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TMI Blog2014 (4) TMI 568X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be remitted back to the AO for fresh adjudication – Decided in favour of Revenue. Transfer pricing adjustment - Royalty payment made – Held that:- In subsequent years the assessee had submitted the calculations regarding calculation of net domestic / export sales for the purpose of calculating the payment of royalty and described that if the royalties calculated on the basis of agreement of the assessee with Dow Netherland then royalty paid by the assessee will be on lower side and such contention of the assessee has been accepted by the TPO - out of export as well as local sales the cost of imported goods have been reduced and net sales have been computed accordingly, on which royalty payable is calculated - For the year under consideration the computation is made in the similar manner and it has been shown that overall the assessee has paid less royalty as compared to royalty paid by UK AE to Dow Nether land – thus, there is no reason to interfere in the order of the CIT(A) – Decided against Revenue. - I.T.A. No. 630/MUM/2011 - - - Dated:- 20-1-2014 - I.P. BANSAL AND SANJAY ARORA, JJ. For the Appellant : Ajeet Kumar Jain For the Respondent : M.P. Loh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received any patent but has ended up paying more royalty than the UK counterpart who is the only Associated Enterprise to whom the technical know how is granted and who is paying royalty at 3% of sales of the product and hence the TPO and AO were justified in restricting the royalty at 5% of the export sales instead of 8% as claimed by the assessee. 7. On the facts and circumstances of the case and in law, the Id. CIT(A) failed to consider the fact that even if the RB! permits a royalty rate of 8% on exports, but considering that no OW group entity pays royalty at a rate higher than 5%, the rates could not be said to be at arms length and the TPO and AO was justified in making the adjustment. 2. Ground No.1 2 raise one issue regarding disallowance of Rs.1,82,00,000/- claimed on account of advertisement and sales expenditure. Ground No. 3 4 relate to disallowance of Rs.4,65,00,000/- on account of miscellaneous expenses. Both these grounds were argued together by both the parties on the basis that facts relating to both these issues are similar. Accordingly, these grounds are disposed of as under. 3. The assessee is engaged in the business activity of manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d without such verification Ld. CIT(A) has committed an error in deleting the addition as the assessee has claimed large expenses towards advertisement, sales and miscellaneous expenses. 5. On the other hand, Ld. AR submitted that AO could not point out any defect in the expenditure claimed by the assessee and he has made adhoc disallowances. Ld. CIT(A) has found that the sample copy of invoices submitted by the assessee were in order and the accounts of the assessee were audited and there was no adverse comment by the auditors. He submitted that in view of these facts Ld. CIT(A) was right in deleting the addition and his order should be upheld. 6. We have heard both the parties and their contentions have carefully been considered. It is true that the disallowance made by the AO is adhoc disallowance without pointing out any defect in the claim of the assessee. Such course of action cannot be adopted by the AO. If assessee has maintained proper accounts which are audited, then the AO, without either rejection of books of accounts or without pointing out any defect in the expenses cannot make an adhoc disallowance. At the same time disallowance cannot also be deleted simply fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Provides only Manufacturing technology for Chloropyrofos - Provides Licenced Know How for 9 Products as per Appendix A of the agreement. - Provides Licenced Patents as per Annexure B of the Agreement 3. - Royalty to be paid@ on Net Domestic sales - Royalty to be paid @3% on Net sales (No rate difference between exports and domestic sales) (Net of Returns, allowances, Rebates, discounts, transport.) 4. Separate charges of USD 12,00,000 for Process design Package to be paid in 4 installments. - No such charges. 7.1 The assessee submitted that its transactions could not be compared with UK AE and several circumstances were explained, according to which the royalty was pleaded to be allowed as per agreement of the assessee. The arguments inter-alia include the adjustments to be made as per agreement of the assessee with Dow Netherlands and agreement of Dow Netherlands with UK AE. 7.2 During the course of proceedings before Ld. CIT(A) a chart was submitted by which it was shown that if such adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.3 Accordingly, the addition was computed as under: A.Y.2002-03 A.Y.2003-04 Net Internal sales A 23,39,18,328 29,45,02,720 3% Royalty on above as Arms Length Price B=3%of A 70,17,550 88,35,081 Royalty Claimed by assessee 5% on net sales) C 1,16,95,916 1,47,25,136 Difference to be added D=C- B1 46,78,366 58,90,055 Net Export sales A 10,45,02,485 5,80,57,797 5% Royalty on above Arms Length Royalty B=5% of A 52,25,124 29,02,890 Claimed by assessee 8% on net sales C 83,60,199 46,44,624 Difference to be added D=C - B2 31,35,075 17,41,734 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 5.15% 7.5 Thus it was held that the TPO was wrong in applying 3% royalty rate on domestic sales and 5% rate on gross exports sales and the said method adopted by TPO was inherently flawed. The revenue is aggrieved, hence, has filed aforementioned grounds. 7.6 We have heard both the parties on this issues. During the course of hearing it was brought to our notice that in subsequent years the assessee had submitted the calculations regarding calculation of net domestic / export sales for the purpose of calculating the payment of royalty and described that if the royalties calculated on the basis of agreement of the assessee with Dow Netherland then royalty paid by the assessee will be on lower side and such contention of the assessee has been accepted by the TPO in respect of assessment year 2005-06, 2006-07 and 2007-08, copies of these orders of TPO are placed on our record and were also given to Ld. DR. 7.7 It was observed from the aforementioned orders passed by TPO that he has given the rebate out of export sales as well as local sales and for assessment year 2005-06 the chart is as follows: Sr. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales as per RBI approval) 6. Difference to be added (5-4) I 1,327,557 On account of domestic sales: S. No. Particulars Amount in Rs. 1. Local Sales A 269,872,414 2. Less: Cost of imported goods ( as per RBI guideline) B 73,581,211 3. Net Sales amount for royalty C 196,291,203 4. Royalty on net sales @3% D 8,096,172 5. Royalty paid by the assessee (5% on the Net Sales as per RBI approval) E 9,814,560 6. Difference to be added (5-4) II 1,718,388 For assessment year 2007-08 the chart is as under: Sr. No. Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X
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