No Weighted Average Cost of Capital method can be applied for purpose of computing ALP of Royalty income: ITAT Upholds Deletion of Adjustments in favour of Britannia Industries [Read Order]

The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) upheld the deletion of adjustments in favor of Britannia Industries and held that the weighted average cost of capital (WACC) method cannot be applied for computing Arms Length Price (ALP) of royalty income. 

Britannia Industries, the respondent assessee was a public limited company engaged in the business of manufacturing and trading bakery and dairy products and had entered into certain international and specific domestic transactions. 

The revenue appealed against the order passed by the Commissioner of Income Tax (Appeals) in deleting the adjustment made by the Assessing Officer amounting to Rs. 3,09,32,411/- for International transactions on royalty Income. 

N.S. Saini, the counsel for the assessee contended that the weighted average cost of the capital method was a widely and universally accepted parameter to value the intangible assets and since the assessee had already offered higher income from royalty than the one computed as per WACC, no upward adjustment was called for the Commissioner considering the submissions of the assessee as well as also taking the basis of royalty rates of other concerns engaged in a similar type of activity. 

Abhijit Kandu, the counsel for the revenue contended that WACC was applied to value the business as a whole and the same cannot be applied to value intangibles which on a standalone basis is considered riskiest than the business as a whole and referring to the annual report of the company stated that the company was working on new products and also improving existing products through packaging and marketing. 

The Bench observed that the Weighted Average Cost of Capital (WACC) method should not be applied for computing ALP of royalty income and the brand value needs consistent research and development and regular investment because a mistake at any point in time could reduce the value of a brand drastically. 

Also observed is that the assessee has been consistently showing royalty income since Assessment Year 2008-09 to 2013-14 and the same had never been disputed by the revenue authorities and even in the subsequent years the same had not been disputed. Therefore, no interference was called for in the finding of the Commissioner. 

The two-member bench comprising Sonjoy Sarma (Judicial) and Manish Borad (Accountant) upheld the deletion of adjustments while dismissing the appeal filed by the revenue. 

To Read the full text of the Order CLICK HERE

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