ITAT Favours JCB India: Rejects Arbitrary Royalty Adjustments, Directs TPO to Follow Advance Pricing Agreement Standards [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT)set aside an arbitrary transfer pricing adjustment on royalty payments and directed the Transfer Pricing Officer (TPO) to align with the Advance Pricing Agreement (APA) parameters.

The assessee, JCB India, is the Indian subsidiary of a multinational company engaged in the manufacturing and trading of construction equipment, spare parts, and components. The company had entered into Technology Transfer Agreements (TTA) with its associated enterprises (AEs) to receive proprietary technology, allowing it to manufacture and sell technologically advanced products.

During the assessment year (AY) 2013-14, the company made royalty payments to its AEs based in the United Kingdom (UK) and Germany for the use of technology and intellectual property. While the UK-based royalty payments were settled through MAP proceedings, the TPO questioned the payments made to the German AE and proposed an adjustment, setting the ALP at 2% instead of 5%. The Dispute Resolution Panel (DRP) upheld this adjustment and aggrieved by this the assessee moved an appeal to the ITAT.

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The assessee asserted that the royalty rate of 5% was justified based on two critical factors

Consistency in Past and Future Assessments, which is the same 5% royalty rate had been accepted in previous years and later years, including under an APA for AY 2018-19 to 2022-23. The assessee argued that the TPO’s selective adjustment for AY 2013-14 was arbitrary and lacked justification.

The assessee also held that royalty payments to UK AEs had been accepted under MAP proceedings between the Indian and UK tax authorities, and that the same rationale should apply to the non-UK AE (Germany), given the identical nature of the agreements.

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The assessee challenged the TPO’s rejection of Comparable Uncontrolled Price (CUP) method, arguing that the comparables selected by the taxpayer from RoyaltyStat database were valid and aligned with international standards. Instead, the TPO applied an "Other Method", selecting only one agreement with a 3% royalty rate and then arbitrarily reducing it to 2% without any factual basis.

This was further countered by the Departmental Representative (DR) who first relied completely on the orders of the tax authorities below ITAT. It was contended by him that the tribunal has already denied the benefit of MAP in the first round observing that MAP is not applicable to non-UK entities. Similarly it was argued that the APA was entered in 2019 but was not pleaded earlier. Further it was contended by him that the agreement of assessee with Non-UK AE is different as there is no benefit of the brand of the assessee, which is owned by the UK entity.

After reviewing the case, ITAT found that the TPO ignored the APA and MAP resolutions, which had already validated the 5% royalty rate for similar transactions in other years.It was also held that the technology transfer agreements (TTAs) with UK and non-UK AEs were identical, meaning the same principles of compensation should apply.

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The ITAT bench consisting of Brajesh Kumar Singh (Accountant Member) and Anubhav Sharma (Judicial Member) observed and held that the TPO’s selection of a single comparable and its downward adjustment to 2% was arbitrary and lacked objective reasoning. Prior assessments for AY 2010-11, 2011-12, and 2012-13 had accepted the 5% royalty rate for Germany-based AEs, further reinforcing the need for consistency. As a result the ITAT allowed the taxpayer’s appeal and directed the TPO to follow the APA parameters while determining the ALP for the disputed royalty payments.

To Read the full text of the Order CLICK HERE

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