L’oreal in India is engaged in manufacturing and distribution of cosmetics and beauty products. In respect of the distribution L’oreal had applied the RPM by benchmarking the gross margin of at 4o.80% against that of comparables at 14.85%.
The tax administration rejected the RPM method on the basis that the L’oreal India was consistently incurring losses and the gross margins cannot be relied upon because of product differences in comparables. Accordingly, the tax administration applied Transactional Net Margin Method.
L’oreal argued that the years of losses was due to a market penetration strategy in India – not non-arm’s-length pricing of transactions. The comparables had been on the Indian market much longer than L’oreal and had established themselves firmly in the Indian market.
The Appellate Tribunal observed that L’oreal India buys products from its parent and sells to unrelated parties without any further processing. According to the OECD TPG, in such a situation, RPM is the most appropriate transfer pricing method.
L’oreal India had also produced evidence from its parent that margin earned by the parent on supplies to L’oreal India was 2% to 4% or even less. The tax administration had not disputed these facts. The tax administrations statement, that the parent have earned higher profit, was not based on facts.
The Tribunal found that profit earned by the parent was reasonable and hence there was no shifting of profits by L’oreal India to its parent.
See also: India vs. Loreal 12 April 2012 and India vs. Loreal 25 Oct. 2012
L'Oreal_India_P.Ltd,_Mumbai_vs_Assessee_on_4_May,_2016