Use of RPM for distribution activities upheld in case of L’Oreal India Pvt. Ltd.

November 19 , 2014 : The Bombay High Court affirmed a tribunal decision accepting the taxpayer’s use of the Resale Price Method (RPM) for purposes of determining the arm’s length price of its international transactions with respect to distribution activities in the case of CIT v. L’Oreal India Pvt. Ltd. (ITA No. 1046 of 2012 (7 November 2014)


The taxpayer, a corporation engaged in the manufacture and distribution of cosmetics and beauty products in India, divided its business activities into two segments: (1) manufacturing; and (2) distribution. The taxpayer selected the RPM for its international transactions, but the Transfer Pricing Officer applied the Transaction Net Margin Method (TNMM) to the taxpayer’s distribution segment on the basis that the taxpayer’s pricing policy was not at arm’s length because of consistent losses. The Transfer Pricing Officer also observed that the comparables selected by the taxpayer could not be relied upon because of product differences and that the function, asset, and risk comparision of the taxpayer to the selected comparables was sufficient only for TNMM, and not for RPM.

On administrative appeal filed by the taxpayer, the Commissioner for Income-tax (Appeals) rejected the transfer pricing adjustment (in part, by relying on OECD Transfer Pricing Guidelines).

Tribunal, High Court decisions

On review, the Mumbai Bench of the Income-tax Appellate Tribunal agreed with the administrative determination and noted that there is no order of priority for transfer pricing methodologies in India. The tribunal also observed that the RPM is the most appropriate method for distributing and marketing activities when goods are purchased from related parties and resold to unrelated parties. The High Court affirmed the determination of the tribunal. While India’s tax department asserted that use of the TNMM more properly reflected the arm’s length price of international transactions in respect of the taxpayer’s distribution activity—because as the tax department asserted, the taxpayer had spent huge sums on selling and distributing products, and as such, there was a substantial value addition to the goods sold for which the RPM could not be applied for determining the arm’s length price—the High Court observed that because RPM had been previously accepted by the Transfer Pricing Officer in the taxpayer’s prior and subsequent years, the tribunal did not err in allowing the taxpayer’s appea

Source: KPMG Global Research










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