Income Tax Tribunal grants relief to Ray-Ban

Income Tax Tribunal grants relief to Ray-Ban

ITAT strikes off adjustment made by TPO on account of ALP and advertising, marketing and promotion (AMP) expenses

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, headed by division member consisting of R.K. Panda (Accountant Manager) and Kuldip Singh (Judicial Member) allowed the appeals filed by the appellant Ray-Ban and in relief struck off the adjustments made by the Transfer Pricing Officer (TPO) on account of Arm's Length Price (ALP) of Advertisement, Marketing, and Promotion Expenses (AMP) expenses.

The appellant, M/s Ray-Ban Sun Optics India Ltd. claimed to be engaged in manufacturing and distribution of Ray-Ban brand sunglasses and prescription frames in India and to carry out the manufacturing operation, the taxpayer imported certain raw material and components from Luxottica Group entities for manufacturing of finished sunglasses in India.

In addition, and for the distribution operation, the taxpayer (Ray-Ban) also imported finished Ray-Ban branded sunglasses and other luxury brand sunglasses from Luxottica Group entities for sale to independent third-party dealers/distributors in India.

It was contended that TPO while examining the Transfer Pricing (TP) study made by the taxpayer pointed out that a huge expenditure had been made by the taxpayer towards AMP in brand building and marketing of Ray-Ban products in India for which it sought to be compensated with a minimum certain amount.

Initially in the order, the TPO found from the annual report of the Associated Enterprises (AE) that sales, gross profit and operating income of AE have been increasing over the past five years i.e., from 2003 to 2007 and the benefit of this expenditure incurred on AMP is flowing from the Luxottica Group and thereby held that AMP expenditure of Rs 8.38 crore as an international transaction under section 92B (1) read with clause (v) of section 92F of the Income Tax Act, 1961.

The TPO was of the opinion that since the taxpayer had failed to produce any agreement for the relevant previous year as claimed for before the Tribunal, there was no change in the facts and law regarding the issue and ratified upward adjustment of Rs 4.21 crore made by the TPO vide order to the income of the taxpayer.

The ITAT on 22 January 2021 observed, "We are of the considered view that merely by applying the Blue Line Testing, the existence of international transactions cannot be proved and as such, adjustment made by the TPO in the aggregate of any excessive/non-routine expenses is not in consonance with the principles. We are further of the considered view that learned Dispute Resolution Panel has erred in comparing the AMP/Gross Profit ratio of the taxpayer vis-à-vis comparable company for the purpose of determining the value of the international transactions of AMP is nothing but applying the BLT which has no statutory mandate."

According to ITAT, the first step is to determine the existence of international transactions by the revenue and if the existence of international transactions qua AMP expenditure is established only then ALP of the same is to be determined.

ITAT ruled, "We cannot presume the existence of international transactions qua AMP expenditure as the taxpayer has denied the existence of international transactions and has not received any subsidy/grant in connection with international transactions with Associated Enterprises."

The ITAT highlighted that 'selling expenses' was not only to trade discount/volume discount rather any expenses which have been incurred for purpose of enhancing sales would fall under the purview of selling expenses.

The ITAT proceeded to conclude and said that it cannot ignore the submission of the department that the matter is pending before the Apex Court and the decision of Apex Court would be binding upon all the authorities.

Consequently, the court set aside the orders of authorities (ACIT) and allowed the appeal filed by the taxpayer.