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2015 (1) TMI 921 - AT - Income TaxTransfer pricing adjustment - most appropriate method for determination of the ALP - TNMM v/s CUP method - payment of royalty for using the technology and technical know-how - Held that:- As found payment of royalty is independent of the purchase of raw materials, components, tools, packing materials, fixed assets etc. The royalty is exclusively towards the use of know-how in the manufacturing process undertaken by the assessee and is therefore not in any way interlinked or inter-connected with other transactions and it would not lead to inaccurate result if it is analyzed separately. In such a situation, we are of the opinion that the contract of payment of royalty can be analyzed separately and the ALP of such a payment can be determined independently. Where comparable uncontrolled transactions are not available, establishing arm’s length price or royalty rate may not be a straight forward exercise and may require a flexible approach that need not be strictly based on specified transfer pricing methods. Therefore, in such a situation, the perfect approach for indirectly bench marking royalty payments is to bench mark the profit margin left in the tested party, after payment of lump sum fee or royalty with the profit margins of comparable uncontrolled companies. Therefore, we are of the opinion that even if the royalty payment is to be analyzed separately, TNMM is the most appropriate method for determining the ALP. The fact that the assessee was engaged in the activity of manufacture itself proves the use of technical know-how by the assessee and therefore, as held by the Hon’ble Delhi High Court in the case of EKL Appliances (cited supra), the AO or the TPO cannot question the commercial expediency of the assessee or the quantum of benefit the assessee derived while making the payment. We agree with this contention of the assessee. Remand the issue for determining the ALP under the TNMM, the assessee as well as the Revenue have to search for comparable companies. Therefore, we remit this issue to the file of the AO/TPO to determine ALP of royalty by adopting TNMM after giving the assessee a fair opportunity of hearing. - Decided in favour of assessee for staistical puroses.
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