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Direct Tax

Whether fees paid for advertising, marketing in ICC events can be taxable as Royalty in India?

LG Electronics India Private Ltd A.A.R. No AAR/971/2010


LG Electronics India Pvt. Ltd (LG India) is a private limited company incorporated in India. International Cricket Council (ICC) is the official international governing body for cricket responsible to its members for the governing of the sport of cricket. ICC Development (International) Limited (IDI), is a company incorporated in UAE, which owns and controls the Commercial Rights in relation to the ICC Events. IDI has licensed the commercial rights for India in relation to the ICC events to IDI Mauritius Limited (IML), a tax resident of Mauritius. All rights and power to negotiate and enter into an agreement to grant Global Partnership right and Marketing and Advertising right in respect of the territory of India were vested with IML.

IML and LG India had entered into ‘Marketing and Advertising Agreement’ (MAA) pursuant to which IML had agreed to grant LG India certain promotional, advertising, marketing and other commercial rights in the capacity of being a Global Partner in connection with the ICC events.

LG India had entered into another agreement, namely ‘Global Partner Agreement’ (GPA) with IML, wherein IML had agreed to grant LG India the Global Partnership Rights in connection with the ICC events in respect of the territory of India. LG India has sought advance ruling with respect to MAA.

As per LG India, the consideration paid under MAA would not qualify to be considered as Royalty under the India- Mauritius treaty. Thus, in the absence of a Permanent Establishment (PE) no income shall be taxable in India. Further, LG India also denied the applicability of withholding tax under Section 194E as the payment by LG India was neither made to a non-resident sports association nor was the payment in the nature of guarantee money.

On the other hand, the Revenue had submitted that in respect of the games played in India, provision of Section 194E of the Act, read with section 115BBA, will be attracted. Such consideration should therefore be subject to withholding tax at the rate of 20%. Reliance was placed on the Supreme Court Judgement in the case of PILCOM. Further, it was alleged that the applicant had employed an artificial device of splitting up a single bundle of commercial rights into two.

Thus, MAA and GPA must be read together and the composite payment was for the commercial rights inextricably linked with the use of logos, marks and brands. Thus, such income would be considered as Royalty.


The Authority for Advance Ruling (AAR) observed that the commercial rights under MAA are predominantly in respect of advertisement, marketing and promotion of LG products while those under GPA are on account of association, licensing, franchising, sponsorship, etc. Even if the two agreements are considered as a part of a composite agreement, only those rights can be taxed, which fulfill the conditions for ‘royalty.’ The payment under MAA is neither found to be on account of the use or right to use any copyright of literary, artistic or scientific work nor for any information concerning the industrial, commercial or scientific experience. Thus, consideration under MAA cannot be taxed as Royalty.

Furthermore, with respect to the applicability of section 194E for matches played in India, it was observed that ICC is the official international governing body for cricket, and the matches for which the payment was made under MAA could not have been conducted without the sanction of ICC.

IML was managing the commercial rights of ICC Events for the territory of India. As per this arrangement, IML was only acting as a commercial arm of the ICC. Thus, payment under MAA was found to be payable to a nonresident sports association/institution in relation to the game played in India. Taxes should be withheld at the rate of 20% under Section 194E read with 115BBA. The Supreme Court judgment of PILCOM was followed.

Our Comments

The AAR has once again highlighted that even where an agreement is considered as composite, only the income having nexus with India can be taxed in India.

Whether professional fees paid to offshore lawyers and CAs can be taxable as Fees for Technical Services (FTS) in India?

M/s Sundaram Business Services Limited Vs. The Income Tax Officer ITA No: 771/CHNY/2019


During the year under consideration, the taxpayer availed certain professional services from two offshore entities, i.e., (1) TWB Pty Ltd., a US Chartered Accountant company, and (2) KL Gates, an Australian law firm. The taxpayer did not deduct any taxes on the professional fees paid to KL Gates on the grounds of Article 14 of India-Australia DTAA, which states that professional services or other independent activities of a similar character shall be taxable only in the country where such professional has a fixed base.

With respect to payments made to TWB Pty Ltd, the taxpayer was of the view that although payments made to the company do no fall under the ambit of Article 14, the same is grossly covered under Article 7, and in the absence of a PE, business income cannot be subject to tax in India.

On the contrary, the Assessing Officer (AO) considered both the fees as FTS and made additions. The AO’s order was upheld by the CIT(A). Aggrieved by the order, the taxpayer filed an appeal before the Chennai Tribunal.


Considering the arguments of both the parties, the tribunal held that M/s. KL Gates has rendered professional services in connection with a dispute with Tranzact Financial Services, and such services are in the nature of independent professional services as defined under Article 14 and hence are outside the scope of the definition of royalties as defined u/s.9(1)(vi) of the Act, and thus, outside the scope of the provision of section 195 of the Act.

As for the professional charges paid to M/s. TWB Pty Ltd., a company of Chartered Accounts, payment is outside the scope of provisions of section 195 of the Act, because it is neither in the nature of royalties as defined u/s.9(1) (vi) of the Act nor in the nature of FTS because the nature of services rendered by the company of accountants does not make available technical knowledge, expertise, skill, know-how or processes to the assessee.

Our Comments

There have been several instances where courts have decided that independent professionals' income cannot be brought under the umbrella of FTS. This is a welcome decision.

Transfer Pricing

Whether prior period income to be included in operating revenue base for determination of ALP?

MTU India Private Limited [TS-102- ITAT-2021(PUN)-TP] - A.Y. 2013-14


The taxpayer is engaged in the business of marketing and distribution of MTU, Detroit Diesel and Mercedes Benz (Off-highway) diesel engines and spare parts, including associated equipment.

The international transactions were in relation to the distribution division of the taxpayer, which comprised of (i) Purchases from Associated Enterprises (AEs), which were sold to non-AEs; (ii) Receipt of Commission on sale of the AEs products in India; (iii) Receipt of income on rendering global procurement services; and (iv) Income from the rendition of warranty services.

During the course of the assessment, one of the key issues identified by the Transfer Pricing Officer (TPO) was in relation to the prior period income considered as operating income by the taxpayer in relation to the commission income. The TPO disagreed with the transfer pricing analysis carried out by the taxpayer on issues such as aggregating the commission income with the distribution division, comparable companies, including considering the prior period income as operating income, thereby making an adjustment.

Accordingly, against the adjustment made by the TPO, the taxpayer filed an application before the Dispute Resolution Panel (DRP). While the DRP did provide relief on few issues, however it treated of prior period income as operating income.

Ruling by Income Tax Appellate Tribunal (ITAT)

The ITAT observed that since the taxpayer used Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM), as per rules of 10B(1)(e) requires that all the operating costs qua the international transaction are to be reduced from all the operating revenues of the international transaction.

The transaction of `prior period commission income’ was a consequence of the taxpayer changing the accounting treatment for recognizing commission income from raising the invoices by the AE to the customer to recognizing revenue on receipt of credit notes from AE (even if payment was already received in the earlier year). As a consequence of the change in the accounting policy, while prior year’s income was forming part of the year under consideration as prior period income, some income of the current year was also accounted for, in the subsequent year as prior period income.

The ITAT further explained that where the transaction commences and is completed in a single year, then there can be no question of including the prior period expense or incomes in the arm’s length price (ALP) determination. However, when the international transaction is completed in year two, then the relevant costs/revenue of the international transaction from year one would also qualify for consideration in determining the ALP even though characterized as `prior period costs/ revenue.’

In the instant case, based on the intercompany agreement, the ITAT laid down the three steps, where the commission income would conclude. These are: (i) background work for sale; (ii) Actual sale by the AEs; and (iii) realization of the invoice value by the AE from the Indian customers (issuance of credit note by the AE needs to coincide with receipt of payment by the AE).

All operating costs/income relating to these three steps would form part of the ALP determination.

Based on this principle, the ITAT set aside the order and directed the TPO/AO to decide the issue accordingly.

Further, ITAT also directed the AO/ TPO to adopt the correct Profit Level Indicator (PLI) for two comparable companies while computing ALP. Also, AO/TPO had overlooked the directions of the DRP while passing the order and is directed to comply with the DRP’s direction.

ITAT rules in favor of the taxpayer on principle and comparables.

Our Comments

While computing the operating profit, it is necessary that all operating costs/revenue in relation to the international transactions are considered and are aligned with the inter-company agreement when closing the books. This would help avoid giving rise to such disputes.

Whether taxpayer’s berry ratio, i.e., Operating Profit/Value Added Expenses OP/VAE can be used for benchmarking over revenues OP/ TC?

Agility Logistics Private Limited [TS-114-ITAT-2021(MUM)-TP] - A.Y. 2013-14 and A.Y. 2014-15


The taxpayer is engaged in the business of providing logistics services offering a comprehensive portfolio of international, domestic and specialized freight handling services.

During the years under consideration, the taxpayer had primarily engaged in the receipt of freight revenue from its AEs and payment of freight expenses to its AEs. The taxpayer had benchmarked its international transactions using external TNMM at the entity level and using OP/VAE as the PLI. On the basis of multiple-year data, the taxpayer had worked out its margin at 30.22% as against the arithmetic mean margin of 27.79% of the comparable companies.

During the course of the assessment, the TPO directed the taxpayer to provide a single-year margin of the comparable companies selected by his predecessor in the immediately preceding year for determining the ALP. Further, the TPO also called upon the taxpayer to compute the margins of the comparables selected in the TP study report using OP/TC as the PLI after applying two more filters4 in addition to the filters that were already considered in the TP study report.

The taxpayer provided the information on a without prejudice basis. The TPO from this set only accepted two companies and further added three companies. Thereafter, the TPO worked out the ALP using OP/TC as the PLI and made a transfer pricing adjustment of INR. 286.9 million. Aggrieved by the order, the taxpayer filed an appeal before the DRP.

After deliberating the issue at length, the DRP observed variation in the revenue and cost of the so-called passthrough costs proved that the TPO had rightly concluded that the taxpayer was making profits as regards the same. Further, the DRP observed that the TPO had clearly brought out the fact that the taxpayer was rendering significant services with reference to freight charges through negotiations with air and shipping companies. However, such benefits were reaped by the taxpayer separately and not shared with third parties.

The DRP while, rejecting the plea for pass-through costs, stated that the TNMM was based on improper financial and factual data and that the PLI of OP/ VAE was a very fragile PLI and in fact, one which was not used earlier in the case of any logistic concern providing freight forwarding services.

The DRP, while providing its order, dismissed taxpayer’s other arguments on multiple-year data and partially rejected the inclusion of three additional comparable companies by the TPO.

The DRP, while rejecting the ground on restricting the TP adjustment only to the extent of international transactions, stated that since the DRP order is not appealable by the TPO/AO, and the Special Leave Petition (SLP) filed by the tax department was pending before Hon’ble Supreme Court, if the DRP accepted the taxpayer’s contention it would be tantamount to pre-judging the issue and bringing finality to the issue pending before the Hon’ble Apex Court.

Ruling by ITAT

While deliberating in detail, the ITAT upheld the validity of OP/VAE as the PLI, also known as Berry ratio for benchmarking the international transactions, stated that the passthrough costs didn’t involve any service and risk element of the taxpayer, nor did the taxpayer employed any assets in relation of the same. They supported their decision relying on Mumbai ITAT’s ruling in the case of DHL Logistics Private Limited5, a similarly placed logistic service provider.

The ITAT restored the matter to the AO/ TPO for the purpose of benchmarking the international transactions of the taxpayer by adopting the PLI of OP/VAE.

In connection with the plea on a proportional adjustment, the ITAT stated that a TP adjustment envisaged in Chapter X is only in respect of the international transactions of the taxpayer with its AEs and cannot be extended to the transactions entered into by the taxpayer with the independent unrelated third parties.

Accordingly, the matter was restored to the AO/TPO for the limited purpose of working out the TP adjustment only in respect of the transactions of the taxpayer with its AEs.

Regarding additional comparables, the ITAT restored the issue to AO/TPO.

Appeal of the taxpayer is allowed.

Our Comments

It is important to understand the industry nuances and identify the industry's peculiarities and then determine the kind of PLI to be applied. Many companies/industries incur passthrough costs in undertaking their core business activities, where no service/ risk element is present. This is an ideal case to deliberate on the use of the correct PLI, i.e., OP/TC or OP/VAE.

Whether TNMM can be the Most Appropriate Method when Comparable Uncontrolled Price (CUP) data is available?

UBS Securities India Private limited [TS-126-ITAT-2021(MUM)-TP] - A.Y 2003-04


The taxpayer is a part of the UBS group and is a securities broking company, and is a leading broking house in India, servicing the needs of Foreign Institutional Investor (FII) and domestic mutual funds. During the year taxpayer has entered transactions with its AEs who operates as FII based in Mauritius.

The taxpayer entered into a transaction of the brokerage with its AEs and applied TNMM as the most appropriate method for the purpose of benchmarking. TPO rejected the TNMM applied by the taxpayer and preferred the CUP method and proposed transfer pricing adjustment.

First-level appellate authority upheld the adoption of the CUP method by TPO and rejected the taxpayer’s contentions regarding volume adjustments and salary costs adjustments.

Further, the tax authorities alleged that taxpayer failed to provide details of an employee of its AEs – details of its AEs employees.

The taxpayer challenged the transfer pricing addition mainly on the following grounds:

  • While selecting the comparable transactions, domestic comparables also ought to have been selected;
  • Volume adjustment is critical and ought to have been done while determining the arm’s length price under the CUP approach
  • Transactions with third parties need to be further adjusted on account of the salary cost of the research personnel.

ITAT’s judgment

  • ITAT upheld the CUP approach adopted by the tax authorities;
  • ITAT observed that TNMM could not be the most appropriate method in the instant case, given that there are market rate prevailing for broking services;
  • The ITAT opined that in the presence of a reliable, comparable uncontrolled price, the CUP method should have been chosen as it is the MAM, as it is most direct method and hence is preferable to all other methods which determine the ALP in an indirect manner, and
  • The comparable cases considered by the taxpayer under the TNMM are not engaged in functions that are similar to the taxpayer.
  • Geographical differences are a relevant factor in determining the comparability. Thus domestic thirdparty transactions are not comparable with the overseas FIIs on account of geographic differences.
  • ITAT rejected the argument of the taxpayer that adjustment needs to be carried out on account of the marketing function, the taxpayer claimed that it does not perform any marketing function on AE transactions.

The ITAT observed that the taxpayer has failed to provide any particulars of the marketing function undertaken by the overseas AE. The taxpayer has not even provided the details of the employees on the role of the AE in this regard. This indicates that the taxpayer undertakes the marketing functions in respect of both related party transactions as well as third-party transactions.

Our Comments

This judgment once again emphasizes the most fundamental aspect of any TP analysis – the selection of the MAM. The taxpayer needs to document the reasoning for the selection of the MAM adequately.

4. (i) service income to total income greater than 75% filter and (ii) turnover filter of 1/10th times to 10 times
5. DHL Logistics Private Limited vs. DCIT, Circle 9(3)(1), Mumbai, ITA No. 1030/Mum/2015, dated 20.12/.2019

Indirect Tax

Whether proceedings initiated by the Directorate of Revenue Intelligence (DRI) for recovery of duty not paid under Section 28(4) of the Customs Act, 1962 are valid in law?

[Background: As per the said Section, a ‘proper officer’ can issue a notice in case of short-levy or short-payment of duty.]

Canon India Private Limited Versus Commissioner Of Customs [2021 (3) TMI 384 - Supreme Court of India]


  • A consignment of cameras arrived at Delhi.
  • The importer submitted a Bill of Entry (BOE) to the Customs authorities along with literature containing specifications of the cameras;
  • After verifying the BOE and other documents, the Customs authorities cleared the goods as exempt from duty as per Notification No.15/2012;
  • Later, a Show Cause Notice (SCN) was issued under the said Section alleging that the Customs authorities had been induced to clear the cameras by willful misstatement and suppression of facts about the cameras.
  • The Deputy Commissioner, Appraisal Group, passed the decision to clear the goods for import because they were exempt from customs duties. However, the SCN was issued by the Additional Director General, DRI.

Based on the above facts, the Supreme Court held as under:

  • The Section empowers and confers the power of recovery on ‘the proper officer’;
  • Parliament has employed the article ‘the’ not accidentally but with the intention to designate the proper officer who had assessed the goods at the time of clearance;
  • It must be clarified that the proper officer need not be the very officer who cleared the goods but maybe his successor in office or any other officer authorized to exercise the powers within the same office. In this case, anyone authorized from the appraisal group;
  • It is, therefore, clear that the Additional Director General of DRI was not ‘the’ proper officer to exercise power under the said Section, and the initiation of the recovery proceedings in the present case was without any jurisdiction and liable to be set aside.

Our Comments

This is a crucial judgment and is expected to result in other importers approaching the High Court to seek relief in similar cases wherein SCN has been issued/ proceedings have been initiated by the DRI officers without proper authority.

The judgment also lays down an important precedence for GST and other tax laws, which contain similar provisions requiring initiation of proceedings by ‘the proper officer.’

However, it would be interesting to see whether the government brings in retrospective amendments to the legislature to overcome this judgment and to validate the powers of DRI and ensuing proceedings.

Whether the subsidized shared transport facility provided to employees in terms of employment contract through third-party vendors would be construed as ‘supply of service’ by the company to its employees?

[Background: It was obligatory for the applicant to arrange a transport facility for female workers under a notification issued by the Uttar Pradesh government.]

North Shore Technologies Private Limited [2021(3) TMI 707 - Authority for Advance Ruling (AAR), Uttar Pradesh]


  • The applicant provides an optional subsidized shared transport facility to its employees for commutation between office and residence;
  • This facility is provided by a thirdparty vendor who issues an invoice in the name of the applicant and charges GST therein.
  • However, the applicant has not availed any ITC on the same.
  • As regards the payment to the third-party vendor towards transport charges, the applicant deducts a subsidized amount from the salaries of employees and bears the balance cost itself.

Based on the above facts, the AAR ruled as follows:

  • While defining the term ‘supply,’ emphasis has been made upon the term ‘in the course or furtherance of business.’
  • The applicant is transferring the entire amount collected from their employees to the third-party vendor who is providing transport services to their employees.
  • This activity is not integrally connected to the functioning of their business.
  • In its press release dated 10 July 2017, the Central Board of Indirect Taxes and Customs (CBIC) has clarified that ‘the supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subject to GST.’
  • Therefore, the arranging of transport facility for the employees and recovery from employees towards such transport facility, under the terms of the employment contract, cannot be considered as supply of service in the course of furtherance of business.

Our Comments

This is an interesting ruling as it rules that providing transport facility to its employees cannot be said in furtherance of business. However, in such a scenario, the Department can raise questions on the eligibility of ITC in relation to input transport services received by the taxpayer [given that such facility being obligatory in nature, the ITC is otherwise eligible].