2017 (3) TMI 1639 - HC - Income Tax

Benchmarking of management fee - payment of royalty - MAM - CUP OR TNMM - Held that - This Court is of the opinion that having regard to the previous decision in EKL Appliances 2012 (4) TMI 346 - DELHI HIGH COURT as held we are of the opinion that once TNMM has been applied to the assessee company s transaction, it covers within its ambit the royalty transactions in question too and hence the Department s contention for applying the CUP method is erroneous. The ratio of which was correctly applied, no substantial question of law arises. On the first issue, i.e. management fees, the matter stands remitted by the ITAT. The appeal is accordingly dismissed with the pending application.

Summary

Issues:
1. Challenge to ITAT order regarding benchmarking of management fee and payment of royalty.
2. Application of CUP method vs. TNMM method for royalty payment.
3. Disallowance of royalty by TPO based on business and commercial expediency.

Analysis:
1. The High Court dealt with the Revenue's appeal challenging an ITAT order regarding benchmarking of management fee and payment of royalty. The TPO and DRP approached the matter concerning royalty payment, emphasizing that the AE's allocation of treatment royalties to specific countries lacked justification. The ITAT, however, held in favor of the assessee, stating that the pay-outs were justified expenses. The assessee contended that the CUP method was not applicable, advocating for the TNMM method instead. The High Court referred to the decision in CIT v. EKL Appliances, emphasizing that the TPO should not disallow payments incurred for business purposes without proper justification.

2. Regarding the application of the CUP method versus the TNMM method for royalty payment, the High Court found that TNMM, once applied to the assessee's transaction, covered royalty transactions as well. The Court cited the decision in Cadbury India Ltd. vs. ACIT, where the use of TNMM for royalty was upheld. The Department's contention for applying the CUP method was deemed erroneous, and the Court found support in the Cadbury India Ltd. case.

3. The High Court addressed the issue of disallowance of royalty by the TPO based on business and commercial expediency. Referring to the decision in EKL Appliances, the Court emphasized that the TPO should not sit in judgment on the business decisions of the assessee. The Court distinguished other judgments cited by the Department, stating that they were not applicable to the present case. Ultimately, the Court dismissed the appeal, stating that no substantial question of law arose based on the correct application of the EKL Appliances decision. The matter of management fees was remitted by the ITAT, and the appeal was dismissed with the pending application.