ITAT sets aside arbitrary 3% royalty rate imposed by DRP without proper comparables analysis

ITAT Delhi ruled in favor of the assessee regarding transfer pricing adjustment on royalty payments. The DRP had arbitrarily set a 3% royalty rate without proper comparables, rejecting the TPO's NIL determination. The tribunal found the DRP's approach flawed, noting it relied on judicial precedents rather than conducting proper analysis using appropriate parameters. The court emphasized that CUP method should be applied correctly for royalty payments, and if segregation is permissible, TNMM method applies. The arbitrary 3% rate selection without bringing correct comparables on record was deemed inappropriate, leading to the decision favoring the assessee.

---

---

Issues involved:
The appeal challenges the final assessment order under Income Tax Act, 1961 along with DRP direction.

Transfer Pricing Methodology Issue:
The appellant, engaged in manufacturing, challenged the adoption of CUP Method for royalty payment analysis instead of TNMM. The TPO applied 3% royalty rate without economic analysis, following DRP directions. The appellant objected to the CUP Method and royalty rate, arguing for TNMM and higher royalty rate.

Comparables Selection Issue:
The TPO and DRP were directed to re-compute ALP based on comparables. The appellant contended that no fresh exercise was done, and the 3% royalty rate was adopted without proper justification. The Bench found the selection of comparables arbitrary and not in line with the law.

Judicial Precedents and ALP Determination Issue:
The co-ordinate Bench referred to previous cases and observed that the arbitrary selection of 3% royalty rate without correct comparables was unjustified. The Bench allowed the appeal, noting that the facts did not support the DR's arguments on comparables selection.

Penalty Proceedings Issue:
The appellant challenged the initiation of penalty proceedings under section 270A, arguing against the charging of interest under sections 234B, 234C, and 234D. The Bench upheld the appeal, finding no legal basis for the penalty and interest charges.

Summary:
The appellant contested the assessment order and DRP directions regarding transfer pricing methodology, comparables selection, and penalty proceedings. The Bench found the adoption of CUP Method and 3% royalty rate without proper economic analysis unjustified. Referring to judicial precedents, the Bench allowed the appeal, noting the lack of correct comparables and arbitrary selection of royalty rate. The penalty proceedings and interest charges were also set aside.

---