2013 (5) TMI 219

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..... ss of manufacture of household and agricultural pesticides had entered into an agreement with principal i.e. Sumitomo Chemical Co. Ltd., Japan (SCJ) as per which it had to manufacture certain products for the principal as per specification in the agreement. The principal had also allowed use of technical know-how for which royalty was payable @ 5% of ex-factory sale price for sale of products within India and outside India. Since assessee had paid royalty to the associate enterprise (AE), the AO had referred the issue of determination of transfer pricing adjustment to the Transfer Pricing Officer (TPO). The TPO noted from the agreement that the assessee had to purchase the entire requirement of intermediaries from the principal (SCJ) for th .....

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..... ufactures goods at his own risk as per the specifications of the principal and the property in the goods is passed on to customer at the point of time when goods were sold, it has to be considered as sale of goods and not job work or contract manufacturing. CIT(A) did not accept the contentions raised. It was observed by him that the assessee itself had stated that the activities of the assessee were in the nature of contract manufacturing. The goods were sold mostly to the principal and only small portion of products had been sold to third parties that too only if such customers were approved by the principal. There was therefore no justification for payment of royalty when the goods were sold mostly to the principal. CIT(A), therefore con .....

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..... alty which was not correct. The Tribunal in this regard referred to the judgment of Hon'ble High Court of Delhi in case of EKL Appliances in ITA No.1068/70/2011(Del HC) in which such method adopted by TPO was not upheld. The Tribunal, therefore, held that TPO exceeded its jurisdiction in making recommendation for disallowance of royalty on the ground of no justification. The Tribunal further observed that even on merit, no addition was required. It was pointed out that though the assessee by mistake in the TP study had referred its activities as contract manufacturing, the facts indicated otherwise. The assessee was manufacturing specific products as per specification of the principal and selling the same to principal and to other parties. .....

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