The ‘Sweet Fate’ of Cadbury – Transfer Pricing Relief

Swarnim Srivastava

On 27th November, 2013, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) relieved Cadbury India by setting aside the I-T Department’s transfer pricing order for royalty payments made by the company to its UK based parent.

Income Tax Department had found that the rightful income of an Indian company was possibly being shipped overseas to its parent, by way of alleged excessive royalty payments. Additionally, the said transaction was not in coherence with the arm’s length principle.

The Mumbai bench dismissed the department’s concerns and held that no transfer pricing adjustment was required.

The Reserve Bank of India (RBI) raised the issue first about Cadbury India paying royalty to its parent company based in United Kingdom (U.K).  For the fiscal year 2001-02, Cadbury India paid royalty for use of trademark and the transfer of technical know-how. Cadbury India paid 1 percent of net sales as royalty for trademark and 1.25 percent of net sales as royalty for technical know-how. For 2001-02, the total royalty payments amounted to Rs 12.02 Crore, accounting for 2.25 percent of net sales.

Subsequently, the Transfer Pricing Officer (TPO) of the I-T Department pegged the royalty payment at Rs 9.56 Crore, as against the Rs 12.02 Crore claimed by Cadbury India. The tax department had sought a transfer pricing adjustment of Rs 2.46 Crore.

This order was challenged by Cadbury before CIT (Appeals), which had upheld Cadbury’s stance dismissing the fears of the taxman. CIT (Appeals) held that Cadbury was justified in making a royalty payment after calculating it as 2.25% of net sales. CIT (Appeals) held that payment was at arm’s length and that there was no need for any adjustment. Consequently, a further appeal was made by the department in Mumbai ITAT.

Cadbury argued that it had been making royalty payments for technical know-how since 1993. It also reasoned that it had been making royalty payments for use of trademark since an agreement was reached with the UK based parent in 2001. Cadbury India also argued that other subsidiaries of the same parent, in other countries, had been making similar royalty payments at an average rate of 2.32 percent. This rate, Cadbury, argued was higher than the rate of 2.25 percent being paid by Cadbury India. The company also cited the OECD guidelines to reason that its payments were within the OECD prescribed guidelines.

The Mumbai ITAT observed that other group companies in other countries were also making similar royalty payments for technical knowhow to Cadbury UK. Further, the payment made by Cadbury India had been approved of by the Reserve Bank of India and Foreign Investment Promotion Board. As regards royalty payment for use of the trademark, the ITAT observed that Cadbury India was in fact paying a lesser amount as compared to payments for brand Cadbury made globally by other group companies. It also held that the payments made were even lower than OECD guidelines.

The IT department does still have the legal remedy of challenging the ITAT’s order before the High Court. However, it would only add to the cumbersome tax litigation which is overburdening the judiciary with transfer pricing cases.

Can Pizza Hut Get a ‘Lower Tax’ Treat?

Swarnim Shrivastava

The leading Pizza chain will avail the benefit of a lower tax rate under India-US DTAA or not will be decided by the Delhi High Court ((Available at The Pizza Hut International Case ((Pizza Hut International LLC v. DDIT (ITA No. 1656/Del/11) – been decided by the income tax appellate tribunal (ITAT) last year, where the primary issue was whether the royalty is taxable on ‘gross amount’ or net amount under the tax treaty.

The Tribunal in this ruling explained the meaning of the word ‘gross amount’ and held that the term gross amount includes within its ambit the actual payment and tax deducted at source. Therefore, the taxpayer had option to be taxed at the rate of 15 percent of the gross amount or tax rate applicable under the Act i.e. 20 percent after claiming exemption under Section 10(6A) of the Act.

Factual Background

  • The taxpayer is a tax-resident of the USA and was earning royalty from Yum Restaurant India Ltd (YUM) under a technical license agreement.
  •  In the return of income filed, the taxpayer claimed that its income was taxable at the rate of 15 percent under the tax treaty. The Assessing Officer (AO) noted that the taxpayer had claimed exemption under Section 10(6A) of the Act ((Section 10(6A) of the Act exempts the royalty income if the agreement was made after 31 March 1976 but before 1 June 2002))in respect of tax on royalty borne by YUM.
  • The AO was of the opinion that the assessment has to be made either in accordance with the provisions contained in the Act or in the tax treaty.
  •  The taxpayer cannot avail the exemption under Section 10(6A) of the Act and at the same time claim that tax should be levied at the rate of 15 percent under the tax treaty.
  •  Since the taxpayer claimed the exemption, the income should be taxed at the rate of 20 percent as provided in the Act.

Findings of the Income Tax Appellate Tribunal

  • The term ‘gross amount’ has not been defined in the treaty. In common parlance, these words mean the amount received along with tax deducted at source. If the intention was to tax only that amount which is actually paid to the taxpayer, then the word ‘amount’ only would have been used. Therefore, it was clear that the intention was to tax the ‘gross amount’ and not the net amount of the royalty.
  • Reiterating Section 198 of the Act, the Tribunal held that it embodies in itself the principle that tax deducted at source, for which credit is available to the payee, was nothing but payment of income, utilized for payment of tax on behalf of the payee.
  • Therefore, this section also embodies the principle of ascertaining the gross amount paid by the payer to the payee.
  • ·In terms of this provision also, the gross amount would mean the actual payment by way of royalty and tax deducted at source, paid to the Central Government on behalf of the payee.
  • The amount of tax deducted at source would not be excluded from the total income under Section 10(6A) of the Act as no computation is required for finding the ‘gross amount’ of royalties paid to the taxpayer.
  • ITAT concluded that “both under the Act and the treaty, the tax paid by the licensee (Yum) on behalf of the assessee (Pizza Hut) will have to be included in the “gross amounts”, chargeable to tax. Therefore, the assessee has an option to be taxed at the rate of 15% of the gross amount or tax rate applicable under the Act on the net amount after claiming exemption u/s 10(6A), which is 20%”.

Current Position

The major issue which lies before the High Court is that of whether the Pizza Hut could simultaneously avail of the benefit of a lower tax rate under the Indo-US Double Tax Avoidance Agreement (DTAA) and exemptions on payments of royalty under the Income Tax (I-T) Act. On a perusal of Article 12 of India-USA tax treaty, though the income become taxable at the point when it arises but the same would be taxed only when it is paid to resident of the other state.


Whatever be the decision of the High Court, Pizza Hut would not worry because it will be having the final recourse option i.e. the Apex Court. However, the High Court decision will be crucial considering the legal question at issue, as it will set a precedent for the future.