The Bangalore Bench of the Income-tax Appellate Tribunal found only a license agreement of a brand-name and concluded that the taxpayer and the U.S. entity were not related parties because there was no direct or indirect ownership by the U.S. company of the taxpayer’s management, control, or capital.
The tribunal thus rejected Transfer Pricing Officer’s proposed adjustment. The case is: Page Industries Ltd. v. DCIT [IT(TP)A No. 163/Bang/2015]
The taxpayer manufactured and sold ready-made garments, and was a licensee of a brand-name under a license agreement with a U.S. company. The taxpayer owned the entire manufacturing facility and capital investment in India, and had full control over its employees. There was no participation by the U.S. entity. The taxpayer paid the U.S. entity, as consideration for the use of the brand-name, an amount in the form of a royalty equal to 5% of sales.
The taxpayer incurred expenses related to advertising, marketing, and product promotion. The Transfer Pricing Officer found that this expenditure was made by the taxpayer on behalf of the U.S. entity, to promote the brand-name. Thus, the Transfer Pricing Officer determined that these costs were an international transaction (in the nature of brand-name building); determined the arm’s length price by applying the “bright line method;” and proposed a transfer pricing adjustment in relation to both the royalty payment and the advertising, marketing and promotion expenses.
The taxpayer contested the adjustment on the basis that the taxpayer and the U.S. company were not related parties (i.e., not “associated enterprises”) absent any participation by the U.S. company in the management, control, or capital of the taxpayer. The tribunal agreed with this position, and held that the two entities were not related parties for purposes of the transfer pricing rules in India. Thus, the transfer pricing adjustment was rejected by the tribunal.
Read a July 2016 report [PDF 352 KB] prepared by the KPMG member firm in India: Two enterprises cannot be treated as an associated enterprise unless both the parameters laid down in Section 92A of the Income-tax Act are fulfilled