On 27th November, 2013, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) relieved Cadbury India by setting aside the I-T Department’s transfer pricing order for royalty payments made by the company to its UK based parent.
Income Tax Department had found that the rightful income of an Indian company was possibly being shipped overseas to its parent, by way of alleged excessive royalty payments. Additionally, the said transaction was not in coherence with the arm’s length principle.
The Mumbai bench dismissed the department’s concerns and held that no transfer pricing adjustment was required.
The Reserve Bank of India (RBI) raised the issue first about Cadbury India paying royalty to its parent company based in United Kingdom (U.K). For the fiscal year 2001-02, Cadbury India paid royalty for use of trademark and the transfer of technical know-how. Cadbury India paid 1 percent of net sales as royalty for trademark and 1.25 percent of net sales as royalty for technical know-how. For 2001-02, the total royalty payments amounted to Rs 12.02 Crore, accounting for 2.25 percent of net sales.
Subsequently, the Transfer Pricing Officer (TPO) of the I-T Department pegged the royalty payment at Rs 9.56 Crore, as against the Rs 12.02 Crore claimed by Cadbury India. The tax department had sought a transfer pricing adjustment of Rs 2.46 Crore.
This order was challenged by Cadbury before CIT (Appeals), which had upheld Cadbury’s stance dismissing the fears of the taxman. CIT (Appeals) held that Cadbury was justified in making a royalty payment after calculating it as 2.25% of net sales. CIT (Appeals) held that payment was at arm’s length and that there was no need for any adjustment. Consequently, a further appeal was made by the department in Mumbai ITAT.
Cadbury argued that it had been making royalty payments for technical know-how since 1993. It also reasoned that it had been making royalty payments for use of trademark since an agreement was reached with the UK based parent in 2001. Cadbury India also argued that other subsidiaries of the same parent, in other countries, had been making similar royalty payments at an average rate of 2.32 percent. This rate, Cadbury, argued was higher than the rate of 2.25 percent being paid by Cadbury India. The company also cited the OECD guidelines to reason that its payments were within the OECD prescribed guidelines.
The Mumbai ITAT observed that other group companies in other countries were also making similar royalty payments for technical knowhow to Cadbury UK. Further, the payment made by Cadbury India had been approved of by the Reserve Bank of India and Foreign Investment Promotion Board. As regards royalty payment for use of the trademark, the ITAT observed that Cadbury India was in fact paying a lesser amount as compared to payments for brand Cadbury made globally by other group companies. It also held that the payments made were even lower than OECD guidelines.
The IT department does still have the legal remedy of challenging the ITAT’s order before the High Court. However, it would only add to the cumbersome tax litigation which is overburdening the judiciary with transfer pricing cases.