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2024 (6) TMI 96 - AT - Income TaxTP Adjustment - Addition on account of payment of royalty management fees and IT allocation cost account treating it as not at arm s length price - selection of MAM Most Appropriate Method - AO had rejected the assessee s use of the Comparable Uncontrolled Price (CUP) method and the Transfer Pricing (TP) study making adjustments based on the lack of documentary evidence and the incorrect application of methods - AR submitted that as regards the payment of royalty the assessee entered into a Brand Licensing Agreement for 5 years whereby assessee was assigned the right to manufacture market and distribute two products - AR submitted that TNMM must be adopted as Most Appropriate Method at the Entity Level in assessee s case - HELD THAT - For applying the CUP method the assessee has not found identical comparable and therefore used external CUP as it is the suitable method for determining the ALP. The Assessing Officer has not pointed out as to why external CUP method will not be applicable in assessee s case. In fact the assessee has given all the relevant documents and fulfilled all the criteria of Rule 10D especially giving details as envisaged in Rule 10D(l) (g) (h) and (j) which are most crucial while applying external CUP method. It is not disputed by the revenue that the assessee has paid royalty @ 5.05% to Singapore AE. From the perusal of records it can be seen that the royalty payment was in consonance with the rate at which royalty is allowed by the Indian Regulatory Authority i.e. RBI. Thus rate of 5% is comparable with the rate at which Government of India / RBI allows such payment. Therefore CIT(A) has rightly allowed the rate at 5% of net sales for royalty determination. Hence the contentions of the DR are not justifiable. There is no need to interfere with the findings of the CIT(A). As regards the alternate submissions of the AR the same are rejected as we have not interfere with the findings given by the CIT(A). Thus the aspect of royalty payment of Ground No. 1 is dismissed. Management fees - DR submitted that the agreement entered into by the assessee with its associated enterprise allow the payment of costs along with a markup of 15% - assessee claimed that the payment for the year under consideration was USD 293995 which included the actual costs incurred by the assessee along with a mark up of 15% - As pertinent to note that the assessee entered into Management Service Agreement with Pacific Asia Singapore Pte. Ltd. (Singapore AE) on 01.04.06 with addendum dated 05.01.09 to obtain expertise methods and procedures availability of information development of work force project administration financial planning and control etc. for utilizing the same in corporate functions marketing and sales of the assessee. Pursuant to said agreement the assessee paid to the concerned AE. Contention of the DR that the certificate produced by the assessee stated to be lower/ below the actual costs incurred by the associated enterprises appears to be incorrect as per the supporting evidences produced by the assessee. The mark up of 15% was given as per the actual cost incurred by the assessee while providing the services. Besides this the Revenue has accepted the similar payment in the earlier three years and DR could not point out the factual discrepancy in the present assessment year to that of earlier assessment years. CIT(A) has rightly deleted the addition and there is no need to interfere with the findings of the CIT(A). Hence the aspect of management fee payment of Ground No. 1 is dismissed. Payment of IT services Technical support and management fees - HELD THAT - It is pertinent to note that the assessee entered into an agreement with PL Pacific Asia (Singapore) Pte Ltd. (Singapore AE) on 01.05.06 in respect of Information Technology Services Technical Support and Maintenance. The reimbursement of the expenditure incurred by the AE was in detail given by the assessee before the AO/ TPO. The finding of the AO that IT services Technical support and maintenance fee was not actually incurred and no details given appears to be not correct facts. In fact the assessee in the certificate given by the AE has given the details of the services provided by the AEs and also the reimbursement expenses incurred by the assessee and paid to AE. CIT(A) has verified the same and after taking cognizance of the same allow the payment/expenses. It is not the case of fixing margin for all associates in respect of management support services as contemplated by the Ld. DR but actual cost incurred by the assessee company which has been identified and allowed by the CIT(A). There is no need to interfere with the findings of the CIT(A). Besides this the Revenue has accepted the similar payment in the earlier three years and DR could not point out the factual discrepancy in the present assessment year to that of earlier assessment years. Hence the aspect of IT services Technical support and Maintenance fee payment of Ground No. 1 is dismissed.
Issues Involved:
1. Deletion of addition on account of payment of royalty, management fees, and IT allocation cost. 2. Deletion of addition on account of royalty expenses. 3. Deletion of addition on account of claim payable to customers for non-achievement of sales targets. Summary: Issue 1: Deletion of addition on account of payment of royalty, management fees, and IT allocation cost The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 2,41,23,181/- made on account of payment of royalty, management fees, and IT allocation cost, arguing that the transactions were not at arm's length price. The Assessing Officer (AO) had rejected the Comparable Uncontrolled Price (CUP) method used by the assessee for benchmarking royalty payments and made adjustments accordingly. The CIT(A) found that the assessee had provided all relevant documents and used external CUP method appropriately, aligning with RBI-approved rates. The Tribunal upheld CIT(A)'s decision, stating the AO did not justify why external CUP method was inapplicable and found no need to interfere with CIT(A)'s findings. Regarding management fees, the AO questioned the 15% markup and the lack of documentary evidence. The CIT(A) found the assessee's payments justified and consistent with previous years. The Tribunal agreed, noting the Revenue's acceptance of similar payments in prior years and upheld CIT(A)'s findings. For IT services and technical support, the AO claimed the assessee did not provide adequate cost details. The CIT(A) verified the reimbursement of expenses and found them justified. The Tribunal upheld CIT(A)'s findings, noting the consistency with previous years and the lack of factual discrepancies. Issue 2: Deletion of addition on account of royalty expenses The Revenue argued that the CIT(A) ignored the consistent stand taken by the Revenue in previous years. The Tribunal noted that similar issues for A.Y. 2008-09 and 2009-10 were decided in the assessee's favor by the Tribunal itself. Therefore, the Tribunal dismissed this ground, following the principle of consistency. Issue 3: Deletion of addition on account of claim payable to customers for non-achievement of sales targets The Revenue contended that the CIT(A) ignored the consistent stand taken by the Revenue in previous years. The Tribunal observed that this issue was also decided in the assessee's favor for A.Y. 2008-09 and 2009-10 by the Tribunal. Consequently, the Tribunal dismissed this ground, adhering to the principle of consistency. Conclusion: The appeal of the Revenue was dismissed in entirety, with the Tribunal upholding the CIT(A)'s order on all grounds. The Tribunal emphasized the consistency of the assessee's practices with previous years and found no reason to interfere with the CIT(A)'s findings.
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