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2020 (7) TMI 601 - AT - Income TaxDisallowance of royalty expenses - Disallowance u/s 40A(2)(b) - disallow the excessive or reasonable expenditure - AO has only questioned the fair market value of the expenses - HELD THAT:- In the instant case the AO has only compared royalty expenses of the preceding assessment year and no efforts have been made for identifying the fair market value of such expenses during relevant period, which is one of the requirement for invoking the provisions of section 40A(2)(b). Under transfer pricing provisions the arm’s-length price is compared with similar transactions. Though the provisions of section 40A(2)(b) are general provision as compared to the specific provisions of the transfer pricing, the AO was required to compare the royalty expenses paid in case of the similar product by other companies during the relevant period. AO has not done any such exercise and only made basis of expenses paid in earlier years. As assessee contended that in assessment year 2013-14 the transaction of the royalty expenses were subjected to transfer pricing provisions. As submitted that in assessment year 2013-14 average royalty payment was 2.99% of the sales, which stands accepted by the Department and therefore, no disallowance should be made in the year under consideration, where the royalty expenses are only 2.77% of the sales. This contention is rejected as the fair market value of the expenses have to be identified for the relevant year and percentile of the earlier year cannot be made basis for comparison. Disallowance made out of royalty expenses is deleted. The ground of the appeal is accordingly allowed. Transaction of the royalty expenses between the assessee and its Associated Enterprises (AEs), is international transaction and therefore its arm’s-length price can be determined only under the transfer pricing provisions and not under the provision of the section 40A(2)(b) - when there is specific provisions for dealing with the issue of expenses paid to related party under transfer pricing provisions, the general provisions under section 40A(2)(b) of the Act should not be invoked. We have noticed that this issue was not raised before the lower authorities and it has been raised before us for the first time that too as oral argument and not either as regular ground or additional ground.
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