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Facts
The assessee, Andhra Paper Limited, filed its income tax return for AY 2020-21, which was selected for scrutiny, including international transactions. The case was referred to the TPO to determine the Arm's Length Price (ALP) for royalty payments made to IP-USA for trademark usage (HP Group and Hammermill). The assessee used the CUP method, but the TPO rejected it, finding that the assessee had developed its own marketing intangibles in India and the foreign AE lacked dominant presence.
Held
The Tribunal found the assessee's selection of comparables unconvincing and noted a failure to demonstrate commercial benefit from the trademark license agreements, suggesting the AE was 'piggy-backing.' Distinguishing the case from EKL Appliances Ltd., the Tribunal upheld the TPO's determination of NIL ALP, affirming the upward adjustment and dismissing the assessee's appeal.
Key Issues
Whether the TPO and DRP were justified in rejecting the assessee's CUP method for benchmarking royalty payments for trademark usage and determining the Arm's Length Price (ALP) as NIL, given the assessee's failure to demonstrate commercial benefit and the AE's lack of dominant presence in India.
Sections Cited
143(3), 144C(13), 144B, 142(1), 92CA(1), 92D(3), 234A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, VISAKHAPATNAM “DIVISION” BENCH, VISAKHAPATNAM
Before: SHRI RAVISH SOOD, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
आदेश /O R D E R
PER SHRI S. BALAKRISHNAN, ACCOUNTANT MEMBER:
This appeal is filed by the assessee against the final assessment order passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of Income Tax Act, 1961 (in short ‘Act’) dated 28.06.2024.
I.T.A.No.349/VIZ/2024 Andhra Paper Limited 2. The facts in brief are, assessee filed the return of income on 03.02.2021 declaring the total income of Rs.259,87,86,920/- for the A.Y. 2020-21. Subsequently, the case was selected for scrutiny under CASS on the following issues: - i. International Transactions. ii. ICDS Compliance and Adjustment. iii. Loss from Currency Fluctuations.
The assessee incorporated on 29.06.1964 is an integrated paper and pulp manufacturer. Subsequently, notice u/s. 143(2) of the Act was issued to the assessee on 29.06.2021. Consequent to scrutiny, notice under section 142(1) of the Act was issued on 28.10.2021 containing the detailed questionnaire. In response, assessee made various submissions on 13.07.2021 and 09.12.2021. The case was thereafter referred to Assessing Officer-Technical Unit on 16.11.2021 to Transfer Pricing Officer, [in short “TPO’] under section 92CA(1) of the Act for determining Arm’s Length Price in respect of the International Transactions reported by the assessee during the A.Y.2020-21. As per Form 3CEB the following International Transactions have been benchmarked using CUP Method.
Page. No 2
I.T.A.No.349/VIZ/2024 Andhra Paper Limited 35th to 65th Amount Method Description Rate (In response) adopted Percentile Royalty 18,162,441/- 0.5% and 1.0% CUP 2% to 4% 7,816,222/- 2.5% and 4.5% CUP 2.5% and 4.5% Reimbursement of expenses 77,84,832/- NA Other – performance share plan Method Trade Payable 11,86,447/- NA CUP Outstanding payables for 2,21,33,875/- NA Other performance share plan Method
It was submitted that the assessee has entered into a trademark license agreement with M/s. International Paper Company USA [in short “IP-USA”] for the use of following trademarks on certain products manufactured in India.
Products bearing Sl.No. Trademark Royalty Rate the Trademark 1 IP Logo Paper and pulp 0.5% 2. Hammermill, Cut-size Imaging 1.0% 99-99% JAM-Free and office papers HAMMERMILL Ream Wrap Trade Dress HAMMERMILL Carton Trade Dress 3. HP Office papers 2.5% & 4.5%
As per the agreement IP-USA shall pay a royalty to HP at agreed rates of 2.5% and 4.5% for use of trademark under “Office Paper” category as HP branded products. During the F.Y. 2019-20, the assessee is manufacturing HP branded office papers in India and is selling the same in domestic and export market under the trademark HP. Therefore, IP India [assessee] paid/reimbursed IP-USA royalty @2.5% and @4.5% on sale of HP branded products. IP-USA, which has entered into back-to-back arrangement with HP and HAMMERMILL and charges the same percentage of royalty which IP-USA is required to pay HP and therefore the assessee claimed the royalty payment is made at arm’s length
Page. No 3
I.T.A.No.349/VIZ/2024 Andhra Paper Limited price. Further, in respect of royalty payment of Rs.1,81,62,441/- @0.5% and 1% it was reported that assessee has entered into two separate Trademark license Agreement with IP-USA for right to use its licensed trademark/Logo. As per this agreement the assessee had agreed to pay royalty on paper and pulp products bearing the trademark of HP Group and Hammermill @0.5% and 1% respectively. Assessee benchmarked these royalty payments and the ALP was determined by applying CUP Method considering it to be the Most appropriate Method (MAM).
The assessee in its TP study conducted search in the different databases, namely ktMINe and Royaltystat. The list of comparable selected by the assessee is given below: - Royalty S.No. Name of the Company Licensee (%) 1. The Ohio State University Power Photo Kiosk, 8 Ins 2. Zoological Society of San diego Healthy Planet 3 Products 3. Aronite Industries, Inc. Special stone surfaces, 2 Es3 Inc 4. Major League Basebal Properties, Inc., agent for Classic Best Card Co. 2.25 the National Association of Professional Baseball Leagues, Inc. and its member Clubs 5. International Business Machines Corp (IBM) TST/Impreso, Inc. 2 6. Environmental Products Group Inc. T.A. Drummond 5 Metal Products Ltd.
7. Sony Computer Entertainment Americal Inc. Ziff Davis Media Inc. 1 8. Peak Entertainment Ltd. Coor Media 5 International D.O.O 9. Peak Entertainment Ltd Future Publishing Ltd 6 10. Peak Entertainment Ltd Toontastic Publishing 4 Ltd 1.3 2.3 11. National Football Alumni, Inc. American Sports 8 History, Inc.,
Page. No 4
I.T.A.No.349/VIZ/2024 Andhra Paper Limited Royalty S.No. Name of the Company Licensee (%) 12. Major League Baseball Properties, Inc., as Famous Fixins, Inc. 1 azgent for Major League Baseball Clubs 2 2.5 13. Dale Earnhardt Gargoyles, Inc., 7 14. Beijing Sky Solar Investment and Management Sky Power Holdings 0.05 Co., Ltd., Ltd., 35th Percentile 2 65th Percentile 4 Median 2.4
TPO observed that the benchmarking of the transaction for “payment of royalty” the assessee has adopted CUP Method which requires strict comparability of product/services. Since the assessee has not furnished any copies of agreement with respect to the royalty payment, the TPO rejected the CUP Method adopted by the assessee as the Most Appropriate Method and issued a show-cause notice to the assessee. Thereafter, a fresh TP analysis was carried out by the TPO. The TPO observed that the assessee is in this segment since 1964 and has been significant player long before it was acquired by the foreign AE. He further observed that the brand name or marketing intangible has been developed by the assessee only and not that of the AE. To ascertain the facts, TPO issued a notice to the assessee under section 92D(3) of the Act dated 25.02.2022 asking the assessee to explain since the products being sold by the assessee in the same market before the use of trademarks. The assessee did not submit any reply. Thereafter, the TPO issued a show-cause notice dated 27.06.2023. Since the assessee did not furnish any reply to the show-cause
Page. No 5
I.T.A.No.349/VIZ/2024 Andhra Paper Limited notice the TPO determined the ALP at NIL and made upward revision to Rs.2,59,84,681/- claimed as payment towards use of “marketing intangible” by the assessee.
A draft order under section 144C(1) of the Act dated 18.09.2023 was issued to the assessee proposing the adjustment as concluded by the TPO. The assessee filed its objection on 17.10.2023 before the Ld. Dispute Resolution Panel-1, Bengaluru [in short “DRP”]. The DRP rejected the submissions furnished by the assessee, where the assessee failed to justify ALP of the international transactions and thereby confirming the order of the TPO. Following the directions of the DRP, the Ld. AO passed the final assessment order on 28.06.2024.
On being aggrieved by the final assessment order, the assessee is in appeal before us by raising following grounds of appeal: - “1. That on the facts and in the circumstances of the case and in law, the assessment order dated
28. June 2024 passed by the by the Assessment Unit, Income Tax Department (hereinafter referred to as 'Ld. Assessing Officer' or 'AO') under section 143(3) r.w.s 144C(13) r.ws 144B of the Income-tax Act, 1961 ('the Act') is barred by limitation, void-ab- initio and therefore, ought to be quashed aside in toto. Without prejudice to the above:
2. That on the facts and circumstances of the case and in law, the order of the Ld. Transfer PricingOfficer (hereinafter referred to as 'TO') passed u/s 92CA(3) of the Income- tax Act, 1961, (hereinafter referred to as the 'Act*), subsequently confirmed by the Hon'ble Dispute Resolution Panel (hereinafter referred to as 'Panel') and finally passed by the Ld. AO in the assessment order u/s144C(13) r.w.s 144B of the Act is bad in facts & law and unsustainable.
3. That on the facts and circumstances of the case and in law, the Ld. AO / TPO erred in law and on facts in disregarding the economic analysis undertaken by the Assessee to determine the arm's length price ('ALP') in accordance with provisions of the Act.
Page. No 6 I.T.A.No.349/VIZ/2024 Andhra Paper Limited 4. That on the facts of the case and in law, the Ld. AO / TPO has erred in not appreciating the fact that payment for 'HP' trademark was a mere reimbursement to IP USA for its global contract with HP - a third party, wherein the Assessee paid the royalty rate to IP USA at the same rate at which it was liable to pay to HP.
5. That on the facts and circumstances of the case and in law, the Ld. AO / TPO has erred in rejecting the Comparable Uncontrolled Price method to determine the arm's length price ('ALP') for payment of royalty in relation to 'Hammermill' and IP' trademark / tradename.
6. That on the facts and circumstances of the case and in law, the Ld. AO / TPO has erred in not appreciating the fact that 'HP', HAMMERMILL' and IP' are renowned tradenames in the commercial paper sector and the rights to exploit such tradenames for commercial purposes cannot be made available for nil consideration.
7. That on the facts and circumstances of the case and in law, the Ld. AO / TPO has erred in law and on facts in concluding that trademark licensing arrangement entered into by the Assessee has not provided it with any commercial benefits.
8. That on the facts and circumstances of the case and in law, the Ld. AO / TPO has erred in questioning commercial expediency of the Assessee for entering into the trademark licensing arrangement.
9. That on the facts and circumstances of the case and in law, the Ld. AO has erred in computing the income chargeable under the head 'Capital Gains' amounting to Rs. 1,96,20,094/- (as against returned income of Rs. 98,10,047/-) directly in the computation sheet annexed with the order. 9.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making an addition of Rs. 98,10,047/- to income chargeable under the head 'Capital Gains' directly in the computation sheet despite there being no addition made by Ld. AO during the assessment proceedings.
10. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying 'Total Interest and Fee payable' amounting to Rs. 5,08,495/- while computing the total tax liability for the year under consideration. 10.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A of the Act amounting to Rs. 47,937/- without considering that the return of income has been furnished within the due date prescribed for the year under consideration.
11. The Appellant craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal.”
Ground Nos. 1, 9 and 9.1 are not pressed by the assessee and hence the same are dismissed as not pressed.
Ground Nos. 2, 3 & 11 are general in nature and needs no adjudication.
Page. No 7
I.T.A.No.349/VIZ/2024 Andhra Paper Limited 12. Ground Nos. 4 to 8 relates to payment of royalty for use of HP and HAMMERMILL trademark. Ld. Authorised Representative [hereinafter “Ld.AR”] submitted that the assessee has entered into a trademark license agreement with HP and IP-USA and the royalty payments are made in accordance with the agreement. He further submitted that the comparables selected by the TPO are having multiple transactions whereas the assessee is engaged only in the manufacturing of paper. He referred to the Transfer Prising study report of the assessee wherein the search criteria are defined. He also referred to paper book Page No. 16 wherein the computation of Arm’s length of royalty rates are listed. He further submitted that use of the trademarks by the assessee has increased the turnover year over year. He also submitted that the turnover is also duly certified by the independent Chartered Accountant which is available in Page No. 89 to 91 of the Paper-book. He therefore reiterated that there is a value addition arising out of the use of the trademarks. He also submitted that CUP Method as the Most Appropriate Method for the royalty transaction between third party licensers and licensee. He relied on the decision of the Hon’ble Delhi High Court in the case of EKL Appliances Ltd. [2012] 24 taxmann.com 199 (Delhi HC).
On the other hand, Ld. Departmental Representative [hereinafter in short “Ld. DR”] fully supporting the order of the DRP argued that the assessee has used RoyaltyStat and ktMINE databases for the selection of comparables for Page. No 8
I.T.A.No.349/VIZ/2024 Andhra Paper Limited which there is no justification as it considers only the agreements which are available in the U.S.Securities and Exchange Commission. He further submitted that assessee failed to select the proper comparability analysis. Further he also submitted that strict product similarityshould be used for the application of the CUP Method and in the instant case strict product comparability is absent. Further, he also submitted that there is no commercial benefit obtained under the license of trademark agreement from the use of intangible property. The benefit test, in the instant case has not been proved beyond doubt by the assessee.
He further submitted that merely increase in sales cannot be attributed from the use of intangible property but is a combination of several factors including the demand and supply. Further, he also submitted that the assessee is a much-established entity in India which was incorporated in the year 1964 and the trademark license agreement with International Paper Company, USA who does not have much presence in India does not have any prominent visibility. He also submitted that assessee does not derive any commercial gain for the use of logo which has no presence and would not make any payment for such use. He vehemently argued that assessee has chosen wrong comparables and choosing the foreign comparable could not be accepted. He therefore pleaded that order of the DRP be upheld.
Page. No 9
I.T.A.No.349/VIZ/2024 Andhra Paper Limited 15. We have heard rival sides and perused the material available on record including the cases cited by the rival parties. The assessee has paid trademark royalty to IP-USA for using the IP trademark at 0.5% of net sales, HAMMERMILL Trademark at 1% of net sales amounting to Rs.1,81,62,441/-. Further, assessee has reimbursed IP-USA for which HP trademarks at 2.5% and 4.5% of net sales amounting to Rs.78,22,240/-. The assessee has adopted CUP Method as Most Appropriate Method and compared the royalty rates with the third-party royalty rates in uncontrolled transactions. The assessee in its TP documentation has benchmarked royalty rates within the range of 2% to 4% with the median of 2.4%. Since the assessee paid royalty of 0.5% and 1% to the AE as compared to the median rate of 2.4%, assessee concluded that the payment of royalty is at ALP. However, we find that the assessee has selected comparables using the RoyaltyStat and ktMINE databases which has uncontrolled agreements from U.S.Security Exchange Commission. We also find that assessee also failed to demonstrate the commercial benefit earned under the license of trademark agreement, convincingly. It is also seen that the AE is piggy backing the assessee for the marketing of the intangibles in India.
According to the OECD’s Transfer Pricing guidelines for Multinational Enterprises, it is reasonable to conclude that the payment for using a trademark is at arm’s length, if the trademark provides a financial benefit to members of the group other than the member legally owning the intangible. The solitary
Page. No 10
I.T.A.No.349/VIZ/2024 Andhra Paper Limited issue is how to prove the financial benefit received by the Licensee. In case where the licensee was integrated within the group via acquisition, the comparison of the pre & post-acquisition sales has often produced the necessary evidence that the use of the group trademark positively impacted post- acquisition sales.
In the instant case, the assessee has failed to demonstrate the commercial benefit from the increase in sales was achieved pursuant to the licenses of the trademark agreement entered into with the Associate Enterprises. It cannot also be disputed that the Andhra Paper Mills has brand and significant presence in India and therefore paying for the services without providing any substantial basis that the foreign brand has benefited, could not be accepted. In the instant case, assessee is marketing the foreign brand in India thereby benefiting the AE rather than getting any significant advantage from theAE’s brand. The assessee also failed to substantiate that the payment made for marketing the intangible does not commensurate with the benefits derived by the assessee. A comprehensive value chain analysis is critical to substantiate the arm’s length nature of royalty payment. This analysis involves identifying the relevant intangibles, the value creation arising out of the transactions under review, the functions performed and the risks assumed in connection with the development, enhancement, maintenance, protection and exploitation (DEMPE) of the Page. No 11
I.T.A.No.349/VIZ/2024 Andhra Paper Limited intangibles and the manner in which they interact with other intangibles, tangible assets and with business operations to create value.
In the case of EKL Appliances Ltd, the Delhi High Court held that the TPO was not justified in disallowing brand fee because assessee had been continuously incurring huge losses. It held reasonableness to be seen from point of view of business man and further held that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". The decision relied on by the assessee in the case EKL Appliances Ltd. (supra) is distinguishable to the facts and cannot be applied to the instant case.
In the light of the circumstances as discussed above, we are of the opinion that the since the AE does not have any dominant presence in India by purely relying on the assessee’s identity for marketing its own products need the brand name of the AE, the TPO has rightly quantified the ALP as NIL. We do not find any infirmity in the order of the TPO, thereby dismissing the grounds raised by the assessee and confirm the additions made by the TPO.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on 05th December, 2025.