Cadbury India gets relief in royalty payments dispute

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) today came to the aid of Cadbury India by setting aside the I-T Department's transfer pricing order for royalty payments made by the company to its UK based parent.

The issue arose with the RBI red flagging the payment of royalty by Cadbury India to its UK based parent. For the fiscal year 2001-02, Cadbury India paid royalty for use of trademark and the transfer of technical know-how.

Cadbury India paid 1 percent of net sales as royalty for trademark and 1.25 percent of net sales as royalty for technical know-how. For 2001-02, the total royalty payments amounted to Rs 12.02 crore, accounting for 2.25 percent of net sales.
The I-T Department alleged that the said transaction was not in coherence with the arms-length principle. The taxman’s concerns stemming from worries that the rightful income of an Indian company was possibly being shipped overseas to its parent, by way of alleged excessive royalty payments.
The Transfer Pricing Officer of the I-T Department subsequently, pegged the royalty payment at Rs 9.56 crore, as against the Rs 12.02 crore claimed by Cadbury India. The taxman had sought a transfer pricing adjustment of Rs 2.46 crore.
This order was challenged by Cadbury before CIT (Appeals), which had upheld Cadbury’s stance dismissing the fears of the taxman. CIT (Appeals) held that Cadbury was justified in making a royalty payment after calculating it as 2.25% of net sales. CIT (Appeals) held that payment was at arm’s lenth and that there was no need for any adjustment.
The taxman had appealed against the order of CIT (Appeals) before the Mumbai bench of the Income Tax Appellate Tribunal (ITAT).
Before the ITAT Cadbury argued that it had been making royalty payments for technical know-how since 1993. It also reasoned that it had been making royalty payments for use of trademark since an agreement was reached with the UK based parent in 2001.
Cadbury India also argued that other subsidiaries of the same parent, in other countries, had been making similar royalty payments at an average rate of 2.32 percent. This rate, Cadbury, argued was higher that the rate of 2.25 percent being paid by Cadbury India. The company also cited the OECD guidelines to reason that its payments were within the OECD prescribed guidelines.
In view of these arguments, the Mumbai bench of the ITAT held that there was no doubty that these payments weren’t at arm’s length. It also held that similar payments by subsidiaries of the same parent, in other countries, were at par with royalty payments made by Cadbury India. It also held that the payments made were even lower than OECD guidelines.
The Mumbai bench, finally, dismissed the taxman’s concerns and held that no transfer pricing adjustment was required.
Though a favourable verdict for Cadbury India, experts say that the I-T department does still have the legal remedy of challenging the ITAT’s order before the High Court.