ITAT: Backs TCS in royalty dispute, holds ‘TATA’ brand key to value; Deletes Rs. 1779.23 cr. adjustment

 In a case involving dozen tax issues, Mumbai ITAT almost entirely rules in favour of software giant TCS (Assessee), primarily relying on coordinate bench ruling for earlier years, ITAT adjudicates on various tax issues including brand royalty adjustment, corporate tax deductions etc.; ITAT, on the hotly disputed issue of CIT(A) deleting Rs. 2300 cr. adjustment on account of receipts of brand royalty by Assessee from its

Associated Enterprises for use of brand “TATA CONSULTANCY SERVICES” and “TCS”, rejects Revenue’s invocation of BEPS Action Plans (emphasizing economic reality over legal form), to suggest that even if Tata Sons were assumed to be the legal owners of the trademarks, the economic ownership of the brand “TCS” and “TATA CONSULTANCY SERVICES” rests with TCS on account of having created significant brand value for the said intangible asset; While further rejecting Revenue’s contention that it is not Tata Sons but TCS that ought to remunerated for the economic ownership and value creation in the abovementioned brand, Tribunal opines that “…what adds value to this entire name of “Tata Consultancy Services” is the word “TATA”. If this word “TATA” in “Tata Consultancy Services” is replaced with any other word/name/phrase would have significant impact on the valuation which has not been tested yet”; ITAT also remarks that “The question over which one has to mull is whether the name of this phrase “Tata Consultancy Services” when replaced by another word for “TATA”, would it command the similar brand value and position in the global market in the domain in which it works”; Tribunal refers to the Brand Equity and Business Promotion (BEBP) agreement under which Tata group companies were permitted to use the unified Tata brand for a licence fee, subject to prescribed usage guidelines, further, only companies signing this agreement were entitled to use the ‘Tata’ name and were required to comply with conditions such as adherence to the Tata Code of Conduct and participation in the group’s business excellence framework; ITAT then refers to assessee’s own case for AY 2014-15 wherein it was held that the fee paid by the assessee towards brand to Tata Sons Ltd. is not capital in nature as the brand is not owned by the assessee and thereby dismisses Revenue’s plea; ITAT notes that the facts dealt in the earlier years and the facts narrated in this year are identical, as also, the Brand Valuation Report issued by Brand Finance relied upon by Revenue for distinguishing the preceding years decisions, categorically mentions Tata Sons as the owner of the trade mark; Tribunal further states that the judicial precedents of the preceding years in assessee’s own case squarely applies in this year basis no change in the factual position vis-à-vis brand ownership; W.r.t foreign tax credit for income u/s. 10A/AA, ITAT refers to ruling for AYs 2007-08 to 2015-16 and opines that “…double taxation relief can be given in the cases where income was taxed in India and also in a foreign country”; Thus, ITAT directs AO to allow foreign tax credit only with respect to DTAA countries where the income was subjected to tax both, in India and foreign jurisdiction; Also orders that the assessee would be entitled to relief only to the extent of tax paid overseas on the income which has been offered to tax abroad and also in India; However, specifying that the relief should not exceed the rate of tax payable in India, Tribunal directs AO to “breakup foreign tax credit in three segments - taxes paid in US, Denmark, Hungary, Norway, Oman, Saudi Arabia and Taiwan; taxes paid in other DTAA countries and taxes paid in non-DTAA countries. Credit in respect of taxes paid in US Denmark, Hungary, Norway, Oman, Saudi Arabia and Taiwan should be allowed”; Lastly, clarifying that, in other DTAA countries, credit will not be available in respect of income which is claimed exempt u/s 10A/10AA/10B, while in respect of non-DTAA countries, credit will not be available, ITAT partly allows Revenue’s plea:ITAT Mum