Introduction
The Delhi Bench ‘H’ of the Income Tax Appellate Tribunal (ITAT), in Mobitech Creations Private Limited vs. DCIT (ITA No.1005/Del/2025, Assessment Year 2021-22), delivered a significant ruling on the boundaries of transfer pricing jurisdiction. The core dispute centred on the disallowance of royalty expenditure of Rs. 36,35,75,663/- paid by the assessee to One Plus Technology (Shenzhen) Co. Ltd. (OPT). The Assessing Officer (AO) treated the assessee as an “Associated Enterprise” under Section 92A(1)(g) of the Income-tax Act, 1961, benchmarked the royalty at 5% using RoyaltyStat data, and disallowed Rs.10,38,78,761/- as excessive. The Commissioner of Income-tax (Appeals) upheld the Assessment Order ex-parte. On further appeal, the ITAT admitted additional grounds challenging the very jurisdiction of the AO, ultimately holding that transfer pricing provisions had no application because OPT was not an associated enterprise. The appeal was allowed, and the royalty expenditure was held allowable under Section 37(1) of the Act.
Facts
The assessee filed its original return of income declaring total income of Rs.62,00,72,894/-. A search and seizure operation under Section 132 of the Act was conducted on 21.12.2021 in the cases of the Oppo Mobile India Group, including the assessee. Notices under Sections 143(2) and 142(1) were issued. During assessment proceedings, the assessee was asked to explain a royalty payment of Rs.36,35,75,663/- debited in its Profit & Loss account, paid to OPT under a licence agreement for use of trademarks in connection with promotion, advertisement and sale of One Plus TVs in India. The AO relied on a statement of Vikram Jain, who described the assessee as a sole distributor of One Plus TVs and accessories, to invoke Section 92A(1)(g). The AO reasoned that sales were based on designs and specifications owned by OPT, and therefore the assessee was wholly dependent on the know-how of OPT.
The AO benchmarked the royalty payment at 5% of sales against comparable RoyaltyStat data, found the assessee’s 7% rate excessive, and disallowed the difference of Rs.10,38,78,761/- as unexplained business expenditure. The CIT(A) issued notices, but since the assessee did not comply, the appeal was disposed of ex-parte on the material available on record. The CIT(A) sustained the Assessment Order. Before the ITAT, the assessee filed additional grounds challenging the applicability of Section 92A, Section 92B, Section 92CA, Section 92C, and the allowability of the royalty as business expenditure under Section 37(1).
Reasoning
The ITAT admitted the additional grounds by relying on the Supreme Court’s decision in NTPC Limited vs. CIT (1998) 229 ITR 383 (SC), observing that the issues raised went to the root of the matter and challenged the jurisdictional validity of the Assessment Order. This admission was crucial because jurisdictional objections can be raised even if not urged before lower authorities.
The primary question was whether the assessee qualified as an “Associated Enterprise” of OPT under Section 92A(1)(g). That provision defines an associated enterprise where the business of one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or similar commercial rights owned by the other enterprise. The AO relied on exclusive distributorship and the use of One Plus brand designs to infer such dependency. However, the ITAT found this reasoning misplaced. Exclusive distributorship alone does not satisfy the statutory definition of an associated enterprise. The statute requires control or influence as defined under the Act, and mere commercial dependence through a distribution arrangement cannot be equated with the deemed association prescribed by Section 92A(1)(g).
The assessee had clearly explained that it was an exclusive authorised distributor of One Plus TVs and accessories, and that OPT was not a related or associated enterprise. The financial statements and notes to accounts for related party transactions did not disclose OPT as a related party. The relevant licence agreement, placed at page 167 of the paper book, was only for use of mark(s) in connection with promotion, advertisement and sale of TVs in India. The AO did not bring on record any independent material to rebut this explaination or to establish a deemed association. Therefore, the ITAT concluded that the parties were independent third parties.
Because the parties were independent, the transaction did not qualify as an “International Transaction” under Section 92B of the Act. Transfer pricing provisions apply only to transactions between associated enterprises. Once the relationship of associated enterprise is absent, the transfer pricing machinery, including reference to the Transfer Pricing Officer under Section 92CA, loses jurisdictional foundation. Even though the AO had not invoked Section 92CA or Section 92C in a formal manner, he proceeded to benchmark the royalty under Section 37(1). The ITAT held this was legally impermissible. The AO had no power to adjust the price of an independent transaction under Section 37(1) in the absence of any specific provision empowering such adjustment.
The ITAT further observed that unrelated third-party transactions are presumed to be at arm’s length. When there is no associated enterprise relationship, there is no statutory presumption that the price paid is excessive or not at arm’s length. The lower authorities erred in applying transfer pricing logic to a transaction between independent parties. The royalty payment was made under a valid licence agreement for the use of trade marks in connection with the promotion, advertisement and sale of TVs. The expenditure was incurred wholly and exclusively for the purposes of the assessee’s business. Consequently, it was allowable as a business expenditure under Section 37(1) of the Act.
The ITAT also noted that the CIT(A) had passed the impugned order ex-parte without adequate compliance from the assessee. While the CIT(A) had issued notices, the merits of the jurisdictional challenge were not examined. Since the issue of jurisdiction went to the root of the assessment, the ITAT did not merely remand the matter but adjudicated the additional grounds on the basis of the record and submissions. The failure of the assessee to appear before the CIT(A) did not cure the fundamental jurisdictional defect in the Assessment Order.
The Tribunal also rejected the revenue’s reliance on the earlier partial compliance by the assessee. The fact that the assessee initially furnished some details but did not respond to the final show-cause notice dated 31.01.2023 could not validate an otherwise void assumption of transfer pricing jurisdiction. The AO’s inference from the statement of Vikram Jain that the assessee was the sole distributor of One Plus TVs was not enough to bring the transaction within the deeming provision of Section 92A(1)(g). The summary confirms that the AO had relied on exclusive distributorship alone, which the ITAT expressly held insufficient to create an associated enterprise relationship.
The reasoning also touched on the tolerance limit under Section 92C, as raised in additional ground no.4, but since the foundational jurisdiction failed, the tolerance issue became academic. Similarly, the question of whether royalty is capital or revenue expenditure was rendered secondary because the allowability under Section 37(1) was restored on the ground that the payer and payee were not related parties. The ITAT’s approach reflects a strict interpretation of transfer pricing provisions: statutory deeming provisions cannot be stretched to cover ordinary commercial arrangements merely because one party is the exclusive distributor of another’s products.
Conclusion
The ITAT allowed the appeal filed by Mobitech Creations Private Limited. The Tribunal held that the assessee was not an associated enterprise of One Plus Technology (Shenzhen) Co. Ltd. under Section 92A(1)(g). Consequently, the royalty transaction was not an international transaction under Section 92B, and the AO had no jurisdiction to benchmark the royalty by reference to transfer pricing rules. The disallowance of Rs.10,38,78,761/- was deleted, and the royalty expenditure was held allowable under Section 37(1) of the Act. This ruling reinforces the principle that transfer pricing adjustments require a valid statutory foundation and that unrelated-party transactions remain outside the scope of transfer pricing unless the strict conditions of the Act are satisfied.