The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the “Other method” as per Rule 10AB shall be the most appropriate method for determining the arm’s length price of royalty transactions.
The assessee is a wholly owned subsidiary of Nissei ASB Machine Co. Ltd. and was set up as a 100% Export Oriented Unit (EOU). It is engaged in the manufacturing of injection stretch blow molding machines, molds and parts, components, and subassemblies of machines and molds). The assessee has paid a royalty of Rs.20,63,83,848/-.
It was stated that the royalty payment was in connection with the technology received by M/s. ASB India and ASB Japan provide maintenance and enhancement of technical know-how to ASB India. The assessee was required to pay royalty at 12% and it is payable only in respect of net domestic sales. The assessee adopted the ‘Other Method’ in its revised Transfer Price (TP) study report.
The Transfer Pricing Officer (TPO) observed that the ‘Other method’ adopted by the assessee has been rejected by the Dispute Resolution Panel (DRP) and has upheld the comparable uncontrolled price (CUP) method as the most appropriate method for benchmarking the transaction of royalty and directed the TPO to take Optokos Corporation and DynEco Corporation by taking the average of royalty payments of these two agreements as CUP.
The TPO finally adopted 5.5% as the royalty rate taking comparable companies of Optikos Corporation and DynEco Corporation held that arm’s length price of the royalty transaction would be Rs.9,45,92,597/- and accordingly, adjustment of Rs.11,17,91,252/- was made.
The counsel submitted that the Tribunal in the assessee’s own case for A.Y.2014-15 after detailed discussion had remitted back this issue to the file of the TPO to adopt ‘Other Method’ as the most appropriate method. Even the Departmental Representative admitted that this issue has been remitted back to the file of the TPO after giving categorical directions.
The Two-member bench comprising of Amit Shukla (Judicial member) and Amarjit Singh (Accountant member) remanded the matter back to the file of the TPO to adopt ‘Other Method’ as the most appropriate method and similar line of direction given for this year and to examine the working given by the assessee. The assessee would be at liberty to file any additional documents/submissions to justify the benchmarking on the basis of ‘Other Method’.
Thus, the appeal of the assessee was partly allowed.
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