Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company.
Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income.
An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside.
An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be compensated with a payment from the group rather than having to pay huge royalties.
Judgement of the High Court
The Court ruled in favor of Amway India.
“9. A perusal of the above order reveals that the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Learned Counsel for the appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. In this view of the matter, we therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment (supra), was correct. The relevant portion of the said judgment reads as follows,
“44. In light of the above findings, this Court concludes as follows:
(a) The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.
…………………..” (Emphasis Supplied)
10. In this view of the matter, no substantial questions of law arise for consideration and accordingly, the appeal is dismissed”