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2020 (1) TMI 606 - AT - Income TaxShortfall in ‘royalty’ charged by the assessee from its AE - A.O/TPO working out the ‘royalty’ @3% on the entire sales of the AE - HELD THAT:- As claimed, the ‘royalty’ was consistently being received by the assessee on the manufacturing sales-exports of its AE, viz. M/s Zodiac Clothing Company, UAE LLC. On the basis of our aforesaid deliberations, we are of the considered view that on a conjoint reading of the ‘agreement’ dated 04.04.2008 (which is a renewal of the earlier ‘agreement’ dated 09.11.2002) and the letter of understanding dated 02.01.2003, the ‘royalty’ /fees for technical know-how was to be received by the assessee only on the manufacturing sales (export) of ₹ 46,71,99,283/-[i.e AED 3,79,66,396/-]. Accordingly, we direct the A.O/TPO to delete the TP adjustment of ₹ 68,63,889/- that was made in the hands of the assessee on account of ‘royalty’ shortfall in respect of its international transaction of provision of technical assistance and advisory services to its AE, viz. M/s Zodiac Clothing Company, UAE LLC. Adopting the gross margin rate of 26.98% (trading segment-AE) - adjustment towards shortfall of the amount recoverable by the assessee on account of supply of samples to its AE - HELD THAT:- No feasible comparison could have been made between the mark-up of 7.5% on cost of samples (after recovering salvage value) and the segmental profitability of trading segment of 26.98% i.e gross profit on cost, for determining the ALP of the aforesaid transaction. Apart from that, we find that the TPO had erroneously compared the margins of the controlled transaction i.e mark-up of 7.5% on cost of samples (fabrics) charged to A.E with the segmental profitability of the trading segment of 26.98% (average) of the AE segment. Aforesaid comparability analysis carried out by the TPO, wherein he has compared the margins of controlled transactions is fundamentally incorrect and defeats the very purpose of determining the arm’s length price. In fact, the TPO was obligated to have made a comparison between controlled transactions and uncontrolled transactions i.e margins from transactions with AE and margins from transactions with third parties i.e non-AE’s, which we find he had failed to do. Adjustment made by the A.O/TPO towards shortfall of the amount recoverable by the assessee on account of supply of samples to its AE cannot be sustained and is liable to be vacated. We thus in terms of our aforesaid observations direct the A.O/TPO to delete the addition of ₹ 10,16,356/-. The Ground of appeal No. 3 is allowed. Disallowance u/s 14A - claim of the ld. A.R that as the assessee had sufficient own funds which would justify the investments made in the exempt income yielding assets, therefore, no disallowance of any part of the correlating interest expenditure was called for - HELD THAT:- claim of the ld. A.R is principally fortified by the order of the Hon’ble High Court of Bombay in the case of CIT Vs HDFC Bank Ltd. . [2014 (8) TMI 119 - BOMBAY HIGH COURT] as observed that where the assesse's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the assessee would be out of the interest-free funds available with assessee and no disallowance would be warranted u/s 14A. Although we are principally in agreement with the aforesaid claim of the ld. A.R, however, in the absence of the facts and figures in support of the said claim, we refrain from adjudicating the same. Accordingly, we restore the issue to the file of the A.O, who shall after verifying the veracity of the aforesaid claim of the assessee, therein readjudicate the same. Ground allowed for statistical purpose.
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