2017 (12) TMI 934 - HC - Income Tax

ALP determination - Appellate Commissioner reduced the royalty rate to 2% taking the average of the two categories of transactions - Held that - No infirmity can be found with the ITAT s approach. If the assessee s submissions were to be accepted arguendo the omission by a party to indicate an initial income which was concededly being shown in the past as an international transaction cannot be scrutinized at all. Such an absolute proposition is not possible to support. The assessee is only to explain why the Dabur brand has been permitted to an overseas entity of which it is the present sole or principal shareholder. That it was not such a sole shareholder in the past is an admitted fact. Equally with the same overseas entity when the ownership was of a different pattern royalty was charged for the use of the Dabur brand. Unless at the entity level there is a complete re-organization so as to result in a complete identity of the two concerns or royalty arising out of the use of the Dabur brand had to be treated as an international transaction; it was for all previous years. In these circumstances the conclusions and findings recorded by the Appellate Commissioner and the ITAT cannot be faulted. The assessee s submission with respect to the applicability of second proviso to Section 92CA(2) i.e. that it is entitled to the benefit of the arithmetical mean not exceeding 5% is in our mind insubstantial. The assessee as a matter of fact did not offer any adjustment claiming that there was indeed no international transaction. In these circumstances the question of applicability of the said proviso does not arise. No substantial question of law arises

Summary

Issues:
1. Attribution of income based on international transaction under Section 92B.
2. Determination of arm's length price for royalty payments.
3. Applicability of transfer pricing adjustments under Section 92C.
4. Consideration of comparables for determining royalty rates.
5. Treatment of Dabur brand usage as an international transaction.

Issue 1: Attribution of income based on international transaction under Section 92B

The assessee contended that the findings affirmed by the ITAT were erroneous as there was no international transaction as per Section 92B, thus challenging the attribution of income under Section 92C. The High Court noted the history of the agreement between the assessee and the overseas entity, highlighting the evolution of royalty payments and the subsequent changes in shareholding. The TPO computed royalty rates based on the agreement and the nature of technical support provided, leading to adjustments in the assessment. The CIT(A) modified the ALP determination, considering the appellant's arguments regarding comparables under Section 92C and Rule 10B. The High Court analyzed the arguments presented by the appellant and upheld the findings of the ITAT, dismissing the appeal.

Issue 2: Determination of arm's length price for royalty payments

The dispute revolved around the determination of the arm's length price for royalty payments made by the overseas entity to the assessee. The CIT(A) reduced the royalty rate to 2% after considering the nature of transactions and technical support provided. The ITAT further scaled down the royalty rate to 0.75% based on the absence of comparables and the unique circumstances of the case. The High Court reviewed the arguments regarding the brand usage and the absence of consideration for establishing the trade name, ultimately supporting the ITAT's decision on the arm's length price determination.

Issue 3: Applicability of transfer pricing adjustments under Section 92C

The High Court examined the application of transfer pricing adjustments under Section 92C in the context of determining the arm's length price for royalty payments. The ITAT highlighted the lack of comparables and the unique nature of the FMCG products manufactured by the overseas entity. The Court agreed with the ITAT's approach, emphasizing the need for a thorough analysis of similar payments received by independent entities for making transfer pricing adjustments.

Issue 4: Consideration of comparables for determining royalty rates

The dispute included the consideration of comparables for determining royalty rates, with the appellant arguing against the applicability of past assessments as comparables. The ITAT and the High Court emphasized the importance of analyzing similar payments received by comparable entities and the unique circumstances of the case in determining the arm's length price for royalty payments.

Issue 5: Treatment of Dabur brand usage as an international transaction

The contention regarding the treatment of Dabur brand usage as an international transaction was a key point of dispute. The High Court analyzed the evolution of the brand usage agreement and the changes in shareholding, emphasizing the need to treat royalty arising from the brand usage as an international transaction. The Court dismissed the appeal, supporting the findings of the ITAT and the CIT(A) regarding the nature of the brand usage agreement and the arm's length price determination.

This comprehensive analysis of the legal judgment highlights the key issues, arguments presented, and the Court's findings regarding the attribution of income, determination of arm's length price, applicability of transfer pricing adjustments, consideration of comparables, and the treatment of Dabur brand usage as an international transaction.