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2010 (7) TMI 1047 - AT - Income TaxDeleting the addition u/s 92CA(3) - arm s length price - International Transaction - royalty paid - In Present case, Department filled an appeal on the grounds that The ld. CIT(A) erred, in law and on the facts and circumstances of the case, in deleting the addition of ₹ 43,68,838/- being the difference in the arm s length price and the value of the International Transaction on account of Royalty. The AO made this addition on the basis of TPO s order passed u/s 92CA(3) of the I.T. Act. HELD THAT - In fact, The expenditure in question was no doubt incurred for business purposes and it was this which was the determining the factor, as rightly noted by the ld. CIT(A). The payments made by the assessee to the Joint MD and the Technical Adviser were correctly found by the ld. CIT(A) to be genuine business expenditure. It remains undisputed that as per the OECD guidelines, the assessee was not a contract manufacturer. Rather, it was an independent company. The royalty was paid by the assessee under the Technology Agreement, computed on the basis of the entire production/sales. Considering, all the facts We do not find any reason to record any variance with the well reasoned elaborate findings of fact recorded by the ld. CIT(A). The same are hereby upheld. In the result, the appeal filed by the Department is dismissed.
Issues Involved:
1. Deletion of addition made by AO on account of difference in arm's length price and value of International Transaction related to royalty. 2. Expenditure on deputation of personnel from Associated Enterprise. 3. Computation of royalty paid to Associated Enterprise. Detailed Analysis: 1. Deletion of Addition on Account of Difference in Arm's Length Price and Value of International Transaction Related to Royalty: The Department's appeal contested the deletion of an addition of Rs. 43,68,838/- by the Commissioner of Income Tax (Appeals) [CIT(A)]. This addition was made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) order under section 92CA(3) of the Income Tax Act. The TPO disagreed with the assessee's method of determining the arm's length price for royalty payments to its Associated Enterprises (AE). The TPO made an adjustment of Rs. 43,68,838/- due to the difference in arm's length price and the value of the international transaction. 2. Expenditure on Deputation of Personnel from Associated Enterprise: The TPO observed that the assessee incurred expenses for two personnel from the AE, Mr. Keichi Osawa (Technical Advisor) and Mr. Tadao Katsuchi (Joint Managing Director), totaling Rs. 25,52,610/-. The TPO opined that these expenses should not have been borne by the assessee since the royalty payment already covered technical information improvements. The CIT(A) deleted this addition, noting that the expenses were genuine business expenditures and there was no evidence that the payments were not at arm's length. 3. Computation of Royalty Paid to Associated Enterprise: The TPO also made an adjustment of Rs. 18,16,228/- for royalty paid on sales made to the AE. The assessee paid royalty at 3% on both domestic and export sales, net of imported raw materials. The TPO erroneously computed the royalty at 3% on gross sales. The CIT(A) found that the actual royalty payment was Rs. 12.82 lakhs, which was included in the sale price of components sold to the AE. The CIT(A) noted that the royalty payment was at arm's length and the TPO did not provide any material evidence to show otherwise. Judgment: The Tribunal upheld the CIT(A)'s order, stating that the expenses for the personnel were genuine business expenditures and were not related to the royalty payment. The Tribunal also agreed with the CIT(A) that the royalty computation by the TPO was incorrect and that the actual royalty payment was at arm's length. The Tribunal found no reason to vary from the CIT(A)'s findings and dismissed the Department's appeal. Conclusion: The appeal filed by the Department was dismissed, affirming the CIT(A)'s deletion of the addition of Rs. 43,68,838/-. The Tribunal concluded that both the expenses for deputed personnel and the royalty payments were at arm's length and genuine business expenditures. The Department's grievance was found to be without substance and merit.
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