TP adjustment towards brand development services deleted as no contract exists between the parties: ITAT Chennai

ITAT Chennai held that transfer pricing adjustment towards brand development services unjustified in absence of contract amongst the assessee and its associated enterprises. Accordingly, AO directed to delete addition made towards brand fee adjustment.

Facts- The matter involved here is that TPO proposed adjustment on account of expenses incurred by the assessee for brand building allegedly incurred for the benefit of its AE. TPO held an opinion that the assessee was manufacturing car under license from Hyundai Korea who was the owner of brand / trade mark / trade name “Hyundai”. The assessee was permitted to use the said brand in terms of ‘Technology and Royalty agreement’ dated 30.09.2002. In terms of said agreement, the assessee had no independent choice or discretion to select or use any brand name of its choice. The assessee manufactured the cars with brand and logo of its AE and spent considerable amount for Advertising, Marketing and Promotion (AMP) expenditure which resulted into increase in brand value of its AE. Accordingly, the assessee was to be compensated for the same as held in earlier assessment years. Accordingly, TPO proposed similar adjustment in this year.

TPO computed that the assessee’s contribution in brand building of Hyundai brand would be 6.09%. Though the assessee assailed the same, TPO held that this transaction would be an international transaction within the meaning of Sec. 92B(1) which included the provision of services. Finally, 50% of AMP expenses with mark­up of 7.1% was held to TP adjustment which resulted into an adjustment of Rs.209.18 Crores in the hands of the assessee.

Conclusion- Held that as is evident from the orders of Ld. TPO itself, this issue stood covered in assessee’s favor in all the earlier years. The bench, in IT(TP)A No.39/Chny/2021 dated 22.12.2021 for AY 2016-17 chose to follow earlier view of the Tribunal and held learned TPO as well as learned DRP were erred in making transfer pricing adjustments towards brand services by adopting Spearman’s Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, directed the AO/TPO to delete transfer pricing adjustment made towards brand development services. Therefore, consistent with the view taken by the coordinate Bench, we direct the AO to delete addition made towards brand fee adjustment.