ITAT Deletes Rs. 1,205 Crore Transfer Pricing Adjustment on Vodafone–Essar Trademark Royalty
Pranav B Prem
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted the ₹1,205 crore transfer pricing adjustment made on royalty payments for the use of “Vodafone” and “Essar” trademarks, holding that controlled transactions cannot be used for benchmarking under the Comparable Uncontrolled Price (CUP) method. The Bench comprising Shri Yogesh Kumar U.S. (Judicial Member) and Shri S. Rifaur Rahman (Accountant Member) observed that the Assessing Officer (AO) and Transfer Pricing Officer (TPO) had erred in relying on a controlled transaction between Virgin group entities to benchmark the royalty rates paid by Vodafone Idea Ltd.
Background
The assessee, Vodafone Idea Ltd. (formerly Vodafone Mobile Services Ltd.), filed its return for Assessment Year 2016–17. During the year, it paid royalties of ₹158.91 crore to Vodafone Ireland Marketing Ltd. and Vodafone Sales & Services Ltd. for use of the “Vodafone” brand (at 0.7% of net service revenue) and ₹19.17 crore to Rising Group Ltd. for use of the “Essar” brand (at 0.35% of net service revenue). The assessee benchmarked these transactions using the CUP method as the most appropriate method and also under TNMM at the entity level. The TPO, however, rejected the assessee’s benchmarking approach, holding that the “Essar” brand had no value and that royalty for it should be taken at Nil, while the royalty rate for the “Vodafone” brand should be reduced to 0.25%. The adjustment was based on a royalty transaction between Virgin Enterprises Ltd. and Virgin Mobile USA LLC, which the assessee contended was a controlled transaction between associated enterprises and therefore invalid for CUP comparison. The TPO computed an adjustment of ₹1,205.47 crore, which was upheld by the Dispute Resolution Panel (DRP).
Assessee’s Contentions
Appearing for the assessee, Advocate Salil Kapoor assisted by Advocate Soumya Singh, argued that the TPO had committed a fundamental legal error by relying on a controlled transaction between related entities for CUP benchmarking. The assessee emphasized that Rule 10B(1)(a) of the Income Tax Rules requires comparison with uncontrolled transactions—that is, those between unrelated parties. The counsel relied on the decisions in Vodafone West Ltd. v. DCIT (ITA Nos. 909 & 944/Ahd/2014) and Vodafone Digilink Ltd. v. DCIT (ITA No. 1169/Mum/2014), where the ITAT had held that transactions between associated enterprises cannot be considered for comparability under the CUP method. It was further submitted that the royalty payments for the “Essar” trademark were genuine business decisions and that the TPO could not substitute his own view of commercial expediency for that of the assessee, relying on CIT v. EKL Appliances Ltd. [345 ITR 241 (Delhi)] and Cushman & Wakefield (India) Pvt. Ltd. [ITA No. 475/2012].
Revenue’s Stand
The Department contended that the TPO’s benchmarking was justified and that the Virgin group transaction could be relied upon as a reasonable external comparable for determining the arm’s length price of the royalty payments.
Tribunal’s Observations
The ITAT noted that the issue was squarely covered by earlier rulings in the assessee’s own group cases. In Vodafone West Ltd. and Vodafone Digilink Ltd., the respective Benches had held that transfer pricing adjustments cannot be based on related-party transactions, as the CUP method specifically requires comparison with uncontrolled transactions. The Bench quoted from the Ahmedabad ITAT decision in Vodafone West Ltd., which in turn relied on ACIT v. Bilag Industries Pvt. Ltd., observing that: “A comparable uncontrolled transaction signifies a transaction between enterprises other than associate enterprises, whether resident or non-resident. The TPO cannot rely upon a controlled transaction between two associated enterprises for benchmarking under the CUP method.”
The Tribunal emphasized that related-party prices do not satisfy the fundamental condition of comparability under Rule 10B(1)(a). Since the TPO’s entire benchmarking exercise was based on such a controlled transaction, the resulting adjustment was legally unsustainable. The Bench also noted that the DRP had ignored the binding precedents and failed to appreciate that the same issue had already been decided in favour of the Vodafone group by coordinate benches in earlier years.
Respectfully following its earlier rulings and other judicial precedents, the ITAT held that the royalty payments made by Vodafone Idea Ltd. were at arm’s length and that the benchmarking based on a controlled Virgin group transaction was invalid. Accordingly, the Tribunal directed the deletion of the ₹1,205 crore transfer pricing adjustment made in respect of the royalty payments for the “Vodafone” and “Essar” trademarks. The ITAT thus reaffirmed that controlled transactions cannot be used for comparability under the CUP method and that transfer pricing adjustments must be based solely on uncontrolled transactions between independent entities.
Appearance
Counsel For Appellant: Salil Kapoor, Adv
Counsel For Respondent: S. K,. Jadav, CIT DR
Cause Title: Vodafone Idea Ltd Versus ACIT
Case No: ITA No. 8361/Del/2019
Coram: Shri Yogesh Kumar U.S. (Judicial Member), Shri S. Rifaur Rahman (Accountant Member)
