TaxTMI 
TaxTMI 
2019 (3) TMI 1539
X X X X Extracts X X X X
X X X X Extracts X X X X
....pplying the CUP method as most appropriate method. 2. During the year assessee has paid royalty to its associated enterprise for use of Vodafone and Essar trademark to Vodafone Ireland marketing Ltd of INR 76477939 and Rising group limited of INR 38238969 in terms of an agreement entered into by the assessee along with group entities into a trademark license agreement with the rising group limited and Vodafone Ireland marketing Ltd for use of 'Vodafone' and 'Essar" name and trademark while providing telecommunication services in India. 3. The agreement with Rising group limited was effective from 29/06/2007. The assessee has been granted a non-exclusive license to use the 'ESSAR' Mark in relation to corporate endorsements in India. The assessee also has a right to grant sublicenses of their licenses rights of 'ESSAR" name and 'Essar' Mark in the ordinary course of business to any or all of their affiliate's and the service provider, distributors, agents, exclusive dealers and other similar persons, solely in connection with the promotion, marketing, advertising, sales and provision of telecommunication products subject to certain conditions specified in the agreement. According t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tional transaction. Hence, it was incorporated in assessment order. 8. Therefore assessee preferred an appeal before the coordinate bench, who decided in ITA number 1950/Del/2014 for assessment year 2009 - 10 on 14/03/2018 wherein the whole issue was dealt with at para number 58 - 68 as under:- "58. The next ground is against disallowance of brand royalty of Rs. 11,47,16,908/-. 59. The facts of this ground are that the assessee reported two international transactions in Form no. 3CEB including 'Payment of Royalty fee for use of trade name and mark' amounting to Rs. 11,47,16,908/-. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO noticed that the assessee paid royalty amounting to Rs. 7,64,77,939/- to Vodafone Ireland Marketing Ltd. for use of the brand name 'Vodafone' and Rs. 3,82,38,969/- to M/s Rising Group Ltd. for use of brand name 'Essar'. The TPO observed that the Agreements for payment of royalty with both the parties were made effective from 29.06.2007. Use their respective trademarks, viz., Vodafone and Essar. Both the companies agreed not to charge any royalty till 31.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es on the reasoning that no benefit accrued to the assessee or the assessee did not pay any royalty for the use of brand in the past. 62. Simply because no royalty was paid in the past can be no reason to treat the ALP of royalty at Nil in later years. Chapter-X of the Act dealing with the transfer pricing provisions, contemplates making a comparison of the international transaction with the comparable uncontrolled transactions. If such a comparison demonstrates that the payment under the international transaction is at ALP in comparison with the other comparable uncontrolled transactions, then the transacted value of the international transaction has to be accepted. A comparison has to be made with comparable uncontrolled transactions and not with the assessee's past practice. So this reasoning of the TPO, as affirmed by the DRP, is not sustainable. 63. In so far as the use of the 'Benefit test' for determining the ALP of such services at Nil is concerned, it is noticed that the Hon'ble Punjab & Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016)380 ITR 307 (P&H) has held that the question whether a transaction is at an arm's length price or not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aged in providing cellular mobile telephony services. There can be no comparison of a company dealing in hardware with a company providing telephony services. Pre-requisite for application of the CUP method is that there must be a complete identity between the international transaction and the uncontrolled transaction, with which comparison is sought to be made. When we examine the nature of the international transaction under consideration and the transaction between Forward Industries Inc., USA to Motorola Inc. USA, it is manifested that there is no comparison whatsoever between the two. That apart, it is a transaction between two foreign parties and hence cannot be considered for comparing an international transaction with the Indian assessee as a tested party. We, therefore, disapprove the comparable transaction used by the assessee for benchmarking the international transaction of payment of royalty for use of brands. 67. That apart, it is noticed that the action of the TPO in determining Nil ALP of the international transaction on the ground that no benefit accrued to the assessee and then the AO making addition simply on the basis of recommendation of the TPO, is not in a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman & Wakefield (supra). In these circumstances, we set aside the impugned order on this score and send the matter to the file of AO/TPO for deciding it in conformity with the above discussion and the law laid down by the Hon'ble jurisdictional High Court in the aforenoted case. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such proceedings." 9. Assessee challenged order of the coordinate bench before the honourable Delhi High Court. Honourable High Court was pleased to pass an order on 01/06/2018. Per para number 3 of the order of the honourable High Court the following directions were given:- "The Court has considered the submission of the parties, the ITAT remitted for fresh reconsideration of the issue relating to advertising, marketing and promotion (AMP) expenses. Further more, it also, through stray sentences in the impugned order not premised on any reason in no manner observed that the benchmarking of international transactions pertaining to payment of royalty and not be done by using com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces that how the royalty rate has been fixed to justify that the payment of royalty is at arm's-length, the cost benefit analysis and economic benefit derived by the assessee and details of royalty rates in the industry et cetera to support that the payments are at arm's-length. He further referred to the order of the coordinate bench dated 14/3/2018 and referred to the order of the honourable Delhi High Court wherein the order of the coordinate bench was set aside back to the file of ITAT appalled in the acceptance of two foreign parties as a comparable company. In the end, he submitted that both the parties accept the CUP method and only issue is with respect to the comparability analysis. He further referred to the economic analysis, the methodology of selection of the comparables, relevant rule of the income tax rules and stated that functional similarity has nothing to do with for benchmarking the international transactions in CUP Method. He further relied very heavily on the United Nations TP manual for comparability analysis and stated that it is a comparability analysis for the 'intangible property' and benchmarking is to be applied accordingly. He further stated that funct....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which is stated to have more than 13,000 uncontrolled agreements obtained over the last several years from the securities exchange commission. There is no justification for using the database, which considers only the agreements, which are available with securities Exchange Commission. The ld AR was specifically asked about the justification of using the software ' PowerK' despite having specific databases on royalty. Importance of Selection of database is paramount in comparability analysis. 16. Umpteen number of databases are available such as :- (i) Indian databases a) Prowess [ 27000 Indian Companies] b) Capitaline Plus [24000 Indian Companies] c) ACE TP [ 38000 Companies with different verticals] (ii) Foreign data Bases a) S & P' Research insight - Compustat North America database [ 31000 Active us Companies] b) AMADEUS [ 21 million Companies] c) OSIRIS [ 78000 Companies] d) OneSource e) FAME [9 Million companies] f) MOODY's g) EDGAR Plus [ Lexis Nexis] h) BLOOMBERG i) THOMSON Reuter [ 10 Million] j) FACTIVA [32000 companies over 200 countries] (iii) Royalty payment Specific Software a) RoyaltyStat b) RoyaltySOurce c) ktMINE Many datab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Satellite Telecommunications; * Providing satellite television distribution services--are classified in U.S. Industry 517311, Wired Telecommunications Carriers; and * Operating as mobile virtual network operations (MVNO)--are classified in U.S. Industry 517911, Telecommunications Resellers. Therefore, this qualitative filter even accepting the reasoning of the above filter of the assessee is accepted, the exclusion of specific above codes and selecting nearby codes did not have any justification. (ii) The assessee selected the agreement type in the database of trademark (but not technology). The assessee further applied the filter of percentage of net sales, percentage of gross sales et cetera. Accordingly, assessee obtained 25 comparable agreements for further evaluation and those were tested as under[ page no 21 of TP Study report] :- a. It applied the filter that the comparable said agreement should be in force during financial year 2008 - 09 or up to 2 years prior to that. This filter resulted into the rejection of nine agreements out of 25. b. The assessee also applied a filter of comparable agreement on related products, which resulted into rejection of 10 agreeme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ication. 22. On the aspect of quantitative filters adopted by the assessee are with related to the payments. In the agreement entered into by the assessee the payment terms are payment of specified percentage over the net service revenue. However, the assessee adopted a filter of payment terms of percentage of gross sales. There is no such condition in any of the agreement entered into by the assessee with both the parties with respect to the payment of fees on gross sales. There is no justification found in the transfer pricing study report with respect to the above filter applied by the assessee. 23. Therefore one of the quantitative filters applied by the assessee also deserves to be rejected is devoid of any justification. 24. Now we come to the result of the search process conducted by the assessee. Initially after applying a particular 'powerK' database, applying filter of North American Industry Classification and also putting the search on specific 'agreement type', and further narrowing down it by applying percentage of net sales as payment of Royalty and percentage of gross sales both, surprisingly the assessee could filter out only 25 comparable agreements out of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsaction between two independent enterprises involves comparable goods or services under comparable conditions then only it becomes comparable uncontrolled transactions. It is an accepted fact that even minor change in the properties of the products, circumstances of the trade may have a significant effect on the prices. The product comparability is absolutely key, in particular, physical features such as size, weight, and appearance along with volume and reliability as well as the regulatory requirements and the like. US regulation 1.482.1)(d) for CUP also lays down following criteria for comparability :- "(d) Comparability -- (1) In general. Whether a controlled transaction produces an arm's length result is generally evaluated by comparing the results of that transaction to results realized by uncontrolled taxpayers engaged in comparable transactions under comparable circumstances. For this purpose, the comparability of transactions and circumstances must be evaluated considering all factors that could affect prices or profits in arm's length dealings (comparability factors). While a specific comparability factor may be of particular importance in applying a method, ea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been a Motorola licensee since 2001.[ https://www.streetinsider.com/Corporate+News/Forward+Industries+%28F ORD%29+Announces+Extended+License+Deal+with+Motorola/3690579.ht ml] 30. In view of this, the transfer pricing study document prepared by the assessee for benchmarking the royalty payment does not inspire any confidence but merely eyewash. 31. The learned assessing officer/transfer pricing officer/dispute resolution panel also did not look into the comparability analysis and the benchmarking methodology applied by the assessee for the about transaction and merely rejected the same on the principle of benefit analysis. As a best practice, they should have examined the whole transaction of the assessee with all aspects and then pass the order is on the merits of the case, which would have saved great hardship to the assessee of frequently knocking the doors of various judicial forums. The learned authorised representative also stated that in all appeals listed before us of this assessee the above issue is common and therefore he requested that if the benchmarking methodology of determination of the arm's-length price of the royalty payment is decided once and for all, the dis....