Tribunal sets aside CIT(A)'s order, ruling royalty payment legitimate under agreement.

The Tribunal allowed the appeal, setting aside the CIT(A)'s order and deleting the addition made on account of royalty payment. The decision was based on the Tribunal's prior rulings in the assessee's cases for assessment years 2003-04 and 2004-05, establishing the legitimacy of the royalty payment under the agreement with the principal.

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Issues:
Transfer pricing adjustment on account of payment of royalty.

Analysis:
The appeal was against the order of CIT(A) for the assessment year 2007-08 concerning transfer pricing adjustment made by the AO on payment of royalty amounting to Rs.54,05,834. The assessee, engaged in manufacturing pesticides, had an agreement with a Japanese principal for manufacturing products as per specifications, with royalty payable at 5% of sale price. The TPO determined arms-length-price of royalty at nil, recommending an adjustment of Rs.54,19,026 due to the nature of contract manufacturing. The AO added this amount. The assessee contended that it purchased materials independently, bore risks, and sold goods to approved parties, disputing the contract manufacturing characterization. CIT(A) upheld the adjustment, citing the nature of activities and sales primarily to the principal.

In the Tribunal, the assessee's counsel referenced previous cases where similar royalty payments were allowed. The Tribunal noted discrepancies in the TPO's approach, citing the requirement to determine arms-length-price before recommending adjustments. It referenced a Delhi High Court judgment disapproving such TPO methods. The Tribunal found the royalty payment justified as it was for technical know-how, not manufacturing, and was based on value-added price. It noted no disallowance in prior years and ruled the royalty was a legitimate business expense. Consequently, the Tribunal reversed the CIT(A)'s decision, deleting the addition based on the precedent set in the assessee's earlier cases.

In conclusion, the Tribunal allowed the appeal, setting aside the CIT(A)'s order and deleting the addition made on account of royalty payment. The decision was based on the Tribunal's prior rulings in the assessee's cases for assessment years 2003-04 and 2004-05, establishing the legitimacy of the royalty payment under the agreement with the principal.

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