TMI Blog2017 (3) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... tead of the contractual rate of 3% for payment of royalty. No reason is offered by the TPO for picking on 2%. This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. In consequence, we find that the TPO, having rejected the comparables cited by the assessee, did not take the trouble to examine alternate comparables so as to justify reduction of the rate for payment of royalty and by applying a wholly inapplicable methodology of determining the benefit from payment of such royalty, he capriciously reduced the rate for payment of such royalty from 3% to 2%. - I.T.T.A. NO. 595 OF 2016, ITTASR NO. 1708 OF 2015 - - - Dated:- 23-12-2016 - SANJAY KUMAR AND M.S.K. JAISWAL, JJ. For The Petitioner : Narasim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sanitary ware products in India for sale in domestic and international markets. The assessee entered into a Royalty Agreement on 01.04.2009 with its Associated Enterprise (AE), RAK Ceramics PSC, UAE. As per Clause of this agreement, in consideration of the ongoing technical assistance on process and product improvement to be provided to the assessee or any other services as specified in the agreement, including any technology or services provided, the assessee was to pay to the AE royalty equivalent to 3% of the net ex-factory sale price of the products on both domestic and export sales during the tenure of the said agreement. The first such royalty payment was made during the financial year 2009-10. In its return filed for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; and as it had failed to do so, the royalty payment was pegged at 2% instead of 3%, as provided in the agreement. This determination by the TPO under Section 92CA of the Act of 1961 was confirmed by the Dispute Resolution Panel (DRP), Hyderabad, vide order dated 25.06.2014 and was acted upon by the Deputy Commissioner of Income Tax, Circle- 3(1), Hyderabad, the Assessing Officer, as evidenced by the Assessment Order dated 24.07.2014. 5. Aggrieved by such assessment in so far as it related to the payment of royalty, the assessee filed I.T.A.No.1492/Hyd/2014 before the Tribunal. The Tribunal took note of the fact that no analysis had been undertaken by the TPO in fixing the arm's length price of the royalty payment made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or as to how it should source its technical know-how. He would place reliance on the judgment of the Supreme Court in CIT v. Walchand Co. (P.) Ltd. [1967] 65 ITR 381. 8. Having considered the rival submissions, we find that the assessee offered two transfer pricing studies in relation to payment of royalty. In so far as the acceptable study adopting the Comparable Uncontrolled Price method is concerned, it is not in dispute that the assessee offered three comparables with an average royalty payment of 3.65% as against its own rate of royalty at 3%. Significantly, the TPO rejected these comparables on the ground that they were US based, while the AE of the assessee was UAE based. Having rejected these comparables, it was for the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine what remuneration should be paid to an employee by the assessee. 10. Applying the same logic to the case on hand, once it is admitted by the Revenue that the assessee entered into a royalty agreement with the AE and the assessee claimed benefit from such agreement, in the form of quantum increase in sales with no apparent increase in production, minimal product recalls and low after sales maintenance cost, and consequently paid royalty in terms thereof, it was not for the TPO to determine as to what could be the other reasons for increase in the assessee's sales and profit. 11. Above all, there is no explanation forthcoming as to why the TPO decided upon 2% instead of the contractual rate of 3% for payment of royalty. No rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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