Case Law Details

Case Name : Sara Lee TTK Ltd Vs DCIT (ITAT Mumbai)
Appeal Number : ITA no.376/Mum/2012
Date of Judgement/Order : 24/08/2016
Related Assessment Year : 2007-08
Courts : All ITAT (5788) ITAT Mumbai (1784)

CA Suraj R. Agrawal

Suraj R. AgrawalBrief of the Case:-

The assessee did not benchmark the royalty payment separately. On enquiry by the TPO, it relied on RBI approval given in 1995 and also on the fact that the assessee earned a gross profit of 41.6%. TPO applied Press Note 9 (2000 series) and restricted it to 1% on the plea that the payment was for use of trademark without transfer of technology.

Case Summary:-

Facts of the case:

  • The assessee-company is engaged in the business of manufacture and sale of shore care, household care and personal care products.
  • Before the TPO, the appellant has taken the rate of royalty approved by the department of Industrial Policy and Promotion (DIPP) and its consequent approval by the RBI as a benchmark and had contended that its transaction relating to the payment of royalty is at arm’s length.
  • However, the TPO relying on the press note 9(2000 series) dated 08.9.2000, restricted the royalty payment to 1% of domestic sale towards the use of trademark without transfer of technology.
  • On the assessee’s plea that the approval given to it by the DIPP / RBI should be taken as the benchmark, he held that the rate of royalty approved by DIPP is towards collaboration/ manufacturing/technical knowhow agreement towards which the RBI permitted royalty @ 5% of net sales on domestic sales and 8% on netsales on export sales under automatic route and hence those approvals cannot be considered as a benchmark towards royalty for the use of trademark/brand.
  • In the facts and circumstances, the Ld. CIT(A) considered that the prevailing rate of royalty for use of brand or trade mark would be the rate prescribed by the RBI in their press note No 9(2000 series) dated 08.9.2000 and accordingly upheld the action of the AO/ TPO.

Contentions of Appellant:

  • The agreement is a mere extension of the original agreement of 1995 and hence the royalty payment cannot be regarded as being restricted to the use of Trademark alone.
  • He contended that Press Note 9 (2000) series relied upon by the TPO and the Ld.CIT(A), in no way supports the TPO/ Ld.CIT(A)’s restriction on rate of payment of royalty to 1% as the Para III of the Press Note, relied upon by TPO/Ld.CIT(A) relates to royalty payments made exclusively for use of trademarks and brand names without technology transfer.However, in the present case, since there is a technology transfer, it is clear that the restriction in Para III has no application.
  • With respect to objection of revenue that there has been no benchmarking done by the assessee company. it was submitted that the assessee company has obtained specific approval from RBI permitting payment of royalty @5% and hence the Department and assessee have both relied on Government Approval for benchmarking.

Contention by Respondent:

  • The RBI’s approval is in connection with foreign exchange and it would look into the matter from that angle only. Their approval for the purpose of remittance/ outflow of foreign exchange, does not ipso facto, partake the character of ALP, which has to be determined as per TP regulations.

Ruling of Honorable ITAT/Court:

  • The assessee has not separately benchmarked the Royalty transaction at the time submission of Form 3CEB or at the time of preparation of Transfer Pricing Report. It is settled proposition of law that it is the onus of the assessee to prove that the transactions were taken at arm’s length.
  • The RBI approval/FIPB approval is not determinative of ALP and cannot be considered to be a valid CUP.Automatic route under which FIPB approvals or RBI approvals are granted have been devised for the “ease of doing business”. These approvals emanate from other legislation or policy and are not in relation to determination of Arm’s Length Price. The purpose of the RBI approval/FIPB approval is entirely different and cannot be equated with the arm’s length principle.
  • Going by the relevant TP provisions as enshrined under the Act and relevant Rules, it is mandatory that the appellant has to independently benchmark its international transaction with independent comparable so as to arrive at arm’s length price, which has not been made in this case.
  • In the interest of justice and fair play, this case should be restored back to the file of AO, who shall require the assessee to bench mark its international transaction of ‘royalty’ with independent comparable following suitable methods prescribed under the Act and on its compliance, the AO after giving adequate opportunity to the assessee shall decide this issue in accordance with the TP regulations.
  • In the result, appeal of assessee is allowed for statistical purposes.
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