2019 (7) TMI 923 - AT - Income Tax

TP Adjustment - MAM selection -ALP of the royalty paid AE - assessee has benchmarked the payment of royalty by applying CPM - DR arguing in favour of applicability of CUP submitted that since the assessee failed to furnish rates at which royalty was paid by other group entities TPO determined the arm s length price at nil - HELD THAT - The aforesaid argument of the learned DR is unacceptable simply for the reason that the Transfer Pricing Officer could not have determined the arm s length price under CUP by applying the rate of royalty paid by other group entities since they are controlled transactions. Whereas rule 10B(1)(a) mandates that the price charged for an uncontrolled transaction / transaction should be considered as a CUP. As regards the justifiability of payment of royalty qua RBI/SIA approvals we must observe that in the decisions cited by the learned AR the Tribunal has held that the rate at which payment of royalty was approved by the RBI/SIA can be considered as arm s length price. In the case of A.W.Faber Castell India Pvt. Ltd. 2017 (4) TMI 1011 - ITAT MUMBAI cited by the learned DR though the Tribunal has observed that arm s length price of royalty needs to be determined in accordance with the Transfer Pricing regulations however the bench also observed that if an authority by way of specific approval has allowed a particular rate of payment it does carry persuasive value and can act as one of the supportive tools for carrying out benchmarking of transaction relating to payment of royalty. Insofar as the decision of the Tribunal in Skol Breweries 2013 (1) TMI 623 - ITAT MUMBAI cited by the learned DR we must observe that the Tribunal has observed that press note of Ministry of Commerce fixing rate of royalty under FDI policy cannot be considered to be relevant for determination of arm s length price under the Act. Thus following the well settled proposition of law that the view favourable to the assessee has to be taken we are inclined to follow the decisions cited by the learned AR holding that the determination of arm s length price as approved by the RBI/SIA is valid. On the basis of the aforesaid reasoning we uphold the decision of the learned Commissioner (Appeals) in deleting the addition made on account of transfer pricing adjustment. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition made towards transfer pricing adjustment to the arm's length price of the royalty paid by the assessee to its overseas Associated Enterprise (AE).

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Towards Transfer Pricing Adjustment to the Arm's Length Price of the Royalty Paid by the Assessee to its Overseas Associated Enterprise (AE):

The Revenue challenged the deletion of the addition made towards transfer pricing adjustment to the arm's length price of the royalty paid by the assessee to its overseas AE. The assessee, an Indian company formed through a joint venture, engaged in manufacturing and marketing irrigation equipment, had entered into several international transactions with its overseas AE, benchmarking them using the Cost Plus Method (CPM).

The Transfer Pricing Officer (TPO) accepted the benchmarking for all transactions except the royalty payment. The TPO rejected the assessee's justification for the royalty payment, citing the lack of details on the cost of technology development and royalty rates paid by other group concerns. Consequently, the TPO determined the arm's length price of the royalty payment as nil and recommended an addition of Rs. 56,30,506.

Upon appeal, the first appellate authority admitted additional evidence from the assessee, including agreements and cost details, and ruled in favor of the assessee. The appellate authority reasoned that the royalty payment was made in compliance with statutory regulations, was part of prolonged negotiations between JV partners, and was consistent with payments made by other group entities.

The Revenue's representative argued that the TPO was justified in rejecting CPM and should have applied the Comparable Uncontrolled Price (CUP) method. However, the Tribunal found that the TPO did not apply any prescribed method and determined the arm's length price on an ad-hoc basis, which is legally unsustainable. The Tribunal upheld the first appellate authority's decision, emphasizing that the TPO must benchmark the transaction using a prescribed method.

The Tribunal also addressed the Revenue's argument that the TPO applied the CUP method, finding no evidence of such application. The Tribunal highlighted that the TPO failed to follow the mechanism prescribed under rule 10B(i)(a) for CUP, and thus, the contention was unacceptable. The Tribunal noted that the RBI/SIA approval could be considered as a valid CUP, supporting the assessee's claim.

In conclusion, the Tribunal dismissed the Revenue's appeal and upheld the deletion of the transfer pricing adjustment for the royalty payment. The decision applied mutatis mutandis to the appeals for the assessment years 2004-05 and 2005-06, resulting in the dismissal of those appeals as well.

Order Pronounced in the Open Court on 25.04.2019.