2011 (12) TMI 233 - AT - Income Tax

Transfer Pricing - adjustment in ALP addition made on account of royalty - royalty paid @ 3% on export and domestic sales (net of imported raw-material & bought out components) to AE Revenue contending assessee to be contract manufacturer on the ground that goods were specific goods, produced for the associate enterprises using the technology received from AE - A.Y. 04-05 - Held that - Royalty fee is being paid by the appellant under the Technology agreement to the A.E, no distinction is made between the products sold to the A.E or sold to the independent parties.Further, Assessee has placed on record various evidences to prove that royalty payment at 8% on export and 5% on domestic sales has been referred as a reasonable payment. However, TPO failed to bring any material on the record which can suggests that payment of royalty @ 3% was excessive, and not at arm s length price. Moreover, no material was brought on record to show that sales price charges was not at arm s length. TPO further not brought any material indicating the fact that assessee is a contract manufacturer. He only draws inference in this regard. Thus, after taking into consideration the facts and circumstances and the findings of the CIT (Appeals), we do not find any merit in this appeal Decided against the Revenue.

Summary

Issues:
Transfer pricing adjustment on account of royalty payment.

Analysis:
The case involved an appeal by the revenue against the order of the Learned CIT (Appeals) regarding the addition of Rs. 19,37,386 as the difference in arm's length price and the value of an international transaction related to royalty payment. The Assessing Officer had made this addition based on the Transfer Pricing Officer's order under sec. 92CA(3) of the Income-tax Act. The assessee, engaged in manufacturing automobile industry components, had undertaken international transactions with overseas associate enterprises, resulting in the scrutiny assessment. The TPO recommended an adjustment in the arm's length price, specifically related to royalty paid to an associate enterprise. The Assessing Officer added this amount to the total income of the assessee.

Upon appeal, the Learned CIT (Appeals) reevaluated the facts and circumstances, ultimately deleting the addition made by the Assessing Officer. The tribunal carefully examined the case, noting that the assessee had shown multiple international transactions, with the TPO accepting most but disputing one transaction involving royalty payment to an associate enterprise. The TPO considered the assessee as a contract manufacturer for specific goods received from the associate enterprise, deeming the royalty payment unjustified based on OECD guidelines. However, the tribunal found that the royalty payment was within the government-approved limits and followed the cup method for determining the arm's length price.

The tribunal further analyzed the arguments presented by the assessee, highlighting that the royalty payment was integral to the cost of production and recovered from sales prices, maintaining revenue neutrality. It was emphasized that the prices charged to the associate enterprise were at market rates, and no evidence suggested otherwise. The tribunal noted that a similar issue had been addressed in a previous assessment year, with the ITAT upholding the deletion of a similar royalty payment disallowance by the Learned CIT (Appeals).

Considering the lack of evidence supporting excessive royalty payment or non-arm's length pricing in sales to the associate enterprise, the tribunal dismissed the revenue's appeal. The tribunal's decision was based on the absence of material indicating the royalty payment was excessive or not at arm's length, as well as the lack of evidence suggesting sales were not at arm's length prices. The tribunal also highlighted the previous ITAT decision upholding the deletion of a similar addition, reinforcing the dismissal of the revenue's appeal.