Clubbing of International Transactions is not possible when the AE does not Provide Adequate Justification: ITAT Bangalore [Read Order]

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Upholding an order passed by the Transfer Pricing Officer, the division bench of the ITAT, Bengaluru ruled that international Transactions cannot be clubbed unless the AE provide adequate justification for such clubbing.

The assessee-Company, a subsidiary of M/s Falcon Ltd, Hong Kong. As per an agreement entered into by the assessee with M/s Falco Ltd, the assessee made royalty payment at 8% of the sale to the latter for manufacturing electronic components by using technology, expertise and knowhow of Falco and marketing and selling components under the brand name of Falco in India as well as abroad by the assessee-company.

When the matter was referred to TPO, he held that the appellant was not justified in paying royalty at the rate of 8% on sales as there was no value addition made from the AE. He was of the opinion that if the royalty is paid on gross sales it amounts to paying the royalty on the purchases made by the AE also. Accordingly, he made making ALP adjustment in respect of royalty payment made to M/s. Falco Limited.

The bench noted that it is a settled legal position that an international transaction can be clubbed / aggregated with other international transactions provided such transactions are closely connected with each other. However, the assessee, in the present case, failed to establish that the transaction royalty payment is closely linked with the other transactions carried out with AE. “It is trite law that a justification should be shown for clubbing the transactions. In the absence of such justification clubbing other transactions is not possible. The onus always lies on the assessee-company to establish the justification for clubbing and aggregation of the transaction of payment of royalty with other transactions. As mentioned (supra) the assessee-company had failed to discharge such onus, in the circumstances we confirm the orders of the lower authorities in this respect of ALP adjustment on payment of royalty.”

Read the full text of the Order below.

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