2019 (8) TMI 643 - AT - Income Tax

TP adjustment - royalty payment for the use of tangibles - application of CUP method as a comparable uncontrolled transaction in comparable circumstances - HELD THAT - We find it difficult to ignore the contention of the assessee has been that the assessee had a compounded annual growth rate of 31.31% from FY 2006-07 to FY 2012-13 and the sale had been rapidly growing over the past few years, whereas, the growth in royalty payment to Bain USA has been negligible in comparison at 1% on domestic Revenue and 2% on foreign Revenue (affecting royalty of 1.18%) paid to Bain USA, for there is no evidence to disprove the same. On a perusal of the result of the search carried out by the taxpayer from the SIA database summarised by the Ld. CIT(A) in his order at page No. 14 we are satisfied that the payment made by the assessee to Bain USA is far less than the list percentage paid by E.Merck (India) Ltd at 2%. Further as is evident from the order of the Ld. TPO at page No. 5, the Bain USA said to have provided the specialised expert eyes and vide spectrum of consulting capability which are running into dozens. On a careful consideration of all these services are enumerated by the Ld. TPO himself in his order and in the light of the decisions of Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT , AWB India private limited 2014 (11) TMI 284 - ITAT DELHI and EKL appliances 2012 (4) TMI 346 - DELHI HIGH COURT we are of the considered opinion that the Ld. TPO erred in applying the benefit test, in the absence of any dispute as to the actual payment or the provision of services by Bain USA at the disposal of the assessee by way of models at their website which the assessee accesses and applies as and when necessary. With this view of the matter where unable to agree with the Ld. DR that the Ld. CIT(A) committed any error in upholding the contention of the assessee and in deleting the addition made on the suggestion of the Ld. TPO. Uphold the reasoning given and conclusions reached by the Ld. CIT(A) in the impugned order. We accordingly conclude that these appeals are devoid of merits and are liable to be dismissed.

Summary

Issues Involved:
Transfer pricing adjustments for royalty payments made by the assessee to a related party; Application of the Comparable Uncontrolled Price (CUP) method; Determination of arm's length price for international transactions; Benefit test in benchmarking royalty payments; Linking profitability to royalty payments.

Transfer Pricing Adjustments for Royalty Payments:
The Revenue challenged the Transfer Pricing adjustments made by the Transfer Pricing Officer (TPO) regarding royalty payments by the assessee to a related party. The TPO had made upward adjustments for royalty payments, leading to increased assessments for the relevant years. The assessee contested these adjustments, arguing that the benefits received from the related party justified the royalty payments.

Application of the Comparable Uncontrolled Price (CUP) Method:
The Revenue contended that the TPO erred in applying the CUP method using a "benefit test" for benchmarking the royalty payments. The assessee, on the other hand, maintained that the TPO failed to consider the detailed economic analysis and internal/external CUP data provided by them. The dispute centered on whether the CUP method was appropriate for determining the arm's length price of the royalty payments.

Linking Profitability to Royalty Payments:
The core issue revolved around linking the profitability of the assessee to the necessity of royalty payments for using intangible assets. The Revenue argued that the profitability of the business should influence the determination of royalty payments, while the assessee relied on legal precedents to support the position that profitability should not be the sole criterion for assessing the validity of royalty payments.

Detailed Analysis:
The case involved challenges to Transfer Pricing adjustments for royalty payments, with the Revenue disputing the TPO's approach and the assessee defending the benefits received from the related party. The Revenue argued that the TPO's application of the CUP method using a "benefit test" was incorrect, while the assessee emphasized the economic analysis and CUP data provided. The issue of linking profitability to royalty payments was crucial, with legal precedents cited to support both positions. Ultimately, the Tribunal upheld the Ld. CIT(A)'s decision, concluding that the appeals lacked merit and dismissing them, along with the cross objections. The judgment highlighted the importance of considering the actual services provided and the benefit derived from royalty payments in determining arm's length prices for international transactions.