Assessee is Andhra Paper Limited.
The Assessee is engaged in the business of manufacturing paper and paper products.
The primary issue was whether the royalty paid by the assessee to its AE for use of trademarks was at ALP, where the TPO rejected the CUP method and determined the ALP at NIL on the ground of absence of commercial benefit.
Assessee’s Contentions | Revenue’s Contentions |
|---|---|
The assessee contended that the royalty paid to its AE for use of trademarks was at ALP, having been benchmarked using the CUP method with comparable third-party agreements sourced from recognized databases. | The Revenue contended that the CUP method adopted by the assessee was not reliable, as strict comparability required under CUP was absent and the foreign royalty agreements relied upon were not comparable. |
It was submitted that the use of the licensed trademarks resulted in commercial and economic benefits, including increased sales and market recognition, and that the TPO cannot question commercial expediency of the transaction. | It was argued that the assessee failed to demonstrate any tangible commercial or economic benefit arising from the use of trademarks, and mere increase in sales could not be directly attributed to payment of royalty. |
The assessee argued that the determination of ALP at NIL was arbitrary and contrary to transfer pricing principles, and that the TPO erred in disregarding the economic analysis and documentation furnished by the assessee. | The Revenue submitted that the AE lacked significant brand presence in India, and therefore the determination of the arm’s length price of royalty at NIL was justified in the facts and circumstances of the case. |
ITAT's Judgement -
The ITAT held that the assessee failed to demonstrate any tangible commercial or economic benefit arising from the use of trademarks, and mere increase in sales could not be conclusively attributed to the royalty payment.
The Tribunal noted that the AE did not have a significant brand presence in India, whereas the assessee was an established entity in the Indian market, indicating that the assessee was largely responsible for developing and promoting the brand locally.
Considering the absence of a clear nexus between the royalty payment and business benefits, and the inadequacy of comparables under the CUP method, the ITAT upheld the arm’s length price of royalty at NIL, thereby sustaining the transfer pricing adjustment.
The Visakhapatnam ITAT upheld the ALP of royalty at NIL, holding that the assessee failed to demonstrate any tangible commercial benefit or provide a reliable comparability analysis for the payment.
