The delhi bench of Income Tax Appellate Tribunal, in a recent ruling opined that once an international transaction is found to be at an arm’s length, no disallowance can be made from the same. The Tribunal, on this basis, allowed the claim of deduction of amount paid to the assessee as royalty.
In the instant case, the assessee M/s YKK India Pvt Ltd filed an appeal before the Appellate Tribunal challenging an order passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2004-05 in which the appellate authority has disallowed Rs 1,42,72,406 paid to YKK Holding Asia Pte Ltd as technical fees. The assessee contended that the above order was passed without considering the order passed under section 92CA(3) of the Income Tax Act for AY 2004-05 wherein entire amount of technical fees has been considered and allowed.
The Tribunal while concluding the issue opined that in the earlier case, the case was decided in favor of the assessee since the payments for international transactions in question, i.e. payment of technical services fee to the AEs, have been held to be at ALP by the Transfer Pricing Officer. The Tribunal, on this basis has invalidated the order disallowing the claim of deduction.
The Tribunal further considered the issue raised by the Revenue in another appeal, i.e, whether the amount of royalty paid to the assesseecan be treated as capital expenditure.
Earlier, the Assessing Officer disallowed the claim of the assessee by finding that “in consideration of the royalty paid, the assessee has been granted non-exclusive and non-assignable licence to utilize the trademark the patents and knowhow from M/s YKK Corporation Japan” and that“it is clearly seen ………that the payment of royalty result in long term benefit of enduring nature to the assessee”. The Assessing Officer thus concluded that“the expenditure on royalty payment is thus clearly an expenditure of capital in the nature”.
The assessee, on the other hand, submitted that the royalty was computed @ 4% of the net sales amount on slide fasteners and even this computation clearly showed that the nature of rights granted by the licensee is sell products by use of YKK trademarks which is duly approved by the Reserve Bank of India.
On appeal, the learned CIT(A) was of the view that the payment of royalty to the AE is an international transaction reported to the TPO and once such a transaction is found to be at an arm’s length, no disallowance can be made from the same.
The Tribunal bench comprising of Judicial Member Beena A Pillai and Accountant member , however opined that “under the royalty agreement, undoubtedly the assessee gets the valuable knowledge and know how but the royalty is computed with reference to the net sale proceeds which clearly shows that the linkage is with revenue generated by the assessee.” The Tribunal, following the decision in CIT Vs Modi Revlon Ltd. [(2012) 78 DTR 342(Del)]observed that “What is material is that the royalty is linked to the revenue, that the benefit from the royalty arrangement, even though on continuous basis, are not of enduring advantage, that the ownership of brand (i.e YKK, in this case) continues to be of licensor and the payment for royalty is only in respect of the goods actually sold. Under these circumstances, the royalty payment cannot be said to be in the capital field. We have also noted that the payment for royalty has been accepted to be an arm’s length payment and there is no dispute on that aspect. There is also no dispute that the royalty payment is in respect of the netsales revenues of the current year. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. The appeal of the revenue, therefore, fails”.
Read the full text of the order below.
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