Determination of ALP for Royalty Payment: Delhi HC dismisses Income Tax Department’s Appeal against Amway India [Read Order]

In a recent ruling in favour of the assessee-Amway India Enterprises, a Division Bench of the Delhi High Court comprising Justice Manmohan and Justice Manmeet Pritam Singh Arora held that, “the mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP.” and dismissed the appeal by the Income Tax Department.

The respondent company, Amway India Enterprises, engaged in direct selling of consumer products through multi-level-marketing filed its return for the Assessment Year 2013-14 in which it had international transactions with the Associated Enterprises (AEs). The case was referred to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price. The TPO recommended an adjustment of ALP determined for Royalty payment on account of managerial remuneration to the director.  The Assessing Officer (AO) confirmed the addition made by the TPO and re-assessed the income of the assessee accordingly.

The Assessee, aggrieved by this addition approached the Commissioner of Income Tax (Appeals) (CIT(A)) and seeked deletion of the same. CIT(A) deleted the impugned addition made on account of transfer pricing adjustment for transaction related to royalty.

Aggrieved by the deletion of the additions, the order of CIT(A) was challenged by the revenue by an appeal to the Income Tax Appellate Tribunal (ITAT). ITAT, however, ruled in favour of the assessee and upheld the decision of the CIT(A).

In the present appeal, it was contended by the revenue that the ITAT had erred in confirming the ruling of the CIT(A) as the payment was excessive and not at ALP of advertisement, marketing and promotion expenses incurred by the assessee for the benefit of AE’s trademark and brand with the aid of the marketing intangibles of the parent entity.  The revenue has also put forward that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited.

The bench observed that the findings of both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal were in accordance with the law laid down in the case of  ChrysCapital Investment Advisors India Private Limited by the Delhi High Court which was also confirmed to be applicable in the present case and held that “the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty.” The decisions of CIT(A) and ITAT were thereby confirmed and the appeal was dismissed, in favour of the assessee.

To Read the full text of the Order CLICK HERE

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