Royalty payments transfer pricing matter restored to AO/TPO for fresh adjudication following precedent

The ITAT Delhi addressed a transfer pricing adjustment concerning arms length pricing of international transactions for royalty payments. The tribunal noted identical issues with similar facts existed in the assessee's appeals for assessment years 2008-09 and 2009-10, where additional evidence was similarly furnished. Following its own precedent from those earlier years, the ITAT restored the matter to the AO/TPO for fresh adjudication in accordance with law and previous directions dated 14.5.2018. The assessee's appeal was allowed for statistical purposes.

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Issues Involved:
1. Error in completing the assessment u/s 144C/143(3) of the Income Tax Act, 1961.
2. Transfer pricing adjustment on account of the difference in the arms length price of the international transaction of payment of royalty.

Summary:

1. Error in Completing the Assessment u/s 144C/143(3) of the Income Tax Act, 1961:
The assessee challenged the assessment order dated 28.1.2015, wherein the AO completed the assessment at an income of Rs. 9,80,28,905 against the returned income of Rs. 8,75,02,380. The assessee contended that the AO/DRP erred on facts and in law.

2. Transfer Pricing Adjustment on Account of the Difference in the Arms Length Price of the International Transaction of Payment of Royalty:
The assessee raised multiple grounds related to the transfer pricing adjustment of Rs. 1,05,26,525. The AO/DRP held that the assessee was not required to pay royalty for services provided to the associated enterprise (AE). The AO/DRP determined that royalty was only payable on sales made to unrelated third parties, not appreciating that the entire revenue of the assessee was from sales of services to third parties, whether direct customers or customers of the AE.

The AO/DRP conducted a cost-benefit analysis to determine the arms length price of the royalty payment, which is not a prescribed method under Rule 10B of the Income Tax Rules, 1963. The AO/TPO applied the CUP method without providing comparable data and disregarded that the transaction had already been benchmarked using the TNM method.

The assessee submitted additional evidence, including an Addendum to the Intangible and Proprietary Property and Licensing agreement, which clarified the understanding between the parties. This evidence was essential for a proper adjudication of the matter.

Tribunal's Decision:
The Tribunal noted that an identical issue was previously addressed in the assessee's own case for the assessment years 2008-09 and 2009-10. The Tribunal had restored the issue back to the AO/TPO for a fresh decision after considering the additional evidence. Following this precedent, the Tribunal set aside the issue of payment of royalty to the AO/TPO for fresh adjudication in accordance with the law, considering the additional evidence provided.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, and the issue of the transfer pricing adjustment was remanded back to the AO/TPO for a fresh decision. The Tribunal emphasized the importance of considering the additional evidence to ensure substantial justice.

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