2016 (12) TMI 936 - AT - Income Tax

TPA - determining the arm s length price of the international transactions - payment of royalty - Held that - Payment of royalty by the assessee to its associated enterprise, Dow Netherlands @ 5% on domestic sales and 8% on export sales is liable to be considered as at an arm s length rate in view of the Circular No.5 dated 21/7/2003. Therefore, the addition made by the Assessing Officer on this count is unsustainable. In the ultimate analysis, we uphold the action of the CIT(A) in deleting the addition, albeit, on a different ground.

Summary

Issues Involved:
1. Disallowance of travelling and conveyance expenses.
2. Disallowance of freight and forwarding charges.
3. Disallowance of miscellaneous expenditure.
4. Adjustment of royalty payment towards arm’s length price.

Issue-wise Detailed Analysis:

1. Disallowance of Travelling and Conveyance Expenses:
The Assessing Officer (AO) disallowed 50% of the travelling and conveyance expenses amounting to ?1,12,39,325/- due to the assessee's failure to submit complete details justifying the expenditure. The CIT(A) deleted this disallowance, referencing a similar deletion in the previous assessment year (2003-04). The Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for readjudication, following the precedent set in the assessment year 2003-04.

2. Disallowance of Freight and Forwarding Charges:
Similarly, the AO disallowed 50% of the freight and forwarding charges totaling ?3,35,04,706/-, citing the assessee's lack of detailed justification. The CIT(A) deleted this disallowance based on his order for the previous year. The Tribunal, following the same rationale as for the travelling and conveyance expenses, remanded this issue back to the AO for reconsideration.

3. Disallowance of Miscellaneous Expenditure:
The AO disallowed 50% of the miscellaneous expenditure amounting to ?3,81,11,174/-, again due to insufficient details from the assessee. The CIT(A) deleted this disallowance, referencing the previous year's decision. The Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for readjudication, consistent with the approach taken for the other disallowances.

4. Adjustment of Royalty Payment Towards Arm’s Length Price:
The AO, following the TPO's recommendation, adjusted ?1,21,81,647/- towards the royalty payment made by the assessee to its associated enterprise, Dow Netherlands, to align it with the arm’s length price. The CIT(A) deleted this adjustment, referencing his order for the previous year. The Tribunal noted that the royalty rates paid by the assessee were approved by the Secretariat of Industrial Approval (SIA) and the Reserve Bank of India (RBI). The Tribunal upheld the CIT(A)'s deletion of the adjustment, referencing the Bombay High Court's judgment in the case of CIT vs. SGS India Pvt. Ltd., which affirmed that royalty rates approved by the Central Government constitute valid Comparable Uncontrolled Price (CUP) data. The Tribunal concluded that the royalty rates of 5% on domestic sales and 8% on export sales paid by the assessee were at arm's length, and thus, no adjustment was necessary.

Conclusion:
The Tribunal allowed the Revenue's appeal partly for statistical purposes by remanding the issues related to disallowances of travelling and conveyance expenses, freight and forwarding charges, and miscellaneous expenditure back to the AO for readjudication. However, the Tribunal upheld the CIT(A)'s deletion of the adjustment towards the royalty payment, affirming that the royalty rates paid by the assessee were at arm's length. The order was pronounced in the open court on 10/08/2016.