Transfer Pricing: ALP of royalty for trademark usage and technical know-how fee can be determined as per TNMM. Approval of RBI & Govt. means payment is as at arms length

Cadbury India Ltd v ACIT( ITAT Mumbai)

The assessee entered into an agreement with its parent company, Cadbury Schweppes, pursuant to which it agreed to pay royalty for the use of trademarks and royalty for the use of technical know-how at 1.25% each of the net sales. This was approved by the RBI and the SIA (Government). The assessee adopted the Transaction Net Margin Method (“TNMM”) for computing the ALP of the international transactions by comparing the net margin of the company at entity level with that of companies engaged in food products, beverages and tobacco business. The TPO held that the transactions pertaining to payment of royalty for trademarks and technical know-how fee had to be separately and independently bench-marked using the Comparable Uncontrolled Prices (“CUP”) method. He held that the ALP of royalty and technical know-how fee should be computed at 1% of sales the instead of at 1.25% of the sales. This was reversed by the CIT(A) who held that the royalty and technical know-how fee paid by the assessee were at ALP. On appeal by the department to the Tribunal HELD dismissing the appeal:

The assessee has been paying royalty on technical know-how to its parent AE since 1993. Other group companies across the Globe are also paying the same royalty. Also, the payment is as per the approval given by the RBI and the SIA. Hence there cannot be any scope of doubt that the royalty payment on technical know-how is at arms length. As regards the royalty on trademark usage, the assessee is in fact paying a lesser amount if the payment is compared with the payment towards trademark usage by other group companies using the brand “Cadbury” in other parts of the world. Accordingly, the royalty payment on trademark usage is also within the arms’ length and does not call for any adjustment (Lumax Industries (ITAT Del) (attached) followed). The Department’s request for a remand to the TPO to examine the AMP expenses in the light of Maruti Suzuki 328 ITR 210 (Del) (and L. G. Electronics 140 ITD 41 (Del)(SB)) rejected

Note: In Lumax Industries (ITAT Del) (attached to file) it was held that the “economic benefit test” could not be adopted while evaluating the ALP of royalty payments and that it cannot be examined in isolation of production & sales & on a standalone basis. The overall TNMM method was approved as the correct method for evaluating the ALP of the royalty payment