TMI Blog2020 (7) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emitted on sound and rational basis of commercial expediency principles which has been unlawfully interdicted by Ld AO/Ld CIT-A on mere basis of assumption and presumption only. 4. That order passed by Ld AO dated 20/12/2018 and further order passed by Id CIT A dated 17/06/2019 are bad in law in as much as disallowance of ₹ 366,82,337/- u/s 40A(2)(b) is made without appreciating that burden lying on revenue to invoke section 40A(2)(b) is patently un-discharged in present case as no effort is made at any stage to demonstrate so called alleged excessiveness in payment of subject royalty sans which entire disallowance becomes ultra vires to provisions of the Act; 5. That order passed by Ld AO dated 20/12/2018 and further order passed by Id C1T A dated 17/06/2019 are bad in law in as much as disallowance of ₹ 366,82,337/- u/s 40A(2)(b) is made without appreciating that law does not allow revenue to put itself in armchair of business man and dictate business expediency which is in exclusive domain of assessee ; 6. That the appellant craves leave to add add/alter any/all grounds of appeal before or at the time of hearing of the appeal. Humble Prayer: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses have been consistently allowed. He submitted that in identical facts in assessment year 2015-16 and 2017-18 no scrutiny as been carried out and returned income has been accepted. He referred to a chart on page 1 of the paper-book of average royalty payment in percentile terms paid from financial year 2012-13 to financial year 2016-17. He submitted that in the year under consideration average royalty payment is 2.77 percentage of net sales, whereas royalty payment at 2.99% has been accepted by the Department in financial year 2012-13 corresponding to assessment year 2013-14. He submitted that in assessment year 2013-14, the transfer pricing adjustment made by the learned Transfer Pricing Officer (TPO) was deleted by the learned Dispute Resolution Panel (DRP) and issue has not been further litigated by the Department. According to him, once the Department has already accepted the average rate of 2.99% of royalty payment in the assessment year 2013-14, the action of the Assessing Officer for considering the royalty payment at the rate of 2.77% as excessive is not justified. 5. The Ld. DR, on the other hand, relied on the order of the lower authorities and submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Vs. ACIT (2009) 314 ITR 1 (Guj.) that the AO is required to record a findings as to whether the expenditure is excessive or unreasonable in relation to any of the three requirements prescribed, which are independent and alternative to each other. 6.3 In the instant case, the Ld. CIT(A) has sustained the disallowance observing as under: 5.4 The contention of the appellant is not acceptable as it has not furnished any justifiable reason for increment in royalty compare to previous year. The AO has prepared a chart in the assessment order para 3.2.1 and it is observed that there is increase in the rate of royalty in some product to the extent 39%, 55%, 67.5% 71%. The appellant has not given any reason for such increase of the rate of royalty. Even the rate of royalty is much higher for new line of products. The appellant is paying royalty to its parent company and transaction are with the related party covered as per the provisions of section 40A(2)(b). Res judicata is not applicable in the income tax proceedings and each year is an independent year. It is not necessary for the AO to follow the same order as determined in the previous years. This year AO has pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DAIKIN RB-133 4% 6.7% 67.5% 7 VOLTAS PCB. RB -126 4% 4.39% 10% 8 ONIDA PCB-RB-108 4% 6.83% 71% From the perusal the above chart it can be observed that, on the same kind of parts, the assessee company had increased the royalty without any basis in a very short time span of 6 months. In some cases this increment is only 5%,6% or 7% but in some other cases it is 55%, 67.5% - 71%. It is common sense that rates of royalty come down for the same product with the passage of time. But here in the case of the assessee, the rates are increasing with a very rapid rate and within 6 months. Further the assessee is not able to justify the reasons of steep increament in payments for royalty on the same products that too within 6 months. 3.2.2. If we compare the rates of Royalty for new line of products with the rates of royalty for old products, we find that the assessee has agreed to pay much higher rates for n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses paid in case of the similar product by other companies during the relevant period. The Assessing Officer has not done any such exercise and only made basis of expenses paid in earlier years. 6.6 The Learned Counsel of the assessee contended that in assessment year 2013-14 the transaction of the royalty expenses were subjected to transfer pricing provisions. He 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 of the learned Counsel 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. 6.7 In view of the above discussion, the disallowance made out of royalty expenses amounting to ₹ 3,66,82,337/-is deleted. The ground No. 4 of the appeal is accordingly allowed. 7. The Learned Counsel of the assessee argued that in the case of the assessee the transaction of the royalty expenses between the assessee and its Associated En ..... X X X X Extracts X X X X X X X X Extracts X X X X
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