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TMI Blog2017 (12) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... d held all the transactions to be at ALP except for the payment of royalty. He observed that the assessee has paid a sum of Rs. 11,96,02,712 to its AE which is calculated at 3% of its net sales. He observed that as per the royalty agreement dated 1.4.2009, the royalty is being paid for the technology upgradation and assistance, ongoing process, product design and improvement and complete knowhow assistance including any technology or services provided during the period prior to the agreement. He observed that in the T.P document, the assessee has adopted CUP method for its T.P study and that the database used by the assessee is for U.S based companies wherein the copies of the agreements of those companies have not been furnished. The TPO held that the benchmarking, if any, has to be done in respect of Indian Companies engaged in similar trade, making royalty payment, and not that of US companies. Further, the TPO has also observed that the assessee has not been able to conclusively establish the benefit derived by it by the receipt of technology. Therefore, he held that the ALP of the royalty should be at 2% of its net sales and accordingly computed the adjustment u/s 92CA of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market, TPO will determine the ALP. It is patent and obvious from TPO's order, the determination of ALP at 2% is not at all in conformity with Rule 10B(1)(a). The TPO has not brought even a single comparable to justify arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis. Rather it is on adhoc or estimate basis, hence, not in accordance with statutory provisions. The approach of TPO in estimating royalty at 2% by applying the benefit test, in our view, is not only in complete violation of TP provisions but against the settled principles of law. ITAT, Mumbai Bench in case of M/s Castrol India Ltd. Vs. Additional CITY, ITA No. 1292/Mum/2007 dated 20/12/2013 while examining ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his notice on behalf of the assessee and confirmed the TP adjustment made by the TPO in respect of royalty payment which was totally unjustified. We therefore, delete the addition made by the AO/TPO and confirmed by the ld. CIT on account of TP adjustment in respect of royalty payment and allow ground no. 3 of the assessee's appeal." 11. Similar view has also been expressed in the other decisions relied upon by ld. AR. At the cost of repetition, it needs reiteration, assessee has benchmarked the royalty payment by bringing comparables both under TNMM as well as CUP. Whereas, TPO has rejected the analysis done by assessee under both the methods without any reasonable basis nor has brought a single comparable to justify ALP of royalty at 2%. Unfortunately, ld. DRP has approached the entire issue in rather mechanical manner without examining whether approach of the TPO is in accordance with statutory mandate. Therefore, determination of ALP of royalty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of the assessee, the TPO determined that the reason for the same was increased marketing along with offer of discounts and that there was no justification for payment of royalty at 3% to the AE by the assessee. This reasoning is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee. 9. In Walchand & Co. (P.) Ltd. (supra), the Supreme Court observed in the context of the Income Tax Act, 1922 that when a claim is made for an allowance by the assessee, the income tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. The Supreme Court pointed out that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively for the purpose of business, it has to be adjudged from the point of view of the businessman and not of the revenue. The Supreme Court concluded that it is open to the revenue to come to the conclusion that the alleged payment was not real or that it had not been incurred by the assessee in the character of a trader or that it was not laid out exclusively for the purpose of the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd (2009) reported in 319 ITR 306 (SC). 9. The learned DR, however, placed reliance upon the judgment of the Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat transport corporation (2014) 366 ITR 170 (Guj) and Kerala High Court in the case of Commissioner of Income-tax, Cochin vs. Merchem Ltd (378 ITR 443)(Ker.). She submitted that in the case of CIT Vs. Alom Extrusions Ltd, the Hon'ble Supreme Court was considering the disallowance made by the AO u/s 43B of the Act, whereas in the case before us, the AO has not invoked the provisions of section 43B but has invoked the provisions of section 36(1)(va) and therefore, the disallowance has to be sustained. 10. Having regard to the rival contentions and the material on record, we find that the assessee has remitted the employee's contribution to the Govt. A/c within the prescribed due dates, except for one day delay, with respect to a sum of Rs. 1,24,657. Clause (va) of section 36(1), clearly lays down that the deduction of employees contribution received by the assessee shall be allowed only, if such sum is credi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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