ALP Adjustment not permissible on Notional Amount of Royalty Paid by Overseas Subsidiary: ITAT [Read Order]

While allowing the appeal, the ITAT follows the earlier order and upholds CIT(A)'s decision
ALP Adjustment - Notional Amount - Royalty Paid - Overseas Subsidiary - ITAT - taxscan

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) held that ALP Adjustment is not permissible on a notional amount of royalty paid by an overseas subsidiary and confirmed the CIT(A)’s action in deleting the addition made on account of waiver of royalty received from two subsidiaries.

Asian Paints, the assessee is a company engaged in the business of manufacturing paints and enamels. The assessee filed its return of income declaring a total income of Rs.1687,44,80,830 under the normal provisions of the Act. Subsequently, the assessee revised its return of income declaring a total income of Rs.1693,93,81,100. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) were issued and served on the assessee.

The Assessing Officer (“AO”) vide order passed under section 143(3) of the Act assessed the total income of the assessee at Rs.1973,66,56,516, under normal provisions of the Act, after making certain additions/disallowances. The CIT(A), vide impugned order, granted partial relief to the assessee. Being aggrieved, both the assessee as well as the Revenue are in appeal before us.    

Following its earlier approach adopted during AYs 2011-12 to 2014-15, the AO made the addition of the balance royalty, i.e. 2%, which was deleted by the CIT(A), added the Bench.

The two-member Bench comprising Prashant Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that considering the financial position of subsidiaries located in Bangladesh and Sri Lanka, the assessee agreed to waive part of the royalty and thereby credited 1% of the royalty amount to the P&L account instead of 3% as per the agreement.

The Bench observed that the Coordinate bench in assessee’s own case deleted a similar addition by holding that when only 1% Royalty is payable by overseas subsidiaries, AO has no authority to make an addition of balance 2% Royalty waived by the parties, which is nothing but a notional income considered taxable by the AO in assessee’s hands.

While allowing the appeal, the ITAT follows the earlier order and upholds CIT(A)’s decision.

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