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2014 (5) TMI 734 - AT - Income TaxTransfer pricing adjustment – Determination of ALP – Technical knowledge supplied to AE - Held that:- The assessee had filed in the course of the TPO assessment as well as before the DRP detailed submissions, including Agreement between AE and assessee, justifying why the technical knowhow supplied by its AE was crucial to the running of its business over the sustained period of the agreement – Following CIT v. EKL Appliances Ltd. [2012 (4) TMI 346 - DELHI HIGH COURT] - so long as the expenditure or payment by assessee has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning – they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises - the guidelines discourage re-structuring of legitimate business transactions - The reason for characterization of re-structuring as an arbitrary exercise is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. It is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity - It is also not necessary to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years - The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more - the assessee company maintained the necessary documentation of the international transactions as per Section 92D read with Rule 10D - The assessee company had also submitted details of the technology knowhow it obtained from its AE and the details of the Royalty payments made - The TPO has not only refuted the justification of Royalty payments but also pointed out that there was "reverse flow" by analyzing the deputation of personnel by the Indian company for various projects - This has been countered by the assessee specifically - The TPO has not countered that argument effectively nor is there anything on record to indicate otherwise. Once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous – Relying upon M/s. Cadbury India Ltd Versus Addl Commissioner of Income Tax [2014 (4) TMI 926 - ITAT MUMBAI] the use of TNMM for Royalty is upheld – thus, the addition made by the TPO and upheld by the DRP is unsustainable and is to be set aside – Decided against Revenue.
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