ALP: ROYALTY PAYMENTS PERIODICALLY APPROVED BY RBI COULDN’T BE DETERMINED AT NIL
ALP OF ROYALTY COULDN’T BE DETERMINED AT NIL IF ROYALTY PAYMENTS WERE PERIODICALLY APPROVED BY RBI
DCIT v. Kirby Building Systems India Ltd. [Hyderabad ITAT] ITA No. 316 of 2015, dated August 07, 2015
Facts of the case
The assessee-company was engaged in the business of manufacture of pre-engineered building system products. During relevant year, assessee entered into international transactions with its Associated Enterprise (AE) situated in Kuwait. In course of said transactions, assessee paid royalty to its AE at the rate of 7.5 per cent of sales. The TPO took a view that assessee had not derived any benefit from services rendered by AE requiring payments in question and thus took ALP of said payments at nil and made additions to assessee’s ALP in respect of royalty payments made to AE.
Decision of the Tribunal
The Appellate Tribunal held that it was not required by assessee to demonstrate that payment of royalty was justified because agreements were periodically approved by RBI and by Ministry of Industries and assessee was paying amount as per agreements. The TPO has not analysed these payments either under TNMM method or under any other method which require to be analysed as per the relevant provisions. However, the TPO has examined the business necessity of payment of technical know how fee and royalty under the provisions of section 37(1) rather than under the provisions of Transfer Pricing (TP). His decision of not allowing any royalty payment or technical know how payment and determining the ALP at NIL cannot be sustained in view of the fact that this technical know how fee and royalty were agreed upon when the assessee has originally entered into agreement as on 01.04.2000 much before the T.P. provisions came on statute. Therefore, royalty and technical know how payments made by the assessee to its AE are considered at arm’s length.
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