TaxTMI 
TaxTMI 
2010 (7) TMI 1047
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....e AO made this addition on the basis of TPO's order passed u/s 92CA(3) of the I.T. Act." 2. The facts are that during the assessment proceedings, the AO noticed the following International Transactions entered into by the appellant during the financial year 2003-04, as reported in Form 3CEB, filed along with the return of income. S.No. Type of international Transaction Method selscted Value of Transaction 1. Purchase of raw material, dies, jigs and special tools TNMM 1,19,43,197 2. Purchase of consumable & raw material TNMM 69,98,605 3. Sale of finished goods TNMM 6,05,40,938 4. Sales return of finished goods sold - 4,30,104 5. Royalty CUP 1,00,32,469 6. Payment of commission TNMM 70,933 7. Payment of dividend....
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.... in accordance with the provision of Sec. 92C(1) and (2). ii) The TPO further observed that royalty has been paid on total sale irrespective of sales made to same Associated Enterprise or other enterprises. Royalty has been paid @ 3% of he sales. Sales made to the AE amounted to Rs. 6,05,40,938/-. Accordingly, the corresponding royalty paid to the AE on these sales comes to Rs. 18,16,228/-, therefore, TPO held that it should not allow and to that extent it is an excess payment and the royalty payment is not at arm's length to that extent. Accordingly, an adjustment of Rs. 18,16,228/- is made on the royalty account. iii) The TPO further noticed that the assessee has incurred following expenses in respect of the two personnel of the Associa....
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....ing the difference in the arm's length price and the value of International Transaction on account of royalty, overlooking that the AO had made the addition on the basis of the TPO's order passed u/s 92CA(3) of the I.T. Act. 9. The learned counsel for the assessee, on the other hand, has placed strong reliance on the impugned order. It has been contended that the ld. CIT(A) has rightly deleted the addition wrongly made by the AO; and that the TPO did not bring any material on record to show that the prices were not at arm's length. 10. We have heard the parties and have perused the material on record. The addition of Rs. 43,68,838/- comprises of two components, i.e., the expenditure on deputation of personnel of Associated Enterprise (add....
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....'s length price. It is these two amount of Rs. 16,76,839/- and Rs. 8,75,771/-, that go to make up the amount of Rs. 25,52,610/-, which was added on the first count by the AO, which addition has been deleted by the ld. CIT(A). The payment was an obligation of the assessee as per the know-how licence agreement, as noted by the ld. CIT(A). Besides, the TPO failed to take into account the fact that the assessee never bore the cost of about Rs. 75.38 lakhs, representing the cost of salary paid in Japan to the ex-patriates deputed . It is noteworthy that in assessment year 2002-03, the TPO had accepted the payment of royalty to MMTL. The same had also been done by the AO for assessment year 2003- 04. Such payment was held to be at an arm's length....
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....t was this which was the determining the factor, as rightly noted by the ld. CIT(A). It has not been shown that the payment was not as ought to have been made by a prudent business-man under similar circumstances, in the course of its/his normal business activities. 13. The payments made by the assessee to the Joint Managing Director and the Technical Adviser were thus correctly found by the ld. CIT(A) to be genuine business expenditure. 14. So far as regards the other limb of the addition, the assessee was paying royalty @ 3% on export as well as domestic sales net of imported raw material and brought out components. The actual payment of royalty was of Rs. 12.82 lakhs. This was erroneously computed for sales to MMTL, at Rs. 18,16,228/-.....
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....uch, the fee was paid on the sales made to the AE also. There was no material brought by the TPO to demonstrate that the price on sales made to the AE was not at an arm's length . That being so, it was at market determined prices that the sales were made by the assessee. Moreover, it goes unchallenged that the fees paid under the Technology Agreement comprises an integral part of the cost of production, which was recovered from the sale price. It was thus, that so far as regards the sales made to the AE, the amount of fees paid under the Technology Agreement was recovered by the assessee from the AE as part of sale price. This being so, such fee paid became revenue neutral, that is to say, in case the assessee did not pay the fees on the sa....