BRAND BUILDING OF THE INTANGIBLES OWNED BY ITS AE AT RS.100.05 CRORE , AS UNDER: NET SALES OF THE TAXPAYER IN THE DISTRIBUTION SEGMENT = RS.437.31 CR ARMS LENGTH % OF AMP EXPENDITURE = 8.78% ARMS LENGTH AMP (8.78 * RS.437.31 CR = RS.38.40 CR EXPENDITURE INCURRED BY THE TAXPAYER ON AMP = RS.123.98 CR EXPENDITURE INCURRED FOR DEVELOPING THE INTANGIBLE [RS.123.98 ( - ) 38.40 CR.] = RS.85.58 CR ADD MARK UP @ 16.90% (16.90% *RS.85.58CR) = RS.14.46 CR ARMS LENGTH VALUE FOR AMP ACTIVITY = RS.100.05 CR VALUE RECEIVED BY THE TAXPAYER = NIL DIFFERENCE = RS.100.05 CR ACCORDINGLY, ON THE BASIS OF HIS AFORESAID DELIBERATIONS , IT WAS CONCLUDED BY THE TPO THAT THE TOTAL ADJUSTMENT IN RESPECT OF THE AMP EXPENDITURE INCURRED BY THE ASSESSEE IN RESPECT OF DEMPE FUNCTIONS FOR THE INTANGIBLES OWNED BY ITS AE FOR BOTH THE SEGMENTS WORKED OUT AT 354.73 CRORES VIZ. (I) MANUFACTURING SEG MENT : RS. 254.68 CRORES ; AND (II) DISTRIBUTION SEGMENT : RS. 100.05 CRORE . P A G E | 23 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) 1 4 . WE FIND THAT O N THE BASIS OF HIS AFORESAID OBSERVATIONS , THE TPO WAS OF THE VIEW , THAT THE ASSESSEE HAD NOT ONLY RENDERED ITS SERVICES AS A DISTRIBUTOR BUT HAD ALSO INCURRED HUGE AMP EXPENSES (28.35% OF ITS SALES ) TOWARDS RENDERING OF DEMPE FUNCTIONS FOR THE BRAND OWNED BY ITS AE, VIZ. L O REAL S.A., FRANCE. IT WAS OBSERVED BY THE TPO THAT FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF ITS DISTRIBUTION SEGMENT THE ASSESSEE HAD ADOPTED RPM AS THE MOST APPROPRIATE METHOD FOR CARRYING OUT THE COMPARABILITY ANALYSIS. THE TPO HELD A CONVICTION THAT AS THE AMP EXPENSES INCURRED BY THE ASSESSEE WERE TAKEN BELOW THE LINE OF PROFIT & LOSS ACCOUNT, THEREFORE, IF RPM WAS A PPLIED AT GROSS PROFIT LEVEL, THE MARKETING FUNCTION CARRIED OUT BY THE ASSESSEE WOULD NOT BE CONSIDERED IN THE COURSE OF THE SAID BENCHMARKING ANALYSIS. IN FACT, THE TPO WAS OF THE VIEW THAT IN ORDER TO MAKE THE COMPARABLES SELECTED BY THE ASSESSEE/TPO SI MILAR TO THE ASSESSES FUNCTIONS, ASSETS EMPLOYED AND RISK ASSUMED, SUITABLE ADJUSTMENT WAS REQUIRED TO BE MADE AS PER RULE 10B(2) OF THE INCOME - TAX RULES. THE TPO WORKED OUT THE INTENSITY OF THE AMP EXPENSES ON THE PROFIT LEVEL INDICATOR OF OPERATING PROFI T/SALES PERCENTAGE AT 7.75%. ACCORDINGLY, THE TPO ON THE BASIS OF THE ADJUSTED RPM METHOD PROPOSED AN ADJUSTMENT OF RS. 60.03 CRORES IN RESPECT OF THE ALP OF THE GOODS IMPORTED BY THE ASSESSEE FROM ITS AE. 1 5 . FURTHER, WE FIND, THAT IT WAS OBSERVED BY THE TPO THAT THE ASSESSEE IN RESPECT OF ITS MANUFACTURING SEGMENT HAD PAID ROYALTY @ 6.75% OF ITS TOTAL SALES . IT WAS OBSERVED BY THE TPO THAT THE ROYALTY OF 6.75% OF SALES (MANUFACTURING SEGMENT) COMPRISED OF TWO PARTS VIZ. (I). ROYALTY ON ACCOUNT OF TECHN ICAL KNOWHOW: 5%; AND (II). ROYALTY ON ACCOUNT OF TRADEMARK: 1.75%. WE FIND THAT AS REGARDS THE PAYMENTS MADE BY THE ASSESSEE TOWARDS ROYALTY THE TPO HAD OBSERVED AS UNDER: P A G E | 24 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) (A). TRADEMARK ROYALTY : IT WAS OBSERVED BY THE TPO THAT THE ASSESSEE HAD NOT PAID ANY ROYALTY ON ACCOUNT OF EXPLOITING OF THE TRADEMARK TILL A.Y 2005 - 06. THE TPO WAS OF THE VIEW THAT THE ASSESSEE BY INCURRING AMP EXPENSES HAD AS A MATTER OF FAC T GENERATED THE TRADEMARK OF LO REAL PRODUCTS IN INDIA, THE LEGAL OWNERSHIP OF WHICH REMAINED VESTED WITH THE AE. FURTHER, IT WAS NOTICED BY THE TPO THAT THE ASSESSEE WAS NOT ENTITLED TO ANY BENEFITS AT THE TIME OF TERMINATION OF THE LICENSE AGREEMENT. IN FACT, THE TPO DRAWING SUPPORT FROM T HE BEPS REPORT WAS OF THE VIEW THAT AS THE ASSESSEE HAD CARRIED OUT SIGNIFICANT AMP EXPENSES FOR DEMPE FUNCTIONS, THEREFORE, NO SUCH ROYALTY WAS PAYABLE BY THE ASSESSEE. A CCORDINGLY, THE TPO TREATED THE ALP OF THE TRADEMARK ROYALTY AT RS. NIL AND REJECTED THE PAYMENT OF ROYALTY @1.75% OF THE TOTAL SALES BY THE ASSESSEE TOWARDS TRADEMARK ROYALTY. (B). TECHNICAL KNOWHOW ROYALTY : IT WAS OBSERVED BY THE TPO THAT THE ASSESSEE HAD BENCHMARKED THE ROYALTY @5% OF SALES TOWARDS TECHNICAL KNOWHOW BY RELYING ON T HE ROYALTY STUDY CARRIED OUT BY NERA ECONOMIC CONSULTING IN NOVEMBER, 2013. THE TPO OBSERVED THAT AS PER THE SAID STUDY THE COMPARABLES CONSIDERED WERE MAINLY THE COMPANIES MAKING PAYMENTS FOR TRADEMARK ROYALTIES. IT WAS OBSERVED BY HIM THAT OUT OF 12 COM PARABLES SELECTED BY THE ASSESSEE ONLY 4 COMPARABLES WERE HAVING THE PAYMENT FOR BOTH MARKETING & PROCESSING ROYALTY AND THE REMAINING 8 COMPARABLES WERE RELATED TO PAYMENT OF EXCLUSIVE MARKETING ROYALTY. FURTHER, IT WAS OBSERVED BY HIM THAT THE AVERAGE RO YALTY PAID FOR THE MARKETING INTANGIBLE BY THE 8 COMPARABLES WAS 6.1% AND THE AVERAGE PAYMENT OF ROYALTY FOR BOTH MARKETING & PROCESSING ROYALTY BY THE REMAINING 4 COMPARABLES WAS 8.4%. ON THE BASIS OF HIS AFORESAID OBSERVATIONS, IT WAS CONCLUDED BY THE TP O THAT P A G E | 25 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) THE AVERAGE PAYMENT OF PROCESSING/TECHNICAL KNOWHOW ROYALTY WORKED OUT AT 2.3% [8.4% (AVERAGE PAYMENT OF ROYALTY FOR BOTH MARKETING & PROCESSING ROYALTY) 6.1% ( AVERAGE PAYMENT OF ROYALTY FOR MARKETING INTANGIBLE)]. ACCORDINGLY, IT WAS OBSERVED BY THE TPO , THAT THE ALP OF THE PAYMENT OF ROYALTY FOR TECHNICAL KNOWHOW WAS TO BE TAKEN AT 2.3%. IN THE BACKDROP OF HIS AFORESAID DELIBERATIONS THE TPO BEING OF THE VIEW THAT PAYMENT OF ROYALTY OF 4.45% [TECHNICAL KNOWHOW ROYALTY: 2.7% (+) TRADEMARK ROYALTY: 1.75%] WAS EXCESSIVE IN NATURE. ON THE BASIS OF HIS AFORESAID OBSERVATIONS THE TPO PROPOSED AN ADJUSTMENT OF RS. 56,36,62,918/ - (OUT OF THE TOTAL ROYALTY OF RS. 85,49,94,314/ - ). 1 6 . WE HAVE PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND DELIBERATED AT LENGTH ON THE FACTS INVOLVED IN THE CASE BEFORE US, IN THE BACKDROP OF THE CONTENTIONS ADVANCED BY THE AUTHORISED REPRESENTATIVES FOR BOTH THE PARTIES. THE CORE ISSUE INVOLVED IN THE PR ESENT APPEAL IS AS TO WHETHER THE ADVERTISING, MARKETING AND PROMOTION EXPENSES ( AMP ) INCURRED BY THE ASSESSEE COMPANY CAN BE HELD TO BE AN INTERNATIONAL TRANSACTION. AS OBSERVED BY THE HONBLE HIGH COURT OF DELHI IN THE CASE OF IN SONY ERICSSON INDIA PVT. LTD. VS. CIT (2015) 374 ITR 118 (DEL) AND THEREAFTER IN MARUTI SUZUKI INDIA LIMITED V. CIT (2016) 328 ITR 210 (DEL) , ONUS IS CAST UPON THE REVENUE TO SHOW THAT THERE WAS AN INTERNATIONAL TRANSACTION INVOLVING THE ASSESSEE AND ITS AE WITH REGARD TO INCU RRING OF THE AMP EXPENSES, BEFORE IT COMMENCES THE EXERCISE OF DETERMINING THE ALP OF SUCH TRANSACTION. IF THE R EVENUE FAIL S TO DISCHARGE THIS ONUS THEN THE QUESTION OF THE FURTHER STEP OF DETERMINING THE ALP OF SUCH AMP EXPENSES WOULD NOT ARISE AT ALL. NOW, IN THE CASE BEFORE US, IT HAS THROUGHOUT BEEN THE CASE OF THE ASSESSEE THAT ITS MARKETING ACTIVITY WAS FOCUSED ON GENERATING DOMESTIC SALES FOR ITS MANUFACTURING AND DISTRIBUTION OPERATIONS. IN FACT, IT HAS ALWAYS BEEN THE CLAIM OF THE P A G E | 26 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ASSES S EE THAT THE ADVERTISEMENT AND SALE PROMOTION EXPENSES INCURRED BY IT WERE PART OF ITS BUSINESS MODEL AS THAT OF A MANUFACTURER AND DISTRIBUTOR . AS OBSERVED BY US HEREINABOVE, THE LD. A.R IN ORDER TO DRIVE HOME HIS CONTENTION THAT THERE WA S NO ARRANGEMENT WHAT SOEVER BETWEEN THE ASSESSEE AND ITS AE , VIZ. LOREAL S.A., FRANCE, FOR PROMOTION OF THE AES BRAND BY INCURRING AMP EXPENSES FOR AND ON THEIR BEHALF, HAD DRAWN OUR ATTENTION TO THE AGREEMENT DATED 02.01.2012 (EFFECTIVE FROM 01.01.2012) WHICH REMAINED IN FORCE TILL 31.12.2012 BETWEEN THE ASSESSEE AND ITS AE VIZ. LOREAL S.A., FRANCE. AS IS DISCERNIBLE FROM A PERUSAL OF THE SAID AGREEMENT, WE FIND THAT THERE IS NO ARRANGEMENT WHATSOEVER BETWEEN THE ASSESSEE AND ITS AE VIZ. LOREAL S.A., FRANCE, WHICH OBLIGATED THE ASSESSEE TO INCUR AMP EXPENSES FOR AND ON BEHALF OF THE AE. IN FACT, AS PER THE AGREEMENT THE ASSESSEE WAS AWARDED BY ITS A E VIZ. LOREAL S.A., FRANCE THE EXCLUSIVE RIGHT TO IMPORT, MANUFACTURE (OR HAVE MANUFACTUR ED BY ANOTHE R LOREAL AFFILIATE ), MARKET, DISTRIBUTE AND SELL BRANDED PRODUCTS OF LOREAL GROUP WITHIN ITS TERRITORY . AS AGAINST GRANTING OF THE SAID EXCLUSIVE RIGHTS, THE ASSESSEE WAS OBLIGATED TO PAY ROYALTIES IN PROPORTION WITH ITS NET SALES VIZ. (I). ROYALTY FOR T HE USE OF TECHNOLOGY: 5%; AND (II). R OYALTY FOR THE RIGHT TO USE THE LICENSED TRADEMARKS: 1.75%.WE ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE VIEW OF THE TPO/DRP , THAT AS THE ASSESSEE HAD AGREED TO ALLOCATE EACH YEAR FOR SUCH ADVERTISING AN ANNUAL BUDGET WHICH WOULD PROVIDE FOR SMOOTH RUNNING OF THE BUSINESS, THEREFORE, THE SAME WAS TO BE CONSTRUED AS AN 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' AS PER WHICH THE ASSESS EE HAD AGREED FOR INCURRING AMP EXPENSES FOR BRAND BUILDING OF ITS AE , VIZ. LOREAL S.A., FRANCE . IN OUR CONSIDERED VIEW, THE AFORESAID CONDITION IN THE AGREEMENT ONLY OBLIGATED THE ASSESSEE TO INCUR CERTAIN AMOUNT TOWARDS ADVERTISING OF ITS PRODUCTS IN ORDER TO FACILITATE SMOOTH RUNNING OF ITS BUSINESS. ALSO, P A G E | 27 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) WE DO NOT FIND OURSELVES TO BE IN AGREEMENT WITH THE VIEW TAKEN BY THE LOWER AUTHORITIES THAT AS THE AE VIZ. LOREAL S.A., FRANCE WAS VESTED WITH THE RIGHT AT ITS DISCRETION TO DELEGATE AGENTS IN OR DER TO CARRY OUT MATERIAL CONTROLS IN LABORATORIES, WORKSHOPS AND WAREHOUSES OF THE LICENSEE I.E . THE ASSESSEE COMPANY OR OF THE COMPANIES MANUFACTURING ON A SUB - CONTRACT BASIS FOR THE LICENSEE, THE SAME WAS TO BE COMPREHENDED AS INCURRING OF AMP EXPENSES FOR BRAND BUILDING OF ITS AE VIZ. LOREAL S.A., FRANCE. IN SUM AND SUBSTANCE, WE ARE PERSUADED TO SUBSCRIBE TO THE CLAIM OF THE LD. A.R THAT THERE IS NOTHING PROVIDED IN THE AGREEMENT, DATED 02.01.2012, WHICH WOULD REVEAL THAT THERE WAS ANY ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT BETWEEN THE ASSESSEE AND ITS AE VIZ. LOREAL S.A., FRANCE FOR INCURRING THE AMP EXPENSES BY RENDERING SERVICES TOWARDS THE DEMPE FUNCTIONS FOR THE INTANGIBLES OWNED BY THE AE, WHICH WOULD TAKE THE TRANSACTION WITHIN THE REALM OF THE DEFINITION OF AN INTERNATIONAL TRANSACTION ENVISAGED IN SEC. 92B OF THE ACT. ALSO, WE FIND THAT THE TPO HAD ABSOLUTELY MISCONCEIVED THE SUBMISSIONS OF THE ASSESSEE AND HAD WRONGLY CONCLUDED THAT IT HAD ADMITTED THAT THERE WAS A PRI CE REDUCTION ON GOODS IMPORTED TOWARDS AMP EXPENDITURE INCURRED BY IT . AS A MATTER OF FACT, IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE PRICING OF THE PRODUCTS IN THE INTER - COMPANY SITUATION WAS DRIVE N BY LOREAL GROUP POLICY WHICH ALLOW ED THE ENTITIES (P ERFORMING THE CONTRACT MANUFACTURING ACTIVITIES) FROM WHOM THE ASSESSEE PROCURES THE GOODS, TO KEEP A MEAGER MARGIN OF 2% TO 7% ON ITS MANUFACTURING COST, THEREFORE, THE SAME REVEALED THAT FACTORIES WERE EARNING A VERY SMALL MARK - UP FOR THEIR MANUFACTURING FUNCTIONS, AND THE ENTIRE PROFITABILITY IN RESPECT OF THE PRODUCTS REMAINED WITH THE ASSESSEE IN INDIA. WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE HAD NEVER STATED THAT IT WAS PROCURING GOODS AT DISCOUNTED RATES FROM ITS AE/AFFILIATES IN LIEU OF INCURRING OF AMP EXPENSES FOR BRAND BUILDING OF ITS AE. IN FACT, THE P A G E | 28 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) TPO HAS ABSOLUTELY MISCONCEIVED THE REPLY OF THE ASSESSEE AND HAD DRAWN SELF - SUITING IN FERENCES. WE FIND THAT AS PROVIDED IN THE AGREEMENT, THE ASSESSEE HAD PAID ROYALTY @6.75% OF ITS SALES VIZ. (I). ROYALTY FOR THE USE OF TECHNOLOGY: 5%; AND (II). ROYALTY FOR THE RIGHT TO USE THE LICENSED TRADEMARKS: 1.75%. TO SUM UP, THERE IS NEITHER ANY THING DISCERNIBLE FROM THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE, VIZ. LOREAL S.A., FRANCE, NOR ANY THING HAS BEEN PLACED ON OUR RECORD WHICH COULD PERSUADE US TO CONCLUDE THAT THERE WAS ANY ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT BETWEEN TH E ASSESSEE AND ITS AE VIZ. LOREAL S.A., FRANCE FOR INCURRING THE AMP EXPENSES TO CARRY OUT THE DEMPE FUNCTIONS FOR THE INTANGIBLES OWNED BY THE AE. 1 7 . WE SHALL NOW IN THE BACKDROP OF THE AFORESAID FACTUAL MATRIX, HEREIN DELIBERATE AS REGARDS THE SUSTAI NABILITY OF THE ORDERS OF THE LOWER AUTHORITIES, WHICH WE FIND HAD WORKED OUT THE TP ADJUSTMENTS AS REGARDS THE ALP OF THE AMP EXPENSES INCURRED BY THE ASSESSEE IN RESPECT OF BOTH OF ITS BUSINESS SEGMENTS, VIZ. (I) MANUFACTURING SEGMENT; AND (II). D ISTRIBUTION SEGMENT. AS OBSERVED BY US HEREINABOVE, ONUS IS CAST UPON THE REVENUE TO SHOW THE EXISTENCE OF ANY ARRANGEMENT OR AGREEMENT ON THE BASIS OF WHICH IT COULD BE INFERRED THAT THE AMP EXPENSE S INCURRED BY THE ASSESSEE WAS NOT FOR ITS OWN BENEFIT BUT WAS FOR THE BENEFIT OF ITS AE. THE MERE FACT THAT THE ASSESSEE WAS PERMITTED TO USE THE BRAND NAME OF ITS AE VIZ. LOREAL S.A., FRANCE, WOULD NOT AUTOMATICALLY LEAD TO AN INFERENCE THAT ANY EXPENSE THAT THE ASSESSEE INCURRED TOWARDS AMP WAS ONLY TO ENH ANCE THE BRAND OF ITS AE. NOW, IN THE CASE BEFORE US, AS THE REVENUE HAS FAILED TO DISCHARGE THE ONUS AND THEREIN ESTABLISH TH E EXISTENCE OF ANY ARRANGEMENT OR AGREEMENT , AS PER WHICH THE ASSESSEE HAD AGREED TO INCUR AMP EXPENSES FOR BRAND BUILDING OF IT S AE, THERE FORE, IN OUR CONSIDERED VIEW THERE WOULD BE NO OCCASION TO INFER THE EXISTENCE OF AN P A G E | 29 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) INTERNATIONAL TRANSACTION AS REGARDS INCURRING OF THE AMP EXPENSES BY THE ASSESSEE TOWARDS BRAND BUILDING OF ITS AE . OUR AFORESAID VIEW IS FORTIFIED BY THE JUDG MENT OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF VALVOLINE CUMMINS (P) LTD. VS. DCIT (2017) 298 CTR 349 (DEL) . IN THE SAID CASE THE HONBLE HIGH COURT HAD OBSERVED THAT AS THE AO/TPO WERE UNABLE TO SHOW THAT THERE EXISTED AN INTERNATIONAL TRANSACTION INVOLVING INCURRING OF AMP EXPENSES BETWEEN THE ASSESSE AND ITS AE, THEREFORE, THE TRIBUNAL WAS NOT JUSTIFIED IN REMANDING THE MATTE R . IN THE CA SE OF BAUSCH & LOMB EYECARE (INDIA) PVT. LTD & ORS. VS. ADDL. CIT (2016) 381 ITR 227 (DEL) IT WAS OBSERVED BY THE HONBLE HIGH COURT THAT W HERE PARTIES WERE UNABLE TO SHOW EXISTENCE OF INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSE WITH ASCERTAINABLE PRI CE, THEN EVEN IF SUCH PRICE WAS NIL, THE PROVISIONS OF CHAPTER X COULD NOT BE INVOKED FOR UNDERTAKING TP ADJUSTMENT EXERCISE. A SIMILAR VIEW HAD ALSO BEEN TAKEN BY THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. WHIRLPOOL OF INDIA LTD. (2015) (2016) 381 ITR 0154 (DELHI) . IT WAS OBSERVED BY THE HIGH COURT THAT W HEN THE R EVENUE WAS UNABLE TO DEMONSTRATE ANY TANGIBLE MATERIAL WHICH WOULD REVEAL THAT THERE WAS AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES BETWEEN THE A SSESSEE AND ITS AE , THE QUESTION OF DETERMINING THE ALP OF SUCH TRANSACTION COULD NOT ARISE. IN FACT, THE HONBLE HIGH COURT HAD OBSERVED THAT U NDER SECTIONS 92B TO 92F, THE PRE - REQUISITE FOR COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRANSACTION . THE NEXT STEP IS TO DETERMINE THE PRICE OF SUCH TRANSACTION. THE THIRD STEP WOULD BE TO DETERMINE THE ALP BY APPLYING ONE OF THE FIVE PRICE DISCOVERY METHODS SPECIFIED IN SECTION 92C. THE FOURTH STEP WOULD BE TO COMPARE THE PRICE OF THE TRANSACTION THAT IS SH OWN TO EXIST WITH THAT OF THE ALP AND MAKE THE TP ADJUSTMENT BY SUBSTITUTING THE ALP FOR THE CONTRACT PRICE. FURTHER, IT WAS OBSERVED BY THE HIGH COURT THAT T HE TP ADJUSTMENT IS NOT P A G E | 30 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) EXPECTED TO BE MADE BY DEDUCING FROM THE DIFFERENCE BETWEEN THE 'EXCESSIVE ' AMP EXPENDITURE INCURRED BY THE A SSESSEE AND THE AMP EXPENDITURE OF A COMPARABLE ENTITY THAT AN INTERNATIONAL TRANSACTION EXISTS AND THEN PROCEED TO MAKE THE ADJUSTMENT OF THE DIFFERENCE IN ORDER TO DETERMINE THE VALUE OF SUCH AMP EXPENDITURE INCURRED FO R THE AE. NOW, IN THE CASE BEFORE US, WE ARE AFRAID THAT THE TPO HAD FAILED TO PLACE ON RECORD ANY MATERIAL WHICH WOULD ESTABLISH THERE WAS AN INTERNATIONAL TRANSACTION INVOLVING AMP EXPENSES BETWEEN THE ASSESSEE AND ITS AE. RATHER, THE TP O HAD REFERRED TO THE AVERAGE AMP EXPENSES OF CERTAIN COMPARABLES AND BY COMPARING THE SAME AS AGAINST THOSE INCURRED BY THE ASSESSEE COMPANY, HAD THEREIN HELD THAT THE EXCESS OF SUCH AMP EXPENSES WERE INCURRED TOWARDS DEMPE FUNCTIONS FOR BRAND BUILDING OF ITS AE VIZ. LOREAL S.A., FRANCE. THE LD. D.R HAD TRIED TO IMPRESS UPON US THAT THE METHOD OF BENCHMARKING THE AMP EXPENSES INCURRED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION VIZ. A.Y 2013 - 14, AS OBSERVED BY THE TPO/DRP CANNOT BE FAULTED WITH AS THE SAME IS WELL IN CONFORMITY WITH THE OTHER METHOD ENVISAGED IN SEC. 92C(1)(F) R.W . RULE 10AB, AS HAD BEEN INSERTED BY THE IT (SIXTH AM ENDMENT ) RULES, 2012 W.R.E.F . 01.04.2012 (APPLICABLE FOR A.Y 2012 - 13 AND SUBSEQUENT YEARS). WE ARE UNABLE TO ACCEPT THE SAID CONTENTION OF THE LD. D.R, WHICH THOUGH AT THE FIRST BLUSH APPEARED TO BE VERY CONVINCING . WE ARE AFRAID, THAT AS OBSERVED BY US AT LENGTH HEREINABOVE, AS THE SINE QUA NON FOR COMMENCING THE TP EXERCISE IS TO SHOW THE EXISTENCE OF AN INTERNATIONAL TRA NSACTION , HA D NOT BEEN SHOWN TO HAVE BEEN FULFILLED IN THE INSTANT CASE, THEREFORE, THE ISSUE OF TRAVERSING TO THE ASPECT OF DETERMINING THE VALIDITY OF THE METHOD FOR DETERMIN IN G THE ALP OF SUCH TRANSACTION DOES NOT ARISE AT ALL. AT THIS STAGE, IN ORDER TO DISPEL ANY DOUBTS, WE MAY HEREIN OBSERVE THAT REFERENCE BY THE LOWER AUTHORITIES AS WELL AS BY THE LD. D.R TO THE JUDGMENT OF THE HONBLE HIGH COURT OF DELHI IN P A G E | 31 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) THE CASE OF SONY ERICSSON INDIA PVT. LTD. VS. CIT (2015) 374 ITR 11 8 (DEL) , BEING DISTINGUISHABLE ON FACTS , WOULD THUS NOT ASSIST THE CASE OF THE ASSESSEE BEFORE US. IN THE SAID CASE THE HONBLE HIGH COURT HAD TREATED T HE AMP EXPENSES INCURRED BY THE ASSESSEE AS AN INTERNATIONAL TRANSACTION, FOR THE REASON, THAT THE SAME WAS ADMITTED BY THE ASSESSEE. HOWEVER, AS OBSERVED BY US HEREINABOVE, THE ASSESSEE IN THE CASE BEFORE US HAD NEVER ADMITTED THAT THE INCURRING OF AMP EXPENSES WAS AN INTERNATIONAL TRANSACTION , AND HAD IN FACT SINCE INCEPTION CANVASSED THAT THE SA ID EXPENSES WERE INCURRED IN T H E NORMAL COURSE OF ITS OWN BUSINESS AND NOT FOR RENDERING OF ANY DEMPE FUNCTIONS FOR BRAND BUILDING OF ITS AE . 1 8 . WE FIND THAT IN THE BACKDROP OF OUR AFORESAID OBSERVATIONS THAT DE HORS ANY 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' , AS PER WHICH THE ASSESSEE HAD AGREED FOR INCURRING OF AMP EXPENSES FOR BRAND BUILDING OF ITS AE, VIZ. LOREAL S.A., FRANCE , THE PROVISIONS OF CHAPTER X COULD NOT HAVE BEEN INVOKED FOR UNDERTAKING TP ADJUSTMENT EXERCISE . APART THERE FROM, WE FIND THAT A SIMILAR VIEW HAD BEEN TAKEN BY THE TRIBUNAL WHILE DISPOSING OFF THE APPEALS OF THE ASSESSEE FOR THE PRECEDING YEARS VIZ. A.YS 2008 - 09 TO 2011 - 12. IN FACT, THE TRIBUNAL WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE FOR A. Y 2012 - 13 IN M/S LOREAL INDIA PVT. LTD. VS. ACIT - 7(1)(2), MUMBAI [ITA NO. 1417/MUM/2017; DATED 30.01.2019], HAD FOLLOWED THE VIEW EARLIER TAKEN IN THE PRECEDING YEARS AND HAD VACATED THE ADJUSTMENT OF 304.69 CRORES THAT WAS MADE BY THE TPO BY ALLEGING TH AT THE AMP EXPENSES INCURRED BY THE ASSESSEE WAS AN INTERNATIONAL TRANSACTION UNDER SEC. 92B OF THE ACT. THE TRIBUNAL WHILE SO CONCLUDING HAD OBSERVED AS UNDER: 12 . WE HAVE ALSO PERUSED THE AGREEMENT OF ASSESSEE WITH ITS AE DATED 4 TH JANUARY 2011 EXECUTED BETWEEN ASSESSEE AND ITS AE. CLAUSE 7 OF THE P A G E | 32 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) AGREEMENT DESCRIES ABOUT RIGHT OF DISTRIBUTION OF LICENSED PRODUCT IN THE TERRITORY. AS PER CLAUSE 8 OF THE SAID AGREEMENT THE ASSESSEE IS RESPONSIBLE FOR THE ADVERTISING THE LICENSED PROD UC T IN THE TERRITORY. THE TERRITORY IS DEFINED UNDER CLAUSE 1.5 OF THE AGREEMENT , WHICH MEANS THE TERRITORY OF NEPAL, BHUTAN, BANGLADESH, MALDIVES, MAURITIUS, INDIA AND SRI LANKA. HOWEVER, IT EXCLUDES ANY FREE TRADE ZONE, WHICH MAY EXIST OR MAY BE CREATE D. FURTHER IT EXCLUDES DUTY FREE SHOPS LOCATED IN THE DUTY FREE OR TRAVEL RETAIL AREA WHICH IS SPECIALIZED IN SALES AGAINST FOREIGN CURRENCY TO FOREIGNER OR DIPLOMATIC CORPS, SHIP CHLANDERS, AIRLINES COMPANIES OR SH I PPING COMPANIES. THOUGH THE AE HAS RESER VES ITS RIGHT FOR THE ZONES OF EXCLUDED AREAS. THE CONTENTIONS OF THE LD. A.R FOR THE ASSESSEE IS THAT CLAUSE 8 OF THE AGREEMENT DOES NOT OBLIGATES THE ASSESSEE TO INCUR EXPENSES ON AMP SO AS TO PROMOTE THE BRAND OWNED BY ITS AES. AND THAT THE EXPENSES AR E INCURRED BY ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS. THE PERUSAL OF THE CLAUSE 7 AND 8 REVEALS THAT THERE IS NO AGREEMENT BETWEEN THE ASSESSEE AND THE AES FOR SHARING THE EXPENSES AND THE PAYMENTS MADE BY THE ASSESSEE FOR THE EXPENSES OF AMP. THE TPO HAS ALSO NOT BROUGHT ANY FACT ON RECORD THAT THERE EXIST ANY AGREEMENT BETWEEN THE ASSESSEE AND ITS AE TO SHARE OR REIMBURSE THE AMP EXPENSES. MOREOVER, WE HAVE SEEN THAT THERE IS NO MATERIAL CHANGE IN THE FACTS FOR THE YEAR UNDER CONSIDERATION. THEREF ORE, CONSIDERING THE ABOVE FACTUAL DISCUSSIONS AND THE DECISION OF THE COORDINATE BENCH OF TRIBUNAL FOR A.Y. 2008 - 09 TO 2010 11, ON THE IDENTICAL ISSUE THE GROUND NO. 2 TO 21 OF THE APPEAL IS ALLOWED. WE THUS IN TERMS OF OUR AFORESAID OBSERVATIONS, FIND ING OURSELVES TO BE IN AGREEMENT WITH THE VIEW TAKEN BY THE TRIBUNAL IN THE ASSESSES OWN CASE FOR A.Y 2012 - 13 VIZ. M/S LOREAL INDIA PVT. LTD. VS. ACIT - 7(1)(2), MUMBAI [ITA NO. 1417/MUM/2017; DATED 30.01.2019], THEREFORE, RESPECTFULLY FOLLOW THE SAME. ACCO RDINGLY, BEING OF THE CONSIDERED VIEW THAT AS THE REVENUE HAD FAILED TO DISCHARGE THE ONUS THAT WAS CAST UPON IT AS REGARDS PROVING THAT THERE WAS ANY 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' AS PER WHICH THE ASSESSEE HAD AGREED FOR INC URRING OF AMP EXPENSES FOR BRAND BUILDING OF ITS AE, VIZ. LOREAL S.A., FRANCE , THE TP ADJUSTMENT OF RS. 354.73 CRORES IN RESPECT OF AMP EXPENSES CANNOT BE SUSTAINED AND IS LIABLE TO BE VACATED. THE GROUNDS OF APPEAL NO. 1 TO 21 ARE ALLOWED IN TERMS OF OUR AFORESAID OBSERVATIONS. 1 9 . WE SHALL NOW ADVERT TO THE TP ADJUSTMENT OF RS. 60.03 CRORES MADE BY THE TPO IN RESPECT OF THE DISTRIBUTION SEGMENT OF THE P A G E | 33 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ASSESSEE ON ACCOUNT OF ALLEGED DIFFERENCES IN INTENSITY OF AMP FUNCTIONS PERFORMED BY THE ASSESSEE VIS A VIS THE COMPARABLE COMPANIES , IN ORDER TO ALIGN THE FUNCTIONS, ASSETS AND RISKS PROFILE OF THE ASSESSEE WITH THAT OF THE COMPARABLE COMPANIES. AS OBSERVED BY US HEREINABOVE, THE TPO BY REFERRING TO RULE 10B(2) OF THE INCOME - TAX RULES HAD AFTER CONSID ERING THE INTENSITY OF THE AMP FUNCTIONS AT THE SALES LEVEL, HAD AS PER THE ADJUSTED RPM BENCHMARKED THE INTERNATIONAL TRANSACTIONS OF THE DISTRIBUTION SEGMENT OF THE ASSESSEE COMPANY. ON THE BASIS OF HIS AFORESAID ADJUSTMENTS , THE TPO HAD PROPOSED A TP ADJUSTMENT OF RS. 60.03 CRORES TO BE MADE WHILE DETERMINING THE ALP OF THE PURCHASES MADE BY THE ASSESSEE FROM ITS AES. 20 . WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE AFORESAID TP ADJUSTMENT OF RS. 60.03 CRORES MADE BY THE TPO ON THE BASIS OF ADJUST ED RPM ON ACCOUNT OF ALLEGED DIFFERENCES IN INTENSITY OF AMP FUNCTIONS PERFORMED BY THE ASSESSEE VIS A VIS THE COMPARABLE COMPANIES. AS OBSERVED BY US HEREINABOVE, THE AFORESAID ADJUSTMENT WAS CARRIED OUT BY THE TPO AS PER THE ADJUSTED RPM IN ORDER TO ALIG N THE FUNCTIONS, ASSETS AND RISKS PROFILE OF THE ASSESSEE WITH THAT OF THE COMPARABLE COMPANIES. AS THE REVENUE HAD FAILED TO ESTABLISH THE EXISTENCE OF ANY 'UNDERSTANDING' OR AN 'ARRANGEMENT' OR 'ACTION IN CONCERT' AS PER WHICH THE ASSESSEE HAD AGREED FOR INCURRING OF AMP EXPENSES FOR BRAND BUILDING OF ITS AE, VIZ. LOREAL S.A., FRANCE , THEREFORE, THE AMP EXPENSES INCURRED BY THE ASSESSEE HAD BEEN HELD BY US AS NOT HAVING BEEN INCURRED BY THE ASSESSEE FOR BRAND BUILDING OF ITS AE. ACCORDINGL Y, AS NO PART OF THE AMP EXPENSES ARE ATTRIBUTABLE TO RENDERING OF ANY DEMPE FUNCTIONS FOR THE BRAND S OWNED BY THE AE, THEREFORE, THE TP ADJUSTMENT OF RS. 60.03 CRORE MADE BY THE TPO IN RESPECT OF THE DISTRIBUTION SEGMENT OF THE ASSESSEE ON ACCOUNT OF P A G E | 34 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ALLEGED DIFFERENCES IN INTENSITY OF AMP FUNCTIONS PERFORMED BY THE ASSESSEE VIS A VIS THE COMPARABLE COMPANIES IN ORDER TO ALIGN THE FUNCTIONS, ASSETS AND RISKS PROFILE OF THE ASSESSEE WITH THAT OF THE COMPARABLE COMPANIES , CANNOT BE SUSTAINED AND ARE LIAB LE TO BE VACATED. THE GROUNDS OF APPEAL NO. 29 TO 38 ARE ALLOWED IN TERMS OF OUR AFORESAID OBSERVATIONS. 21 . WE SHALL NOW ADVERT TO THE ADJUSTMENTS ON ACCOUNT OF PAYMENT OF ROYALTY @ 6.75% BY THE ASSESSEE VIZ. (I). ROYALTY ON TRADEMARKS : 1.75%; AND (II). ROYALTY ON TECHNICAL KNOWHOW : 5%. AS OBSERVED BY US HEREINABOVE, THE TPO HAD CONCLUDED THAT PAYMENT OF ROYALTY OF 4.45% [TECHNICAL KNOWHOW ROYALTY: 2.7% (+) TRADEMARK ROYALTY: 1.75%] WAS EXCESSIVE IN NATURE. ON THE BASIS OF HIS AFORESAID OBSERVATIONS THE TPO HAD PROPOSED AN ADJUSTMENT OF RS. 56,36,62,918/ - (OUT OF THE TOTAL ROYALTY OF RS. 85,49,94,314/ - ). 22 . WE SHALL FIRST ADVERT TO THE TP ADJUSTMENT OF 1.75% THAT WAS PROPOSED BY THE TPO AS REGARDS THE ROYALTY FOR USE OF TRADEMARKS THAT WAS PAID BY THE ASSESSEE TO ITS AE, VIZ. LOREAL S.A., FRANCE . IT WAS OBSERVED BY THE TPO THAT THE ASSESSEE HAD NOT PAID ANY ROYALTY ON ACCOUNT OF EXPLOITING OF THE TRADEMARK TILL A.Y 2005 - 06. THE TPO WAS OF THE VIEW THAT THE ASSESSEE BY INCURRING AMP EXPENSE S HAD AS A MATTER OF FAC T GENERATED THE TRADEMARK OF LO REAL PRODUCTS IN INDIA, THE LEGAL OWNERSHIP OF WHICH REMAINED VESTED WITH THE AE. FURTHER, IT WAS NOTICED BY THE TPO THAT THE ASSESSEE WAS NOT ENTITLED TO ANY BENEFITS AT THE TIME OF TERMINATION OF TH E LICENSE AGREEMENT. THE TPO DRAWING SUPPORT FROM THE BEPS REPORT WAS OF THE VIEW THAT AS THE ASSESSEE HAD CARRIED OUT SIGNIFICANT AMP EXPENSES FOR RENDERING OF DEMPE FUNCTIONS, THEREFORE, NO SUCH ROYALTY WAS PAYABLE BY THE ASSESSEE. ACCORDINGLY, THE TPO TREATED THE ALP OF THE TRADEMARK P A G E | 35 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ROYALTY AT RS. NIL AND REJECTED THE PAYMENT OF ROYALTY @1.75% (ON NET SALES), BY THE ASSESSEE. 23 . WE HAVE GIVEN A THOUGHTFUL C ONSIDERATION TO THE ADHOC DISALLOWANCE OF THE ROYALTY ON TRADEMARKS OF 1.75% (ON NET SALES) BY THE TPO. AS IS DISCERNIBLE FROM THE TPO ORDER, THE ROYALTY ON TRADEMARKS HAD BEEN DISALLOWED BY THE TPO , FOR THE REASON , THAT AS PER HIM AS THE ASSESSEE HAD INCU RRED SIGNIFICANT AMP EXPENSES FOR RENDERING OF DEMPE FUNCTIONS FOR THE BRANDS OF ITS AE, THEREFORE, IT WAS NOT REQUIRED TO MAKE ANY PAYMENT TOWARDS ROYALTY ON TRADEMARKS. THE TPO WHILE CONCLUDING AS HEREINABOVE , HAD RELIED ON THE BEPS REPORT. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION AND ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE ADHOC DISALLOWANCE OF THE ROYALTY ON TRADEMARKS BY THE TPO. IN OUR CONSIDERED VIEW, THE DISALLOWANCE BY THE TPO IS BACKED BY A CONVICTION HELD BY HIM THAT THE ASSESSEE IN THE BACKDROP OF SIGNIFICANT AMP EXPENSES INCURRED TOWARDS DEMPE FUNCTIONS AS REGARDS BRAND BUILDING OF ITS AE WAS THUS UNDER NO OBLIGATION TO MAKE ANY PAYMENT TOWARDS ROYALTY ON TRADEMARKS. WE ARE OF A STRONG CONVICTION THAT THE TPO HAD EXCEEDED HIS JURISD ICTION WHILE MAKING AN ADHOC DISALLOWANCE OF ROYALTY ON TRADEMARKS. IN OUR CONSIDERED VIEW, IN THE COURSE OF TRANSFER PROCEEDINGS THE TPO HAS TO EXAMINE WHETHER OR NOT THE METHOD ADOPTED BY THE ASSESSEE TO DETERMINE THE ALP IS THE MOST APPROPRIATE METHOD A ND ALSO WHETHER THE COMPARABLES SELECTED ARE APPROPRIATE OR NOT. IN FACT, IT IS NOT PART OF THE TPOS JURISDICTION TO CONSIDER WHETHER OR NOT THE EXPENDITURE INCURRED BY THE ASSESSEE HAD PASSED THE TEST OF SEC. 37 OF THE ACT, OR NOT. OUR AFORESAID VIEW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT - 1, BOMBAY VS. LEVER INDIA EXPORTS LTD. (2017) 246 TAXMAN 133 (BOMBAY). WE FIND THAT THE ASPECT THAT THE ASSESSEE HAD INCURRED P A G E | 36 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) SUBSTANTIAL AMOUNT OF AMP EXPENSES TOWARDS DEMP E FUNCTIONS FOR THE BRAND OF ITS AE, VIZ. LOREAL S.A., FRANCE, HAD WEIGHED IN THE MIND OF THE TPO WHILE CONCLUDING THAT THE ASSESSEE WAS NOT REQUIRED TO HAVE MADE ANY PAYMENT TOWARDS ROYALTY ON TRADEMARKS. AS OBSERVED BY US HEREINABOVE, THE ADHOC DISALLOW ANCE OF THE ROYALTY PAYMENT BY THE TPO IS BEYOND THE REALM OF HIS JURISDICTION AND CANNOT BE SUSTAINED. IT IS ALSO THE CLAIM OF THE ASSESSEE THAT THE PAYMENT OF ROYALTY ON TRADEMARKS AT 1.75% (ON SALES) HAD BEEN ACCEPTED BY THE TPO IN ITS CASE FOR A.Y 2015 - 16. WE FIND THAT THE TRIBUNAL WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE FOR THE IMMEDIATELY PRECEDING YEAR VIZ. A.Y 2012 - 13 WAS SEIZED OF A SIMILAR ADHOC DISALLOWANCE OF ROYALTY ON TRADEMARKS OF 1.75% (ON SALES) . AFTER NECESSARY DELIBERATIONS, THE TR IBUNAL HAD RESTORED THE MATTER TO THE FILE OF THE DRP FOR FRESH ADJUDICATION. ACCORDINGLY, FINDING OURSELVES TO BE IN AGREEMENT WITH THE VIEW TAKEN BY THE TRIBUNAL IN THE AFOREMENTIONED PRECEDING YEAR VIZ. A.Y 2012 - 13, WE THUS ON SIMILAR TERMS RESTORE THE MATTER TO THE FILE OF THE DRP. THE DRP SHALL IN THE COURSE OF THE SET ASIDE PROCEEDINGS READJUDICATE THE ISSUE AFRESH. NEEDLESS TO SAY, THE DRP SHALL IN THE COURSE OF THE SET ASIDE PROCEEDINGS AFFORD A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSES SEE, WHO SHALL REMAIN AT A LIBERTY TO SUBSTANTIATE ITS CLAIM THAT THE PAYMENT OF ROYALTY ON TRADEMARKS @1.75% (ON SALES) WAS AT ALP, AND NO ADJUSTMENT WAS CALLED FOR IN RESPECT OF THE SAME. THE GROUND S OF APPEAL NO. 26 TO 28 ARE ALLOWED FOR STATISTICAL PUR POSES. 2 4 . WE SHALL NOW ADVERT TO THE CLAIM OF THE ASSESSEE THAT THE TPO / DRP HAD ERRED IN MAKING/SUSTAINING A TP ADJUSTMENT OF 2. 70 % AS REGARDS THE ROYALTY PAYMENT TOWARDS TECHNICAL KNOWHOW @5% (ON NET SALES) THAT WAS PAID BY THE ASSESSEE (MANUFACTURING SEGMENT) TO ITS AE VIZ. LOREAL., S.A., FRANCE. IT WAS OBSERVED BY THE TPO THAT THE P A G E | 37 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) ASSESSEE HAD BENCHMARKED THE ROYALTY OF 5% OF SALES TOWARDS TECHNICAL KNOWHOW BY RELYING ON THE ROYALTY STUDY CARRIED OUT BY NERA ECONOMIC CONSULTING IN N OVEMBER, 2013. THE TPO OBSERVED THAT AS PER THE SAID STUDY THE COMPARABLES CONSIDERED WERE MAINLY THE COMPANIES MAKING PAYMENTS FOR TRADEMARK ROYALTIES. IT WAS OBSERVED BY HIM THAT OUT OF 12 COMPARABLES SELECTED BY THE ASSESSEE ONLY 4 COMPARABLES WERE HAVI NG THE PAYMENT FOR BOTH MARKETING & PROCESSING ROYALTY AND THE REMAINING 8 COMPARABLES WERE RELATED TO PAYMENT OF EXCLUSIVE MARKETING ROYALTY. FURTHER, IT WAS OBSERVED BY HIM THAT THE AVERAGE ROYALTY PAID FOR THE MARKETING INTANGIBLE BY THE 8 COMPARABLES W AS 6.1% AND THE AVERAGE PAYMENT OF ROYALTY FOR BOTH MARKETING & PROCESSING ROYALTY BY THE REMAINING 4 COMPARABLES WAS 8.4%. ON THE BASIS OF HIS AFORESAID OBSERVATIONS, IT WAS CONCLUDED BY THE TPO THAT THE AVERAGE PAYMENT OF PROCESSING/TECHNICAL KNOWHOW ROY ALTY WORKED OUT AT 2.3% [ I.E. 8.4% (AVERAGE PAYMENT OF ROYALTY FOR BOTH MARKETING & PROCESSING ROYALTY) (MINUS) 6.1% (AVERAGE PAYMENT OF ROYALTY FOR MARKETING INTANGIBLE)]. ACCORDINGLY, IT WAS OBSERVED BY THE TPO, THAT THE ALP OF THE PAYMENT OF ROYALTY FOR TECHNICAL KNOWHOW WAS TO BE TAKEN AT 2.3%. IN THE BACKDROP OF HIS AFORESAID DELIBERATIONS, IT WAS OBSERVED BY THE TPO, THAT PAYMENT OF ROYALTY OF 4.45% [TECHNICAL KNOWHOW ROYALTY: 2.7% (+) TRADEMARK ROYALTY: 1.75%] WAS EXCESSIVE IN NATURE. ON THE BASIS OF HIS AFORESAID OBSERVATIONS THE TPO PROPOSED AN ADJUSTMENT OF RS. 56,36,62,918/ - (OUT OF THE TOTAL ROYALTY OF RS. 85,49,94,314/ - ). 25 . WE HAVE GIVEN A THOUGHTFUL CONSIDERA TION TO THE TP ADJUSTMENT OF 2.7 % (ON SALES) CARRIED OUT BY THE TPO AS REGARDS THE RO YALTY PAYMENT OF 5% (ON SALES) BY THE ASSESSEE (MANUFACTURING SEGMENT) TOWARDS USAGE OF TECHNICAL KNOWHOW ' , AND ARE UNABLE TO PERSUADE OURSELVES TO SUBSCRIBE TO THE SAME. WE HAVE PERUSED THE NOVEL P A G E | 38 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) METHODOLOGY ADOPTED BY THE TPO FOR WORKING OUT THE AVERAGE ALP OF ROYALTY PAYMENTS BY THE COMPARABLES AND DO NOT FIND FAVOR WITH THE SAME. ADMITTEDLY, AS OBSERVED BY THE TPO, OUT OF 12 COMPARABLES SELECTED BY THE ASSESSEE ONLY IN THE CASE OF 4 COMPARABLES PAYMENTS WERE MADE FOR BOTH MARKETING & PROCESSING ROYALTY , WHILE FOR IN THE CASE OF THE 8 COMPARABLES THE PAYMENTS WERE EXCLUSIVELY TOWARDS MARKETING ROYALTY. THE DETERMINATION OF ALP OF THE ROYALTY PAYMENT FOR TECHNICAL KNOWHOW BY THE TPO AT 2.3% VIZ. [ AVERAGE PAYMENT OF ROYALTY FOR BOTH MARKETING & PROCESSING OF 4 COMPARABLES : 8.4% ( MINUS ) AVERAGE PAYMENT OF ROYALTY FOR MARKETING OF THE REMAINING 8 COMPARABLES : 6.1% ] CLEARLY REFLECTS AN ARBITRARY APPROACH ON HIS PART . IN OUR CONSIDERED VIEW, THE TPO EITHER OUGHT TO HAVE RESTRICTED HIMSELF TO THE AVERAGE ROYALT Y OF 8.4% FOR BOTH MARKETING & PROCESSING OF THE 4 COMPARABLES AND MADE SUITABLE ADJUSTMENTS AS PER RULE 10B(1)(A)(II) OF THE INCOME - TAX RULES, 1962 TO THE SAME FOR ARRIVING AT THE ALP OF THE ROYALTY FOR TECHNICAL KNOWHOW, OR IN THE ALTERNATIVE COULD HAVE SEARCHED FOR FRESH COMPARABLES AS REGARDS ROYALTY PAYMENT ON TECHNICAL KNOWHOW. IN OUR CONSIDERED VIEW, THE METHOD ADOPTED BY THE TPO FOR ARRIVING AT A TP ADJUSTMENT OF 2.7% AS REGARDS ROYALTY ON TECHNICAL KNOWHOW DOES NOT INSPIRE ANY CONFIDENCE. BE THAT A S IT MAY, WE FIND THAT THE TRIBUNAL WHILE DISPOSING OFF THE APPEAL OF THE ASSESSEE FOR THE IMMEDIATELY PRECEDING YEAR VIZ. A.Y 2012 - 13 HAD RESTORED THE MATTER PERTAINING TO TP ADJUSTMENT AS REGARDS ROYALTY PAID BY THE ASSESSEE TOWARDS TECHNICAL KNOWHOW TO ITS AE, VIZ. LOREAL., S.A, FRANCE TO THE FILE OF THE DRP FOR FRESH ADJUDICATION. ACCORDINGLY, NOT FINDING OURSELVES TO BE IN AGREEMENT WITH THE NOVEL METHOD ADOPTED BY THE TPO FOR BENCHMARKING THE ROYALTY FOR TECHNICAL KNOWHOW OF 5% (ON SALES) PAID BY THE ASSESSEE (MANUFACTURING SEGMENT) TO ITS AE DURING THE YEAR UNDER CONSIDERATION I.E. A.Y. 2013 - 14 , WHICH WE ARE AFRAID IS NEITHER BACKED BY THE MANDATE OF LAW NOR A NY LOGICAL REASONING, P A G E | 39 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) THEREFORE, I N CONSISTENCE WITH THE VIEW TAKEN BY THE TRIBUNAL IN THE A FOREMENTIONED PRECEDING YEAR VIZ. A.Y 2012 - 13, ON SIMILAR TERMS RESTORE THE MATTER TO THE FILE OF THE DRP. THE DRP SHALL IN THE COURSE OF THE SET ASIDE PROCEEDINGS READJUDICATE THE ISSUE AFRESH. NEEDLESS TO SAY, THE DRP SHALL IN THE COURSE OF THE SET AS IDE PROCEEDINGS AFFORD A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, WHO SHALL BE AT A LIBERTY TO SUBSTANTIATE ITS CLAIM THAT THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW @ 5 % (ON SALES) WAS AT ALP AND NO ADJUSTMENT WAS CALLED FOR IN RESPECT OF T HE SAME. THE GROUNDS OF APPEAL NO. 2 4& 25 ARE ALLOWED FOR STATISTICAL PURPOSES . 2 6 . THE GROUNDS OF APPEAL NO. 22 & 23 PERTAINING TO THE TP ADJUSTMENTS MADE BY THE TPO AS REGARDS THE ROYALTY ON TRADEMARKS AND ROYALTY ON TECHNICAL KNOWHOW ARE ALSO ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF OUR AFORESAID OBSERVATIONS. 2 7 . THE GROUND OF APPEAL NO. 39 WHEREIN THE ASSESSEE HAS ASSAILED THE LEVY OF INTEREST U/SSS. 234B, 234C AND 234D OF THE ACT, ARE DISPOSED OFF AS BEING CONSEQUENTIAL IN NATURE. 2 8 . THE GROUN D OF APPEAL NO. 40 WHEREIN THE ASSESSEE HAS ASSAILED THE INITIATION OF PENALTY PROCEEDINGS BY THE A.O U/S 271(1)(C) IS DISMISSED AS PREMATURE. 2 9 . THE APPEAL OF THE ASSESSEE IS ALLOWED IN TERMS OF OUR AFORESAID OBSERVATIONS. ORDER PR ONOUNCED IN THE OPEN COURT ON 2 3 /08/2019. S D / - S D / - ( M.BALAGANESH ) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; 23 .08.2019 P.S ROHIT P A G E | 40 ITA NO.7194/MUM/2017 AY.2013 - 14 M/S LOREAL INDIA PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2) / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
Other Referred Cases
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Laws Referred To
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1:1 Consultation on Tax Litigation
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1:1 Consultation on Startup Compliance
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Consultation on Entity Formation
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Initial LLP Agreement
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Memorandum Amendment Resolution
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