Understanding the DCIT Vs Ferrero India Pvt. Ltd. Transfer Pricing Case

Overview of the Case: DCIT Vs Ferrero India Pvt. Ltd. (ITAT Pune)

The primary issue in the case of DCIT Vs Ferrero India Pvt. Ltd. revolved around whether there existed an international transaction as defined under the applicable tax regulations. The assessee contended that the Transfer Pricing Officer (T.P.O.) could not infer such transactions without evidence of an actual agreement or transaction, suggesting that the lower authorities’ reliance on assumptions was unfounded. The absence of a formal agreement for advertising and marketing expenditures, from which the foreign associated enterprise (AE) could purportedly benefit, was central to the dispute.

Legal Findings

The Revenue failed to demonstrate the existence of any agreement necessitating the incurrence of advertising and marketing (A&M) expenses by the assessee for the benefit of its foreign AE. Importantly, mere excess expenditure on such expenses compared to comparable entities does not infer an international transaction. The Revenue could also not produce any mechanisms for determining the Arm's Length Price (ALP) regarding these expenses.

The T.P.O. had utilized the bright line method to evaluate these A&M expenses, asserting they fell under the purview of promoting the 'Ferrero' brand. However, this approach was found to be inappropriate, as it could not establish the existence of an international transaction necessary for applying the methodology effectively.

Points Considered:

Existence of Agreement: No formal agreements between the assessee and the foreign AE were detected that mandated the assessees' expenditure for A&M activities benefiting the AE.
Illustration of Excess Expenditure: The Revenue's claim that excess A&M expenditure signifies an international transaction was not upheld by sufficient evidence.
Bright Line Test Limitation: The bright line method was deemed inadequate for establishing either the presence of such international transactions or determining ALP.
Deductions for Indirect Benefits: Just because third parties might benefit from the expenditure incurred by the assessee does not justify disallowing the claimed expenses.

Key Contents of the Appeal

The Revenue’s appeal (I.T.A No. 07/PUN/2021) presented several grounds, notably whether the CIT(A) was justified in ruling that a significant portion (90.42%) of A&M expenditure does not constitute an international transaction. The cross objection (C.O. No. 06/PUN/2021) from Ferrero India reiterated similar themes, including:

Non-existence of International Transaction: A&M expenses were related solely to promoting Ferrero India’s products without benefiting the foreign AE.
No Control from AE: The AE had no control over the nature or extent of A&M expenditures.
Improper Benchmarking: The selected comparable entities by the T.P.O. were not correctly aligned with the business profile of the assessee.

Background of the Case

Ferrero India Private Limited, part of the Ferrero Group, commenced operations in India on June 2, 2004. The company faced scrutiny after declaring a loss of ₹562,721,541 for the assessment year (A.Y.) 2011-12, following which a reference was made to the T.P.O. for determining arm's length pricing regarding international transactions related to the purchase of finished goods and an incurred A&M expense.

During the scrutiny, the T.P.O. adjusted the profit based on an alleged excess in A&M expenditures, suggesting these were for the benefit of the foreign AE without establishing a clear basis for such an assertion.

Conclusion

The ITAT Pune affirmed the CIT(A)'s decisions, concluding that Ferrero India Private Limited’s expenditure on A&M did not equate to an international transaction as the Revenue failed to provide necessary evidence of an agreement. Moreover, it highlighted that without proper mechanisms to assess the ALP, discussions on pricing adjustments were rendered moot. Therefore, the appeal from the Revenue was dismissed, and the cross-objection from Ferrero was allowed, sustaining the relief granted to the assessee.

The ruling reinforces the critical principles surrounding the necessity of documented agreements and precise mechanisms in establishing international transactions, emphasizing the burden of proof lies with the Revenue.