ITAT allows appeal on transfer pricing royalty adjustment after accepting post facto addendum clarifying original agreement terms

The ITAT Delhi allowed the appellant's appeal regarding TP adjustment on royalty payments. The TPO had rejected a post facto addendum to the royalty agreement and held that no royalty was payable on services rendered to third parties through the associated enterprise. The ITAT ruled that the addendum merely clarified the original understanding between parties that royalty was payable on entire sales revenue, including third-party sales solicited by the AE. The tribunal found that the Foreign Collaboration Agreement supported this interpretation, with the AE acting as intermediary rather than end customer. The ITAT held both DRP and TPO erred in rejecting the addendum and misinterpreting the agreement clauses.

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Issues Involved:
1. Adjustment to the arm's length price of international transactions of payment of royalty.
2. Validity and impact of the addendum to the agreement on the determination of royalty.
3. Interpretation of the contractual terms between the appellant and TP USA regarding payment of royalty.

Summary:

1. Adjustment to the arm's length price of international transactions of payment of royalty:

The appellant, a wholly owned subsidiary of Teleperformance USA (TP USA), provided voice-based call center services to third parties, which are customers of TP USA. The appellant paid royalty to TP USA based on an agreement dated 02-01-2002. The Transfer Pricing Officer (TPO) initially accepted the transaction of provision of call center services at arm's length price but applied the Comparable Uncontrolled Price (CUP) method for benchmarking the payment of royalty, resulting in a disallowance of the entire payment of Rs. 1,28,68,402. The Dispute Resolution Panel (DRP) accepted the benefit of royalty but restricted it to services rendered to unrelated third parties, resulting in a disallowance of Rs. 64,75,322.

2. Validity and impact of the addendum to the agreement on the determination of royalty:

The appellant introduced an addendum to the agreement effective retrospectively from 02-01-2002, which was admitted as additional evidence by the ITAT. The TPO, in the second round of proceedings, sustained the adjustment, disregarding the addendum as a post-facto arrangement to avoid tax liability. The Tribunal found that the addendum was not required to be registered or notarized and that it merely clarified the original intention of the parties. The Tribunal concluded that the addendum should be considered as it reflects the consistent conduct and actual intentions of the parties.

3. Interpretation of the contractual terms between the appellant and TP USA regarding payment of royalty:

The Tribunal emphasized the importance of the Foreign Collaboration Agreement dated 02-01-2002, which indicated that the appellant was set up to provide services to clients of TP USA. The Tribunal held that the agreement and the addendum clarified that royalty was to be paid on the entire sales revenue, including services rendered to third-party customers of TP USA. The Tribunal rejected the TPO's interpretation that services rendered through TP USA fall under the category of services rendered through an affiliate and concluded that TP USA, being the holding company, cannot be considered an affiliate. The Tribunal sustained the appellant's grounds, allowing the appeals with consequential effect.

Order:

The appeals of the assessee are allowed with consequential effect.

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