2019 (8) TMI 1534 - AT - Income Tax

Assessee wins appeal on TP adjustments for AMP expenses and distribution. Interest levy deemed consequential. Penalty premature.

M/s L‘Oreal India Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Circle 7 (1) (2), Mumbai.

M/s L‘Oreal India Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Circle 7 (1) (2), Mumbai. - TMI Issues Involved:1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses.2. Alternate adjustment on the manufacturing segment on account of payment of royalty for use of technical know-how and trademark.3. Alternate adjustment on the distribution segment for the international transaction of importing finished goods for resale.4. Levy of interest and initiation of penalty proceedings.Detailed Analysis:1. Adjustment on account of Advertisement, Marketing, and Promotion (AMP) expenses:The assessee challenged the adjustment of Rs. 354.73 crores made by the TPO, arguing that AMP expenses were not international transactions under Section 92B of the Income Tax Act. The TPO alleged that AMP expenses incurred by the assessee were for brand promotion services to its AE and should be compensated. The assessee contended that there was no agreement with its AE for incurring AMP expenses for brand promotion. The Tribunal found no evidence of any arrangement or agreement obligating the assessee to incur AMP expenses for the AE's benefit and ruled that the AMP expenses were incurred for the assessee's own business. Consequently, the Tribunal vacated the TP adjustment of Rs. 354.73 crores.2. Alternate adjustment on the manufacturing segment on account of payment of royalty for use of technical know-how and trademark:The TPO proposed an adjustment of Rs. 56.37 crores, arguing that the royalty payments for technical know-how and trademarks were excessive. The TPO disallowed the entire royalty payment for trademarks, stating that the assessee had already incurred significant AMP expenses for brand building. For technical know-how, the TPO used a novel method to determine the ALP, which the Tribunal found arbitrary. The Tribunal restored the matter to the DRP for fresh adjudication, allowing the assessee to substantiate its claim that the royalty payments were at arm's length.3. Alternate adjustment on the distribution segment for the international transaction of importing finished goods for resale:The TPO made an adjustment of Rs. 60.03 crores, alleging differences in the intensity of AMP functions performed by the assessee compared to comparable companies. The Tribunal noted that since the AMP expenses were not considered international transactions, no part of the AMP expenses was attributable to the AE's brand building. Consequently, the Tribunal vacated the TP adjustment of Rs. 60.03 crores.4. Levy of interest and initiation of penalty proceedings:The Tribunal ruled that the levy of interest under Sections 234B, 234C, and 234D is consequential, and the initiation of penalty proceedings under Section 271(1)(c) is premature.Conclusion:The Tribunal allowed the appeal of the assessee, vacating the TP adjustments related to AMP expenses and the distribution segment. The matters concerning royalty payments were restored to the DRP for fresh adjudication. The issues of interest levy and penalty initiation were disposed of as consequential and premature, respectively.