2019 (3) TMI 1539 - AT - Income Tax

TP adjustment - determination of ALP of payment of royalty - method or mechanism of determination of ALP - Assessee has entered into an international transaction of payment of royalty fee for use of trade name and trademarks applying the CUP method as most appropriate method - qualitative and quantitative filters applied by assessee - inadequate facts about the product comparability for technology for which trademark fees is paid as Royalty - HELD THAT - During the course of hearing both the parties also submitted that identical issue is involved with respect to the determination of the arm s-length price of the international transaction of the payment of royalty to associated enterprises in all those years from assessment year 2009 10 to 2012 13. Therefore, it was requested that if the issues remanded to the learned transfer-pricing officer then similar direction to both the parties may be given for all those years and all those appeals may be disposed of with respect to the above ground based on the above limited remand. Therefore, at the request of the parties we also agree to give similar directions for all these years. The transfer pricing study document prepared by the assessee for benchmarking the royalty payment does not inspire any confidence but merely eyewash. Therefore, in view of a) the inadequate facts about the product comparability for technology for which trademark fees is paid as Royalty b) Absence of availability of agreement between two foreign parties, as well as terms , economic indicators, risk etc c) No adjustment on account of geographical difference between two prices d) Use of database PowerK without justification and not using other specific databases e) Use of inappropriate filters Therefore, for all these years, i.e. A Y 2009-10 to 2012 13, We direct limited remand to the ld TPO to examine the comparability analysis for determination of the arm s-length price of the royalty fees paid by the assessee. For the examination of the learned transfer pricing officer we direct the assessee to submit a fresh comparability analysis before the learned transfer pricing officer justifying the use of various database with the rationale for using them, justifying each and every filter that assessee would like to use, justify the various differences in the prices and it is adjustment to be made and all the necessary details before the learned transfer pricing officer on or before 15/04/2019.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for the payment of royalty.
2. Applicability and justification of the Comparable Uncontrolled Price (CUP) method.
3. Use of specific databases and filters for comparability analysis.
4. Functional dissimilarity and benefit analysis in determining ALP.
5. Remand for fresh consideration by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for the Payment of Royalty:
The primary issue revolves around the determination of the ALP for the payment of royalty by the assessee to its associated enterprises for the use of the 'Vodafone' and 'Essar' trademarks. The assessee adopted the CUP method, using a single comparable transaction where Forward Industries Inc., USA paid a 7% royalty to Motorola Inc., USA. The TPO rejected this, determining the ALP as nil, citing functional dissimilarities and the absence of economic benefits to the assessee.

2. Applicability and Justification of the Comparable Uncontrolled Price (CUP) Method:
The assessee used the CUP method, selecting a single comparable transaction. The TPO and the Dispute Resolution Panel (DRP) rejected this method due to a lack of complete identity between the controlled and uncontrolled transactions. The Tribunal upheld that product similarity is crucial for the CUP method, and the single comparable used by the assessee was functionally dissimilar and geographically different.

3. Use of Specific Databases and Filters for Comparability Analysis:
The assessee used the 'PowerK' database, which includes agreements filed with the Securities Exchange Commission. The Tribunal found this unjustified, noting the availability of more specific databases for royalty transactions. The Tribunal also criticized the qualitative and quantitative filters applied by the assessee, finding them without justification and leading to the selection of only one comparable agreement.

4. Functional Dissimilarity and Benefit Analysis in Determining ALP:
The TPO determined the ALP as nil, arguing that no economic benefit was derived by the assessee and that the assessee did not pay royalty in the past. The Tribunal rejected this reasoning, stating that the past non-payment of royalty cannot justify a nil ALP. The Tribunal emphasized that the TPO's role is to determine the ALP, not to decide if the transaction resulted in economic benefits to the assessee.

5. Remand for Fresh Consideration by the Transfer Pricing Officer (TPO):
The Tribunal, following the directions of the High Court, remanded the issue back to the TPO for a fresh determination of the ALP. The Tribunal directed the assessee to submit a fresh comparability analysis, justifying the use of databases, filters, and adjustments for geographical differences. The TPO was instructed to complete the examination and submit a remand report by specified dates, allowing both parties to consider alternative methods if the CUP method is found unsuitable.

Conclusion:
The Tribunal's detailed examination highlighted the inadequacies in the assessee's transfer pricing study, the unjustified use of specific databases and filters, and the inappropriate rejection of the CUP method by the TPO. The matter was remanded for a fresh determination of the ALP, with specific directions for the assessee and the TPO to follow a more rigorous and justified approach in their analysis.