2012 (12) TMI 215 - HC - Income Tax

Transfer Pricing Adjustment - Use of Brand name/ trade name - Arm s length price - Payment of License Royalty - Expense incurred wholly and exclusively for the purpose of business - In assessee s returns AO had disallowed sum of Rs.33.82 crores being 40% of the general license as not incurred wholly and exclusively for the purpose of business and that the royalty was excessive in the circumstances of the case so as to attract proportionate disallowance of 40% - held that - Expenditure was neither excessive nor unreasonable, the same could not be disallowed u/s 40 A (2) of the Act - assessee has been able to discharge its burden namely it was a justifiable and reasonable business expenditure and thus should be allowed u/s 37 of the Act - Transfer Pricing Officer after detailed analysis and examination of the material on record concluded that pricing adjustment was unnecessary; therefore, the application of this amendment, made later, to the facts of this case especially in a context in which they have arisen, is academic - no substantial question of law arises, in these circumstances the appeal is dismissed. Decision in COMMISSIONER OF INCOME TAX Versus M/S NESTLE INDIA LTD 2011 (5) TMI 566 - DELHI HIGH COURT followed.

Summary

Issues:
1. Whether the Tribunal erred in deleting a specific amount from the license royalty paid by the assessee?

Analysis:
1. The Revenue challenged the Tribunal's decision regarding the deletion of Rs.33.82 crores, which was 40% of the license royalty paid by the assessee to the owner of the brand and trademark. The Transfer Pricing Officer (TPO) had initially found no price adjustment necessary. However, the Assessing Officer disallowed the sum based on the TPO's observations that the royalty payment and advertisement expenses were not entirely for business purposes. The CIT (Appeals) directed the deletion of the disallowance, and the ITAT upheld this decision.

2. The ITAT, in its order, noted that the issue was covered by previous decisions and held that the ld. CIT (Appeals) rightly deleted the addition of Rs.33.82 crores based on earlier Tribunal orders. The Tribunal also referred to a decision involving the same assessee from a previous year, where a similar approach was taken, and the Court dismissed the Revenue's appeal.

3. The Court found no reason to deviate from its earlier decision involving the same assessee. It also dismissed the Revenue's argument regarding a subsequent amendment, stating that since the TPO had already concluded that no pricing adjustment was needed, the application of the amendment was irrelevant. The Court concluded that no substantial question of law arose, and therefore, the appeal was dismissed.