ITAT directs AO to delete Transfer Pricing Adjustments by way of Royalty against Himalaya Drug Company [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench directed Assessing Officer to delete Transfer Pricing Adjustments by way of royalty against Himalaya Drug Company.

The assessee, M/s. The Himalaya Drug Company is a partnership firm engaged in manufacture and sale of Ayurvedic medicines and preparations, consumer/personal care products and animal health care products. It filed its return of income for the year under consideration declaring total income of Rs.50.19 crores.

The AO noticed that the assessee has entered into international transactions and accordingly the AO referred the same to the Transfer Pricing Officer (TPO) after obtaining approval of Principal CIT for determining arm’s length price of the international transactions.

The TPO proposed adjustment to the tune of Rs.169.05 crores in respect of international transactions entered by the assessee. The assessing officer accordingly passed a “draft assessment order” making addition of transfer pricing adjustment of Rs.169.05 crores proposed by the TPO to the total income returned by the assessee. The said draft assessment order was served upon the assessee along with a “notice of demand under section 156 of the Act”.

The issue urged by the assessee relates to the Transfer Pricing adjustment relating to “royalty”.

The two-member bench of Beena Pillai and B.R. Baskaran noted that the tax authorities have taken the view that the assessee would have collected royalty amounts for finished goods exported to unrelated parties.

However, it was pointed out that the assessee has not collected any amount over and above the selling price either from domestic customers or from non-AEs.

The ITAT held that it cannot be taken that the AEs have exploited the product registration/license obtained by the assessee from various Governments. Hence the question of payment of royalty does not arise.

Accordingly, the tribunal set aside the order passed by AO/TPO on this issue and directed the AO to delete this Transfer Pricing adjustment.