Assessee making periodically RBI approved royalty payments to its AE, TPO not justified in determining ALP at Nil

Brief about the case

The assessee-company was engaged in the business of manufacture of pre-engineered building system products. During relevant year, assessee entered into international transactions with its AE situated in Kuwait. In course of said transactions, assessee paid royalty to its AE at the rate of 7.5 per cent of sales. The TPO took a view that assessee had not derived any benefit from services rendered by AE requiring payments in question. He thus took ALP of said payments at nil. Accordingly, the TPO made addition to assessee’s ALP in respect of royalty payments made to AE. The DRP noticed that the Tribunal, in assessee’s own case for the assessment year 2006-07 onwards, had considered this issue at length and had come to the conclusion that it was not required by the assessee to demonstrate that payment of royalty was justified because agreements were periodically approved by the RBI and by the Ministry of Industries and the assessee was paying the amount as per the agreements. The DRP following aforesaid orders of the Tribunal, deleted the addition made by the TPO. Revenue knocked the doors of ITAT. It was held by the ITAT (Hyderabad) since DRP had only followed decision of ITAT in assessee’s own case for earlier assessment years, impugned order passed by DRP did not require any interference and therefore the addition was deleted.
Detail

Facts of the case:

• The assessee-company was engaged in the business of manufacture of pre-engineered building system products.
• On verification of the record, the AO observed that assessee has entered into international transactions exceeding Rs.15.00 crores. Therefore, he made a reference to the TPO u/s 92C of the Act for determination of the Arms’ Lengh Price of international transactions.
• The assessee paid royalty @ 7.5% on the sales amounting to Rs.9,39,74,409 and Rs.61,77,041 towards technical fee, subject to a common agreement .
• The AO observed that royalty and fee for technical services are transactions for intangible services and therefore, TPO accepted the CUP method adopted by the
• assessee as the most appropriate method.
• TPO also observed that for financial year 2009-10 and the preceeding previous years from the P&L a/c, it is evident that most of the work is outsourced by the assessee on job work basis. Therefore, he came to the conclusion that assessee has engaged third parties to get the work done on the projects undertaken in a significant way, meaning thereby, that the work involved is a low end job which does not require any speciliazed skills. Therefore, he was of the opinion that there was no need for obtaining any technical services by the assessee from its AE. As regards payment of royalty, the TPO held that unless it is shown that tangible and direct benefit is derived by the assessee and that the royalty payment made, is commensurate with the benefit that is derived or accepted to be derived when parties deal with each other at ALP, the ALP of such payment of royalty would have to be treated as either ‘Nil’ or only to the extent it is shown that the benefit actually was derived from such payment.
• Accordingly, the TPO made addition to assessee’s ALP in respect of royalty payments made to AE.
• The DRP noticed that the Tribunal, in assessee’s own case for the assessment year 2006-07 onwards, had considered this issue at length and had come to the conclusion that it was not required by the assessee to demonstrate that payment of royalty was justified because agreements were periodically approved by the RBI and by the Ministry of Industries and the assessee was paying the amount as per the agreements.
• The DRP following aforesaid orders of the Tribunal, deleted the addition made by TPO.
• The revenue appealed before the Hyderabad ITAT.
• The Hyderabad ITAT decided in favor of assessee.

Contention of the Revenue

• The learned Departmental Representative submitted that the DRP has erred in holding that the royalty payment/fee for technical services is not warranted, though the TPO has held that the applicant was not able to substantiate that any benefit was derived by the tax payer by the services provided by the AE requiring such payments.

 Contention of the Assessee

• The ld Counsel for the assessee, reiterated the submissions made by the assessee before the authorities below and has also relied upon the decision of the Tribunal in assessee’s own case for the earlier A.Ys wherein similar transactions have been analysed by the Tribunal and thereafter relief granted to the assessee.

Held by ITAT (Hyderabad)

• As the DRP has only followed the precedent on the issue in the assessee’s own case and has accordingly issued directions to the AO and the assessment order is in consonance with such directions of the DRP, we do not find any reason to interfere with the same.