2016 (7) TMI 678 - HC - Income Tax

Addition on account of international transactions of payment of royalty - ITAT not confirming the action of the AO in restricting the payment of royalty to 30% of the actual sales as against 56% claimed by the assessee confirmed - Held that - It has been rightly noted by the ITAT, once the liberalized policy did away with the requirement of computing the royalty with reference to the list price (Indian Published Price), the Assessee moved from the regime of royalty payment as a percentage of the list price to the actual license and support review. In the circumstances, the conclusion arrived at by the ITAT appears to be perfectly justified. It is based on facts and does not give rise to any substantial question of law. It may also be noticed that in the AYs 2008-09 and 2009-10, the TPO has accepted the royalty payment at 56% of the actual sales. Also, the Dispute Resolution Panel has accepted the Assessee s case for AYs 2006-07 and 2007-08. - Decided against revenue

Summary

Issues:
1. Whether the ITAT was justified in deleting the addition made by the AO on the basis of the adjustment made by the TPO on account of international transactions of payment of royalty.
2. Whether the ITAT was correct in not confirming the action of the AO in restricting the payment of royalty to 30% of the actual sales as against 56% claimed by the assessee.

Analysis:
1. The case involved an appeal by the Revenue against the ITAT's order regarding the addition made by the AO on the basis of the adjustment by the TPO on international transactions of royalty payment. The TPO had enhanced the royalty rate from 30% to 56%, which the Assessee justified by demonstrating a lower payout compared to previous years due to relaxing controls by the Government of India. The ITAT concluded that the Assessee had adopted the TNMM as the arm's length standard and had a higher OP/sales ratio compared to comparable companies. The change in royalty arrangement to 56% from 30% was made after due procedure and approval from FIPB, following the removal of limits on royalty payments by the new Exchange Control Policy.

2. The ITAT's decision was based on the fact that the liberalized policy removed the requirement of computing royalty based on the list price, allowing the Assessee to move towards royalty payment based on actual sales value. The ITAT's conclusion was supported by the acceptance of royalty payment at 56% of actual sales in subsequent assessment years by the TPO and the Dispute Resolution Panel for previous assessment years. Therefore, the ITAT's decision was deemed justified and fact-based, leading to the dismissal of the appeal by the Revenue.