2025 (4) TMI 132 - AT - Income Tax

Tribunal allows appeal on transfer pricing adjustments for royalty payments and AMP expenditure disputes

M/s Vodafone Digilink Limited. Versus Deputy Commissioner of Income Tax, Cir. 17 (1), New Delhi

ITAT Mumbai allowed the assessee's appeal in a transfer pricing dispute involving royalty payments and AMP expenditure. The court held that TP adjustments ... TP adjustment relating to payment of royalty - assessee argued that the payment of royalty for the use of 'Vodafone' and 'Essar' trademark and trade name is purely a business decision of the assessee which cannot be questioned by the TPO - HELD THAT:- The contract between VIML and OGF for royalty payment have not been provided to the TPO to examine the details of the royalty payment between the tested party and unrelated third party entity. In the light of the above, it is kindly prayed that the matter of adoption of internal CUP as the most appropriate method under the circumstances should be sent back to the TPO for further examination to establish the Arm's Length Price of the royalty transaction. Alternatively, the mean arm's length royalty rate of 5.20%, derived from external CUP agreements through a fresh search, is also treated as an appropriate ALP. Respectfully reliance is placed on the judgment in EKL Appliances Ltd. [2012 (4) TMI 346 - DELHI HIGH COURT] which establishes that Rule 10B(1)(a) of the Rules does not permit the disallowance of any expenditure on the grounds of necessity or prudence. Additionally, we respectfully rely on the Third Member decision in Technimont ICB Pvt. Ltd. [2012 (7) TMI 1172 - ITAT MUMBAI] wherein it was held that the ALP of an international transaction must be determined exclusively by comparing it with comparable uncontrolled transactions and not with a controlled transaction. The determination of ALP at 'Nil' without applying any of the prescribed methods is unjustified. Accordingly, the adjustments made by the Ld. AO are deleted. The order of the DRP is set aside, and the assessee's ground of appeal is allowed. TP adjustment relating to AMP expenditure - These expenses were inextricably linked to the assessee's business operations and cannot be arbitrarily segregated as brand promotion for the AEs. The TPO's characterization of the assessee as a mere distributor, without any substantive reasoning, contradicts the assessee's established role as a full-fledged telecom service provider. The business model chosen by the assessee is to be respected, as per settled jurisprudence, and cannot be re-characterized arbitrarily by the revenue. The application of the bright line test without ensuring functional comparability of the selected comparable and without considering business-specific factors renders the adjustment methodologically flawed. In subsequent assessment years, no adverse inference has been drawn, and no transfer pricing adjustments have been made concerning AMP expenses. This consistency further weakens the revenue's case for the disputed year. As respectfully submitted that the transfer pricing adjustment made in respect of AMP expenditure is devoid of merit and should be deleted. Therefore, the adjustment is set aside, and the assessee's appeal is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the determination of the Arm's Length Price (ALP) for royalty payments to associated enterprises should be set at Nil, as determined by the Transfer Pricing Officer (TPO).2. Whether the Transfer Pricing adjustment related to Advertising, Marketing, and Promotion (AMP) expenditure, which allegedly benefits the associated enterprises, is justified.ISSUE-WISE DETAILED ANALYSIS1. Determination of ALP for Royalty PaymentsRelevant Legal Framework and Precedents:The determination of ALP for international transactions is governed by Section 92C of the Income-tax Act, 1961, which mandates the use of prescribed methods, including the Comparable Uncontrolled Price (CUP) method. The precedents cited include CIT v/s. EKL Appliances Ltd. and LG Polymers India Pvt. Ltd. v/s. ACIT, which emphasize that business decisions should not be questioned if transactions are at arm's length.Court's Interpretation and Reasoning:The Tribunal found that the TPO erred in setting the ALP at Nil without applying any prescribed method. The TPO's reliance on a related party transaction as a comparable was rejected, as it did not meet the criteria for an uncontrolled transaction.Key Evidence and Findings:The assessee provided a fresh comparability analysis, including internal and external CUPs, demonstrating that the royalty rates paid were lower than those in comparable transactions.Application of Law to Facts:The Tribunal applied the principles from the cited precedents, concluding that the TPO's determination of ALP at Nil was unjustified. The Tribunal accepted the assessee's comparables, both internal (agreement with an independent third party) and external (industry database), to establish that the royalty payments were at arm's length.Treatment of Competing Arguments:The Tribunal rejected the TPO's arguments that the royalty payments did not benefit the assessee, relying on precedents that disallow questioning the commercial expediency of business decisions if transactions are at arm's length.Conclusions:The Tribunal set aside the DRP's order and allowed the assessee's appeal, determining that the royalty payments were at arm's length.2. Transfer Pricing Adjustment for AMP ExpenditureRelevant Legal Framework and Precedents:The adjustment of AMP expenditure is scrutinized under the provisions of Chapter X of the Income-tax Act, 1961. The Tribunal referred to the decisions in Maruti Suzuki India Ltd. v/s. CIT and CIT v/s. Whirlpool of India Ltd., which hold that the existence of an international transaction must be established without relying solely on the bright line test.Court's Interpretation and Reasoning:The Tribunal found that the TPO failed to demonstrate any agreement or concerted action between the assessee and its AEs for brand promotion. The application of the bright line test without evidence of an international transaction was deemed inappropriate.Key Evidence and Findings:The assessee argued that AMP expenses were incurred as part of its business operations as a telecom service provider, not under an arrangement with AEs. The Tribunal noted the absence of any material evidence from the revenue to prove an international transaction.Application of Law to Facts:The Tribunal applied the principles from the cited precedents, concluding that the AMP expenses were not incurred for the benefit of AEs. The Tribunal emphasized respecting the business model chosen by the assessee.Treatment of Competing Arguments:The Tribunal rejected the revenue's argument that AMP expenses indirectly benefited the AEs, citing the lack of evidence and the inappropriate use of the bright line test.Conclusions:The Tribunal set aside the adjustment for AMP expenditure, allowing the assessee's appeal.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'The determination of ALP at 'Nil' without applying any of the prescribed methods is unjustified. Accordingly, the adjustments aggregating to Rs.11,47,16,908/- made by the Ld. AO are deleted.''The AMP expenses incurred by the assessee were essential to its business functions as a telecom service provider and were aimed at expanding its subscriber base, not at promoting the brand of its AEs.'Core Principles Established:The Tribunal reinforced the principle that business decisions should not be questioned if transactions are at arm's length. The bright line test cannot be used to presume the existence of an international transaction without evidence.Final Determinations on Each Issue:The Tribunal allowed the assessee's appeal on both grounds, setting aside the DRP's order and deleting the transfer pricing adjustments for royalty payments and AMP expenditure.