2019 (7) TMI 312 - HC - Income Tax

TP adjustment - ALP determination - royalty payments to its Associated Enterprise (AE) - ITAT considered it reasonable to direct the TPO to allow the average royalty percentage at 5.6% (against 6% claimed by the Assessee) - HELD THAT - Order of the TPO, relied upon by the counsel for the Revenue, does not make any reference to the prevalent practice in the travel industry which would give an indication as to the trend in the royalty payment. That could give reasonable indication whether the payment of royalty by the Assessee to its AE for the AY in question was unreasonable. In the absence of such empirical data, to merely conclude that the payment of higher royalty was not justified only because it did not result in any tangible benefit to the Assessee was not be the right approach. With the DRP having accepted the change in the average royalty percentage payment in the travel industry for the following AY at 5.6%, the direction issued by the ITAT to the TPO to adopt the same percentage for the AY in question does not appear to be unreasonable or give rise to any substantial question of law.

Summary

Issues:
1. Exemption application
2. Delay in filing appeal
3. Royalty payments to Associated Enterprise (AE) and Arm's Length Price (ALP)

Exemption Application:
The exemption application was allowed subject to all just exceptions.

Delay in Filing Appeal:
The delay in filing and refiling the appeal was condoned and allowed based on the reasons explained in the applications.

Royalty Payments to Associated Enterprise (AE) and Arm's Length Price (ALP):
The appeal was against the ITAT order regarding royalty payments @5.6% made by the Assessee to its AE, accepted as Arm's Length Price (ALP). The Assessee, a subsidiary of A&K Group, made royalty payments for trademark/brand use, marketing support, and technical inputs. The Assessee claimed the royalty payments @ 6% during the AY in question were at ALP based on permissible rates up to 8% of exports and 5% of domestic sales. The TPO, however, did not accept this explanation, noting a drop in the Assessee's Net Profit Ratio during the AY. The TPO found the higher royalty payment unjustified, stating it did not benefit the Assessee and was a facade. The DRP partially agreed with the TPO, leading to an appeal before the ITAT. The ITAT directed the TPO to allow the average royalty percentage at 5.6% for the AY, based on industry data from a survey report. The Court found the TPO's order lacked reference to industry practices, making it unreasonable to conclude the higher royalty payment was unjustified. With the DRP accepting a change in average royalty percentage for the following AY, the ITAT's direction to adopt the same percentage for the AY in question was deemed reasonable, leading to the dismissal of the appeal.