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2021 (7) TMI 338 - HC - Income TaxTP Adjustment - TPO treating Arms length Price for royalty payment as 'NIL' even though the TPO had clearly established that assessee had not derived any benefit out of royalty payment - HELD THAT - The issue whether the Transfer Pricing Officer, while exercising the jurisdiction under Section 92KA(3) of the Act, can only determine the Arms Length Price of an international transaction, is no longer res integra and the same has already been adjudicated by the decisions of Delhi and Bombay High Courts respectively in 'CIT Vs. EKL APPLIANCES LTD.' 2012 (4) TMI 346 - DELHI HIGH COURT and 'CIT Vs. LEVER INDIA EXPORTS LTD', 2017 (2) TMI 120 - BOMBAY HIGH COURT . The Transfer Pricing Officer cannot derive any benefit from the transaction. Besides that, the finding recorded by the Tribunal that the international transaction of payment of royalty ought to be bench marked in an aggregated manner at entity level on application of transactional net margin method has not been challenged by the revenue before this Court. Therefore, the issue involved in this appeal is covered by the decisions of Bombay as well as Delhi High Court. - Decided in favour of assessee.
Issues:
1. Interpretation of Arms Length Price for royalty payment under the Income Tax Act, 1961. Analysis: 1. The appeal before the Karnataka High Court involved the interpretation of Arms Length Price for royalty payment for the Assessment Year 2007-08. The Transfer Pricing Officer determined the Arms Length Price of a royalty payment transaction as NIL, stating that the assessee had not derived any economic benefit from the transaction. The Assessing Officer incorporated this adjustment in the order, leading to an appeal by the assessee before the Commissioner of Income Tax (Appeals). 2. The Commissioner of Income Tax (Appeals) deleted the adjustment, holding that the method adopted by the assessee for bench marking the international transaction at entity level using the net margin method was correct. The revenue then appealed to the Tribunal, which dismissed the appeal and affirmed the Commissioner's order. The Tribunal held that the Arms Length Price cannot be determined as NIL, as evidence showed that the royalty payment was made for the use of technical know-how, and the Transfer Pricing Officer could not examine the allowability of the claim under Section 37 of the Act. 3. The revenue contended that the Transfer Pricing Officer was correct in treating the Arms Length Price as NIL, as the assessee had not proven any benefit derived from the royalty payment. However, the assessee argued that the Tribunal's finding on bench marking the royalty payment transaction at entity level using the net margin method was not challenged by the revenue, rendering the issue academic. The assessee also cited precedent cases from Delhi and Bombay High Courts to support their argument. 4. The High Court analyzed the submissions and referred to judgments from Bombay High Court to establish that the Transfer Pricing Officer's jurisdiction is limited to determining the Arms Length Price of an international transaction and cannot consider the benefits derived from it. The Court upheld the Tribunal's findings on bench marking the royalty payment transaction and concluded that the issue was covered by previous decisions of the Bombay and Delhi High Courts. 5. Therefore, the High Court answered the substantial question of law in favor of the assessee and against the revenue, dismissing the appeal for lack of merit. The Court found that the Transfer Pricing Officer's determination of NIL Arms Length Price for royalty payment was not sustainable, and the issue was adequately addressed by the Tribunal's decision in line with established legal principles. This detailed analysis of the judgment highlights the key legal issues, arguments presented by both parties, and the court's reasoning in deciding the case.
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