Income Tax Dept cannot Rely on Press Notes to Determine Arm's Length Price of Sales for Payment of Royalty: ITAT [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) held that the lower authorities i.e., income tax authorities was not correct in referring press notes to determine arm's length price either 8% or 7.5% of the sales of the sales for payment of royalty.

The assessee, Menzis Bobba Ground, is in the business of providing ground handling services in the nature of ticketing, checking, load control, messaging and standard communication etc. It entered into a Technical Service Agreement on 06/02/2008 with its Associated Enterprise (AE) Menzies Aviation PLC, UK to get technical advice and support in relation to its ground-handling business. For the years under consideration, the assessee paid a technical service fee of Rs. 4,01,28,000/- for assessment year 2010-11 and Rs. 3,37,53,136/- for assessment year 2011-12 to the AE.

Assessee, in its Transfer Pricing (TP) documentation, benchmarked the international transaction using Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) rejected TNMM as the most appropriate method (MAM) on the ground that payment of technical service fee is in the nature of intangibles and has to be analyzed under Comparable Uncontrolled Price (CUP). He compared the amount of technical service fee paid with the royalty percentage of 8% as allowed to be repatriated by the Reserve Bank of India (RBI) prescribed under the automatic route of remittance, resulting in TP adjustments for both years. Learned Assessing Officer accordingly passed the final assessment orders.

Aggrieved by such an action of the Assessing Officer/TPO, the assessee filed appeals before the Commissioner of Income Tax (Appeals) [CIT(A)]. The first appellate authority, however, rejected the appeals by placing reliance on the decision of the Co-ordinate Bench of the Tribunal in the case of Kirby Building Systems India Limited vs. DCIT, and enhanced the TP adjustment by considering 7.5% as the acceptable percentage of payment of technical service fee paid by another company as ALP for assessee's international transaction. Aggrieved, the assessee appealed before the tribunal.

After hearing both the parties, the tribunal came to the conclusion that it is not necessary to refer to all such decisions on the very same principle. Natural consequence is that in the absence of any doubt expressed by the Assessing Officer/TPO or learned CIT(A), it is not open for the learned DR to raise any new point as to actual rendition of services at this stage and all the decisions relied upon by him.

The two-member bench consisting of Rama Kanta Panda (vice president) and K. Narashima Charry (Judicial member) were satisfied that the Government of India reviewed the extant policy and decided to permit payments for royalty, lumpsum fee for transfer of technology and payments for use of trade mark/brand name on the automatic route i.e., without any approval of the Government of India and there is no cap for such payment as was there in the earlier press note. It was held that the authorities below are, therefore, was not correct in referring to the press notes to determine the arm’s length price either at 8% or 7.5% of the sales. The appeal was partly allowed.

To Read the full text of the Order CLICK HERE

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