JCB India Ltd. vs. ACIT (ITA No. 2327/Del/2022, AY 2013–14)
Royalty Paid to Non-UK AE Held at Arm’s Length
Case Title: JCB India Ltd. vs. ACIT
Bench: Delhi Bench, Income Tax Appellate Tribunal
ITA No.: 2327/Del/2022
Assessment Year: 2013–14
Date of Order: 21.02.2025
Coram: Shri Vikas Awasthy (Judicial Member), Shri M. Balaganesh (Accountant Member)
Background & Facts
- JCB India Ltd. (assessee) is engaged in the manufacture and sale of construction equipment.
- The assessee entered into separate royalty agreements with its UK-based and non-UK-based Associated Enterprises (AEs). One such non-UK AE was JCB Vibromax GmBH, Germany.
- The assessee paid a royalty of 5% of net sales to the German AE for the use of technical know-how, patents, trademarks, etc.
- The Transfer Pricing Officer (TPO) challenged the ALP of this royalty payment, alleging that 5% was excessive and should be capped at 2%.
- The TPO made an adjustment of ₹1.52 crores under section 92CA of the Income-tax Act, 1961.
- The DRP confirmed the adjustment. Aggrieved, the assessee appealed before the ITAT.
Key Legal Issues
- Whether the payment of royalty at 5% of sales to a non-UK AE was at Arm’s Length Price (ALP)?
- Whether the MAP resolution and APA signed with the Revenue can be considered valid comparables for benchmarking the royalty?
- Whether the TPO’s selection of a single external comparable at 3%, further reduced to 2%, was justified?
Assessee’s Arguments
- The royalty agreements with the UK and non-UK AEs were identical in terms and scope—both allowed the use of trademark, know-how, and patents.
- For the UK-based AE, the same 5% royalty was already accepted under MAP for AY 2013–14.
- The assessee also entered into an APA with the CBDT for AYs 2018–19 to 2022–23, which allowed 5% royalty to both UK and non-UK AEs.
- The CUP method used by the assessee was reliable and justified based on these consistent royalty rates accepted by the tax authorities.
Revenue’s Stand / TPO’s Observations
- The TPO rejected the assessee’s benchmarking using internal CUP (UK agreement), saying that the UK MAP cannot be used as a comparable for the German AE.
- Instead, the TPO selected a single third-party agreement showing 3% royalty and reduced it to 2% without clear justification.
- The TPO applied the “Other Method” under Rule 10AB of the Income-tax Rules.
Tribunal’s Findings
1. Agreements are Comparable:
- The Tribunal compared both the UK and German AE agreements and found no material difference between them except product references.
- It noted that both agreements allowed comprehensive rights—use of brand name, technology, patents, processes, know-how, etc.
2. MAP & APA are Valid Benchmarks:
- The MAP resolution with UK authorities accepted 5% royalty as arm’s length for AY 2013–14.
- The APA for later years (2018–19 to 2022–23) also accepted 5% royalty to non-UK AEs.
- The Tribunal held that APA and MAP are persuasive benchmarks as they are based on careful negotiation, analysis, and acceptance by the Indian tax authorities.
APA is a binding document between the assessee and the Revenue for future transactions. The Tribunal can take it into consideration while evaluating historical transactions. — ITAT
3. Rejection of TPO’s Approach:
- The TPO used a single external comparable, and even that was arbitrarily adjusted downward to 2%, which the ITAT held to be unsupported and unreasonable.
- The Tribunal noted that no exhaustive search or comparable analysis was done to justify this 2% rate.
- The assessee’s internal comparables and consistent acceptance of 5% rate were more reliable.
4. Principle of Consistency:
- The ITAT cited the Supreme Court ruling in Radhasoami Satsang v. CIT (1992) to uphold consistency in tax treatment where facts and circumstances remain unchanged.
- It was noted that in earlier and later years, the department accepted the 5% royalty, and therefore, deviating in this year without any new facts was unjustified.
Conclusion & Result
The ITAT held that:
- The royalty paid at 5% to the non-UK AE is at ALP.
- The addition of ₹1.52 crores under section 92CA is deleted.
- The appeal of the assessee is allowed.
Key Precedents Relied Upon
- Radhasoami Satsang v. CIT (SC) – Consistency in tax treatment
- Abhishek Auto Industries Ltd. v. DCIT – Use of internal CUP for royalty
- GE India Technology Centre – APA relevance in assessing TP matters
- Rule 10AB – Guidance on “Other Method” for TP purposes
Implications of the Ruling
- APA/MAP as Valid Benchmarks: The ruling strengthens the use of Advance Pricing Agreements and MAP resolutions for determining ALP in similar historical transactions.
- Reliability of Internal CUP: Royalty payments to related parties can be benchmarked reliably using internal CUPs, provided agreements are materially similar.
- Rejection of Arbitrary Adjustments: TPOs cannot make downward adjustments to royalty rates arbitrarily without detailed and defendable comparables.
- Consistency Doctrine: Taxpayers can rely on accepted TP treatment in other years to argue against sudden deviations by the Revenue.