2026 (4) TMI 656

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....5. The facts of the case are that during the assessment year 2010-11 the appellant paid royalty of Rs. 64,83,281/- on export sales amounting to Rs. 25,81,94,932/-, worked out to 2.51% of export sales. This rate was well within the 8% limit approved by the Reserve Bank of India (for short 'RBI') and significantly lower than the 9.41% (inclusive of taxes) approved by the Government of India under the royalty agreement. The Transfer Pricing Officer, however, restricted the allowance of royalty to only 1% of export sales, resulting in an arm's length price of Rs. 25,81,949/- and consequent disallowance of Rs. 39,01,332/-. Aggrieved, the appellant challenged the Transfer Pricing Officer's order before the Income Tax Appellate Tribunal, Hyderabad Bench 'A'. The Tribunal, vide its order dated 20.04.2015 in ITA No. 217/Hyd./2015, confirmed the restriction imposed by the Transfer Pricing Officer following its earlier orders on similar issues for previous assessment years. Having exhausted the remedies before the Tribunal, the appellant has now approached the High Court under Section 260A of the Act, raising substantial question of law regarding the correctness of restricting the royalty ded....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....ch regulatory approvals creates a strong presumption in favor of the reasonableness of the transaction and the Tribunal erred in disregarding this crucial aspect. 9. Learned counsel for the appellant also challenged the Tribunal's reliance on the appellant's acceptance of the 1% royalty restriction for the subsequent assessment years 2007-08 and 2008-09 as justified for restricting the deduction for the assessment year 2010-11. According to the learned counsel for the appellant, the acceptance of 1% rate in subsequent years was a pragmatic decision made to minimize litigation and reduce the quantum of tax disputes, considering the overall litigation burden under the Income Tax Act and this acceptance was expressly stated to be without prejudice to the appellant's rights and was specific to those assessment years. Therefore, each assessment year constitutes a separate and independent unit of assessment, and the concession granted for one year cannot form the basis for denying legitimate deductions in another year. Thus, the Tribunal's approach of applying the acceptance for subsequent years retrospectively to assessment year 2010-11 violates fundamental principles of tax law and ....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....t arm's length. 13. Learned Senior Standing Counsel for Income Tax Department further contended that the Transfer Pricing Officer conducted a detailed examination of the royalty payments made by the appellant to Gulf Oil International Mauritius (Inc.) and determined that the rate of 2.51% paid on export sales was not at arm's length price and the benchmarking analysis conducted by the appellant was flawed and did not adequately demonstrate that the royalty payment was comparable to transactions between independent enterprises operating under similar circumstances. The Transfer Pricing Officer applied the appropriate methodologies to arrive at the arm's length price of 1% of export sales which was deemed reasonable considering the services rendered, the benefits derived by the appellant, and the market conditions prevailing during the assessment year. Therefore, the disallowance of Rs. 39,01,332/- representing the excess payment over 1% was correctly computed and legally sustainable. 14. Lastly, the learned Senior Standing Counsel for Income Tax Department further contended that the appellant's acceptance of the 1% royalty rate for subsequent assessment years 2007-08 and 2008-....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....me Tax Appellate Tribunal in Kinetic Honda Motor (P) Ltd. vs. Joint Commissioner of Income Tax (77 ITD 393). 17. We find that these contentions, while appearing persuasive at first glance, do not withstand closer scrutiny when examined in the context of the statutory framework governing transfer pricing under the Income Tax Act. The provisions contained in Sections 92 to 92F of the Income Tax Act constitute a self-contained code for determining the arm's length price of international transactions between associated enterprises. The fundamental objective of these provisions is to ensure that such transactions are conducted at prices that would have prevailed between independent parties operating at arm's length under comparable circumstances. The determination of arm's length price is a factual exercise that must be undertaken on a case-by-case basis, considering the specific facts and circumstances of each transaction. 18. The appellant's reliance on regulatory approvals granted by the RBI and the Government of India is misplaced for several reasons. Firstly, these approvals are granted for entirely different regulatory purposes. The RBI approval is concerned with foreign exc....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....lue of intangibles transferred, the benefits derived by the recipient, the economic circumstances of the parties, and numerous other factors that may affect pricing in transactions between independent parties. The record shows that the Transfer Pricing Officer conducted a detailed examination of the royalty payments and concluded that the rate of 2.51% was not at arm's length price based on the specific facts and circumstances of the appellant's case. The Tribunal also examined this determination and found no infirmity in the reasoning or methodology adopted by the Transfer Pricing Officer. The Tribunal's finding that the royalty at 1% of export sales represents the arm's length price is a finding of fact based on appreciation of evidence and materials on record. 22. The appellant has not demonstrated any perversity or legal infirmity in the Tribunal's findings. The mere fact that the appellant disagrees with the factual conclusions reached by the Transfer Pricing Officer and affirmed by the Tribunal does not render those conclusions erroneous in law. The comparative analysis presented by the appellant was duly considered by the authorities below, and their rejection of the same....