Court Upholds Royalty Payments at 5.6% as ALP, Rejects TPO's Reasoning

The court allowed the exemption application subject to exceptions, condoned the delay in filing the appeal, and upheld the ITAT's decision regarding royalty payments made by the Assessee to its Associated Enterprise (AE) at 5.6% as the Arm's Length Price (ALP). The court found the TPO's reasoning for rejecting the Assessee's explanation on royalty payments unjustified, directing the adoption of the average royalty percentage of 5.6% for the relevant assessment year based on industry data. The appeal was dismissed, affirming the ITAT's decision.

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Issues:
1. Exemption application
2. Delay in filing appeal
3. Royalty payments to Associated Enterprise (AE) and Arm's Length Price (ALP)

Exemption Application:
The exemption application was allowed subject to all just exceptions.

Delay in Filing Appeal:
The delay in filing and refiling the appeal was condoned and allowed based on the reasons explained in the applications.

Royalty Payments to Associated Enterprise (AE) and Arm's Length Price (ALP):
The appeal was against the ITAT order regarding royalty payments @5.6% made by the Assessee to its AE, accepted as Arm's Length Price (ALP). The Assessee, a subsidiary of A&K Group, made royalty payments for trademark/brand use, marketing support, and technical inputs. The Assessee claimed the royalty payments @ 6% during the AY in question were at ALP based on permissible rates up to 8% of exports and 5% of domestic sales. The TPO, however, did not accept this explanation, noting a drop in the Assessee's Net Profit Ratio during the AY. The TPO found the higher royalty payment unjustified, stating it did not benefit the Assessee and was a facade. The DRP partially agreed with the TPO, leading to an appeal before the ITAT. The ITAT directed the TPO to allow the average royalty percentage at 5.6% for the AY, based on industry data from a survey report. The Court found the TPO's order lacked reference to industry practices, making it unreasonable to conclude the higher royalty payment was unjustified. With the DRP accepting a change in average royalty percentage for the following AY, the ITAT's direction to adopt the same percentage for the AY in question was deemed reasonable, leading to the dismissal of the appeal.

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