TMI Blog2011 (12) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Further, only a fraction of goods manufactured by the assessee have been sold to the AE. Bulk of sales are to uncontrolled parties. Thus, the assessee is not a captive manufacturer supplying all manufactured goods to the AE. In fact, the technology has been used for manufacturing and supplying goods to independent parties also. Therefore, it cannot be said that the assessee is a contract manufacturer.– Decided against the Revenue. - IT APPEAL NO. 4781 (DELHI) OF 2010 - - - Dated:- 16-12-2011 - Rajpal Yadav And K. G. Bansal , JJ. Vidur Puri for the Appellant B. R. R. Kumar for the Respondent ORDER K. G. Bansal, Accountant Member The assessee has taken up four grounds in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Government of India for payment of royalty @ 1% and 3% of net sale price of the manufactured goods sold or used by the assessee, the payment is justified as the rate of payment has been approved by the Reserve Bank of India. In the alternative, the payment also stands justified under TNNM by using the ratio of profit before tax to sales as profit level indicator ('PLI' for short). This ratio works out at 15.02% in the case of the assessee against the average of 5.91% in the case of comparable cases. For the sake of ready reference, the submissions are reproduced below:- 5.1 The assessee vide its reply dated 18.02.2009 and 28.07.2009 has relied on its reply filed before the TPO in FY 2004-05, wherein it was stated that : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables used to benchmark the transaction (5.91%) and hence is stated to be at an arm's length price in compliance with the Indian Transfer Pricing Regulations. 2.2 The AO had referred the matter to the TPO, who came to the conclusion that there is no justification of payment of royalty to the AE. Two reasons were assigned for coming to this conclusion. Firstly, the assessee is a contract manufacturer and as per guidelines issued by OECD in paragraph nos. 6.14 and 6.17, there is no justification for payment of royalty in such a case. Secondly, the assessee has itself created provision for technical know-how separately as seen from the schedules of the audit report. Paragraph nos. 6.14 of the OECD guidelines is reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sum technical know-how fees paid for both the type of know-how are apportioned between the two based on technical estimates made by the company. Running royalty paid to the collaborators is written off to revenue in the year in which it accrues. 2.4 Based upon the aforesaid finding furnished by the TPO, the royalty payable in respect of the goods supplied to the AE, quantified at ₹ 14,47,956/-, has not been allowed. Thus, the total income in the draft order has been computed at ₹ 17,02,97,707/-. 3. The learned Dispute Resolution Panel-II, New Delhi ('the DRP' for short) has approved this adjustment. The deduction of 5% has also not been allowed on the ground that under the amended proviso to section 92C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries, Department of Industrial Policy Promotion, issued in 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method. The second aspect is whether the assessee is a contract manufacturer for the AE. In this connection, it is seen from the order of the TPO itself that only a fraction of goods manufactured by the assessee have been sold to the AE. Bulk of sales are to uncontrolled parties. Thus, the assessee is not a captive manufacturer supplying al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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