TaxTMI 
TaxTMI 
2016 (5) TMI 343
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.... International Transaction." 3. In a connected cross objection, filed by the assessee against the same order, the assesse has raised the following grievance:- "On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer and the Hon'ble Commissioner of Income Tax (Appeals) erred in rejecting the appellant's contention that as the payments of Royalty were approved by the Reserve Bank of India the same was at arm's length." 4. The relevant material facts are as follows. The assesse before us is a subsidiary of Schenectady (India) Holdings Pvt. Ltd. which, in turn, is a wholly owned subsidiary of SI Group Inc. USA. The assessee is engaged in the manufacture and sale of organic chemicals and phenolic resins having wide range of industrial applications. During the course of proceedings before the Transfer Pricing Officer, it was, inter alia, noted that the assessee has made a payment of Rs. 3,39,67,540/- towards royalties. However, the Transfer Pricing Officer held arm's length price of the royalty at NIL on the basis of following reasoning:- "3. Payment of Royalty In the form 3CEB, the assessee has reported payment ....
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....echnology utilized under the agreement which enhanced the sales or production. On the other hand, the annual reports for 2005-06 &. 2006 -07 clearly state: "The technology acquired by the Company in the past for production of cumene, phenol, acetone, phenolic resins have been fully absorbed. The technologies have been further upgraded over the years through in house innovation and knowledge engineering" Thus, it can be inferred that there was no technology utilized under the said agreement to justify royalty payment. Even otherwise the assessee failed to benchmark that the payment was at ALP. That other AEs have paid at similar rates would not benchmark the transaction, as all were controlled transactions. In view of this an adjustment of Rs. 3,39,67,540/- is to be made as assessee failed to give economic justification for the payment of royalty." 5. Aggrieved, assessee carried the matter in appeal before the leaned CIT(A) who deleted the said adjustment by observing, inter alia, as follows: "6.5 I have considered the facts of the case, submission of the appellant as against the findings/observations of the AO/TPO in their order u/s. 143(3) r.w.s. 144C....
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....ot be said that the appellant has not been able to demonstrate the receipt of technology and technical support on continuous basis. iv. The TPO in his order has also not brought any fact to the contrary to such submission of the appellant. v. The appellant has contended regarding the observations of the TPO that approval of RBI cannot be considered for determination of arm's length price. The appellant has relied on Rule 10B(2)(d) and on the various decisions in this regard. In respect of such contentions of the appellant, it is mentioned that the approval of the RBI for the payment of royalty is from the perspective of foreign exchange management Act. Under such circumstances, though the bona fide of the payment to be made or made by the appellant cannot be doubted but it remains to be examined whether such payments made by the appellant is inconformity with an arm's length principle as per the Indian Transfer Pricing Regulations. The Hon'ble Punjab & Haryana High Court in the case of Coca Cola India Inc. Vs. ACIT (P & H) (2008-TIOL-658-HC-P & H -IT) have clearly observed that the approval of RBI would not be determinative factor from the perspective ....
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....er and is conforming intra-group transfer pricing policy. x. The TPO in his order has also observed that appellant has not benchmarked this transaction. During the course of appellate proceedings, the benchmarking analysis conducted by the appellant was submitted additional evidence under rule 46A. It has been contended by the appellant that it case falls under clause (d) of Rule 46A of the I.T. Rule, 1962. Such additional evidence submitted by the appellant was forwarded to the TPO who after examining the same, has submitted his report vide his letter No. Addl. CIT/TP-II(4)/ Addl. Evidence/12-13 dated 26.9.2012. The contents of the report of the TPO has been reproduced as sub-para 6.3 above. It is seen from the report of the TPO that he has not specifically disputed the benchmarking analysis conducted by the appellant and has mentioned that the calculation of arm's length price rate of royalty payments answers only secondary reasons for the disallowance of royalty by the TPO, the primary ground being the economic justification which has not been answered xi. This being the fact that the appellant has not benchmarked this international transaction and further,....
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.... 8. We find that the issue is covered, by our order of even date in assessee's own case for the assessment year 2006-07, wherein we have held as follows :- "7. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that the Transfer Pricing Officer did note, and was apparently swayed by the fact of assessee's making losses. It was for this reason that the payment of royalty was held to be not at an arm's length price, as is implicit in the Transfer Pricing Officer's observation to the effect that "having considered the submission made by the assessee in respect of payment of royalty, the position of the assessee cannot be accepted due to the fact that the assessee has incurred an operating loss during the year under consideration". The Transfer Pricing Officer has thereafter proceeded to treat the arm's length price of the royalty as "NIL", thus virtually disallowing entire royalty payment. It is not, however, clear as to under which method of ascertaining the arm's length price, the value of royalty has been determined as "NIL". There cannot be an adhoc adjustment in ....
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....llowed. 12. We now take up the appeal filed by the assessee. 13. Ground no.1 is general in nature and does not call for any adjudication. 14. In ground nos.2, 3 and 4, which we will take up together, the assessee has raised the following grievances:- Ground No.2 - Addition under Section 92CA(3) of the Act in respect of import of product 2, 4 DTBP from the associated enterprise, amounting to Rs. 16,34,685. 2.1 On the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in confirming the addition made by AO/TPO relating to import of the product 2, 4 DTBP, to the extent of Rs. 16,34,685 under Section 92CA(3) of the Act by not appreciating the submissions made by the Appellant. 2.2 The Appellant prays that the Transfer Pricing adjustment made under Section 92CA(3) of the Act in relation to import of product 2, 4 DTBP is erroneous, unwarranted and be deleted." Ground No. 3 - Addition under Section 92CA(3) of the Act in respect of export of the product DPO to the associated enterprise, amounting to Rs. 7,99,076. 3.1 On the facts and in the circumstances of the case and in law, the Learned CIT(A) has erre....