2015 (11) TMI 1619 - HC - Income Tax

Court Affirms 3% Royalty Benchmark for Subsidiary, Rejects Revenue's Press Note Argument

The Commissioner of Income Tax Versus SGS India Pvt. Ltd.

The Court upheld the Tribunal's decision to apply a 3% benchmark for Royalty payment by a wholly owned subsidiary to its parent company, rejecting the ... Addition on account of fees for technical services - TPA - ALP determination - lowering of bench marking - Held that:- It is an undisputed position before us that the assessee is a wholly owned subsidiary of its parent company which is registered in Switzerland. The respondent pays to its parent company Royalty for use of its Trademark/brand name. Therefore, admittedly the present case is covered by Clause IV and not Clause III of the Press Note 9(2000 series). The aforesaid clause IV of the Press Note 9 (2000 series) allows payment of Royalty upto 8% on export sales by wholly owned subsidiaries to its offshore parent companies. On the last occasion that is on 23 September 2015 Revenue sought time to take instructions on whether Clause IV as reproduced hereinabove is applicable in the case of respondent assessee. Today Mr. Tejveer Singh, on instructions, states that the respondent assessee is covered by clause IV of the Press Note 9 (2000 series) dated 8 September 2000. Therefore, the bench marking of the Royalty paid at 3% by the respondent to arrive at the ALP is much below the Royalty for trade mark / brand name which is allowed to be paid by wholly owned subsidiary to its offshore parent company. The grievance of the Revenue that the Tribunal ought to have lowered the bench marking on application of Clause III of the Press Note 9 (2000 series) dated 8 September 2000 does not survive. Accordingly, question as proposed does not give rise to any substantial question of law. Thus not entertained. - Decided against revenue Issues:1. Interpretation of transfer pricing rules for payment of royalty for technical services.2. Application of Press Note No.9 (2000 series) for determining the Arms Length Price (ALP).3. Determining the appropriate benchmark for Royalty payment by a wholly owned subsidiary to its parent company.4. Compliance with Foreign Investment Promotion Board (FIPB) approval for Royalty payment.5. Dispute over the percentage of Royalty payment for the use of trademark/brand name.Analysis:1. The appeal challenged the order passed by the Income Tax Appellate Tribunal (the Tribunal) regarding the addition made by the Transfer Pricing Officer of a specific amount on account of fees for technical services for the Assessment Year 2002-03.2. The respondent, a wholly owned Indian subsidiary of a parent company based in Switzerland, engaged in providing certification services, contended that 3% of the revenue generated should be considered as reasonable Royalty for using the parent company's trademark. The Transfer Pricing Officer (TPO) disagreed and relied on Press Note No.9 (2000 series) to lower the benchmark for computing the Arms Length Price (ALP).3. The Commissioner of Income Tax (Appeals) upheld the TPO's order, but the Tribunal concluded that a Royalty between 5% to 8% could be justified based on FIPB instructions. The Tribunal accepted the respondent's argument that a 3% benchmark for Royalty payment to the parent company was appropriate.4. The Revenue argued that Press Note No.9 (2000 series) mandated a lower Royalty percentage than 3% for determining the ALP. However, the respondent contended that as a wholly owned subsidiary, they were entitled to pay Royalty up to 8% on exports and 5% on domestic sales to the parent company under Clause IV of the Press Note.5. After confirming that the respondent fell under Clause IV of Press Note No.9 (2000 series), the Court dismissed the Revenue's grievance, stating that the Tribunal correctly applied the benchmark of 3% for Royalty payment, which was below the permissible Royalty percentages for wholly owned subsidiaries. Consequently, the appeal was dismissed with no costs awarded.