2013 (6) TMI 21 - AT - Income Tax

Other income with regard to computation of arm s length price for royalty - Whether TPO was justified in making addition - Held that - The assessee has an option to adopt a price which may vary from arithmetical mean of ALP up to five per cent. The difference between the net profit of the assessee and NPM of the arm s length price is certainly less than 5% and, therefore, the assessee has a right to claim that the NPM of the assessee i.e. 5.02% should be adopted as arm s length price. The TPO had determined the arm s length price of royalty by TNMM. Thereafter, he worked out the addition which may be required to be made under the head royalty and then he compared the royalty paid by the assessee and the ALP of royalty determined by him. However, as find that the proviso refers to the arm s length price determined by various methods and adopting of the mean of such method and then the assessee had been given an option to adopt a value which should not vary more than 5% from the mean of the ALP determined by the TPO. Therefore, what is to be varied is the percentage of the ALP determined by the TPO as per most appropriate method. In this case, the TPO considered TNMM to be the most appropriate method and accordingly determined the arm s length price at 6.23%. Therefore, the assessee has a right to adopt the ALP within the variation of 5% from 6.23%. The NPM declared by the assessee is 5.02% and, therefore, as per proviso to Section 92C(2), the assessee is fully justified to claim that since the difference between the NPM declared by him and the ALP determined by the TPO is less than 5%, no addition is called for. Therefore, agree with the assessee s contention and uphold the order of CIT(A) deleting the addition made by the TPO. In favour of assessee.

Summary

Issues:
1. Interpretation of arm's length price for royalty computation under Section 92C(2) of the Income-tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT DELHI involved a dispute regarding the inclusion of other income in the computation of arm's length price for royalty. The Revenue challenged the order of the CIT(A) for the assessment year 2004-05. The primary contention raised by the Revenue was that the TPO was justified in including other income in determining the arm's length price for royalty.

During the hearing, the appellant's counsel argued that the addition made by the Assessing Officer was not sustainable as the difference between the net operating profit of the assessee and the arm's length price determined by the TPO fell within the safe harbor zone specified in Section 92C(2) of the Income-tax Act, 1961. On the other hand, the DR contended that the assessee's case did not fall within the range specified in the proviso to Section 92C(2).

Upon careful consideration of the submissions and perusal of the TPO's order, it was observed that the TPO had accepted the assessee's explanation for all transactions except royalty. The TPO determined the arm's length price of royalty under the TNMM method, which resulted in a difference between the declared value and the computed arm's length price.

The TPO's order highlighted that the proviso to Section 92C(2) did not allow for adjustment if the variation exceeded the specified limit of +- 5%. However, it was argued that the assessee had the option to adopt a price within 5% of the arithmetical mean of the arm's length price. Since the difference between the net profit margin of the assessee and the arm's length price was less than 5%, the assessee was entitled to claim that the declared net profit margin should be adopted as the arm's length price.

Ultimately, the Tribunal agreed with the assessee's contention and upheld the CIT(A)'s order to delete the addition made by the TPO for royalty computation. The appeal of the Revenue was dismissed, emphasizing the application of the proviso to Section 92C(2) in determining the arm's length price for royalty.

In conclusion, the judgment provided clarity on the interpretation of the arm's length price for royalty computation under the relevant provisions of the Income-tax Act, 1961, and upheld the decision in favor of the assessee based on the permissible variation in the arm's length price.