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

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 Revenue's argument based on Press Note No.9 (2000 series). The Court found that the Tribunal's determination fell within the permissible Royalty percentages for such subsidiaries, leading to the dismissal of the appeal without costs.

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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.

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