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2019 (2) TMI 1962 - AT - Income TaxTP Adjustment - Disallowance of royalty paid by the assessee to its Holding Company - appellant company had entered into technical knowhow agreement with its Holding Company for every model of the car manufactured and the appellant company paid royalty of 5% on the domestic sales and 8% on export sales - as argued TPO /DRP were not justified in holding that the royalty payment should be bench marked separately. It was contended that the appellants whole entity approach of bench marking royalty payments along with all other transactions by adopting TNM method at the entity level is justifiable - HELD THAT - As relying on assessee own case 2015 (9) TMI 962 - ITAT CHENNAI we hold that the average royalty payment up to the rate of 4.7% on the sales is justified. Since the assesse claims that the average royalty paid is 3.64% , we hold that the Revenue is not justified in making the impugned adjustments and hence direct to delete the additions. The corresponding grounds of appeal are treated as allowed. Capital subsidy - HELD THAT - Since this issue is decided in the assessee s favour by the AO in the earlier assessment year , the corresponding grounds are allowed.
Issues Involved:
1. Application of Comparable Uncontrolled Price (CUP) Method for benchmarking royalty payments. 2. Jurisdiction of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) regarding lump sum technical know-how payments. 3. Treatment of capital subsidy received from SIPCOT. Issue-wise Detailed Analysis: 1. Application of Comparable Uncontrolled Price (CUP) Method for Benchmarking Royalty Payments: The primary issue was the benchmarking of royalty payments made by the assessee to its Associated Enterprise (AE) using the CUP method. The assessee, engaged in the manufacture and sales of motor cars, paid royalty to its AE based on an agreement. The TPO initially accepted the operating margins but later made an ad-hoc disallowance of 10% of the royalty, deeming it excessive. The DRP directed the TPO to adopt the CUP method, which led to a remand report. The TPO’s search in the “Royaltystat” database yielded no direct comparables, and the assessee also failed to find functionally comparable companies. The TPO then used three companies in the automobile components sector, concluding that the royalty paid on domestic sales was at arm’s length, but not on export sales. The TPO also allocated past lump sum technical know-how payments proportionately, which the DRP confirmed. The assessee argued that the CUP method was incorrectly applied and cited a previous ITAT decision for AY 2007-08, where similar additions were deleted. The ITAT observed that the TPO had accepted a royalty rate of 4.7% in the automotive sector in the past and that the assessee’s average royalty payment of 3.64% was lower. The ITAT held that the average royalty payment up to 4.7% was justified and directed the deletion of the impugned adjustments. 2. Jurisdiction of TPO and DRP Regarding Lump Sum Technical Know-how Payments: The assessee contended that the TPO and DRP exceeded their jurisdiction by analyzing lump sum technical know-how payments made in past years (AY 2003-04 and AY 2005-06) when such payments were not transactions in the current assessment year (AY 2006-07). The ITAT agreed with the assessee, noting that the DRP’s specific direction was to conduct a transfer pricing study for the relevant year using the CUP method. Thus, the addition made by the TPO and sustained by the DRP was beyond their jurisdiction. 3. Treatment of Capital Subsidy Received from SIPCOT: The assessee received a subsidy from SIPCOT for industrialization purposes and claimed it should not be reduced from the actual cost, referencing the Apex Court decision in P J Chemicals. The AO disallowed this claim, and the DRP upheld the disallowance. The assessee argued that this issue had been decided in its favor in AY 2003-04 by the CIT(A), and the AO had given effect to this order. The ITAT found merit in the assessee’s submissions and allowed the corresponding grounds, following the earlier decision. Conclusion: The ITAT allowed the assessee’s appeal, directing the deletion of the royalty-related adjustments and accepting the treatment of the capital subsidy in line with the previous assessment year’s decision. The order was pronounced on 4th February 2019 at Chennai.
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