Bird’s eye view on Brand name
A brand name is a unique name, symbol or picture that the owner may use to identify special products or services that distinguishes it from other. Brand name may confer a valuable market status to the goods or services to which they are attached, whether or not those goods or services are otherwise unique. In case, the owner of such a brand name allows its usage to another entity, then a fee is recovered as a mode of compensation which is generally known as brand royalty.
Controversy involved – Appropriate approach of benchmarking
Under the Indian Transfer pricing regulations (TPR) there has always been a long drawn controversy on the benchmarking of the transaction of payment of brand royalty by one Associated Enterprise (AE) to another AE. More often than not, it is seen that the payer of brand royalty is an Indian AE and accordingly it is required to substantiate its arm’s length nature of the transaction in its Transfer pricing study report.
In quite a number of instances, the Indian AE being the taxpayer benchmarks the said transaction by aggregating it with other international transactions under Transactional Net Margin Method (TNMM) on a contention that the same intrinsically linked to its other international transactions. In other words, the taxpayer contends that its operating margin is higher than the comparable companies even after making the payment towards brand royalty and accordingly the said transaction is at arms length. However, the Transfer Pricing Officers (TPO) tend to adopt the Arm’s length Price (ALP) of the said transaction as NIL by contending that the taxpayer has failed to satisfy the benefit test i.e. a benefit has accrued out of usage of such brand name. So a question arises whether the aggregation methodology is an appropriate approach to benchmark such kind of transactions?
Ruling in the case of Goodyear India
The Hon’ble Income Tax Appellate Tribunal (ITAT), Delhi, pronounced a ruling in the case of Goodyear India Limited (Goodyear India) wherein the ITAT accredited a direct nexus between the manufacturing activities of the taxpayer and the payment of brand royalty, and thus ruled that ALP can be determined for such payment under aggregation approach at the entity level for manufacturing activities.
Facts of the case
Consequently, the taxpayer filed an appeal before the ITAT.
Ruling given by the ITAT
The ruling in the case of Goodyear India has been welcomed by many of the taxpayers and has dispirited the tax authorities to consider the ALP of the transaction pertaining to payment of brand royalty to be at NIL. It has also provided a green flag to taxpayers to consider aggregation as an appropriate method to benchmark such kind of transaction. Further, corroborating the aggregation methodology with a secondary exercise such as conducting a search on the publicly available databases to extract the third party rates in order to test the arm’s length nature of the transaction can add feathers to taxpayers cap (in such a scenario a cost-benefit analysis must be done before undertaking said exercise).
Nonetheless, it is always in the interest of the taxpayer to maintain documents that can substantiate the benefit test. It is a need of hour, that the Revenue authorities provide certain guidance on documentation requirements for such type of transactions taking into cognizance of what is practical and feasible, which will help the taxpayers to reduce the overall compliance burden and also reduce litigation significantly.
*The author is a Transfer Pricing Professional and the views expressed are strictly personal. He can be reached at firstname.lastname@example.org for any queries.