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
