A two-Judge Bench of the Delhi High Court in Dabur India Ltd. vs. Pr.Commissioner of Income Tax held that Transfer Pricing adjustment is applicable to overseas subsidiary despite of receiving any royalty.
In the instant case, the Petitioner Dabur India Ltd. was aggrieved when the Assessing Officer (AO) & the Transfer Pricing Officer (TPO) added royalty income @ 4% in the year it had stopped obtaining royalty from its subsidiary- Dabur International Ltd. The assessee appealed against this addition. The Appellate Commissioner considered the grounds and comparing the assessments completed for the previous years, accepted the TPO/AO’s findings. However, the Arm Length Price (ALP) determination at the appellate stage was modified. The Appellate Commissioner reduced the royalty rate to 2%.
The assessee further appealed to the ITAT, which partly accepted its plea and scaled down the rate of royalty to 0.75% and directed adjustments accordingly. In its discussion, the ITAT affirmed the findings of the Appellate Commissioner and also the argument of the assessee with respect to absence of brand building, etc.
The assessee in its appeal to the High Court of Delhi under Section 260A of the Income Tax Act, 1961. urged that the findings of the lower authorities affirmed by the Income Tax Appellate Tribunal (ITAT) were erroneous. The assessee further contended that prior to the Dabur International Ltd. becoming a subsidiary, royalty way payable by the overseas entity for the use of brand name and technical know-how and the income had been duly accounted. But after becoming a 100% subsidiary, it was used by the assessee to manufacture its products overseas. The assessee also argued that the mere absence of consideration for use of the Dabur brand, per se cannot amount to an international transaction.
However, the Bench presided by Justice S. Ravindra Bhat and Justice Sanjeev Sachdeva, while confirming the ITAT order, noted that unless at the entity level there is a complete re-organization so as to result in a complete identity of the two concerns or royalty arising out of the use of the Dabur brand, had to be treated as an international transaction; it was for all previous years.
“The Court is of the opinion that having regard to the conspectus of facts, no infirmity can be found with the ITAT’s approach….The assessee is only to explain why the Dabur brand has been permitted to an overseas entity – of which it is the present sole or principal shareholder. That it was not such a sole shareholder in the past is an admitted fact. Equally, with the same overseas entity, when the ownership was of a different pattern, royalty was charged for the use of the Dabur brand. Unless at the entity level there is a complete re-organization so as to result in a complete identity of the two concerns or royalty arising out of the use of the Dabur brand, had to be treated as an international transaction; it was for all previous years. In these circumstances, the conclusions and findings recorded by the Appellate Commissioner and the ITAT cannot be faulted.”
Dismissing the appeals, the Court upheld the conclusions and findings recorded by the Appellate Commissioner and the ITAT.
Subscribe Taxscan Premium to view the Judgment
