TaxTMI 
TaxTMI 
2020 (7) TMI 601
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.... Other grounds on merits Qua disallowance of u/s 40A(2)(b) (Rs. 366,82,337) 2. That order passed by Ld AO dated 20/12/2018 and further order passed by Id CIT A dated 17/06/2019 are bad in law in as much as disallowance of Rs. 366,82,337/- u/s 40A(2)(b) is made without appreciating that throughout revenue has consistently allowed subject royalty expense in assessment orders dated 16.12.2016 (AY 2014- 2015) and 23.10.2017(AY 2013-2014) and moreover there is no scrutiny examination in identical facts for AY 2015- 2016 and AY 2017-2018 and when such are the facts isolated disallowance in subject period is against the principle of uniformity, consistency and predictability and thus on this short count itself addition sustained needs to be reversed; 3. That order passed by Ld AO dated 20/12/2018 and farther order passed by Id CIT A dated 17/06/2019 are bad in law in as much as disallowance of Rs. 366,82,337/- u/s 40A(2)(b) is made without appreciating that there is no tax evasion plan which is must to invoke section 40A(2)(b) as stipulated in mother circular of CBDT no 6P of 1968 explaining that sans tax evasion provisions of section 40A(2) cant be pressed i....
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....see, the Learned CIT(A) upheld this addition. Aggrieved with the finding of the Ld. CIT(A), the assessee is in appeal before the Income Tax Appellate Tribunal (in short the 'Tribunal') raising the grounds as reproduced above. 3. Before us, the parties appeared through video conferencing. The Learned Counsel of the assessee filed a paper-book containing pages 1-49. The learned Counsel did not raise any argument in support of the jurisdictional ground raised in the appeal. Instead he raised a legal issue that disallowance under provision of section 40A(2)(b) of the Act cannot be made in the case of the assessee as the transaction under reference is an international transaction with the associated enterprise, however, no transfer pricing provisions have been invoked by the Assessing Officer that too when subject transaction in earlier years has gone under transfer pricing adjudications. According to him, the transaction of the royalty expenses falls under transfer pricing provisions, which being a specific provisions, the general provisions under section 40A(2)(b) cannot be invoked for making addition of excessive royalty expenses. 4. On the merit of the addition, the learned....
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....that once purchases are made by the assessee from the persons falling under any of the categories under section 40A(2)(b), the burden is upon the assessee to establish the price paid by it is not excessive or unreasonable and it is duty of the assessee to prove and discharge its burden by leading proper evidence subject to cross-examination by the Department. 6. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. Before us, no arguments had been preferred by the Learned Counsel of the assessee on ground No. 1 of the appeal, therefore same is dismissed as not pressed. 6.1 As regard to addition on merit is concerned, we find that disallowance under section 40A(2)(b) of the Act can be made by the Assessing Officer, if he is of the opinion that such expenditure is excessive or unreasonable having regard to: (i) the fair market value of the goods, services or facilities for which payment is made or; (ii) the legitimate needs of the business of profession of the assessee or; (iii) the benefit derived by or accruing to him therefrom. In above circumstances, the Assessing Officer shall disall....
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....ssing Officer has only questioned the fair market value of the expenses and not questioned to the legitimate need of the expenses or the benefit derived from the expenses. The relevant finding of the Assessing Officer is reproduced as under: "3.2.1. The charts related to Definition of Product and the Royalty rates as on 01.04.2015 & 10.09.2015 filed the assessee have been perused and comperative figures for some of the products are as under: S.No. Customer Name Part Code Rate of Royalty w.e.f 1.4.15 Rate of Royalty w.e.f 1.10.15 % of Increase 1 MSIL FK0422-12S 3.4% 5.34% 55% 2 MSIL FK0491-12S 5% 5.34% 7% 3 DEID FK0422-12S 5% 5.29% 6% 4 DEHU FK0422-12S 5% 5.24% 5% 5 DAIKIN RA-063 1.8% 2.5% 39% 6 DAIKIN RB-133 4% 6.7% 67.5% 7 VOLTAS PCB. RB -126 4% 4.39% 10% 8 ONIDA PCB-RB-108 4% 6.83% 71% From the perusal the above chart it can be observed that, on the same kind of parts, the assessee company had increased the royalty without any basis in a very short time span of 6 months. In some cases this increment is ....
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....rived. In the instant case the Assessing Officer has only compared royalty expenses of the preceding assessment year and no efforts have been made for identifying the fair market value of such expenses during relevant period, which is one of the requirement for invoking the provisions of section 40A(2)(b) of the Act. Under transfer pricing provisions the arm's-length price is compared with similar transactions. Though the provisions of section 40A(2)(b) of the Act are general provision as compared to the specific provisions of the transfer pricing, the Assessing Officer was required to compare the royalty expenses paid in case of the similar product by other companies during the relevant period. The Assessing Officer has not done any such exercise and only made basis of expenses paid in earlier years. 6.6 The Learned Counsel of the assessee contended that in assessment year 2013-14 the transaction of the royalty expenses were subjected to transfer pricing provisions. He submitted that in assessment year 2013-14 average royalty payment was 2.99% of the sales, which stands accepted by the Department and therefore, no disallowance should be made in the year under consideration, whe....