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2019 (2) TMI 1790 - AT - Income TaxTP Adjustment - determination of the royalty payment at Rs. Nil by using the benefit test - HELD THAT:- We find that the assessee has used the technology supplied by its AE for in its manufacturing process and for such use of technology, it has paid the royalty. A.O has applied the benefit test and observing that the assessee failed to prove the benefit derived by it by use of such technology, he has disallowed the entire expenditure by treating the arm’s length price at Nil. We find that such an issue had arisen, before the Coordinate Bench of the Tribunal at Bangalore in the case of M/s. Toyota Kirloskar Auto Parts Pvt Ltd Vs. ACIT [2015 (1) TMI 921 - ITAT BANGALORE] held that so long as expenditure payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning and as provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but wholesale disallowance of the expenditure is not contemplated or authorized, thus set aside the finding of the TPO that the ALP of the transaction of royalty is ‘nil - 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 As decided in M/S. RAK CERAMICS INDIA PRIVATE LIMITED [2017 (12) TMI 191 - ITAT HYDERABAD] once it is admitted by the Revenue that the assessee entered into a royalty agreement with the AE and the assessee claimed benefit from such agreement, in the form of quantum increase in sales with no apparent increase in production, minimal product recalls and low after sales maintenance cost, and consequently paid royalty in terms thereof, it was not for the TPO to determine as to what could be the other reasons for increase in the assessee's sales and profit. . Above all, there is no explanation forthcoming as to why the TPO decided upon 2% instead of the contractual rate of 3% for payment of royalty. No reason is offered by the TPO for picking on 2%. This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. A.O cannot determine the royalty at Nil. Therefore, we remit the issue to the file of the AO/TPO with a direction to determine the arm’s length price of royalty by adopting TNMM as the most appropriate method and adopting the suitable comparables. Needless to mention that the assessee shall be given a fair opportunity of hearing. Accordingly, the appeal of the assessee is treated as allowed for statistical purposes.
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