2011 (12) TMI 174 - AT - Income Tax

Transfer Pricing dis-allowance of royalty payment - Revenue contending assessee to be contract manufacturer assumping that specific goods were manufactured for AE therefore, no royalty was needed to be paid - whether the royalty paid @ 3% of the net sale price stands justified - Held that - Assessee has placed on record various evidences to prove that royalty payment at 8% on export and 5% on domestic sales has been referred as a reasonable payment. However, TPO failed to bring any material on the record which can suggests that payment of royalty @ 3% was excessive, and not at arm s length price. Further, only a fraction of goods manufactured by the assessee have been sold to the AE. Bulk of sales are to uncontrolled parties. Thus, the assessee is not a captive manufacturer supplying all manufactured goods to the AE. In fact, the technology has been used for manufacturing and supplying goods to independent parties also. Therefore, it cannot be said that the assessee is a contract manufacturer. Decided against the Revenue.

Summary

Issues Involved:
1. Disallowance of royalty payment to Associated Enterprise (AE) based on Transfer Pricing Officer's order.
2. Justification of royalty payment under Comparable Uncontrolled Price (CUP) method.
3. Assessment of whether the assessee is a contract manufacturer for the AE.
4. Disallowance of 5% deduction under section 92C(2) due to difference in arm's length price.

Analysis:

Issue 1: Disallowance of Royalty Payment to AE:
The appellant contested the Assessing Officer's decision to disallow royalty payment of Rs. 14,47,956 to the AE based on the Transfer Pricing Officer's recommendation. The TPO concluded that there was no justification for the payment of royalty to the AE, citing OECD guidelines and the creation of a separate provision for technical know-how by the appellant.

Issue 2: Justification of Royalty Payment under CUP Method:
The appellant justified the royalty payment under the Comparable Uncontrolled Price (CUP) method, referring to the technical collaboration agreement approved by the Government of India and the Reserve Bank of India. The appellant argued that the payment was in compliance with Indian Transfer Pricing Regulations and provided evidence of approvals and correspondences supporting the royalty payment.

Issue 3: Assessment of Contract Manufacturer Status:
The Tribunal analyzed whether the appellant qualified as a contract manufacturer for the AE. It was noted that only a fraction of goods manufactured were sold to the AE, with the majority sold to uncontrolled parties. The Tribunal concluded that the appellant was not a captive manufacturer solely supplying goods to the AE, as technology was also used for supplying goods to independent parties.

Issue 4: Disallowance of 5% Deduction under Section 92C(2):
The Dispute Resolution Panel-II disallowed a 5% deduction under section 92C(2) as the difference between the arm's length price determined by the AO and the appellant exceeded 5%. Consequently, an addition of Rs. 14,47,956 was made to the total income returned by the appellant.

Conclusion:
After considering the submissions and evidence presented, the Tribunal found no justification for the disallowance of royalty payment to the AE. The Tribunal ruled in favor of the appellant, allowing the appeal and overturning the decision to disallow the royalty payment.