2014 (1) TMI 646 - AT - Income Tax

Determination of Arm s Length Price - License fees for use of intangible/intellectual property Addition of Licence Fees paid to AE - DTAA with Switzerland - Held that - Following SGS India (P.) Ltd. 2014 (1) TMI 388 - ITAT MUMBAI - the royalty at 5% to 8% was accepted as per FIPB Instructions issued by the Ministry of Commerce Government of India - the assessee s international transaction of payment of licence fee at 3% was accepted by the Tribunal at ALP - the rate of licence fees at 3% paid by the assessee at ALP. Non-adjudication by the CIT(A) Benefit of Article 10 of Switzerland Double Taxation Avoidance Agreement Held that - When a particular issue is raised before the ld. CIT(A) for the first time it becomes his duty to first discuss the admission aspect of the same and then decide on its merits if he is agreeable with its admission - As there is no discussion worth the name in the order on these aspects matter restored to the CIT(A) for adjudication Decided Partly in favour of Assessee.

Summary

Issues:
1. Determination of Arm's Length Price (ALP) of license fees for use of intellectual property.
2. Benefit of Article 10 of India Switzerland Double Taxation Avoidance Agreement (DTAA) regarding the rate at which the dividend should be taxed.

Analysis:

Issue 1: Determination of Arm's Length Price (ALP) of license fees for use of intellectual property

In the assessment years 2004-05 and 2005-06, the appellant paid license fees to its associated enterprise (AE) for the use of intellectual property and intangibles at a rate of 3% of turnover. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) at 1% on local turnover and 2% on export turnover based on Govt. of India's Press note No.9 of 2000. The Commissioner of Income Tax (Appeals) upheld the TPO's decision against the appellant. However, the Tribunal, considering a similar issue in earlier years, ruled in favor of the appellant, citing precedent where royalty rates of 5% to 8% were accepted. The Tribunal upheld the rate of license fees at 3% paid by the appellant as ALP, setting aside the lower rate determined by the TPO. Consequently, the appeal for the assessment year 2004-05 was partly allowed.

Issue 2: Benefit of Article 10 of India Switzerland Double Taxation Avoidance Agreement (DTAA)

Regarding the assessment year 2005-06, the appellant contested the addition made on the license fees paid to its AE, which was restricted by the TPO to 1% on domestic sales and 2% on export sales, similar to the preceding year. The Tribunal, following the decision for the earlier year, directed that the payment of license fees at 3% should be accepted as ALP. Another ground of appeal was related to the benefit of Article 10 of the India Switzerland DTAA concerning the tax rate on dividends. The appellant argued that tax on dividends should not exceed 10% as per the DTAA, contrary to the 13.06% paid as per the Income Tax Act. The Commissioner of Income Tax (Appeals) did not address this issue in the impugned order. The Tribunal noted the absence of discussion on this matter and returned the case to the Commissioner of Income Tax (Appeals) for a decision in accordance with the law. Consequently, the appeal for the assessment year 2005-06 was partly allowed.

This judgment highlights the importance of consistency in determining Arm's Length Price for transactions involving intellectual property and the necessity for tax authorities to consider relevant Double Taxation Avoidance Agreements while assessing tax liabilities on international transactions.