TaxTMI 
TaxTMI 
2026 (3) TMI 115
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....-13, the assessee company paid Rs. 11,00,82,626/- to M/s. Netafim Ltd., Israel towards Royalty under a Technical Collaboration Agreement for obtaining technical know-how, training and skills relating to extrusion, assembly and marketing of drip irrigation systems. The said transaction was reported as an international transaction under section 92B of the Act and the assessee conducted a transfer pricing study under section 92C of the Act using the Comparable Uncontrolled Price (CUP) method. As per the benchmarking analysis carried out by an independent Chartered Accountant firm, the royalty rate of 4% of adjusted sales paid by the assessee company was found to be within the arm's length range, with the mean rate of comparable agreements being 4.30%. Upon reference from the Assessing Officer (AO), Transfer Pricing Officer (TPO) examined the said transaction and issued a show cause notice proposing to determine the arm's length price (ALP) of the royalty payment at NIL. Assessee submitted a detailed reply in support of the transaction, however, Ld. TPO proceeded to determine the ALP at NIL and proposed an upward adjustment of Rs. 11,00,82,626/. Ld. AO made a corresponding addi....
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....t had accrued to the Appellant from the payment of royalty, and accordingly determined the ALP of such payment at NIL. TPO was of the view that the appellant failed to substantiate how the services under the royalty agreement translated into direct economic benefits. Further, TPO without prejudice to his contention that the royalty agreement is non-genuine which does not pass the commercial benefit test and thus the ALP of such royalty is NIL, contended that the benchmarking exercise carried out by the appellant is faulty and defective and accordingly rejected the same. As an alternative proposition, the ALP of the royalty rate was thus determined at 1.75% of Net sales 4.8. Specifically, the appellant has drawn attention to orders passed by the Hon'ble ITAT for AYs 2003-04 to 2007-08, wherein the Hon'ble Tribunal has upheld the royalty payments at the rate of 4% as being at arm's length. The Hon'ble ITAT, in those years, not only accepted the royalty transactions as legitimate business expenditures but also deleted the transfer pricing adjustments made by the TPO. These decisions have not been reversed as of the date of this order. 4.9. Further, co....
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....ment is as follows: "13. Once the Tribunal in its earlier orders has held that the transaction of payment of royalty for use of technology is inextricably linked with manufacturing activity and should be aggregated with other international transactions in the manufacturing segment for the purposes of benchmarking the same, and the TPO having accepted the aggregating of international transaction of payment of royalty with other international transactions in the manufacturing segment and not drawn any adverse inferences in respect of such aggregation of royalty payment under identical agreement, the Tribunal should have followed the order of the co-ordinate bench rendered under identical facts. More so, when in a majority of the years from the Assessment Year 2006-07 up to the Assessment Year 2014-15 it was under the very same agreement and the orders were passed after thoroughly scrutinising the international transactions entered into by assessee, the transfer pricing report obtained and the transfer pricing documentation maintained. 14 Therefore, we answer all the three questions in favour of assessee. 15 Appeals accordingly allowed, No order as to costs.....
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..... Additionally, I have verified that the all the income and expenditure incurred in relation to the said project and under the said agreement were also accounted in the books of the Appellant which is also substantiated and confirmed by the Form 10CCB issued by the Chartered Accountant as per the provisions of section 80IA of the Act. Further, the learned AO has concluded that the appellant was engaged in the business of works contract by alleging that the appellant was executing contractual functions on behalf of its holding company for the Andhra Pradesh Government, which itself treated the payments as contractual in nature by deducting tax under section 194C of the Act. However, from the facts of the case. I find that the appellant was independently executing its obligations under a contract directly entered into with the Andhra Pradesh Government, and there is no material on record to suggest that the appellant was acting on behalf of its foreign parent company. The mere fact that tax was deducted under section 194C does not conclusively establish that the arrangement was a works contract, as section 194C covers all categories of contracts and not exclusively works contracts. T....
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....g of Rs. 11,00,82,626/- adjustment made on account of Royalty payment to Associated Enterprise (AE) without appreciating that there was no justification by assessee for payment of royalty to AE? (ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that Royalty payment to Associated Enterprise (AE) to be aggregated under TNMM without appreciating that only intrinsically linked transaction can be aggregated and payment of royalty is a separate class of transaction is not intrinsically lucked transaction and has to be benchmarked separately? (iii) On the facts and circumstances of the case and in law, the Ld. CIT(А) erred in allowing the deduction u/s 80IA of the Act amounting to Rs. 28,35,347/ ignoring the fact that assessee was executing contractual functions on behalf of its holding company for the Andhra Pradesh Government, which itself treated the payments as contractual in nature. (iv) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal. 5. Heard rival submissions and perused the materials available on record including the Paper....
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....pon RBI/SIA approval as comparable uncontrolled price (CUP). Though, learned Commissioner of Income Tax (Appeals) has observed that the assessing officer has rightly determined the ALP of royalty payment at nil by following CUP, however, nowhere in the assessment order the assessing officer has mentioned the method adopted by him to determine the ALP. Be that as it may, it has been brought to our notice that while deciding identical issue relating to payment of royalty to AE, the Tribunal has decided the issue in favour of the assessee. On perusal of the order passed by the Tribunal in preceding assessment year, as referred to above, we find that while deciding identical issue under similar facts and circumstances, the Tribunal has held as under:- "13. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. The factual matrix relating to the disputed issue reveals that the assessee has entered into various international transactions with its AE Netafim, Israel, including payment of royalty. It is also a fact that in the transfer pricing study report, the assessee has aggregated all international trans....
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....t convinced with the benchmarking of the assessee, he should have independently benchmarked the arm's length price of royalty payment by adopting any one of the prescribed methods which he has failed to do. That being the case, the determination of arm's length price at nil on purely ad-hoc basis without assigning any valid and acceptable reason is legally unsustainable. Therefore, the addition made on account of adjustment made to the arm's length price of royalty payment deserves to be deleted. 15. Having held so, it is now necessary to deal with some of the submissions made by the learned Departmental Representative. The learned Departmental Representative has submitted that the Transfer Pricing Officer determined the arm's length price of the royalty payment by applying CUP method. Firstly, neither the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer nor any other material even remotely demonstrate that the Transfer Pricing Officer has applied method while determining the arm's length price of royalty payment at nil. Therefore, the learned Departmental Representative while arguing the issue before us has given a complete....
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....ment and has held that TNMM is the most appropriate method to determine the arm's length price of royalty payment. In the facts of the present appeal, while arguing in favour of applicability of CUP, the learned Departmental Representative has submitted that since the assessee failed to furnish rates at which royalty was paid by other group entities, the Transfer Pricing Officer determined the arm's length price at nil. The aforesaid argument of the learned Departmental Representative is unacceptable simply for the reason that the Transfer Pricing Officer could not have determined the arms length price under CUP by applying the rate of royalty paid by other & JU Group entities since they are controlled transactions. Whereas, rule 10B (4) (a) mandate mandates that the price charged for an uncontrolled transaction /transaction should be considered as a CUP, As regards the justifiability of payment of royalty qua RBI/SIA approvals, we must observe that in the decisions cited by the learned Authorised Representative, the Tribunal has held that the rate at which payment of royalty was approved by the RBI/SIA though, the Tribunal has observed that arm's length price of royalt....
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....ch decisions, we do not find any infirmity in the order passed by Ld CIT [A]. Thus, the Ground nos.1 and 2 raised by the Revenue are devoid of merits and liable to be dismissed. 6. The Assessee claimed deduction u/s. 80IA(4) of the Act in respect of its participation in the Andhra Pradesh Micro Irrigation Project (APMIP). Whereas the only basis for disallowance made by the Ld. AO was with reference to the name "Netafim ACS and India Ltd." on the first page of the Agreement which was a typographical error. During the appellate proceeding the assessee placed on record various documentary evidences to substantiate that it was in fact the executing party, copy of the agreement signed by the assessee's Managing Director, work orders, invoices, payment advices, performance certificates, TDS certificates. After considering the same Ld. CIT[A] granted the relief to the assessee of deduction u/s. 80IA(4) of the Act of Rs. 28,35,347/=. The Revenue could not place on record any contrary material to deny the claim of deduction u/s. 80IA(4) of the Act. Therefore, the factual findings arrived by the Ld CIT[A] with documentary evidences does not require any interference and the Ground no. 3 ra....