2018 (2) TMI 1280 - AT - Income Tax

Determination of ALP of international transaction qua payment of royalty - TPO has disallowed the royalty payment on the ground that the taxpayer has not been able to prove any real tangible benefit that has passed to him by technology received from its AE - Held that - When AE has granted exclusive nontransferable and non-divisible licence to use the technical information for manufacture, to use Yamaha trademark and permit the company dealers to use the Yamaha trademark in the course of marketing activities in India and then paid the royalty at predetermined rate, it is not the prerogative of the TPO to decide if any tangible benefit has been transferred to the taxpayer from the technical know-how received from its AE because decision of a businessman for business expenditure or payment of royalty for running the business cannot be interfered by the TPO in any manner. Liability of the business expenditure and adjustment of ALP cannot be made on the basis of the fact no benefit has been accrued to the taxpayer. It is only for the businessman to see as to how to execute the decision for better running of the business. TPO/DRP have erred in making adjustment of ALP on account of royalty payment by the taxpayer to its AE - Decided in favour of assessee

Issues Involved:
1. Validity of the Assessing Officer's order.
2. Discrepancy in assessed loss.
3. Addition due to difference in arm's length price.
4. Adjustment on account of royalty payment.
5. Determination of arm's length price of royalty.
6. Rejection of contention regarding Rule 10B(1)(a) and royalty expenditure.

Detailed Analysis:

1. Validity of the Assessing Officer's Order:
The taxpayer argued that the order passed by the learned Assessing Officer (AO) was flawed both legally and factually. However, this issue was deemed general and not specifically adjudicated.

2. Discrepancy in Assessed Loss:
The taxpayer contended that the AO incorrectly assessed the loss at ?238,92,49,906/- instead of the declared ?263,71,10,531/-. This issue was also considered general and was not specifically adjudicated.

3. Addition Due to Difference in Arm's Length Price:
The taxpayer challenged the addition of ?24,78,07,525/- as the difference in arm's length price (ALP) confirmed by the Dispute Resolution Panel (DRP). The Transfer Pricing Officer (TPO) had determined the ALP of the royalty payment to be nil, leading to the proposed adjustment.

4. Adjustment on Account of Royalty Payment:
The TPO applied the Comparable Uncontrolled Price (CUP) method and concluded that the taxpayer did not demonstrate any tangible economic benefit from the technology received from its Associated Enterprises (AE). The TPO also noted the lack of comparable cases where independent parties made similar royalty payments. The DRP upheld this adjustment.

The taxpayer argued that the royalty payment was justified and covered by a previous decision of the Tribunal for AY 2009-10. The taxpayer provided detailed explanations about the nature and benefits of the royalty payment, emphasizing that the technology and trademark provided by the AE were crucial for manufacturing and selling motorcycles. The Tribunal found that the TPO's reasoning was flawed and unsupported by evidence. The Tribunal noted that the royalty payment was based on a pre-determined rate and was essential for the taxpayer's business operations.

5. Determination of Arm's Length Price of Royalty:
The Tribunal referred to the decision in CIT vs. EKL Appliances Ltd. (2012) 345 ITR 241, which held that the TPO cannot disallow an expenditure solely on the grounds that it was not necessary or prudent. The Tribunal also cited the Punjab & Haryana High Court's decision in M/s Knorr-Bremse India Pvt. Ltd. vs. ACIT, emphasizing that profitability is not the sole determinant of whether a transaction is at arm's length.

The Tribunal concluded that the taxpayer had sufficiently demonstrated the justification for the royalty payment and its arm's length price. The Tribunal directed the AO to delete the addition made on account of the royalty payment.

6. Rejection of Contention Regarding Rule 10B(1)(a) and Royalty Expenditure:
The taxpayer argued that Rule 10B(1)(a) does not authorize the disallowance of royalty expenditure on the grounds of necessity or prudence. The Tribunal upheld this contention, emphasizing that the business decisions regarding expenditures are within the taxpayer's discretion and cannot be interfered with by the TPO.

Conclusion:
The Tribunal ruled in favor of the taxpayer, directing the deletion of the adjustment made on account of the royalty payment. The Tribunal emphasized that the TPO and DRP erred in their assessment and that the taxpayer's business decisions regarding royalty payments were justified and at arm's length. The appeal was allowed, and the addition of ?24,78,07,525/- was deleted.

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