Mumbai ITAT: Fee Paid to Tata & Sons Ltd. for its Brand is Not Considered Capital, No Royalty

The fee furnished via the taxpayer, Tata Consultancy Services (TCS), for the brand to Tata and Sons Ltd. is not capital in nature for the cause that the brand does not get owned via the taxpayer, Mumbai Bench of Income Tax Appellate Tribunal (ITAT) ruled.

There is no royalty that provides to get levied on the brand as the taxpayer is not the brand owner. There could not be any TP adjustment for the amount that must have been obtained via the taxpayer for the brand royalty, as seen by the bench of Vikas Awasthy (Judicial Member) and Padmavathy S. (Accountant Member).

Recommended: Earning via FTS or Royalty May Force Foreign Companies/Non-residents to File ITR

The taxpayer/respondent has engaged in the business of exporting the software of computer furnishing e-solutions, BPO activities, and other management consultancy activities.

The opinion of the Transfer Pricing officer (TPO) is that the taxpayer is deemed as one of the big four in information technology for FY 2013-14 and is counted as an assertive brand.

The taxpayer before the TPO provides that Tata Sons Limited owns the brand statutory and therefore there is no right of the taxpayer to levy the fees for the brand.

The taxpayer contended that their revenue-sharing arrangement with the associated entity already encompasses compensation for brand royalty, eliminating the need for any additional fees or royalties. However, the Transfer Pricing Officer (TPO) did not concur with the taxpayer’s arguments.

The TPO asserted that the taxpayer is the primary contributor to the brand’s value and substantiates and maintains this value through their service delivery credentials.

Consequently, the TPO believed that the taxpayer should be entitled to suitable compensation for the brand’s value. To arrive at an adjustment of Rs. 1187.06 crores, the TPO applied a 2.9% royalty rate to the revenue generated by the associated entities utilizing the taxpayer’s services.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] removed the Transfer Pricing (TP) adjustments related to the provision for software and consultancy, as well as the adjustment pertaining to brand royalty fees.

The taxpayer argued that the TPO’s decision to make adjustments for notional fees associated with a brand not owned by the taxpayer, as perceived by the TPO, was not justified.

The Income Tax Appellate Tribunal (ITAT) affirmed the CIT(A)’s ruling and eliminated the TP adjustments related to the provision for software and consultancy and the adjustment concerning brand royalty fees.