In a partial relief to Carraro India, the Pune Bench of Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) for re-determining Arm‟s Length Price (ALP) of international transaction of payment of Royalty.
The appellant, M/s. Carraro India Private Limited is engaged in the business of manufacturing mechanical transmissions, clutches, hydraulic lifts, planetary drives, axles for agricultural tractors, and industrial and construction applications including components parts and spares. The return of income was filed declaring a loss of Rs.3.52 crore. Certain international transactions were reported in Form No. 3CEB.
The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions.
Instantly, the point of consideration is with the international transaction of brand royalty out of the composite international transaction of “Payment of Royalty” amounting to Rs.1,98,77,764/-, which covers both the brand royalty and also royalty for know-how. The assessee applied the Transactional Net Marginal Method (TNMM) for demonstrating that the international transaction was at ALP.
The TPO did not accept the assessee’s contention that payment of Royalty, as permitted under the Automatic Route of the Government of India, was to be considered at ALP. He took note of the fact that the assessee paid Royalty for the last eight years and most of the Royalty Agreements had expired. He further did not find any logic in the assessee’s contention of payment of brand royalty for the use of Carraro name and logo as the same was part of the assessee‟s own name. He held that the additional and new brand royalty payments were nothing but an excuse taken for perpetual payments.
Considering these facts, he determined Nil ALP of the international transaction of brand royalty and accordingly proposed transfer pricing adjustment of Rs.70,52,220/-. When the matter came up before the AO for passing the assessment order, he observed that the assessee paid total Royalty of Rs.2,36,20,250/-. He took note of the fact that the TPO proposed transfer pricing adjustment in respect of Brand Royalty at Rs.70,52,220/-. The AO made two observations in his order on the royalty payment.
Firstly, he treated the payment of Royalty as a capital expenditure subject to depreciation of @25%. Secondly, he held that the total amount of Royalty paid at Rs.2.36 crore was not paid for any business purpose. Invoking the provisions of section 37 of the Act, he made the addition for the full amount of Rs.2.36 crore.
The CIT(A) overturned the assessment order on the disallowance made by the AO u/s.37 of the Act and also did not approve the capitalization of the Royalty by the AO. He, however, countenanced the transfer pricing adjustment proposed by the TPO at Rs.70,52,220/-.
The coram headed by the Vice President, R.S.Syal and Judicial Member, S.S. Vishwanethra Ravi set-aside the impugned order on this score and remit the matter to the file of AO/TPO for re-determining the ALP of the international transaction of payment of Royalty and disallow the duplicate payment of brand Royalty in terms indicated above in the Tribunal order for the assessment year 2009-10 above.
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