Relief to Toyota: ITAT upholds quashing of Separate Benchmarking of Royalty after Margin accepted to be at ALP [Read Order]

The Income Tax Appellate Tribunal, Bangalore recently granted relief to Toyota, upholding the order of a Transfer Pricing Officer ( TPO ) in which the royalty was separately benchmarked after the margin was accepted to be at Arm's-Length Price ( ALP ) by the TPO.

The decision was given by the ITAT while hearing two Income Tax Appeals filed by The Deputy Commissioner of Income Tax, Central Circle – 2(1), Bangalore against M/s. Toyota Kirloskar Motor Pvt. Ltd. (Toyota), and two cross Appeals filed by Toyota, on the basis of an order passed by the Commissioner of Income Taxes ( Appeals ), Bangalore - 12 ( CIT(A) ) in respect of the financials of the Assessee for the Assessment Years (A.Y.) 2008-09 and 2009-10.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Assessee, being the Indian subsidiary of Toyota filed their returns of income on 29.08.2008 declaring a total income of Rs.3,65,08,48,458/-. Following a reference under Section 92CA of the Income Tax Act, 1961, the TPO concluded that the trading and manufacturing segments are at arm’s length and evaluated the arms length character of technical assistance fee and the royalty separately.

Concluding that Assessee had not demonstrated any economic benefit and therefore he computed the arm's length price at Nil and treated the royalty payment of Rs.97,82,11,238/- as transfer pricing adjustment. Such decision by the TPO was contested by the Toyota before the CIT(A) averring that the ITAT, Bangalore had set aside the similar Transfer Pricing adjustment for the A.Y. 2008-09.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

In the present appeal, the Revenue queried whether the CIT(A), Bangalore was right in holding that royalty cannot be separately benchmarked on the determination of ALP on international transaction while the same Bench had passed a conflicting decision in the case of M/s Gemplus India Pvt Ltd, while also querying whether the TPO is required to determine the ALP of the international transaction but cannot examine and benchmark the international transaction between the assessee and the AE for payment of royalty.

The two-member Bench of the Income Tax Appellate Tribunal, Bangalore comprising Laxmi Prasad Sahu, Accountant Member and Soundararajan K., Judicial Member observed that the present case has stark similarity to the Assessee’s own case before the Bangalore Bench of the ITAT, where the Tribunal had held that no separate adjustment would be required for the payment of royalty if the Transactional Net Margin Method (TNMM) approach has been adopted at entity level.

Upholding the precedence of the prior decision by the ITAT in the Assessee’s own case for A.Y. 2009-10, the Tribunal proceeded to reject the grounds raised by the Revenue; the cross-appeals being counter to the main appeals were held to become infructuous in this instance.

To Read the full text of the Order CLICK HERE

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