Benefit test cannot be the sole criteria to evaluate ALP in international transaction: Delhi ITAT

Read order: GOODYEAR INDIA LTD vs. NEAC, DELHI

LE Staff

New Delhi, August 20, 2021: While allowing the appeal of assessee, the Delhi ITAT held that while evaluating arm’s length price (ALP) of a service rendered abroad, it is wholly irrelevant as to whether taxpayer has benefited from it or not.

The Coram of Kul Bharat (Judicial Member) and Dr. B R R Kumar (Accountant Member) directed the Assessing officer (AO) to delete the addition made for the transaction related to payment of trademark fee to Associated Enterprise (AE) of the assessee. 

Going by the background of the case, the assessee company had undertaken certain international transactions, pursuant to which the Transfer Pricing officer (TPO) recommended an upward ALP adjustment and concluded that the assessee had been mandatorily using the Goodyear trademark/logo in India since 1922. 

Noticing that entire marketing effort in India was admittedly driven, planned and executed by the assessee to grow value and significant economic substance to the brand owned by its AE, the TPO advised the AO to enhance the income of assessee by adding payment of trademark fee to AE. 

The Delhi ITAT found that the facts in the present case were identical as in ITA No.5650/Del/2011, wherein the Co-ordinate Bench had decided the issues in favour of the assessee by observing that when evaluating the arm’s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not.

The real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant, added the Bench.

The ITAT said that the AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm’s length price of these services is ‘NIL’. 

The authorities have been swayed by the considerations which are not at all relevant in the context of determining the arm’s length price of the costs incurred by the assessee in cost contribution arrangement, opined the Bench.

Therefore, taking a consistent view, the Delhi ITAT directed the AO to delete the addition in the light of decision of the Coordinate Bench.