TaxTMI 
TaxTMI 
2017 (4) TMI 1011
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....n the circumstances of the case and in law, the learned Assessing Officer/TPO/DRP has; 2. Erred in determining the arm's length price for royalty payment as Nil (without undertaking economic analysis and using one of the prescribed methods) and disallowing the entire royalty payment amounting to Rs. 1,91,03,040/; 3. Erred in rejecting the transfer pricing analysis undertaken by the appellant by considering the FIPB approval as comparable uncontrolled price ('CUP'); 4. Erred in violating the principles of judicial discipline in not following the order of the Hon'ble Tribunal for AY 2011-12 wherein the Hon'ble Tribunal, relying on Jurisdictional High Court in case of SGS India Private Limited I.T. Act Nos 1807 of 2013 has held that FIPB approval is a valid CUP for benchmarking purposes; 5. Erred in not appreciating the fact that the royalty payments is already benchmarked under Transaction Net Margin Method ('TNMM') analysis under bundled transaction approach; 6. Erred in not accepting the additional evidences submitted by the Appellant using CUP method from Power K database for fresh benchmarking analysis; Corporate Tax Grounds On the facts and in the circumstances of ....
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.... at the rate of 3%. Therefore, the same was at Arm's Length Price as the payment was far below then the rate of approval granted by the government under FEMA rules and industrial norms. However, the AO did not agree with the above contention of the assessee. It was observed by him in the assessment order that no comparable royalty agreement was produced by assessee to justify the CUP method adopted by it. Therefore, AO determined the 'ALP' (Arm's Length Price) at nil in respect of payment of royalty and accordingly made addition of the entire amount of royalty paid by assessee to its AE. It was further brought to our notice that in doing so the AO followed the assessment orders of earlier years i.e. AYs 2010-11 & 2011-12 passed in assessee's own case. The DRP also followed its earlier orders while endorsing the views of the AO and gave no relief to the assessee. 4. During the course of hearing before us, Ld. Counsel of the assessee drew our attention on the order dated 13.9.2016 passed by the Tribunal for AY 2011-12 in assessee's own case and submitted that this issue has been decided in favour of the assessee. It was also contended that Tribunal had relied upon the order of the H....
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....ssee and the payment at the rate of 3% was made only for grant of license and right to use the trade mark owned by its AE. 9. Further, she also brought on record Press Note No.8 (2009 series) dated 16.12.2009 issued by Ministry of Commerce & Industry, Department of Industrial Policy and Promotion (FC Section) which amended the earlier notification issued on the subject of requirement of approval for payment of royalty to the foreign collaborator under different circumstances. The said notification waived all the restrictions levied in this regard and payment of royalty for transfer of technology or for use of trademark/brand was put under the automatically route completely. Thus, no approval of the government of India was required for making such payment. However, such payments remained subject to the Foreign Exchange Management Rules and requirement of post reporting system for payment of royalty was also retained. She also placed before us, copy of the notification dated 15th May, 2010 issued by Ministry of Finance (Department of Economic Affairs) whereby Foreign Exchange Management (Current Account Transaction) Rules, 2010 were suitably amended to bring them in line with the no....
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....benefits of clause (iv) as against the benefit of clause (iii) as was contended by AO in the said case. However, at no place Hon'ble High Court has given any such ratio that rates prescribed by the government authorities under automatic route would ipso-facto become Arm's Length Price also under Transfer Pricing Regulations. It was thus contended that assessee cannot take benefit of aforesaid judgment of the Hon'ble Bombay High Court in each and every case dehors the facts of that case. The said judgment confined to the peculiar facts and circumstances of the said case only and no such ratio came out from the Hon'ble High Court judgment as is claimed by assessee. She further placed relying upon the judgment Hon'ble Supreme Court in the case of B.S. Bazwa vs State of Punjab 2 Supreme Court Cases 523 (SC) for the preposition that the decision rendered on the basis of concession of one of the parties does not lay down a preposition of law, which can be made binding on other cases. In view of these submissions she requested for following the order of the Tribunal for AY 2010-11 and also requested for sending this issue back to the file of the AO for making fresh examina....
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....as the DRP were of the opinion that the payment of royalty has to be justified on the basis of 'ALP' price to be determined on the basis of independent study to be carried out as per transfer pricing regulations and since no such proper study has been made by assessee, no 'ALP' could be determined and thus same was taken at nil. Under these circumstances, total amount of royalty of Rs. 1,91,03,040/- paid by assessee to its AE located in Germany was held to be not allowable since it 'ALP' was taken it nil and accordingly and upward adjustment of the same amount was made on account of royalty payment. 13. During the course of hearing before us, Ld. CIT-DR heavily relied upon the decision of the Tribunal in assessee's own case for assessment year 2010- 11, wherein this issue was held against the assessee and the matter was sent back to the AO for carrying out fresh transfer pricing analysis to determine 'ALP' of the royalty payment. She also relied upon a Press Note No. 8 (2009 series) dated 16.12.2009 issued by Ministry of Commerce and Industry whereby restrictions on payment of royalty were waived and the same was put under automatic route. She also relied upon judgment of Hon'....
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....y and payments for use of trademark/brand name on the automatic route i.e. without any approval of the Government of India. All such payments will be subject to Foreign Exchange Management (Current Account Transaction) Rules, 2000 as mentioned from time to time. 3. A suitable post-reporting system for technology transfer/ collaborations and use of trade mark/brand name will be notified by the Government separately. 4. These guidelines issue in modification of provisions relating to foreign technology proposals/approvals contained in paragraphs 3 of Press Note 10 (1991), para 7 of Press Note 11 (1991), para 4 & 5 (a) of Press Note 12 (1991), para 2-6 of Press Note 20 (1991), para 2 of Press Note 5 (1992), para 4 Press Note 4 (1994), para 3 of Press Note 18 (1997) and paragraphs III and IV of Press Note 9 (2000). These guidelines will issue in supersession of provisions of Press Note 18 (1991), Press Note 4 (1992), Press Note 1 (1995), Press Note 4 (1996), Press Note 1 (2002) and Press Note 2 (2003). (Gopal Krishna) Joint Secretary to the Government of India D/o IPP F. No. 5(6)/2008-FC Dated 16.12.2009". 15. A perusal of the aforesaid notification shows that the Government of I....
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....sonableness and genuineness of the expenditure could not have been gone into by the Assessing Officer. The purpose for which such permission is given by the RBI is totally different. The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the Income-tax Act and that is the function of the Income-tax authorities and, therefore, they can validly go into such an issue. Thus, we answer question of law No.2 in favour of the revenue and against the assessee but hasten to add that it has no bearing on the outcome of the case as they payment is found to be reasonable and genuine, even otherwise". (Emphasis supplied in bold) 18. Further, in the case of Oracle India Private Limited, it was inter-alia observed by the Hon'ble Delhi High Court that notification issued by RBI to the said assessee permitting payment of royalty at the rate of 30% of IPP of the Oracle Software Appliances may not be the conclusive factor for the purpose of determination of 'ALP' under Transfer Pricing Regulations. 19. Similarly in the case of Sony Ericsson Mobile C....
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....B approval is not determinative of ALP and cannot be considered to be a valid CUP. Automatic route under which FIPB approvals or RBI approvals are granted have been devised for the "ease of doing business". These approvals emanate from other legislation or policy and are not in relation to determination of Arm's Length Price. The purpose of the RBI approval/FIPB approval entirely different and cannot be equated with the arm's length principle. The approvals of rates given by the DIPP and the RBI are for different purposes, like for promotion of industries, management of foreign exchange etc. and it varies in accordance with the business practices prevalent at different times which are clear from the RBI approvals themselves. Going by the relevant TP provisions as enshrined under the Act and relevant Rules, it is mandatory that the appellant has to independently benchmark its international transaction with independent comparables so as to arrive at arm's length price, which has not been made in this case. The comparability analysis is the substratum of determining the ALP, which has not been done by assessee at any stage. At the very same time we found that the revenue authorities h....
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.... are not shifted to foreign tax jurisdiction without payment of legitimate share of tax due in India. Therefore, in our considered opinion, independent exercise of determination of 'ALP' is needed to be done to find out if payment of royalty has been dome in line with 'Arm's Length Price' or not. It has become all the more necessary now in view of Press Note No.8 (2009 series) dated 16.12.2009 (supra) brought on record before us, since restriction on the rates of payment of royalty has been waived by concerned authorities. Therefore, the 'ALP' of the royalty needs to be determined in accordance with the Transfer Pricing Regulations. However, we also find force in the contention raised by the Ld. Counsel that if an authority by way of any specific approval has allowed a particular rate of payment, then it does carry persuasive value and can of course act as one of the supportive tools for carrying out bench marking of transaction of payment of royalty. Thus, under these circumstances and in view of aforesaid discussion, we find it appropriate to send this issue back to the file of the AO, as has been done by Tribunal in AY 2010-11 in assessee's own case. 23. The assessee shall be f....