Facts of the Case

  • The assessee, Dabur India Ltd., permitted use of its brand name “Dabur” and provided expertise to its overseas entity (initially Redrock, later Dabur International Ltd., UAE).
  • Earlier, royalty @1% was charged under an agreement.
  • After becoming a 100% subsidiary, the overseas entity stopped paying royalty.
  • The Transfer Pricing Officer (TPO) determined royalty @4% by combining:
    • 3% for technical support products
    • 1% for non-technical products
  • Adjustment of ₹5.44 crore was made by AO.
  • CIT(A) reduced royalty to 2% (average basis).
  • ITAT further reduced it to 0.75%.
  • The assessee challenged before the High Court under Section 260A.

Issues Involved

  1. Whether absence of royalty payment constitutes an “international transaction” under Section 92B.
  2. Whether Transfer Pricing adjustment can be made without comparable transactions under Section 92C read with Rule 10B.
  3. Whether past agreements can be relied upon for determining Arm’s Length Price (ALP).
  4. Whether use of brand without consideration automatically leads to TP adjustment.

Petitioner’s Arguments (Assessee)

  • No international transaction existed, hence no TP adjustment required.
  • No comparable uncontrolled transactions were identified as mandated under Section 92C.
  • Agreement for royalty had become inoperative.
  • No technical support or brand-building effort was provided during the year.
  • Past assessments cannot be treated as valid comparables.
  • Claimed benefit of ±5% range under proviso to Section 92CA(2).

Respondent’s Arguments (Revenue)

  • Use of brand by associated enterprise inherently constitutes an international transaction.
  • Royalty was charged in earlier years; discontinuation requires justification.
  • TP provisions mandate determination of ALP irrespective of agreement status.
  • Absence of consideration cannot escape scrutiny under TP regulations.
  • Adjustments were justified based on earlier arrangements and factual matrix.

Court Order / Findings

  • The Delhi High Court upheld the findings of ITAT and CIT(A).
  • Key observations:
    • Mere non-receipt of royalty does not negate existence of international transaction.
    • Past conduct (charging royalty earlier) is a relevant factor.
    • Assessee failed to justify why royalty was discontinued despite continued brand use.
    • TP provisions apply even if no formal agreement exists.
    • Absence of comparables does not invalidate adjustment if facts justify ALP determination.
    • Claim of ±5% variation rejected as no adjustment was originally offered by assessee.
  • Held: No substantial question of law arises. Appeal dismissed.

Important Clarifications

  • Brand usage by AE without consideration = International Transaction possible.
  • Agreement existence is not mandatory for TP applicability.
  • Past royalty arrangements can influence ALP determination.
  • Assessee must justify change in pricing behavior in controlled transactions.
  • TP adjustment can be sustained even where comparables are weak if facts support inference.

Sections Involved

  • Section 92B – International Transaction
  • Section 92C – Arm’s Length Price
  • Section 92CA – Reference to TPO
  • Section 260A – Appeal to High Court

 Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:7775-DB/SRB13122017ITA11422017.pdf

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