ITAT Mumbai Deletes ₹572.83 Crore Brand Royalty Transfer Pricing Adjustment Against Vodafone Idea

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has deleted a ₹572.83 crore transfer pricing adjustment on Vodafone Idea Ltd.'s payment of brand royalty.

It held that the controlled transaction relied on by the tax department could not be used as a comparable under the Comparable Uncontrolled Price (CUP) method.

A bench of Accountant Member Om Prakash Kant and Judicial Member Anikesh Banerjee observed:

"The Coordinate Benches of the Tribunal, while dealing with identical transfer pricing adjustments in the assessee's own case for Assessment Years 2011-12, 2012-13 and 2013-14, as well as in the cases of its group concerns referred to hereinabove, have consistently held that the agreement entered into between Virgin Enterprises Ltd. and Virgin Mobile USA LLC, being a controlled transaction, cannot constitute a valid comparable for determining the arm's length price under the CUP Method. The Tribunal has further held that the arm's length price of an international transaction has to be determined only by comparing it with comparable uncontrolled transactions in accordance with Rule 10B of the Income-tax Rules, 1962. The Revenue has not brought to our notice any distinguishing feature in the facts of the year under consideration nor any subsequent judicial pronouncement taking a contrary view."

The appeal arose from the assessment for 2015-16, in which the Transfer Pricing Officer (TPO) made adjustments relating to brand royalty, interest paid on external commercial borrowings (ECBs) and advertisement, marketing and promotion (AMP) expenditure.

On the brand royalty issue, the tribunal noted that the TPO had rejected the comparable agreements relied on by Vodafone Idea and instead benchmarked the transaction using an agreement between Virgin Enterprises Ltd. and Virgin Mobile USA LLC.

Since that agreement was itself a controlled transaction, the tribunal held that it could not be treated as a valid comparable under the CUP method. It followed earlier decisions in Vodafone Idea's own case and those involving its group companies to delete the adjustment.

The tribunal also deleted the transfer pricing adjustment on interest paid on ECBs. It observed that while approval granted by the Reserve Bank of India is not conclusive for determining the arm's length price, it is a highly relevant contemporaneous benchmark. It found that the TPO's benchmarking did not adequately account for factors such as country risk, currency risk, tenure and borrower profile, and followed earlier decisions on identical facts.

On the AMP expenditure, the tribunal relied on the Delhi High Court's rulings in Maruti Suzuki India Ltd. and Whirlpool of India Ltd. and observed:

"The Hon'ble Delhi High Court in Maruti Suzuki India Ltd. v. CIT (2016) 381 ITR 117 (Del.) and CIT v. Whirlpool of India Ltd. (2016) 381 ITR 154 (Del.) has categorically held that the existence of an international transaction in respect of AMP expenditure cannot be inferred merely because the assessee has incurred substantial advertisement and marketing expenditure or by applying the Bright Line Test. The Revenue is required to establish, on the basis of tangible material, the existence of an arrangement or understanding between the assessee and its Associated Enterprise for incurring such expenditure. In the absence of such material, no transfer pricing adjustment can be sustained."

Finding that the Revenue had failed to establish any such arrangement, the tribunal deleted the AMP adjustment as well. It allowed Vodafone Idea's appeal on all three transfer pricing issue

For Assessee: Ketan Ved, AR

For Revenue: Saurabh Deshpande, (CIT DR)