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2014 (11) TMI 728 - AT - Income TaxTransfer pricing adjustment -Payment of royalty and technical service fee disallowed –Held that:- Following the decision in Kirby Building Systems India Ltd. Versus Additional Commissioner of Income-tax, Range-8, Hyderabad [2014 (10) TMI 696 - ITAT HYDERABAD] - Kirby Building Systems India P. Ltd., is a wholly owned subsidiary of Alghanim Industries, a Kuwait based Multi-Billion Conglomerate - It is one of the world’s largest producers of Pre- Engineered Steel Buildings (in short “PEB”) and has been operational for more than 38 years since 1976 - There is no dispute with reference to the fact that assessee was promoted by the Kirby Building Systems, Kuwait and its original technical service agreement for payment of lump sum amount of $ 2 million dollars as technical knowhow fee and royalty of 2.5% in the first year and 5% from second year onwards up to March 31, 2007 was approved by the RBI and Ministry of Industries - assessee did not remit any of those amounts in those years and the agreement was amended periodically - in the year assessee has paid $ 1 lakh dollars as technical knowhow fee and royalty at 7.5% on domestic sales as per the agreements entered into and approved by the authorities - apart from legal position, even on merits the disallowance of entire technical knowhow payment and part disallowance of royalty payment to AE was not warranted. The agreements were periodically approved by RBI and by Ministry of Industry and assessee was paying the amounts as per the agreements - Even though approval by the other Governmental authorities does not prevent TPO in examining the ALP as per the provisions of the Act, TPO did not examine the issue under the T.P. provisions at all but took upon the role of an A.O. in analyzing the commercial expediency of payment of royalty and technical knowhow under the provisions of section 37(1) - Since the agreements were approved by the authorities and the royalty fee and technical knowhow are at arm’s length and that assessee’s claim should be allowed as such - There is no information brought on record by the TPO that the payment at 7.5% on the net sales is not at arm’s length as there was no other comparable case brought on record - Generally, the Government of India is approving the royalty payments at 7.5% of the sales and this approval given by the RBI and Ministry of Industry is at par with similar agreements being approved in other contracts/agreements - royalty and technical knowhow payments made by the assessee to its AE are considered at arm’s length and the grounds raised by the assessee on this issue are allowed – Decided in favour of assessee. Reimbursement costs – TPO was of the opinion that the services provided by Kirby India in implementation of SAP comes under support services which are required to be marked-up - Held that:- Assessee allocated costs on man-month basis for implementation expenses and man-hour basis for license cost - there is no denial of executing the work by assessee - assessee also extended credit to AEs and TPO charged interest for the credit period - this is not a pure reimbursement of cost but cost sharing exercise in implementing ERP systems in the group - It certainly involves services by assessee company - mark up is warranted under the TP provisions. Rate of markup – Held that:- Some services are certainly required and assessee has to incur cost in the beginning there by extending some credit facility, a markup of 5% on the reimbursement cost would justify the facts of the case – Decided in favour of assessee.
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