Dabur India Ltd v. Pr. Commissioner of Income Tax-III

1. The assessee in its appeal under Section 260A urges that the findings of the lower authorities affirmed by the Income Tax Appellate Tribunal (ITAT) are erroneous. It is urged specifically that the attribution of an international transaction, is premised upon the existence of one under Section 92B, calling for adjustment under Section 92C and in the present case, in fact, there was no such transaction; furthermore it is contended that in the absence of any comparable transaction between 2017:DHC:7775-DB ITA No.1142/2017 Page 2 unrelated third parties or an unrelated third party and the assessee, the attribution of income could not have been made.

2. The facts are that the appellant used to provide expertise and also permit the use of its name “Dabur” by a UAE based entity Redrock. The arrangement was embodied in an agreement in terms of which the overseas entity Redrock paid royalty of 1%. The assessee acquired the shareholding in Redrock; this resulted in a name change – the overseas entity was then described as M/s Dabur International Ltd. Subsequently, the overseas entity which had then become a 100% subsidiary of the assessee ceased to pay the royalty.

3. The TPO to whom the returns were referred by the Assessing Officer (AO) took into account the articulated agreement entered into by the assessee with the Redrock in the earlier orders and computed royalty chargeable from M/s Dabur International Ltd. @ 4%. The TPO, in doing so, clubbed the rates of royalty @ 3% being the royalty payable on manufacturing items with the support of the assessee and while using technical knowhow provided; and 1% of the products manufactured without the aid and support of the assessee. The latter class were marketed under the “Dabur brand”. The AO accepted the TPO’s additions and finalized the assessment by making appropriate adjustment to the tune of `5,44,69,000/-. The assessee appealed against this addition; the Appellate Commissioner considered the grounds and comparing the ITA No.1142/2017 Page 3 assessments completed for the previous years, accepted the TPO/AO’s findings. However, the ALP determination at the appellate stage was modified. The Appellate Commissioner reduced the royalty rate to 2% taking the average of the two categories of transactions. The assessee’s arguments with respect to existence or absence of comparables having regard to the mandate of Section 92C and Rule 10B were taken note of. The relevant discussion and findings of the CIT(A) are as follows:- “9.[9] The appellant has argued that agreement with Dabur International has become inoperative w.e.f. 01.04.2005 and hence there was no obligation on part of Dabur International to pay royalty. As discussed supra in para 9.4, since income arising from international transaction has to be determined having regards to arm's length price, existence of agreement or otherwise is not relevant. Therefore, argument of the appellant that agreement was not in operation during period under consideration is not relevant as price of international transaction is to be determined by TP regulations. The undisputed fact is that Dabur International Ltd. has been permitted to use Dabur brand name and the appellant had been receiving royalty income for the same upto preceding AY. The TPO has treated said agreement dated 01.04.2003 as basis for arm's length price in the absence of any comparable provided by the appellant. Now the issue is whether TPO is correct in adopting 4% rate of royalty chargeable from Dabur International Ltd. Clause 4 of said agreement is reproduced as under: ITA No.1142/2017 Page 4 "In consideration for due discharge by Dabur of its obligations hereunder and use of its trademark/trade name, Dabur is entitled during terms of agreement to a royalty of: (a) 3% of FOB sales (net of taxes and sales return) of Redrock of Dabur branded products which are developed and marketed by Redrock through technical and R&D support from Dabur and which are manufactured in accordance with technical specifications detailed by Dabur (b) 1% of FOB sales (net of taxes and sales return) of Redrock of Dabur branded products which are developed by Redrock from any other party without ant technical and R&D support from Dabur." The appellant has argued that since Dabur International had not sourced any technical support from Dabur India, clause (a) above shall not apply. This contention of the appellant cannot be brushed aside completely in view of letters furnished by the appellant mentioned supra. Even, this was also the stand of the appellant before TPO when appellant furnished working of royalty at Rs.

75.27 lakhs on FOB sales of Rs. 7526.84 lakhs i.e. @ 1%. This fact has been mentioned in para 7.[9] and 7.16 of TPO's order. Rejecting this computation of the appellant, TPO has worked out royalty @ 4% of FOB sales. This approach of TPO is faulty because even if it is assumed that Dabur International has manufactured all its products by using technical know-how of Dabur India, royalty shall be payable @ 3% as per clause 4(a) above and in that case, sub-clause(b) shall not come into operation. However, considering the material furnished by the appellant, it is seen that products ITA No.1142/2017 Page 5 manufactured by Dabur International in UAE are different from those manufactured in India and in case of same name of products, it has been shown that oil base (raw material) is different from those products manufactured in India. Therefore, it can be safely inferred that most of the products if not all, manufactured in UAE are being manufacture without technical support from Dabur India. In view of this, there shall be a portion of FOB sales on which royalty becomes payable @ 3% and another substantial portion of FOB sales on which royalty shall become payable @1%. Under no circumstances, royalty shall become payable @ 4% on total FOB sales as held by TPO. In view of these facts, it shall be more realistic and reasonable if royalty payable is worked out @ 2% on total FOB sales i.e. average rate. Accordingly, I hold that arm's length price or royalty from Dabur International is Rs. 150.52 lakhs. The AO is directed to give relief to the appellant on this account accordingly.”

4. The assessee further appealed to the ITAT, which partly accepted its plea and scaled down the rate of royalty to 0.75% and directed adjustments accordingly. In its discussion, the ITAT affirmed the findings of the Appellate Commissioner and also the argument of the assessee with respect to absence of brand building, etc. The discussion by the ITAT in this regard, inter alia is as follows:-

5. The assessee contends that the mere absence of consideration for use of the Dabur brand, per se cannot amount to an international transaction. Counsel faulted the ITAT for affirming Appellate Commissioner’s finding and also urged that for making order in any lawful adjustments, necessarily the Revenue had to take into account comparables, the past history of the assessment of a particular party ipso facto cannot constitute a comparable, was allowed.

6. The Court is of the opinion that having regard to the conspectus of facts, no infirmity can be found with the ITAT’s approach. If the assessee’s submissions were to be accepted arguendo, the omission by a party to indicate, an initial income, which was concededly being shown in the past as an international transaction, cannot be scrutinized at all. Such an absolute proposition is not possible to support. The assessee is only to explain why the Dabur brand has been permitted to an overseas entity – of which it is the present sole or principal ITA No.1142/2017 Page 9 shareholder. That it was not such a sole shareholder in the past is an admitted fact. Equally, with the same overseas entity, when the ownership was of a different pattern, royalty was charged for the use of the Dabur brand. Unless at the entity level there is a complete re-organization so as to result in a complete identity of the two concerns or royalty arising out of the use of the Dabur brand, had to be treated as an international transaction; it was for all previous years. In these circumstances, the conclusions and findings recorded by the Appellate Commissioner and the ITAT cannot be faulted. The assessee’s submission with respect to the applicability of second proviso to Section 92CA(2), i.e. that it is entitled to the benefit of the arithmetical mean – not exceeding 5%, is in our mind, insubstantial. The assessee, as a matter of fact, did not offer any adjustment claiming that there was indeed no international transaction. In these circumstances, the question of applicability of the said proviso does not arise. No substantial question of law arises; therefore the appeal is dismissed.

S. RAVINDRA BHAT, J

SANJEEV SACHDEVA, J DECEMBER 13, 2017 kks