The Income Tax department is reportedly set to dispute a recent tribunal decision that ruled in favour of Tata Consultancy Services (TCS), rejecting a tax demand of over ₹600 crore.

What Happened: The IT department had previously investigated TCS regarding transfer pricing adjustments, assessing whether the company’s transactions with affiliated enterprises adhered to arm’s length principles, the Economic Times reported, citing sources.

It also examined whether TCS should be subject to taxes on brand fees. For the assessment year FY14-15, the assessing officer (AO) determined an assessed income of ₹18,752 crore.

Background: The transfer pricing officer (TPO) valued TCS as one of the top four technology industry brands at $8.2 billion. Consequently, the TPO applied a 2.9% royalty on the revenue generated by TCS’s associated enterprises using its services, resulting in an adjustment of ₹1,187.06 crore.

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However, TCS countered this claim, asserting that it lacked the right to charge brand fees as the brand legally belonged to Tata Sons. TCS also contended that the revenue-sharing model already included brand royalty remuneration, with no additional fees or royalties required, according to court documents reviewed by the business daily.

TCS then appealed to the Commissioner of income tax (CIT) Appeals, who reversed the transfer pricing adjustments for software and consultancy provisions and brand royalty fees.

The ITAT bench had said, “The fee paid by the assessee toward the brand to Tata Sons is not of capital nature, as the brand is not owned by the assessee. Therefore, no royalty can be charged on the brand…We find no issues with the order of the CIT(A). This ground of the revenue is dismissed.”

Tata Consultancy Services will lead off the second-quarter earnings season for the information technology (IT) sector on Wednesday. However, analysts do not anticipate significant surprises due to ongoing global demand challenges. The firm is also expected to announce a buyback of shares.

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