2017 (12) TMI 1404 - AT - Income Tax

Adjustment on royalty payment - Held that - The royalty payment by the assessee in all the preceding years from assessment years 1997-98 to 2002-03 have been allowed and no adjustment has been made on account of arm s length price of international transactions, which arises from June, 1996 i.e. 04.06.1996. Further, the Revenue has failed to bring on record any evidence to show that there was any change in facts and in the absence of the same, no adjustment is warranted in the instant assessment year. Further the two parties were independent at the time of signing the agreement for payment of royalty and where payment of royalty was pursuant to such an agreement between independent entities and not associated enterprises; and where the concern become associated enterprise in a later period and where the price paid to associated enterprises was the same as entered when it was an independent entity, then the same has to be considered as uncontrolled transaction. Such was the proposition laid down by the Mumbai Bench of Tribunal in Addl. Director of Income Tax (IT) Vs. Ballast Nedam Dredging (2013 (1) TMI 830 - ITAT MUMBAI). Applying the said principle, we hold that on this count also, there is no merit in making any adjustment on account of the international transactions of payment of royalty. Accordingly, we hold that there is no merit in the order of TPO/Assessing Officer in holding the arm s length price of international transactions of payment of royalty at Nil. Coming to the second aspect of the issue, where the assessee was making payment of royalty to its associated enterprises at the rates which have been approved by the RBI. We find that the Hon ble Bombay High Court in CIT Vs. SGS India (P.) Ltd. 2015 (11) TMI 1619 - BOMBAY HIGH COURT had held that rate of royalty approved by SIA/RBI would constitute CUP data and the transaction would be at arm s length price.In the facts of present case, where the assessee has paid royalty to its associated enterprises as per the rates which were approved by RBI, which is not in dispute, then the said transaction would be at arm s length price. Accordingly, we hold that no addition is warranted on this count under Transfer Pricing provisions. Accordingly, we hold so. International transactions of payment of royalty is to be accepted at arm s length price and we reverse the order of TPO/Assessing Officer in holding the value of international transactions at Nil. The findings of CIT(A) are reversed but claim of assessee is allowed on other grounds. Thus, the grounds of appeal raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Justification of CIT(A) in setting aside the adjustment made by the TPO to royalty payment.
2. Applicability of the doctrine of res judicata in income tax proceedings.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Setting Aside the Adjustment Made by the TPO to Royalty Payment:

The Revenue appealed against the CIT(A) order concerning the adjustment made by the TPO to royalty payments for the assessment years 2003-04 and 2005-06. The TPO had determined the arm's length price of the royalty payments as Nil, arguing that the assessee failed to establish the arm's length nature of these payments. The TPO noted inconsistencies in royalty payments across different years and questioned the basis for the royalty rate.

The CIT(A) overturned the TPO's adjustment, noting that in the intermediate year (2004-05) and subsequent years (2006-07 onwards), no adjustments were made to the royalty payments. The CIT(A) emphasized that the royalty agreement was consistent across these years and that the TPO had accepted the technology transfer in other years. The CIT(A) concluded that there was no need to re-examine the merits of the case since the royalty payments were accepted in other years.

The Tribunal upheld the CIT(A)'s decision, noting that the original royalty agreement was between independent parties and was approved by the RBI. The Tribunal referenced the Mumbai Bench of Tribunal in Addl. Director of Income Tax (IT) Vs. Ballast Nedam Dredging, which held that transactions between independent entities that later become associated enterprises should be considered uncontrolled transactions. The Tribunal also cited the Bombay High Court in CIT Vs. SGS India (P.) Ltd., which held that royalty rates approved by the RBI/SIA constitute CUP data, making the transaction at arm's length price.

2. Applicability of the Doctrine of Res Judicata in Income Tax Proceedings:

The Revenue contended that the CIT(A) wrongly applied the doctrine of res judicata, which is not applicable to income tax proceedings. The doctrine of res judicata prevents the same issue from being litigated multiple times once it has been judicially decided.

The CIT(A) had set aside the TPO's adjustments partly based on the consistency of the royalty payments being accepted in other years, effectively applying the principle of res judicata. The Tribunal, while not explicitly addressing the doctrine, supported the CIT(A)'s reliance on consistency and the acceptance of royalty payments in other years as a basis for their decision.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision to set aside the TPO's adjustments. The Tribunal held that the royalty payments were at arm's length price based on the original independent agreement and RBI approval, and emphasized the importance of consistency in accepting these payments in other years. The Tribunal's decision implicitly supported the CIT(A)'s approach, which aligned with the principles of res judicata, even though the doctrine itself is not formally applicable in income tax proceedings.