Facts of the Case

The present appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2013-14.

The assessee, M/s Amway India Enterprises, is engaged in direct selling of consumer products through a multi-level marketing model. It declared an income of ₹3,04,03,40,790.

Since the assessee had international transactions with its Associated Enterprises (AEs), the matter was referred to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP).

The TPO proposed adjustments:

  • ₹15.66 crore on account of royalty payments
  • ₹7.54 crore on managerial remuneration

The Assessing Officer (AO) confirmed these additions. However, the Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal and deleted the royalty-related adjustment. The ITAT upheld CIT(A)’s decision, leading to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether royalty payment made by the assessee to its Associated Enterprises was excessive and not at Arm’s Length Price under Section 92C of the Income Tax Act, 1961.
  2. Whether comparables can be rejected solely on the ground of high profit margins or high royalty rates.
  3. Whether ITAT erred in confirming deletion of transfer pricing adjustment related to royalty.

Petitioner’s (Revenue) Arguments

  • The royalty payment was excessive considering the Advertisement, Marketing and Promotion (AMP) expenses incurred by the assessee for the benefit of AEs’ brand.
  • The assessee created marketing intangibles for its AEs and should have been compensated instead of paying high royalty.
  • The TPO correctly excluded certain comparables due to abnormal royalty rates.
  • Reliance placed by CIT(A) and ITAT on Chrys Capital Investment Advisors (India) Pvt. Ltd. was incorrect.

Respondent’s (Assessee) Arguments

  • The rejection of comparables by the TPO was arbitrary and lacked proper reasoning.
  • High royalty rate alone cannot be a valid ground for exclusion of comparables.
  • The selected comparables satisfied all filters prescribed by the TPO.
  • The findings of CIT(A) and ITAT were based on proper appreciation of facts.

Court’s Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and upheld the ITAT’s order.

  • Both CIT(A) and ITAT rightly held that rejection of comparables by the TPO was based on conjectures and surmises.
  • If the excluded comparables were considered, the royalty payment would be at arm’s length.
  • The reliance on Chrys Capital Investment Advisors (India) Pvt. Ltd. v. DCIT was correct.
  • No substantial question of law arose in the present case.

Final Order: Appeal dismissed.

Important Clarification

  • A comparable cannot be excluded merely due to high or low profit margins or royalty rates.
  • Proper analysis under Rule 10B(3) is mandatory before excluding comparables.
  • Transfer pricing adjustments must be based on objective criteria, not assumptions.

Sections Involved

  • Section 92C – Determination of Arm’s Length Price
  • Section 92CA – Reference to Transfer Pricing Officer
  • Rule 10B of Income Tax Rules – Determination of ALP

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3715-DB/58908092022ITA3132022_193905.pdf

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