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2019 (6) TMI 443 - HC - Income TaxTPA - ALP of payment of royalty u/s 92CA(3) - ITAT allowing the assessee's contention that as the payments of Royalty were approved by the Reserve Bank of India ('RBI'), the same was at Arm's Length - HELD THAT - Transfer Pricing Officer could have applied any of the specified methods for determining Arm's Length Price of the transaction, in case he was of the opinion that the purchase of knowhow made by the assessee from the associated enterprise was not at Arm's Length. Instead of carrying out any such scientific exercise, the Transfer Pricing Officer went on to the justification of the purchase made in the context of the incremental benefit earned by the assessee out of such know-how. This was clearly not within the purview of the Transfer Pricing Officer. Transfer Pricing Officer could not replace the assessee and question its business decision. In the context of the purchase being at Arm's Length, the CIT(Appeals) had permitted the assessee to produce additional evidence which was taken on record after remand report and such evidence proved that the price paid by the assessee was at Arm's Length. No question of law arises. Income Tax Appeal is dismissed.
Issues:
1. Deletion of addition related to payment of royalty under section 92CA(3) of the Income Tax Act, 1961. 2. Approval of royalty payments by the Reserve Bank of India and its impact on Arm's Length Price determination. Analysis: Issue 1: Deletion of addition related to payment of royalty under section 92CA(3) of the Income Tax Act, 1961: The appeal challenged the judgment of the Income Tax Appellate Tribunal regarding the addition of royalty payment amounting to a specific sum. The Transfer Pricing Officer had made adjustments based on the lack of specific benefits derived from the technology purchased through royalty payments. However, the CIT (Appeals) held that the justification for the purchase of know-how could not be judged by the Transfer Pricing Officer. The assessee demonstrated that the purchase was at Arm's Length Price by providing evidence of similar transactions by unrelated parties. The CIT (Appeals) accepted this evidence after calling for a remand report and subsequently deleted the addition. The Tribunal upheld this decision based on its previous ruling for the same assessee in a prior assessment year. The High Court concurred with the Tribunal's decision, emphasizing that the Transfer Pricing Officer's role was to determine the Arm's Length Price using specified methods rather than questioning the business decisions of the assessee. The court found no error in the Tribunal's decision and dismissed the Income Tax Appeal. Issue 2: Approval of royalty payments by the Reserve Bank of India and its impact on Arm's Length Price determination: The second issue revolved around whether the approval of royalty payments by the Reserve Bank of India implied that the payments were at Arm's Length Price. The RBI's approval was based on the FEMA angle, specifically for technology transfer payments. However, the court highlighted that such approval did not automatically translate to compliance with other applicable laws. The court clarified that the RBI's approval did not cover all legal aspects, as indicated in Condition 7 of Press Note No.9 issued by the Ministry of Commerce and Industry. Despite this, the CIT (Appeals) allowed the assessee's contention regarding RBI approval without considering the broader legal implications. The High Court's decision focused on the Arm's Length nature of the transaction rather than solely relying on RBI approval, ultimately dismissing the Income Tax Appeal. In conclusion, the High Court upheld the Tribunal's decision to delete the addition related to royalty payments, emphasizing the importance of determining Arm's Length Price objectively and adhering to specified methods rather than delving into the business justifications of the taxpayer. The court's analysis centered on the legal framework governing transfer pricing and the need for a comprehensive assessment based on established principles.
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