The tax authorities had issued a notice of assessment which disallowed tax deductions for royalties paid by R…Cash & C…, S.A. to its Polish parent company, O…Mark Sp. Z.o.o. R… Cash & C…, S.A. appealed to the Administrative Court, which later annulled the assessment. The tax authorities then filed an appeal with the Administrative Court of Appeal. Judgement of the Court The Court of Appeal revoked the judgement issued by the administrative court and decided in favour of the tax authorities. Extracts “It is clear from the evidence in the case file that the applicant has succeeded in demonstrating that the agreement to transfer rights is not based on effective competition, in the context of identical operations carried out by independent entities. The studies presented by the challenger do not succeed in overturning this assertion, since, as is clear from the evidence (12), they relate to operations and market segments other than the one at issue in the case. The provision for the payment of royalties for the transfer of the brands, together with the unpaid provision of management and promotion services for the brands in question by the applicant, prove that there has been a situation that deviates from full competition, with the allocation of income in a tax jurisdiction other than the State of source, without any apparent justification. The application of the profit splitting method (Article 9 of Ministerial Order 1446-C/2001 of 21 December 2001) does not deserve censure. Intangible assets are at stake, so invoking the comparability of transactions, in cases such as the present one, does not make it possible to understand the relationships established between the companies involved. It should also be noted that the Polish company receiving the royalties has minimal staff costs, and that brand amortisation costs account for 97.72% of its operating costs. As a result, the obligations arising for the defendant from the licence agreement in question are unjustified. In view of the demonstration of the deviation from the terms of an arm’s length transaction, it can be seen that the taxpayer’s declaratory obligations (articles 13 to 16 of Ministerial Order 1446-C/2001, of 21.12.200) have not been complied with, as there is a lack of elements that would justify the necessary adjustment. Therefore, the correction under examination does not deserve to be repaired and should be confirmed in the legal order. By ruling differently, the judgement under appeal was an error of judgement and should therefore be replaced by a decision dismissing the challenge.” Click here for English translation. Click here for other translation ...

Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company. Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income. An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside. An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be compensated with a payment from the group rather than having to pay huge royalties. Judgement of the High Court The Court ruled in favor of Amway India. Excerpts “9. A perusal of the above order reveals that the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Learned Counsel for the appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. In this view of the matter, we therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment (supra), was correct. The relevant portion of the said judgment reads as follows, “44. In light of the above findings, this Court concludes as follows: (a) The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. …………………..”    (Emphasis Supplied) 10. In this view of the matter, no substantial questions of law arise for consideration and accordingly, the appeal is dismissed” ...

Adidas India Marketing Pvt. Ltd. is engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Following an audit for FY 2016-2017, an assessment had been issued by the tax authorities where adjustments had been made to (1) advertising, promotion and marketing activities in Adidas India which was considered to have benefitted related parties in the Adidas group, (2) royalty/license payments to the group which was considered excessive and (3) fees paid by Adidas India to related parties which was considered “fees for technical services” (FTS) subjekt to Indian withholding tax. Following an unfavorable decision on the first complaint, an appeal was filed by Adidas with the Income Tax Appellate Tribunal. Judgement of the ITAT The Tribunal decided predominantly in favor of Adidas. Issues 1 and 2 was restored back to the tax authorities for a new decision in accordance with the directions given by the Tribunal, and issue 3 was set aside ...

In applying the provisions of Chapters I – III to transactions involving the transfer of intangibles or rights in intangibles, it should be borne in mind that intangibles often have unique characteristics, and as a result have the potential for generating returns and creating future benefits that could differ widely. In conducting a comparability analysis with regard to a transfer of intangibles, it is therefore essential to consider the unique features of the intangibles. This is particularly important where the CUP method is considered to be the most appropriate transfer pricing method, but also has importance in applying other methods that rely on comparables. In the case of a transfer of an intangible or rights in an intangible that provides the enterprise with a unique competitive advantage in the market, purportedly comparable intangibles or transactions should be carefully scrutinised. It is critical to assess whether potential comparables in fact exhibit similar profit potential ...

In the early 2000s the IRS issued a “APA study guide” where guidance is provided in relation to various practical issues in the area of transfer pricing. The study guide is part of a large collection of IRS practices and statistics from working with MAP and APA that can be accessed via this link ...