TPO cannot separately benchmark royalty payments when overall margin already accepted as arms length price

ITAT Bangalore dismissed revenue's appeal challenging CIT(A)'s order allowing assessee's appeal against TPO's separate benchmarking of royalty payments. The Tribunal held that royalty cannot be separately benchmarked when TPO has already accepted the overall margin as arms length price. CIT(A) correctly ruled that once margins are accepted at arms length, additional separate benchmarking of royalty component is not justified under transfer pricing provisions.

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Issues:
Transfer Pricing Adjustment - Royalty Benchmarking

Detailed Analysis:
The judgment involves two appeals by the revenue and two Cross Objections by the assessee regarding transfer pricing adjustments related to royalty payments for the A.Ys. 2008-09 and 2009-10. The appeals and cross objections were disposed of together due to identical issues. The primary issue was whether royalty payments could be separately benchmarked when the TPO accepted the margin to be at arm's length price. The TPO had initially treated the royalty payment as transfer pricing adjustment, but the assessee contended that royalty should not be separately benchmarked based on previous tribunal decisions. The Ld.CIT(A) allowed the appeal, relying on previous decisions favoring the assessee.

The revenue appealed the Ld.CIT(A)'s decision for A.Y. 2008-09, questioning whether royalty could be benchmarked separately and arguing that the TPO should determine the arm's length price (ALP) of the international transaction. The revenue also contended that the benefit derived from royalty payments should be considered integral to transfer pricing analysis. The Tribunal considered various case laws and the assessee's previous cases to determine whether separate benchmarking of royalty was necessary. The Tribunal referred to previous decisions where royalty was not separately benchmarked when the margin was accepted to be at arm's length price, ultimately deciding in favor of the assessee.

The Tribunal upheld the Ld.CIT(A)'s decision, stating that no separate benchmarking of royalty payment was required when the TNMM approach included royalty at entity level. The Tribunal found that the issue was similar to previous cases in the assessee's favor and dismissed the revenue's appeal. The judgment for A.Y. 2009-10 followed the same reasoning and dismissed the revenue's appeal. The Cross Objections by the assessee were deemed infructuous and dismissed in light of the dismissal of the revenue's appeals.

In conclusion, the Tribunal held that separate benchmarking of royalty payments was not necessary when the TNMM approach included royalty at entity level. The judgment relied on previous decisions in the assessee's favor and dismissed the revenue's appeals for both A.Ys. 2008-09 and 2009-10. The Cross Objections filed by the assessee were also dismissed as infructuous.

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